The following is a case update written by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, analyzing a recent decision of interest:

Reversing the Bankruptcy Appellate Panel, the Eighth Circuit Court of Appeals recently held that a spouse’s earlier bankruptcy discharge did not retroactively extinguish the debtor’s joint and several liability for a fraudulent transfer judgment against the debtor and her spouse. Lariat Companies, Inc. v. Wigley (In re Wigley), 951 F.3d 967 (8th Cir. 3/9/20).

To view the opinion, click here.

FACTS

Lariat Companies, Inc. (Lariat) received a lease guaranty judgment against Michael Wigley in connection with its lease of commercial real property to a company he had formed to operate a restaurant. Two years later, in a case under the Minnesota Uniform Fraudulent Transfer Act (MUFTA), the Minnesota court held Barbara Wigley jointly and severally liable for fraudulent transfers she had received from her spouse, Michael.

Mr. Wigley filed for bankruptcy under chapter 11 one year later. Lariat filed a proof of claim in his case, subject to the lessors’ cap provided in 11 U.S.C. § 502(b)(6). Mr. Wigley paid the capped amount through his confirmed plan of reorganization and received his discharge. Based on that discharge, the Wigleys subsequently sought to vacate the fraudulent transfer judgment in the Minnesota court. The court ruled that Mr. Wigley’s discharge did not retroactively extinguish the fraudulent transfer judgment.

Mrs. Wigley then filed her own chapter 11. Lariat filed a proof of claim based on the fraudulent transfer judgment. The bankruptcy court allowed Lariat’s claim based on Mrs. Wigley’s joint and several liability under the judgment. On appeal, the Bankruptcy Appellate Panel (BAP) of the Eighth Circuit reversed, finding that Lariat had no preexisting creditor rights because Mr. Wigley had paid its capped claim and received a discharge of his personal liability under the judgment. On further appeal, the Circuit Court reversed the BAP and affirmed the bankruptcy court.

REASONING

The Circuit Court determined that Lariat held a claim against Mrs. Wigley based on Bankruptcy Code section 524(e), which provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” 11 U.S.C. § 524(e). It reasonably concluded that while Mr. Wigley’s discharge extinguished his personal liability under the fraudulent transfer judgment, Mrs. Wigley remained liable for that debt.

The Circuit Court rejected Mrs. Wigley’s contention that Lariat’s acceptance of Mr. Wigley’s bankruptcy plan which fully paid its capped claim extinguished her liability under MUFTA. In doing so, it made two pointed observations: First, the parties had stipulated that Mr. Wigley’s payment did not cover all money owed judgment creditor; and, second, the Minnesota court had ruled that the fraudulent transfer judgment still existed, even after spouse’s discharge. The Circuit Court also observed that the BAP similarly had mistakenly concluded that Lariat’s claim against Mrs. Wigley no longer existed because it was predicated on Mr. Wigley’s (discharged) lease guaranty judgment. Articulating bankruptcy law’s longstanding principle that “discharge destroys the remedy, but not the indebtedness,” it concluded that the discharge of Mr. Wigley’s liability for the fraudulent transfer judgment did not extinguish Mrs. Wigley’s joint and several liability under that judgment.

AUTHOR’S COMMENT

That the “discharge of a debt of the debtor shall not affect the liability of another entity” is axiomatic under bankruptcy law. The BAP got it wrong by focusing on the creditor rights that gave rise to the underlying judgment and not the fact that the state court ruled that the judgment still existed notwithstanding the discharge of Mr. Wigley’s liability for the judgment. This decision by the Eighth Circuit is a reminder that one spouse’s discharge of his joint and several liability for a debt in no way impacts the other spouse’s personal liability for the same debt.

It should be noted that the Wigleys’ chapter 11 cases were filed in Minnesota, not a community property state. If the bankruptcy cases had been filed in a community property state, the outcome may have been different because of the community discharge in Section 524(a)(3).

For discussions of cases involving similar issues, see:

• 2007 Comm. Fin. News. 72, Bankruptcy Court May Enjoin Proceedings Against Nondebtor If Debtor Shows Likelihood of Successful Reorganization and If Harm to Reorganization Outweighs Harm to Plaintiff.
• 2008 Comm. Fin. News. 27, Seventh Circuit Approves Plan of Reorganization Containing Nondebtor Release of Claims by Nonconsenting Creditor; Circuits Are Split.

These materials were authored by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.