Dischargeable or Not Dischargeable: Does an Intentional Breach of Contract Fall within Willful and Malicious under Section 523(a)(6) of the Bankruptcy Code?

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I. INTRODUCTION

Even though a decade has passed since the Supreme Court decided the case of Kawaauhau v. Geiger,1 confusion still exists between the various federal jurisdictions as to the meaning of willful and malicious under § 523(a)(6) of the Bankruptcy Code when addressing contractual breach.2 The Supreme Court was successful in defining willful and malicious in matters involving tortious conduct; however, the decision did not abate the conflict among the various jurisdictions in matters involving contract. The Supreme Court's opinion left too much room for interpretation on one particular issue: Can the injuries resulting from a breach of contract without a separate tortious act be considered willful and malicious1?

Historically, courts have interpreted the willful and malicious injury of § 523(a)(6) as those damages caused solely as the result of a debtor's intentionally tortious behavior. However, since the Geiger case, this interpretation has been expanded by some courts to include "willful and malicious injury" caused by a breach of contract even in the absence of an accompanying tort. For example, in 2003, the Fifth Circuit Court of Appeals held that damages resulting from a breach of a contract can be considered willful and malicious if the breaching debtor intended to injure the nonbreaching party.3 In that case, the Fifth Circuit did not require the presence of separate tortious conduct to prevent discharge under § 523(a)(6).

In sharp contrast, the Ninth Circuit and other lower federal courts continue to hold that a breach of contract must be accompanied by the commission of a legally recognized tort in order to meet the standard of willful and malicious under § 523(a)(6).4 This paper explores the language and context of § 523(a)(6) as it is being applied in Bankruptcy contract cases. This paper also analyzes the federal circuit split and contrasting interpretations of the Code Section and the legal concerns about adapting such a broader interpretation of § 523(a)(6).

II. HISTORY OF THE WILLFUL AND MALICIOUS INJURY EXCEPTION TO DISCHARGE

Considerable changes in the U.S. bankruptcy law(s) have taken place since the original enactment of the goals and philosophies of the bankruptcy process. The first federal bankruptcy law was enacted in 1800 and was considered a creditor's remedy. Under the Bankruptcy Act of 1800, only merchants were eligible debtors and only involuntary bankruptcy was permitted.5 Additionally, a discharge could only be obtained with the approval of the bankruptcy commissioners and two-thirds in number and value of the creditors holding debts of "at least fifty dollars."6 There were provisions for exceptions to discharge, but only on three basic grounds: 1) the debtor failing to disclose a fictitious claim, 2) a one-time gambling loss of fifty dollars or a loss of three hundred dollars in the twelve months preceding bankruptcy, or 3) debts owed to the federal government or any of the states.7

The Bankruptcy Code was amended in 1841 and the changes brought new protection and rights to debtors by allowing them to file voluntary bankruptcy petitions.8 Under the Bankruptcy Act of 1841, as long as the debtor complied with the process and provisions of the Act and obtained the consent of a majority of his creditors, he would receive a discharge. The statute only excepted from discharge debts arising from "defalcation as a public official" and fiduciary obligations. The courts also retained the previously recognized exception for debts due to the federal government or any of the states.9

When Congress again reformed the Bankruptcy Code in 1898, it recognized that the discharge of indebtedness not only freed the individual debtor, but ultimately benefitted all of society. Commentator Michael DeFrank wrote of the "social utility" theory of discharge:

The social utility justification for discharge posits that discharging obligations of individuals hopelessly in debt benefits society as a whole. …