7.24.2007

N.D. Illinois (Banktcy Ct.) Notes Split Re Debt Dischargability for Intentional Breach of Contract In Chapter 7 Bankruptcy Proceedings

Per In re Salvino, Slip Copy, 2007 WL 2028577, (Bankr.N.D.Ill. Jul 09, 2007) (NO. 05-B-61546, 06-A-1092):

Section 523(a)(6) excepts from discharge debts for "willful and malicious injury by the debtor to another entity or to the property of another entity." Whether Acquisition's $1.5 million claim for breach of contract is nondischargeable under this provision depends on the extent to which "willful and malicious injury" encompasses intentional breaches of contract. The circuits are split on this question.

The Fifth Circuit holds that any breach of contract is nondischargeable as a willful and malicious injury if the debtor either intended to injure the other party to the contract by breaching it or if injury to the other party was "substantially certain" to result from the breach; tortious conduct is not required. See In re Williams, 337 F.3d 504, 510 (5th Cir.2003) ( "[D]ischargeability of contractual debts under Section 523(a)(6) depends upon the knowledge and intent of the debtor at the time of the breach, rather than whether conduct is classified as a tort....").

The Ninth Circuit, on the other hand, holds that "to be excepted from discharge under § 523(a)(6), a breach of contract must be accompanied by some form of 'tortious conduct' that gives rise to 'willful and malicious injury." ' In re Jercich, 238 F.3d 1202, 1206 (9th Cir.2001). Unreported decisions from the Sixth and Tenth Circuits are similarly split. FN7 The Seventh Circuit has not addressed the question.

FN7. Compare In re Sanders, No. 99-6396, 2000 WL 328136 (10th Cir. Mar. 29, 2000) (tortious conduct not required for "willful and malicious injury" under § 523(a)(6)) with In re Best, No. 03-5098, 2004 WL 1544066 (6th Cir. June 30, 2004) (breach of contract unaccompanied by tortious conduct cannot be a "willful and malicious injury"). An unpublished decision of the Fifth Circuit holds, contrary to Walker, that tortious conduct is required for § 523(a)(6) nondischargeability, citing Jercich for that rule. In re Deasy, No. 02-11200, 2003 WL 21018189 at *1 (5th Cir. Apr. 18, 2003) ("[A] bare breach of contract claim fails, as a matter of law, to establish ... a 'willful and malicious injury' for purposes of § 523(a)(6).").

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