1977, July, Pg. 1108. Important: Know Section 17 of the Bankruptcy Act.

Authorby Jerome S. Malman

6 Colo.Law. 1108

Colorado Lawyer

1977.

1977, July, Pg. 1108.

Important: Know Section 17 of the Bankruptcy Act

1108Vol. 6, No. 7, Pg. 1108Important: Know Section 17 of the Bankruptcy Actby Jerome S. MalmanJerome S. Malman is a sole practitioner with offices in Denver and Evergreen.1109If you are in the general practice of law and are operating under the assumption that bankruptcy law is distinct and separate from your practice, hopefully you will find this article enlightening and informative. The filings of bankruptcies have been on the increase ever since the inception of the Bankruptcy Act of 1898.(fn1) The intent of this article is to acquaint you with Section 17 of the Act,(fn2) which deals with debts that are not dischargeable. This section of the Act could very well affect (1) certain causes of action in personal injury litigation; (2) the extension of credit or loans by a client to a potential bankrupt; and, finally, (3) the terms of property settlement agreements in domestic relations laws.

The bankruptcy court, through its referees, now has jurisdiction conferred upon it through legislation(fn3) to determine the dischargeability issues, whereas it formerly had authority only in exceptional cases as held in Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695 (1934). The rationale behind this 1970 legislation was to allow a single court, that is, the bankruptcy court, to pass upon the question of dischargeability of a particular claim and thus be able to develop an expertise in this area. Prior to this bill, state court judges could determine dischargeability, yet they were not as experienced on these issues because of the limited number of cases coming before them. For some classes of debts, the jurisdiction of the bankruptcy court is exclusive, while for all other classes it is concurrent.

THE EFFECT OF SECTION 17 ON PERSONAL INJURY LITIGATION

It is hard to think of a more disheartening facet of our practice than when obtaining a successful judgment in a civil action, we see the fruits of our labor vanish through the filing of a bankruptcy petition by the defendant-debtor. However, if the complaint is carefully drafted to include certain causes of actions and these are subsequently proven, then the debt arising from the judgment will be nondischargeable in bankruptcy. Section 17 a(8) provides that a discharge in bankruptcy shall release a bankrupt from all of his provable debts except such liabilities "for willful and malicious injuries to the person or property of another...."

The determination by the state court as to the question of willful and malicious injury can certainly be controlling upon the referee's decision as to dischargeability. Thus, a verdict which includes punitive

1110damages and/or body judgment against the defendant-bankrupt is a verdict which is well worth pursuing. The leading case in Colorado that points out the importance of this is Valdez v. Sams, 134 Colo. 488, 307 P.2d 189 (1957). The plaintiffs had alleged in their complaint that they sustained injuries and damages resulting from an automobile collision proximately caused by the defendant's negligence. They further alleged that the defendant willfully, recklessly, carelessly and negligently drove his vehicle into and against the plaintiff's vehicle. A default judgment was entered against the defendant and only compensatory damages were awarded, evidencing the conclusion that only simple negligence was found.The debt arising from the default judgment was subsequently discharged in bankruptcy. The Colorado Supreme Court held that if the plaintiffs had desired to protect themselves against the possibility that the defendant might seek a discharge in bankruptcy, it was incumbent on them to receive a specific finding in the trial court that the negligence of the defendant was such that a discharge in bankruptcy would not operate to release the judgment. Thus, a specific finding of willful and malicious injury or the awarding of punitive damages and the enunciation of this finding in the default judgment order would have protected the judgment from subsequent dischargeability.

The bankruptcy court is now rather limited to the record in the state trial court and may not go behind it to determine the facts upon which the judgment is predicated. This conclusion was reached by the Tenth Circuit Court of Appeals in Raley v. Nicholas, 510 F.2d 160 (1975), thus again demonstrating the extreme importance of obtaining a specific finding as to willful and malicious injury, as may be evidenced by an award of punitive damages and/or body judgment. For now, the bankruptcy court is limited to the record from the state court and cannot admit extrinsic evidence to explain the state court's findings.

The Effect on Automobile Accident CasesWhether a particular claim arising out of an automobile accident will survive a discharge in bankruptcy depends upon the particular facts and circumstances surrounding the injury and the specific acts of misconduct charged against the tortfeasor.

Mere excessive speed, though willful, does not imply malice. In addition to this, there must be some motive or purpose found against the tortfeasor as perpetrated upon the plaintiff. A judgment against a motorist who ran down a...

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