Opinion
No. BK-1-79-0006
May 23, 1979
Bankrupt — Debts Not Affected by Discharge — Nondischargeable Torts — Effect of Prior Judgment
A state court judgment against a bankrupt for conversion of a creditor's property was not sufficient to prevent discharge of the debt under Section 17a(2) of the Bankruptcy Act as no factual determination as to the elements of dischargeability had been made by the state court, and the conversion was not "willful and malicious".
The bankrupt had received the proceeds of an insurance policy, contrary to a prior order of a state court in the creditor's divorce action. That order required the creditor's spouse to designate the creditor as beneficiary of all policies of life insurance and to keep the policies in full force and effect. The creditor's spouse failed to designate the creditor beneficiary of a certain policy — instead designating the bankrupt as beneficiary. The state court judgment had awarded the creditor the amount of the proceeds of insurance that bankrupt had received and spent when the creditor's spouse died.
In discharging the debt, the bankruptcy court first determined that the state court judgment had not made a factual determination as to the elements of dischargeability, and therefore was not conclusive in the bankruptcy action under principles of rcs judicata or collateral estoppel. The court then indicated that for the conversion to be nondischargeable pursuant to Section 17a(2), the facts must indicate that the bankrupt's conduct was willful and malicious. Because in the present case, it was not clear that when the bankrupt received the insurance proceeds she knew or should have known of the creditor's superior right to the property, disregarded that right and appropriated the property, the court found that the circumstances of the case did not support a finding of willful and malicious conduct on the part of the bankrupt. Therefore, the debt represented by the state court judgment was dischargeable. See Sec. 17a(2) [§ 523(a)(2)] at ¶ 9228.