
Even if an individual DR receives a discharge,
some of her debts may be excluded from that
general discharge

The CR owed a debt that is excluded from
discharge is able to try to collect that debt
from the Dr after bankruptcy

i.e., no “fresh start” for the Dr as to the
excepted debt

523(a) contains an exclusive list of debts
excepted from discharge

Number of excepted debts has continued to
grow – now have 21 excluded types of debts
in 523(a)

Several of the excepted debts are ones in
which the Dr acted “wrongfully” in creating
the debt in the 1st place
 fraud
 willful and malicious injury
 DUI
 embezzlement

Other excepted debts are explainable as
favoring what are deemed to be creditors
who are particularly worthy
 taxes
 alimony and child support

Other debts excepted from discharge are
more difficult to explain -- except by
reference to political pressure
 student loans
▪ could argue is a PRO-human capital rule, b/c incentivizes
CRs to extend student loans to DRs that will then enable
DR to have more productive human capital

All of 523(a) exceptions apply to individual
DRs who otherwise receive a discharge in:
 chapter 7 (§ 727(b)) or
 chapter 11 (§ 1141(d)(2))

Code originally contained “superdischarge”
(1328(a)) for DR who completed plan
performance in chapter 13 case

The idea was to provide an incentive for debtors
to elect chapter 13 voluntarily

Most of 523(a) debts discharged, including:
 taxes (523(a)(1))
 fraud (523(a)(2))
 willful and malicious injury (523(a)(6))

Over time, Congress has cut back on the scope
of the superdischarge, making more and more
523(a) debts nondischargeable even in fullperformance chapter 13

Today, the only common debts still left as part of
the “super” discharge are for:
 (i) stale income taxes – i.e., due more than three years
before bankruptcy, and no other funny business (e.g.,
fraudulent return, etc.)(§ 523(a)(1)(A)) and
 (ii) debts arising from property settlements in divorce
or separation proceedings (§ 523(a)(15))

Change from carrot
in 2005
to stick

Before, idea was to offer consumer debtors a
carrot (e.g., superdischarge) to file 13

Now, just use the means test stick to deny
chapter 7 to them, so only “choice” left is
chapter 13

Where are exceptions litigated?
 for three types of nondischargeable debts, the
creditor may only challenge dischargeability in an
adversary proceeding in the bankruptcy court during
the bankruptcy case. § 523(c)(1).
▪ Fraud 523(a)(2)
▪ Larceny, embezzlement, fiduciary defalcation (a)(4)
▪ Willful and malicious injury (a)(6)
 For everything else – can bring action to collect in
state court after bankruptcy
▪ i.e., exception is “automatic”

CR complaint objecting to discharge of one of
the types of debts that has to be litigated in
bankruptcy must be filed in the bankruptcy
court within 60 days of the first date set for
the creditors’ meeting (unless court extends
time) Rule 4007(c).

Creditors are notified of this bar date in the
initial bankruptcy notice

Discharge objection must be filed as adversary
proceeding in bankruptcy court. Rules 4004(a),
7001(4)

Complaint must be filed within 60 days after the
first date set for the meeting of creditors (unless
court extends). Rule 4004(a)

The trustee and creditors will be notified of bar
date in initial notice of bankruptcy case

Creditor has burden of proof in discharge
exception action (and in discharge denial)

Supreme Court has held that the standard of
proof is preponderance of the evidence in
discharge exception cases
 Grogan v. Garner, 398 U.S. 279 (1991)

Standard if proof as “preponderance” is very
important b/c means CR can get collateral estoppel
to prove a discharge exception.

Example:


CR obtained final judgment against DR prior to
bankruptcy, and as part of that judgment court made a
necessary finding of fraud
CR could bring a discharge exception action in bankruptcy
under § 523(a)(2) and invoke that prior fraud finding
through collateral estoppel

Procedural bar does not run the other way

Res judicata is not applied to bar a creditor from
raising a discharge exception claim for the first time in
bankruptcy. Brown v. Felsen, 442 U.S. 127 (1979).

