As Chino personal bankruptcy lawyers, we caution our clients that not every debt is dischargeable in bankruptcy. Certain debts, most notoriously student loans and child support obligations, can hardly ever be discharged and must simply be repaid. However, when a dispute arises about this, the bankruptcy court has the prerogative of deciding on a case by case basis. In Reshetar Systems v. Thompson, Scott and Kirsten Thompson of Minnesota filed for bankruptcy about six months after Reshetar obtained a legal judgment against Scott. Scott is the president and sole member of Construction 70 Inc., which had failed to pay Reshetar for its subcontracting work on an Applebee's. Reshetar moved to make the debt exempt from discharge, but the bankruptcy court and the Eighth Circuit both disagreed.
Reshetar completed its drywall and carpentry work, but Construction 70 never paid. Construction 70 did end up in litgation with Applebee's, but obtained most or all of the payment owed it. Thus, Reshetar successfully sued Construction 70 in Minnesota state court, obtaining a $78,000 judgment that covered both the unpaid debt and attorney fees. Scott Thompson was personally liable. After the bankruptcy filing, Reshetar filed for determination of the dischargeability of the debt. It cited laws exempting debts from discharge when they arise from fraud in the performance of a fiduciary duty; embezzlement; and willful and malicious behavior. After a trial, the bankruptcy court found in favor of the Thompsons. Reshetar appealed.
On appeal, the Eighth Circuit focused first on whether Thompson had a fiduciary duty to Reshetar. Reshetar looked for one created by Minnesota state law -- but as the bankruptcy court found, the law expressly precludes finding a fiduciary relationship. Nor could Reshetar find a fiduciary duty in a constructive trust created by Construction 70's insolvency, the panel said, because the bankruptcy code does not allow a fiduciary duty created by a constructive trust. The panel next rejected the argument that Construction 70 had embezzled funds owed to Reshetar, noting that nothing in any of the three companies' contracts required Construction 70 to hold funds in trust for Reshetar. Nor did Construction 70 commit larceny, since the funds paid to it were lawfully obtained. Finally, the appeals court looked at the allegation of willful and malicious injury, which refers to debts created by an intentional tort that was directed at the creditor. Reshetar argued that failure to pay was the tort of conversion, but the Eighth agreed with the bankruptcy court that there was no property of Reshetar's in Construction 70's hands to convert. Nor, according to the bankruptcy court, was the conduct maliciously aimed at Reshetar. Thus, the Eighth Circuit upheld the lower court and denied Reshetar exemption from discharge.
This decision is surely upsetting for Reshetar, a small business that never got paid for perfectly good work through no fault of its own. But as Fullerton consumer bankruptcy attorneys, we know one mission of the bankruptcy courts is to help debtors make a fresh start, without heavy debts hanging over them. In this case, in fact, Thompson may very well have ended up in bankruptcy because he knew he couldn't pay the $78,000 judgment within a reasonable amount of time, and could get into even more serious financial trouble by trying. The bankruptcy code allows exceptions to bankruptcy for debts created by criminal or tortuous conduct -- but in this case, none of the circumstances fit the exceptions. As Temecula individual bankruptcy lawyers, we appreciate that the balancing of interests here considers debtors' ability to start over.
Howard Law, P.C., represents clients across California who are considering whether bankruptcy can help them avoid overwhelming debt or foreclosure. To learn more or set up a meeting, send us an email or call today at 1-800-872-5925.