by: William Andrew McNeal
Becket & Lee LLP, Malvern, Pa.
The Fifth Circuit recently affirmed a district court decision that had affirmed a bankruptcy court's decision to adjudge a debt nondischargeable pursuant to 11 U.S.C. §523(a)(2)(B) in the individual chapter 7 case of the principal shareholder of an excavating company. According to the lower court, in winning a subcontract for his company on the strength of materially false and intentionally deceptive financial statements, the individual was personally liable because, in violating §523(a)(2)(B), he was culpable either for acts of common-law fraud or as a corporate agent reachable by piercing the corporate veil.
While the appellate review of the nondischargeability decision is notable for its thoroughness and detailed reasoning, perhaps more significant is its sua sponte review of the bankruptcy court's jurisdiction to render a monetary judgment against the debtor, which was an issue of first impression in the Fifth Circuit. According to the Second, Sixth, Seventh, Eighth and Ninth Circuits, the appellate court determined that the bankruptcy court acted properly and within its powers.
Like the others before it, the Fifth Circuit found that the statutory construct for a bankruptcy court's jurisdiction, viz., by referral from a district court, over core proceedings arising under title 11, and those arising in or related to cases under title 11, did not extend to a monetary judgment. Instead, the court relied on pragmatism and tradition, the latter being more precisely a manifestation of legislative intent.
As a matter of pragmatism, opined the court, judicial efficiency is best served by investing monetary judgment jurisdiction in the bankruptcy court because the requisite showings in the facts and the law for nondischargeability - such determination occurring in a core proceeding - also showed the amount and basis for the debt. It appeared wasteful to require a separate action in federal or state court.
According to the appellate review, the traditional basis for a bankruptcy court's jurisdiction to render a monetary judgment springs from provisions of the 1898 Bankruptcy Act. The court reasoned that such authority survived the Bankruptcy Code's 1978 enactment because the latter manifested the intent of Congress to expand the jurisdiction of bankruptcy courts vis-à-vis that afforded by the earlier Act. The Fifth Circuit joins five of its sister circuits in affirming a bankruptcy court's jurisdiction to enter a monetary judgment against a debtor after finding his debt to be nondischargeable.
1. Morrison v. Western Builders of Amarillo Inc. (In re Morrison), 555 F.3d 473 (5th Cir. 2009)