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Some Judgments, Including Those Based on Fraud, Are Not Always Avoidable Through Bankruptcy

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By Joseph G. Ballstaedt

When deciding whether to sue a person or entity, you must be aware that the person or entity may not be able to pay a judgment awarded by a court or may be able to avoid paying the judgment, even if it has the means to pay. A resounding victory in court is utterly worthless if the opposing party is “judgment proof” because it has no assets, little equity in a home or other real property, minimal personal property, no job or source of income, etc. Similarly, even if a party has enough assets to satisfy the judgment, it can hide the assets. Also, a party can file for bankruptcy and be discharged from many of its debts, including most types of civil judgments, leaving a party to fight in bankruptcy proceedings for recovery. Many parties use the threat of bankruptcy as leverage to attain a favorable settlement agreement outside of court.

However, although parties who go bankrupt t are ones that will likely have difficulty finding funds to repay debts, bankruptcy does not legally free a party from all debts and civil judgments. Federal law explains that a bankruptcy does not discharge certain debts, including but not limited to debts for:

  • money, property, services, or credit obtained by fraud (general fraud);
  • fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny (fraud by a fiduciary);
  • a domestic support obligation;
  • willful and malicious injury to another person or entity or their property;
  • student loans (unless the debt from discharge would impose an undue hardship);
  • death or personal injury caused by operating a vehicle while under the influence; and
  • post-petition HOA and condo fees

If you are have a judgment against another based on one of the fraud exceptions listed above, you have the burden of intervening in the bankruptcy proceeding and proving by clear and convincing evidence that the debt should not be discharged. Under the general fraud exception, you must prove 1) the other party made a false representation of material fact with the intention and purpose of deceiving you, 2) you reasonably relied on this false representation, and 2) as a result, you suffered loss or damages. The fraud under this exception must involve moral turpitude or intentional wrongs; fraud implied in law without bad faith or immorality is not sufficient. See In re Dobbs, 115 B.R. 258, 265-66 (Bankr. D. Idaho 1990).

As to the second fraud exception based on a fiduciary relationship, you can only assert this exception if the relationship was not an ordinary commercial relationship. You must prove that an express relationship of trust, created either by agreement or statute, existed prior to the fraudulent acts. This exception does not apply to constructive or implied trusts. See In re Dobbs, 115 B.R. at 262.

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