Suffering an Unfair Job Loss is Tough, our california employment attorneys can help.

Sixth Circuit BAP Reverses Nondischargeability Determination Based on State Court Judgment - In re Dantone

September 27, 2012

Vincent Howard and our San Bernardino consumer bankruptcy attorneys were interested to see an unusual decision in favor of bankruptcy filers accused of embezzlement. In In re Dantone, debtor Susan Dantone of Michigan was accused of failing to return items of value to their owners when her jewelry store went out of business. The owners sued Dantone in state court and obtained a default judgment against her when she failed to show up in court. When Dantone later filed for bankruptcy, the owners filed an adversary complaint seeking to make that debt not dischargeable, and the bankruptcy court granted them summary judgment. The Bankruptcy Appellate Panel of the Sixth Circuit reversed that, however, finding that summary judgment was inappropriate when the underlying issue had never been heard in court.

The plaintiffs had items from "a famous shipwreck" not named, including some musket balls and an emerald pendant. Dantone took delivery and signed for them in 2007, but did not return the musket balls or pendant when the other items were returned in 2008. The plaintiffs filed a complaint in state court, but Dantone failed to respond aside from an initial pro se filing, leading to a default judgment against her for $42,706.10. Some months later, Dantone filed for Chapter 7 bankruptcy and the plaintiffs filed an adversary proceeding, seeking to have the judgment declared not dischargeable due to embezzlement--meaning she would have to pay the full amount back, despite being in bankruptcy. The bankruptcy court granted summary judgment to the plaintiffs based on the understanding that the Michigan state court had already decided the issue. Dantone appealed.

The BAP reversed. Michigan state law controlled the issue, and the panel had to decide whether issue preclusion applied to the case, which would provide an appropriate basis for summary judgment. After an analysis of whether the issue of Dantone's alleged embezzlement was "actually litigated" under state law, the panel declined to decide it, saying Dantone had conceded the issue in briefing to the bankruptcy court. It next turned to the issue of whether the embezzlement case was "necessarily decided" in state court, meaning the issue must have been essential to the previous case. The state-court judgment was for statutory conversion, but the nondischargeability case was based on embezzlement--a different act that requires fraud even though Michigan's conversion law does not. Thus, the essential element of embezzlement was not "necessarily decided" by the state court, and the summary judgment was reversed.

At Howard Law, P.C., our Riverside County individual bankruptcy lawyers are interested in this ruling because it could be very favorable to Dantone, the bankruptcy filer. A default judgment is like forfeiting a soccer game by not showing up; it doesn't mean the underlying issues were actually decided. Resolving the issues could be important, because discharging debt is one of the primary purposes of bankruptcy. Debts should not be declared nondischargeable lightly, or there would be little point in doing the hard work and taking the credit hit bankruptcy causes. Vincent Howard and our San Diego personal bankruptcy attorneys can help explain the unusual circumstances that might cause a proceeding like this, including financial crimes and certain personal injury judgments.

If you're considering bankruptcy because you're deeper in debt than you know how to handle, call Vincent Howard and the team at Howard Law for help. Based in Santa Ana, we represent clients across California. For a consultation, call us today at 1-800-872-5925 or send us a message through our website.

Similar articles:

Panel Upholds Exception From Discharge and Fixing of Damages in Fraud Case - In re Deitz

Unpaid Unemployment Taxes Are Not Nondischargeable Debt, Ninth Circuit BAP Rules - In re Hansen

Eleventh Circuit Affirms That Judgment Against Trustee for Malfeasance Is Not Dischargeable - Bullock v. BankChampaign NA