Example:
 CR in prebankruptcy suit could have but did not raise fraud
as a ground for relief
 CR will not be precluded from contesting discharge of the
judgment debt in bankruptcy on the ground of fraud

Most important and most litigated discharge
exception – BY FAR -- is for debts incurred by
fraud. § 523(a)(2).

The fraud exception has two mutually exclusive
alternatives:
 First: all fraud-based debts other than those obtained
by the use of a false financial statement (subsection
(A))
 Second: fraud debts that arise from the use of a false
financial statement (subsection (B)).

For purpose of proving fraud under (A), a
rebuttable presumption of fraud arises
under § 523(a)(2)(C) if:
 DR incurred a consumer debt of $550 or more for
“luxury goods or services” within 90 days of
bankruptcy, or
 Obtained cash advances aggregating more than
$825 in the 70 days prior to bankruptcy.

Fraud exception complaint has to be filed by
Cr in the bankruptcy court

Within 60 days of 1st meeting of Crs

Cr who loses a 523(a)(2) fraud action to
consumer Dr could be sanctioned for costs and
attorneys' fees incurred
 Idea is to keep Crs from bringing fraud objection just
to pressure Dr to settle with Reaff agreement

Liable if CR’s position "was not substantially
justified"

Unless the court finds that "special
circumstances would make the award unjust"

Statute specifies fraud elements under the
“false financial statement” rule of (B):
 Statement in writing
 Materially false
 Respecting Dr’s or an insider’s financial condition
 On which Cr reasonably relied
 Dr had intent to deceive

Statute does not specify elements under (A)

Supreme Court held in Field v Mans, 516 U.S.
59 (1995), that Congress intended to
incorporate in 523(a)(2)(A) the common law
fraud elements as of date of Code (1978)





Dr made false representation of fact
Dr knew representation was false
Dr made representation with intent to
deceive Cr
Cr justifiably relied on Dr’s representation
Cr sustained injury as proximate result of
representation
-> main difference is justifiable vs reasonable
reliance

Note that Cr must prove actual fraud, with
DR’s bad intent, to prevail under (a)(2)

“constructive” fraud not enough

Biggest fight under fraud exception – DR uses credit
card in months before bankruptcy when in bad
financial condition, not pay,
file chapter 7

CR argues:
 Fraud for Dr who knows she’s in terrible financial situation
to go ahead and incur credit card charges right before files
bankruptcy
 When incurs charges, is impliedly misrepresenting her
ability and intent to repay the debt incurred
▪ b/c she knows she is about to file and discharge debt

Intuitively, seems fraudulent if DR gets credit
by using card but never intended to pay

For example, DR stops at ATM on
way
to courthouse
to file bankruptcy
and gets a cash advance, spends cash buying
presents for her friends

Or the DR who took his family on a 6-week
trip to Europe, put it all on his credit card, and
upon returning to the States filed bankruptcy

But Janet Marie Stearns did not go on a trip
to Europe on Amex’s dime

And she did not stop and get a large cash
advance on her way to the courthouse to file
bankruptcy

Instead, she had a gambling problem, and kept
getting cash advances at the ATM at the Mystic
Lake Casino ($7800 in 2 months Aug-October)


and not surprisingly, she kept losing
made some small payments on the card, but
$7800+ balance left when she filed
she didn’t make much $ in her job ($1382/mo)
No charges for gambling last month before filed



CR must prove that DR made a false
representation of fact

Threshold problem – is the use of a credit
card a representation of ANYTHING?

