4th Circuit: Assault settlement, collection fees nondischargeable

By Nick Hurston

Unpaid principal, late payment interest and collection fees due under a settlement agreement for willful and malicious injuries caused by one party’s assault of the other were not dischargeable in the debtor’s bankruptcy, the 4th U.S. Circuit Court of Appeals has held.

When the debtor stopped making payments, the injured party sued to enforce the settlement agreement and contested the debtor’s attempt to discharge the debt in bankruptcy. The District Court found that neither the unpaid principal nor the collection fees were dischargeable.

U.S. Circuit Judge Pamela A. Harris agreed.

“[T]he statutory question is whether debt embodied in a settlement agreement is ‘debt for’ the underlying tort claim, and whether the agreement comes before or after litigation has no obvious bearing on that point,” she wrote.

U.S. Circuit Judge A. Marvin Quattlebaum Jr. and U.S. District Judge Kenneth D. Bell of the Western District of North Carolina, sitting by designation, joined Harris to affirm the district court’s judgment in Yagi v. Hilgartner.

Arlington, Virginia, litigator James DeVita, who represented Lee Andrew Hilgartner, offered no comment. Alfredo Acin of Offit Kurman, who represented Yasuko Yagi, didn’t respond to request for comment.

Settlement agreement

Hilgartner admitted to assaulting Yagi on two occasions. In a settlement agreement, Hilgartner agreed to pay Yagi $415,000 in installments to compensate her for injuries.

Along with 15% interest on untimely payments, the parties agreed to pay reasonable attorneys’ fees to the prevailing party in any action to enforce or interpret the agreement.

Hilgartner paid $185,955 but eventually stopped. After Yagi sued to enforce the settlement agreement, Hilgartner filed for bankruptcy protection. Yagi then sought a declaration that the full amount Hilgartner owed her under the settlement agreement was nondischargeable under 11 U.S.C. § 523(a)(6).

The Bankruptcy Court agreed that the unpaid $229,045 of the principal was nondischargeable. However, Yagi’s collection debts — including interest on late payments — were dischargeable because they flowed directly from the settlement agreement, rather than her injuries.

Yagi appealed to the District Court, which held that both the unpaid principal and the collection debts were nondischargeable.

Hilgartner appealed.

‘Debt for’

Harris said a “debt” falls within § 523(a)(6)’s exception from discharge if it is “for willful and malicious injury by the debtor to another entity or to the property of another entity.”

Hilgartner neither claimed any factual findings were clearly erroneous nor did he contest that he inflicted willful and malicious injury within the meaning of § 523(a)(6). He maintained that the amounts due under the settlement agreement were not a “debt for” that injury.

Harris drew guidance from 1998’s Cohen v. de la Cruz, where the U.S. Supreme Court instructed that “the introductory phrase ‘debt for’ — which prefaces most of § 523(a)’s exceptions to discharge — ‘connot[es] broadly any liability arising from the specified’ conduct.”

The Cohen court added that “‘“[d]ebt as a result of,” “debt with respect to,” “debt by reason of,” and the like’ — all count as ‘debt for.’”

In 2003, the Supreme Court rejected an argument similar to Hilgartner’s in Archer v. Warner by looking behind a fraud settlement “to determine whether it reflected settlement of” a claim that would otherwise be nondischargeable claim.

“Archer understood itself to be ‘govern[ed]’ by Brown v. Felsen,” Harris wrote. While that case had similar circumstances, it included a consent decree rather than an out-of-court settlement.

“That made no difference, the Archer court concluded: ‘A debt embodied in the settlement of a fraud case “arises” no less “out of” the underlying fraud than a debt embodied in a stipulation and consent decree,’” Harris said. “As Brown governed Archer, so Archer governs here: Hilgartner’s nondischargeable debt for ‘willful and malicious injury’ may have been reduced to a settlement agreement, but that does not ‘change[] the nature of the debt for dischargeability purposes.’”

The judge rejected Hilgartner’s argument that the fraud claim in Archer was distinct.

“[A]s the Supreme Court explained in Cohen, the phrase ‘to the extent obtained by’ does not speak to whether a particular debt is traceable to or arises from fraud for purposes of dischargeability,” she wrote. “Instead, that inquiry is governed by the introductory words ‘debt for’ … — precisely the same words that introduce § 523(a)(6)’s ‘willful and malicious injury’ exception, subject to the same broad reading.”

Nor did it matter that the settlement agreement in Archer resolved an existing lawsuit while the parties here preempted a lawsuit by settlement.

“[A] debt embodied in a pre-suit settlement that resolves a claim for willful and malicious injury ‘“arises” no less “out of” the underlying [tort] than a debt embodied’ in a post-suit settlement,” the judge noted. “What matters is the ‘true nature’ of the debt, not the form of the legal instrument in which it is reflected.”

The parties agreed that the debt in the settlement agreement was for pain, damage and suffering Hilgartner caused during altercations with Yagi that inflicted willful and malicious injury. He could not now discharge the debts in bankruptcy under § 523(a)(6).

Collection debts

Hilgartner disputed whether Yagi’s collection debts — interest on late payments and attorneys’ fees incurred in enforcing the agreement and contesting Hilgartner’s bankruptcy proceedings — were nondischargeable.

Harris agreed with the District Court that “the Supreme Court’s decision in Cohen points toward the opposite result.”

The Cohen court held that treble damages from actual fraud, as well as attorneys’ fees incurred in litigating the fraud, were nondischargeable.

“Cohen forecloses any argument that only the portion of Hilgartner’s debt commensurate with the ‘willful and malicious injury’ he inflicted — the ‘restitutionary’ portion — is non-dischargeable as ‘debt for’ that injury,” Harris wrote.

Through a broad reading of the phrase “debt for,” the Cohen court found that § 523(a)’s exceptions applied to punitive and other related ancillary debts because they “‘connot[e] broadly any liability arising from the specified object’” — fraud, willful and malicious injury or the like.”

Yagi’s collection debts fit that description because they were incurred “as a result of” or “on account of” Hilgartner’s assaults, Harris found.

“But for the assaults, there would have been no settlement agreement and no collection debt,” she wrote. “And, critically, the entire settlement ‘arose from’ the same willful and malicious injuries.”

The bankruptcy court’s opinion that Yagi’s collections debts weren’t fairly traceable to the injuries and resulted only from the settlement employed the same logic that was rejected by Archer, the judge pointed out.

“As Archer makes clear, a settlement agreement does not disrupt the causal chain,” she said. “The settlement simply formalized a bargain — a bargain that envisioned compensation for injury and collection alike — to resolve claims arising from willful and malicious injury.”

The weight of authority that “treats any contrast between ‘fees spent to execute a settlement agreement’ and ‘fees spent to enforce that same agreement’ as a ‘distinction without a difference’” supported the court’s conclusion, Harris wrote.