In the recent case People Bank & Trust Co. v. Bilyeu (In re Bilyeu), 23-1038 (Bankr. W.D. Okla. Nov.8, 2023), Bankruptcy Judge Janice D. Loyd of Oklahoma City elaborated on the notion that a willful breach of contract does not give rise to nondischargeability absent an allegation of an intentional tort.[1] Peoples Bank and Trust Co. (“Bank”) brought an adversary proceeding alleging that the debtors’ failure or refusal to execute certain documents impaired the Bank’s ability to collect on the loan guarantee of the Small Business Administration (SBA) constituted a “willful and malicious injury.” The certain documents in question would give the Bank authority to obtain corporate tax returns of the debtors’ businesses directly from the IRS.
The lawsuit began when debtors guaranteed a bank loan to their small business corporation. However, the corporation defaulted, resulting in foreclosure on the collateral, leaving a deficiency and making the couple liable on their guarantees. The debtors filed a chapter 7 petition before the Bank commenced the adversary proceeding alleging that the failure to execute and deliver the documents required by the SBA made the debtors’ guarantees nondischargeable under §523(a)(6). Subsequent to the Bank’s filing, the debtors filed a motion to dismiss the complaint asserting that the Bank’s complaint does not state a claim for relief of nondischargeability.
Honorable Judge Loyd announced that nondischargeability under the subsection requires an act that is both willful and malicious, stating that willfulness requires both an intentional act and intended harm, or proof that the debtor intended the consequences of the act or believed that the consequences were substantially certain to result. The two elements of malicious and willful are in tandem with each other. Honorable Judge Loyd mentions that debts resulting from recklessness or negligence are not within the scope of 523(a)(6) and the gravamen of the Bank’s complaint plead “willful and malicious injury,” not allegations of a separate but related intentional tort. Moreover, Judge Loyd believed that the Bank was asking the Court to “broaden the reach of 523(a)(6) beyond the injures from tortious conduct to include damage awards for intentional breach of contract.” Ultimately, Judge Loyd emphasized that “the Court cannot stretch 523(a)(6) so far. Applying 523(a)(6) to contract causes of action is not appropriate in light of the long-standing application of the section solely to tort causes of action.” For the preceding reasons, Judge Loyd granted the motion to dismiss the complaint.
[1] Article: https://www.abi.org/newsroom/daily-wire/willful-breach-of-contract-doesn%E2%80%99t-result-in-section-523a6-nondischargeability
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