Consider non-bankruptcy Supreme Court
case of Williams v. United States, 458 U.S. 279
(1982): "a check is not a factual assertion at
all, and therefore cannot be characterized as
'true' or 'false.'“ Id. at 284-85.
≠
“factual assertion”

Williams Court held that bad-check writer
could not be convicted of the “false
statement” crime based solely on the
issuance of a bad check
 b/c no factual assertion

By analogy to Williams, some bankruptcy
courts have concluded that the DR does not
make any representation at all when she uses a
credit card – like presentation of a check, is
simply an authorization to charge the credit
card account
=

Use of a credit card, on this line of reasoning,
is no more able to be “true or false” than is
the delivery of a check


Notwithstanding the powerful logic of the
“no representation” view, most courts in
credit card discharge cases DO find that use
of a card = representation
At the very least, the clear “never intended to
pay” cases are captured this way

Even if decide (notwithstanding Williams)
that use of a credit card can be “true or false”
and thus is a representation – is critical to
identify representation of what?

CR argues: ABILITY to pay
 Janet Marie Stearns, with a monthly income of
$1382, simply was not ABLE to pay back monthly
cash advances of $3900!!

Some courts have agreed with CR and if DR does
not appear to have means to repay the credit
card debt, say Dr made an implied rep of ability
to pay, that could support fraud 523(a)(2)

WRONG!!
 If concerns Dr ability to pay, that deals with Dr’s
financial condition – so must go under (a)(2)(B) – not
(A)
▪ And, must then be in WRITING – not implied

Instead, the only possible implied
representation that a DR can be making
when she uses a credit card is that she has an
INTENT to repay the debt

Thus, the possible false representation of fact
that a DR might get caught with in credit card
cases is whether she did or did not have a
present intent (when she used the card) of
paying it back

Could a DR’s apparent objective inability to
repay a credit card debt ever be relevant to
the issue of her intent to repay?

In Stearns, did the court find that the Cr had
carried its burden of showing that Janet made
a false representation of her intent to pay the
credit card charges?
Explain

Dfn: “completely or inanely foolish; silly;
devoid of intelligence”
“Her persistent belief in the salvation of the "big
win" was fatuous, but there is nothing to
indicate that it was not genuine. Throughout,
the Defendant maintained a subjective intent to
pay back everything she was borrowing from
the Plaintiff”

“This formulation probably will limit success for credit card
issuers under § 523(a)(2)(A) to situations where they can
prove an actual, consciously-conceived plan or scheme on
the part of the cardholder-debtor, contemporaneous with
the charges in question – the scheme being to knowingly
abuse the inherent impersonality of a credit card facility.”

“That is not inappropriate – given the likelihood that much
more credit card overcharging is generated by stupidity
and self-deception than by avarice and chicanery.”

“Bankruptcy under American law is not a hideout for the
malefactor, but it still is a refuge for the irresponsible –
and not inappropriately so.”

What about proving that DR had an intent to
deceive the CR when she used the card,
accompanied by an intent not to repay?

Obviously, closely linked to proof of implied
intent to pay, or not

See in note 23 an illustrative list of a dozen
factors of circumstantial evidence that are
relevant to proving whether the DR had a
subjective intent to deceive

1.
The length of time between the charges made and the filing of the bankruptcy;

2.
Whether or not an attorney has been consulted concerning the filing of bankruptcy before
the charges were made;

3.
Number of charges made;

4.
The amount of charges;

5.
The financial condition of the debtor at the time the charges were made;

6.
Whether the charges were above the credit limit of the account;

7.
Whether the debtor made multiple charges on the same day;

8.
Whether or not the debtor was employed;

9.
The debtor's prospects for employment;

10.
Financial sophistication of the debtor;

11.
Whether there is a sudden change in the debtor's buying habits;

12.
Whether the purchases were made for luxuries or necessities.

What did the Stearns court hold, and why, on
the intent to deceive question?

What facts were good for Janet?

What facts were bad for her?

Cr also must prove both actual and justifiable reliance
on Dr’s misrepresentation of fact

What problems did Stearns court find with the
creditor’s proof of reliance?

Are these problems peculiar to this creditor or
endemic in credit card cases generally?

Under the approach of the Stearns court, how would a
credit card issuer establish reliance?
 Can CR argue PRESUMED reliance on other party’s
implied promise to keep its bargain?

