This article regards Hilgartner v. Yagi (In re Hilgartner), 91 F.4th 186 (4th Cir. 2024).
Prior to filing bankruptcy, the debtor settled an assault claim by agreeing to pay the victim/creditor $415,000.00 in installments. The debtor complied up to a point, paying $186,000. He then stopped and filed a bankruptcy after the victim/creditor filed a motion for a default judgment. The victim/creditor next filed a proof of claim and a complaint claiming the payments due under the settlement agreement were non-dischargeable under Section 523(a)(6) of the Bankruptcy Code as the underlying claim arose from “willful and malicious” injury. The victim/creditor further sought interest and the costs of collection, which included attorneys’ fees incurred for enforcing the settlement agreement.
Are Collection Costs and Interest Dischargeable?
The bankruptcy court found that the remaining amount due and owing under the settlement agreement, i.e., $230,000.00 was nondischargeable as a debt for willful and malicious injury. But, collection costs and interest were dischargeable as new debts.
The district court affirmed the ruling on the $230,000 in principal debt but reversed on interest and collection costs, declaring them also to be nondischargeable. The Fourth Circuit Court of Appeals in Hilgartner v. Yagi (In re Hilgartner), 91 F.4th 186 (4th Cir. 2024), affirmed the district court holding that the debt arising from the settlement agreement was non-dischargeable under Section 523(a)(6) as being willful and malicious. It further held that the costs of enforcing the settlement agreement and interest were also non-dischargeable.
The Fourth Circuit: Archer Controls
In the opinion, the Fourth Circuit pointed out that the Supreme Court had previously found that a “debt” can be broadly construed as being any liability arising from a specified injury. There, the Supreme Court in Archer v. Warner, 538 U.S. 314 (2003), found that settlement of a fraud claim was nondischargeable under Section 523(a)(2)(A). Per Section 523(a)(2)(A), a debt based on false pretenses, a false representation, or actual fraud may be deemed nondischargeable. Finding that Archer controlled, the Fourth Circuit, for the same reasons, held that debt for “willful and malicious injury” under Section 523(a)(6) is also non-dischargeable, even if based on a settlement agreement, as the nature of the debt remained unchanged. It had merely been liquidated.
The Fourth Circuit further held that the term “any debt” arising from the willful and malicious injury causing injury included those debts flowing from a settlement agreement which in this case included interest and costs of collection which in this case is attorney’s fees were nondischargeable as well.
The lesson to be learned is that a debtor in bankruptcy cannot hide behind a claim that is settled and compromised if based on fraud, or willful or malicious injury, even though a default under the settlement agreement is contractual in nature. Such claim can be held to be nondischargeable.
