Wednesday, April 1, 2020
Judgment Debt Is Dischargeable Where Portion Attributable to Fraud Uncertain
By a MetNews Staff Writer
A $1.6 million debt, established by a California judgment, under which a man was found liable both for underpayment of wages and fraudulent transfers, was properly discharged in bankruptcy in its entirety, the Ninth U.S. Circuit Court of Appeals declared yesterday, because it cannot be determined from the face of the judgment how much of the award was based on fraud.
Under 11 U.S.C. § 523 (a)(2)(A), a three-judge panel recited in a memorandum opinion, a debt of money obtained through fraud is nondischargeable. However, it held, without a break-down in the judgment, it is impossible to determine how much of it is nondischargeable.
The California judgment against the debtor, Wayne Wong, was for $265,725.96, plus costs of $10,832.39 and attorneys’ fees and expenses of $1,357,717.50. The complaint in the state lawsuit alleged that Wong provided plumbing work on public works projects, underpaid employees, and fraudulently shifted his assets.
Yesterday’s opinion upholds a judgment of District Court Judge Haywood S. Gilliam Jr. of the Northern District of California, who affirmed a Bankruptcy Court decision.
Burden Not Met
The opinion declares:
“While the bankruptcy court correctly held that the state court judgment was issue preclusive as to the nondischargeability of the debt associated with Wong’s fraudulent transfers, it also correctly ruled that Plaintiffs failed to meet their obligation to show which part of the judgment award was traceable to those fraudulent transfers, as opposed to prevailing wage violations….
“Plaintiffs argue that they do not need to define the portion of the state court judgment attributable to the fraudulent transfers. Instead, they argue that all the damages in the state court judgment should be nondischargeable because of the state court’s issue-preclusive finding regarding Wong’s fraudulent transfers. But the cases that Plaintiffs cite do not support their argument.”
The opinion goes on to say:
“[H]ere there is no dispute as to whether Wong benefitted from the fraudulent transfers described in the state court’s findings. The only question at issue is their size, which under California law, determines the extent of Wong’s liability….Because Plaintiffs failed to show, and the state court judgment itself does not specify, which portion of the state court judgment was traceable to Wong’s fraudulent transfers, the judgment amount is dischargeable debt.”
The judgment creditors argued that the debt is nondischargeable under §523(a)(6) which applies to a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” There was an express finding by the California judge that Wong had inflicted such an injury, they asserted, and that must be given preclusive effect in the federal proceeding.
The judgment does set forth that Wong’s “failure to pay prevailing wages and the active concealment of this conduct was intentional and malicious,” the Ninth Circuit opinion says, but points out that the observation was made in connection with a finding that Wong’s company was his alter ego.
“[I]n order to pierce the corporate veil under California law, it is not necessary that an alter ego acted with a fraudulent or wrongful intent—a creditor need only show that the alter ego’s acts produced an inequitable result,” the opinion says. “The debtors’ intent ‘is beside the point.’ ”
The case is In re Wong, 19-15097.
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