What many courts do is infer reliance unless
the creditor has reason to know otherwise:
 “the credit card issuer justifiably relies on a
representation of intent to repay as long as the
account is not in default and any initial investigations
into a credit report do not raise red flags that
would make reliance unjustifiable.”
Anastas, 94 F.3d at 1286.

Ever since the passage of the Bankruptcy Act
of 1898, Congress has excepted from
discharge debts stemming from “willful and
malicious” injuries by the debtor

The current exception is 523(a)(6)

Just like fraud exception – e.g.:
 The bankruptcy court has exclusive jurisdiction to
determine dischargeability issues under 523(a)(6),
523(c)(1)
 Cr must file complaint within 60 days of 1st CR’s
meeting
 candidate for application of collateral estoppel

prevents the discharge of debts based on
intentional torts (“willful”) that contain some
aggravating features (“malicious”)
 Exactly how aggravating has proven to be difficult
to pin down

Two elements must be proved to establish the
523(a)(6) exception

1st, DR's actions must have been "willful“
 legislative history
▪ means "deliberate or intentional."
▪ Cases allowing a "reckless disregard" standard to suffice
were intended to be overruled by the 1978 Code
▪ Behavior that is merely negligent (or even reckless)
would NOT give rise to a nondischargeable debt under
the sixth exception

2nd -- Dr's actions must have been "malicious"

Until 1998, courts differed widely on the
proper meaning of malice

As well as on the proper interaction between
parts 1 (willful) and 2 (malicious)

Problems have arisen most often in three
types of cases:
 (1) DR converts secured creditor’s collateral for
DR’s own benefit and dissipates proceeds
 (2) DR inflicts an injury driving drunk
 (3) Dr-physician commits particularly egregious
medical malpractice

Question is whether section requires proof of:
 “special malice” – i.e., that the debtor intended to
injure the creditor – or
 whether it is sufficient to prove “implied malice” –
that the debtor intentionally committed an act
knowing that the act was wrongful and was likely
to harm the creditor, without just cause or excuse

Tinker v Colwell (1904):
 Implied malice
 Charles Tinker unable to discharge $50K judgment based on
"criminal conversation" (adultery) with Frederick Colwell's wife
 Not matter whether Tinker was driven by malevolence toward
Frederick or just passion for Frederick's wife
 “Malice, in common acceptation, means ill will against a person;
but in its legal sense it means a wrongful act, done intentionally,
without just cause or excuse.”
 Tinker Court concluded: a “wilful disregard of what one knows
to be his duty, an act which is against good morals, and
wrongful in and of itself, and which necessarily causes injury and
is done intentionally, may be said to be done wilfully and
maliciously, so as to come within the exception.”

Davis v Aetna Acceptance (1934):
 not every intentional tort falls within the exception.
 Cr objected to discharge of debt when Dr converted
Cr’s collateral.
▪ lower courts had found that Dr’s act did constitute a legal
conversion, which is an intentional tort
▪ Supreme Court held that not every conversion was excluded
from discharge, but that aggravating features were required.
▪ DR mistakenly but innocently believed that he had authority to
sell the collateral and use the proceeds
▪ Such a technical conversion, while done intentionally, is not
“malicious,” the Court held, and the resulting debt was held
to be dischargeable.

under 1898 Act, many lower courts found a
nondischargeable debt for willful and
malicious injury in cases involving gross or
wanton negligence that caused personal
injury or death

leading case: Den Haerynck v. Thompson, 228
F.2d 72 (10th Cir. 1955), in which DR
negligently ran over and killed a child while
drunk

1978 Code & legislative history:
 “‘willful’ means deliberate or intentional. To the
extent that Tinker v. Colwell, 139 U.S. 473 (1902),
held that a looser standard is intended, and to the
extent that other cases have relied on Tinker to
apply a ‘reckless disregard’ standard, they are
overruled.”
 Congress apparently had in mind cases such as
Thompson

drunk driving problem addressed specifically
in 1984, with the addition of § 523(a)(9)

bars discharge of debt “for death or personal
injury caused by the debtor’s operation of a
motor vehicle ... if such operation was
unlawful because the debtor was intoxicated
from using alcohol, a drug, or another
substance.”

