On March 25, 2021, the Eleventh Circuit Court of Appeals ruled that a chapter 7 discharge prohibits the holders of a nondischargeable debt from suing the debtor post-discharge to collect a judgment. The Court in Suvicmon Dev., Inc. v. Morrison, 2021 U.S. App. LEXIS 8724 held that a fraudulent transfer action is not synonymous with execution of a judgment, simply because the underlying debt is excepted from discharge. The court reasoned that “fraudulent transfer claims must be based on an underlying claim by a creditor, which the creditor could have sought to satisfy out of the asset that was transferred. However, as a distinct cause of action, a fraudulent transfer claim is a claim distinct from the claim on which it is predicated, in this case the plaintiffs’ securities-fraud claims.”
In Suvicmon, Morrison filed for chapter 7 relief while a state court suit for securities fraud and fraudulent transfers was pending against him. The suit also named his sons as recipients of the alleged transferred property. Northern District of Alabama Bankruptcy Judge Clifton R. Jessup, Jr. granted the creditors relief from stay, allowing that suit to proceed to completion but not to execution of a judgment. The creditors also filed a nondischargeability action in the bankruptcy court, seeking a declaration that the debts arising from the state court suit be held nondischargeable. While the state court and adversary proceedings were pending, the chapter 7 Trustee issued a no-asset report, abandoning all estate property, including the alleged fraudulent transfer claims. Shortly thereafter, Morrison received his chapter 7 discharge.
In the months that followed, the state court entered a judgment of $1.875 million in favor of the creditors on the securities fraud claim but found for Morrison and his sons on the fraudulent transfer claims. Accordingly, Judge Jessup Jr. entered a non-dischargeable judgment against Morrison in the adversary proceeding for $1.875 million. The creditors sought leave to appeal the state court judgment on the fraudulent transfer count, which the bankruptcy court denied. Judge Jessup Jr. ruled “that the discharge injunction barred creditors from proceeding against Morrison in the state courts on the fraudulent transfer claims.” The Northern District of Alabama affirmed the bankruptcy court determination, and the Eleventh Circuit Court of Appeals similarly found that this decision by the bankruptcy court was not an abuse of discretion.
Finally, Suvicmon provides debtors with an important procedural distinction: whereas an adversary proceeding in the chapter 13 context must generally be resolved before confirmation can take place, a chapter 7 discharge can be entered at any time, even while an adversary proceeding for nondischargebility is pending. By seeking chapter 7 relief, Morrison likely mitigated additional monetary damages that were thwarted by the timely entry of his chapter 7 discharge.
Individuals defending state or federal causes of action may consider insolvency or reorganization as a possible alternative. Borrowers and defendants should carefully review all options for seeking relief under chapters 7, 13 or 11 with an experienced bankruptcy attorney. Michelle H. Bass of Wolfson Bolton’s Consumer Bankruptcy practice is available to advise and assist.