Banking, Bankruptcy, and Creditors' Rights
Fifth Circuit Finds Bankruptcy Courts Have Jurisdiction to Enter Monetary Judgment in Dischargeability Proceedings
Tuesday, March 3, 2009
Contributed by: Roger Cox
Bankruptcy courts are often called upon to rule on whether an individual’s debt is dischargeable in bankruptcy. These proceedings are clearly “core proceedings” arising under Section 523 of the Bankruptcy Code, but the Fifth Circuit, on its own initiative, recently raised the issue of whether the bankruptcy court actually has the power to render a money judgment for the underlying debt.
Arguably, this has long been a practice in many Texas-based bankruptcy courts, and it has been approved in many other circuits. But the issue of whether a court can do more than simply determine a debt to be non-dischargeable, rather than entering judgment on the debt itself, had never previously been addressed by the Fifth Circuit.
In In re Morrison, _____ F.3d _____, 2009 WL 103693 (5th Cir. 2009), the Fifth Circuit considered an individual’s appeal of a non-dischargeable judgment entered against him while he was acting as a corporate officer of a subcontractor on a major construction project.
The facts as determined in the bankruptcy court can generally be described as follows: the subcontractor had submitted a materially false financial statement to a general contractor when submitting a bid on a large construction project. The general contractor awarded the bid, but the subcontractor later defaulted and abandoned the job, leaving the general contractor to spend over a half million dollars over the original contract price in order to cure the defaults.
The principal of the corporate subcontractor filed an individual bankruptcy case, and the general contractor filed a dischargeability proceeding against him. The bankruptcy court found that the individual committed common law fraud, concluding that he was “personally liable for the debt . . . under Texas common law, which holds a corporate agent liable for his misrepresentations made on behalf of the corporation.”
The Fifth Circuit affirmed the non-dischargeable judgment against the individual; however, it raised, sua sponte (on its own initiative) the issue of whether the bankruptcy court had the power to render a money judgment for the underlying debt. The court allowed that the determination of dischargeability of a debt is clearly a “core” proceeding under the Bankruptcy Code, but the bankruptcy court had done more than merely declare a debt non-dischargeable – it had actually entered a money judgment against the individual for the amount of the claim. The issue was framed as “whether a bankruptcy court, in addition to declaring a debt non-dischargeable, has jurisdiction to liquidate the debt and enter a monetary judgment against the debtor.”
The Fifth Circuit observed that many other circuits had allowed this practice, but noted that the practice may have arisen more out of pragmatism than out of an actual analysis of whether bankruptcy courts had such jurisdiction. That said, however, the Fifth Circuit agreed and found that bankruptcy courts indeed had such jurisdiction.
As to the merits of the underlying case, the court found that because the corporate officer was apparently engaged in making the material misrepresentations on behalf of his corporation, he could have personal liability. Quoting a Texas court, the Fifth Circuit found that “a corporate officer may not escape liability where he had direct, personal participation in the wrongdoing, as to be the ‘guiding spirit behind the wrongful conduct or the central figure in the challenged corporate activity.’” In re Morrison, quoting Ennis v. Loiseau, 164 S.W.3d 698, 707-08 (Tex. App. – Austin 2005).
Thus, it is finally settled, at least in the Fifth Circuit, that bankruptcy courts may liquidate and enter a money judgment in dischargeability proceedings.
