The primary goal of filing bankruptcy is commonly understood to be the receipt of a discharge of debt, and having a “fresh start” in life. There are probably thousands of cases that state this legal proposition, including Supreme Court cases dating back over 100 years. See Williams v. US Fid and Guar. Co., 236 US 549 (1915).
Certain Debt Exceptions to Discharge
While receiving a discharge is a primary purpose of a bankruptcy filing, not all debts are discharged. Some kinds of debts, such as certain taxes, domestic support obligations, and federal student loans, are automatically not discharged by statute, and the creditor doesn’t have to do anything for this to occur.
Other types of debts may be ruled by the court to not be discharged, but the creditor must file a lawsuit with the bankruptcy court for a determination. There are lists of these types of debts contained in the statutes, including in 11 U.S.C. Sections 523 and 727.
The Sixth Circuit Bankruptcy Appellate Panel recently issued an opinion delving into one of these types, debts arising from embezzlement or larceny: In re Harrison, No. 21-8008 (Feb. 2022).
What is the Difference between Embezzlement and Larceny?
The Court discussed at length a long factual background of the dispute between the debtor and creditor. It seems pretty clear that the debtor probably knew before filing for bankruptcy that he had a very angry creditor on his hands. This is always something you should discuss with your counsel before filing.
It’s also important to understand the definitions of what might be held by a court to be “ embezzlement” or “larceny.” Citing to other cases, the Sixth Circuit BAP reminded us of these standards. “Embezzlement within the scope of § 523(a)(4) is ‘the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come…. A creditor proves embezzlement by showing that he entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud.’”
Larceny on the other hand is more synonymous with theft. Larceny, while similar to embezzlement, is distinguished by the fact that the possession of the property was never lawful.
Whether looking at a situation where either embezzlement or larceny is alleged to have occurred, there is still an element of fraudulent intent involving moral turpitude or intentional wrongdoing. These issues remain expensive battles to fight over in a bankruptcy setting.
DelCotto is experienced in handling all types of cases which may pose challenges to receiving a discharge. If you think you may be in need of our services for this issue or another, please reach out to us at the contact information below. We look forward to assisting you.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset preservation and business restructuring law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.