left unresolved were the (i) collateral
conversion and (ii) horrible doctor cases

Special vs implied malice was the focus –
literally hundreds of lower court opinions

Facts:
 Dr. Paul Geiger, had committed particularly egregious





malpractice
He knowingly and admittedly prescribed a course of
antibiotic treatment for an infection that he knew to
be less effective than a viable alternative
When she got good help (he was out of town),
he canceled that treatment when he got back
Caused Margaret Kawaauhau to have her leg
amputated
And of course he had no malpractice insurance
She got $355K judgment, he filed bankruptcy

Margaret argued that Geiger’s actions =
“willful and malicious injury” because he
knowingly and intentionally administered
substandard medical care, which necessarily
led to her amputation, without just cause or
excuse

And thus squarely within Tinker

Was critical for Margaret to establish more
than simple malpractice, which is plainly just
= negligence and indisputably dischargeable

How did she argue this?
 Said Geiger KNEW he was giving her inadequate
care, but went ahead and did it anyway
 Similar to the case where Doc knowingly used a
nonsterile needle

SCOTUS misleadingly framed the question:
“We confront this pivotal question concerning
the scope of the “willful and malicious injury”
exception: Does § 523(a)(6)'s compass cover
acts, done intentionally, that cause injury (as
the [debtors] urge), or only acts done with the
actual intent to cause injury?”
 And chose the 2nd option

Geiger Court omitted a third interpretation:
 that the debtor intentionally committed
an act that caused injury, knowing that the
act was wrongful and substantially certain to
cause injury, without justification or excuse

The important additions of this preferred
interpretation to the Court’s straw man first
alternative – “acts, done intentionally, that
cause injury” – are:
 (1) Dr knew the act it committed was wrongful,
 (2) Dr knew the act was substantially certain to
cause injury, and
 (3) in so acting Dr had no justification or excuse

Having framed the issue as a false choice
between the alternatives of (i) encompassing
every act done intentionally by a debtor that
causes injury or (ii) only acts done with the intent
to cause injury, the Court chose the latter.

Held that “nondischargeability takes a
deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury.”

Court relied heavily on statutory text – noted
that “[t]he word ‘willful’ in (a)(6) modifies the
word ‘injury.’”

Thus, held “that debts arising from recklessly
or negligently inflicted injuries do not fall
within the compass of § 523(a)(6).”
 This last holding, standing alone, might not work
mischief, but the earlier statement, that a
“deliberate or intentional injury” is required, could

Geiger Court sought to limit subsection (6) to
intentional torts
 this is a defensible interpretation of the section

However -- the way they did so – by also
requiring proof of an intent to injure – went
too far, and much farther than needed to
decide the case

Supreme Court could have decided against
Margaret simply by saying that Geiger did not
commit a “willful” (or “intentional”) tort, but
at most acted with gross negligence (or even
a “reckless disregard”).
 1978 legislative history, reacting to drunk driving
cases that had gone against Dr, made clear that
Congress thought that the section required an
intentional tort.

The way the Court in Geiger read subsection
not only requires an intentional tort, but an
intentional tort in which the debtor also
intends to injure the victim.

Geiger opinion seems to conflate the separate
elements of willfulness and malice into a
single unitary test of “intent to injure.”

Unclear what the word “malicious” adds
 It is difficult to think of many (any?) cases in which
a debtor who inflicted a “willful … injury”
(meaning, as the Geiger Court asserts, an “actual
intent to cause injury”) would not also have acted
with malice!

under Geiger standard, Tinker’s chances of
receiving a discharge for his debt to the
cuckolded husband would be much greater

Colwell would have to show that Tinker intended
to injure him by having an affair with his wife

Facts that Tinker knew that what he was doing
was wrong, knew that by doing so he was
substantially certain to cause injury to Colwell,
and that he had no justification for doing so,
would not seem to suffice under Geiger!

Would impose a substantial burden on tort
victims, if took Geiger Court at its word, if had
to prove that the DR intended to injure the
victim

Lower courts have seized on Rest 2d of Torts
definition of intent to circumvent dire
consequences of Court’s loose language

In Geiger, the Court relied on definition of
“intent” in § 8A of the Restatement of Torts,
that the actor must “intend the consequences
of an act.”

However, the Court omitted the alternative
meaning, also in § 8A: “or that he believes that
the consequences are substantially certain to
result from it.”

Post-Geiger, many lower courts have adopted
this alternative meaning of “intent” and have
read Geiger as allowing exception to
discharge if the creditor can prove that DR
acted knowing that his actions entailed an
“objective substantial certainty of harm,”
 even if CR could not prove that DR acted with a
subjective motive to cause harm

Under this alternative formulation, CR can
prevail either by showing that:
 DR “willed or desired harm” or
 DR “believe[d] injury is substantially certain to
occur as a result of his behavior”

Problem 10.7:
 Dr (Smith) owned a retail business
 Dr financed inventory & receivables with Bank
 Security agreement requires DR to put proceeds from





receivables in collateral account
And, DR can’t use monies in collateral account w/o
Bank’s express written permission
Dr fully understands these limits
DR decides to take $300K out of account to buy
equipment, w/o getting permission from Bank
Motive – save the business, hopefully repay Bank
But gamble fails, loses everything, files bankruptcy


So, this is a classic knowing collateral
conversion case
Under Geiger’s formulation,
“nondischargeability takes a deliberate or
intentional injury”
 And Smith says, “I meant Bank no harm. I wanted
to pay the Bank, in fact. It’s not like I took the
money to go to Vegas. I only stole their money
because I was trying to save my business, and if it
had worked, I’d have paid Bank back.”

On facts like this, if take Geiger literally to
mean what it says, that a CR must prove that
a Dr acted with an actual intent to cause
injury, then the Cr could easily lose a knowing
collateral conversion case such as this
 b/c DR’s motive was not to harm Cr, but to save
his business

However, CR has chance under alternative
formulation of “intent”

Recall, CR can prevail either by showing that the
debtor “willed or desired harm” or “believe[d]
injury is substantially certain to occur as a result
of his behavior.”

This alternative reading gives Cr whose collateral
has been knowingly (rather than innocently)
converted much more hope of blocking the
discharge of the resulting debt

The key issues will be:
 whether DR knew that the conversion was
unauthorized (which it did in 10.7), and
 whether DR believed that his conversion was
“substantially certain” to cause harm to the
(formerly!) secured creditor
▪ How analyze that issue in 10.7?
 Cr does not have to prove subjective personal
malevolence by Dr toward it

One last note on the discharge exceptions –
that it’s very, very hard to discharge a student
loan debt

See 523(a)(8)

inclusive part – defines what loans qualify to be
nondischargeable. Includes any of:
 an “educational loan” or an “educational benefit
overpayment” if made directly by or if insured or
guaranteed by any governmental unit
 any loan made under a "program" funded at all by a
governmental unit or by a nonprofit institution
 "an obligation to repay funds received as an educational
benefit, scholarship, or stipend.“
 any other educational loan that is a qualified educational
loan”. A “qualified educational loan” means loan debt that
is tax-deductible under § 221 of Internal Revenue Code

IF the loan is of any of the types covered in
the prior slide, then will NOT be discharged
UNLESS the Dr can prove that:
“excepting such debt from discharge … would
impose an UNDUE HARDSHIP on the debtor
and the debtor’s dependents”

The litigation is all with regard to what
constitutes an “undue hardship”

Bottom line – almost impossible for student
DR to win

Leading test is still Brunner’s 3-part test:
 1. That the debtor cannot maintain, based on current
income and expenses, a “minimal” standard of living for
herself and her dependents if forced to repay the loans;
 2. That additional circumstances exist indicating that this
state of affairs is likely to persist for a significant portion of
the repayment period of the student loans; and
 3. That the debtor has made good faith efforts to repay the
loans.