Subchapter V bankruptcy cases have exploded in popularity, primarily due to its high rate of obtaining confirmed plans, significantly lower costs, faster pace, and ability for debtors to retain the equity in their businesses. But some bankruptcy courts and circuit courts have begun expanding exceptions for debts that Subchapter V debtors cannot discharge. Recently, former NFL superstar wide receiver Antonio Brown demonstrated when such an exception can apply and how prepetition judgment creditors can preserve their claim against debtors notwithstanding a bankruptcy filing. Depending on the circuit, Brown’s bankruptcy case also serves as a warning to corporate Subchapter V debtors attempting to discharge prepetition debts.

Background

On or about February 11, 2020, Antonio Brown allegedly assaulted and caused bodily harm to Anton Tumanov (“Tumanov”), an employee of Amerimoving, LLC. Brown had hired Amerimoving to relocate his personal property to his new home in Hollywood, Florida. On May 12, 2021, Tumanov filed a complaint against Brown in Florida state court alleging that Brown refused to remit payment for Amerimoving’s services, verbally and physically attacked Tumanov, and attacked Tumanov’s moving vehicle, damaging both the vehicle and personal property in the vehicle belonging to other Amerimoving customers. On July 12, 2022, the Florida state court granted a default judgment against Brown, and on October 7, 2022, the court entered a final judgment in favor of Tumanov against Brown in the amount of $1.2 million with quarterly interest payable on the judgment at 4.75% per annum (the “Final Judgment”).

On May 20, 2024, Brown filed a voluntary chapter 11 Subchapter V bankruptcy petition in the United States Bankruptcy Court for the Southern District of Florida. On May 27, 2024, Tumanov filed an adversary complaint seeking a declaratory judgment that Brown could not discharge the Final Judgment in the bankruptcy case (the “Adversary Complaint”).

The Bankruptcy Code

Subchapter V of chapter 11 of the Bankruptcy Code is only available to debtors that have total secured and unsecured debts of $3,024,725 or less (the limitation was previously $7.5 million). Section 1192 of the Bankruptcy Code governs the discharge/extinguishment of a Subchapter V debtor’s prepetition debts and provides that the bankruptcy court shall grant the debtor a discharge after a debtor’s bankruptcy plan is confirmed and the debtor completes its payments to creditors under the plan. However, section 1192(2) excludes the discharge of any debt specified in section 523(a) of the Bankruptcy Code.  

Although there is currently a circuit split concerning whether section 523(a)’s discharge exceptions apply to businesses in Subchapter V bankruptcies, it is unrefuted that section 523(a) applies to individuals, as section 523(a)(6) expressly provides that “a discharge under section . . . 1192 . . . of this title does not discharge an individual debtor from any debt— . . . (6) for willful and malicious injury by the debtor to another entity or to the property of another entity.” 

The Adversary Complaint and Answer

In his Adversary Complaint, Tumanov alleged that under section 523(a)(6) of the Bankruptcy Code, Brown could not discharge the Final Judgment. In support of this position, Tumanov alleged that the Final Judgment established that as a matter of law, Brown “actually and intentionally struck TUMANOV against his will”; “intended to cause TUMANOV bodily harm”; and “is the actual and proximate cause of TUMANOV’s bodily injuries and his continuing severe bodily injuries, pecuniary losses, and mental anguish.” Accordingly, Tumanov alleged in the Adversary Complaint that the Final Judgment was a debt arising from “willful and malicious injury by the DEFENDANT [Brown] to TUMANOV, and therefore was not dischargeable pursuant to 11 U.S.C. § 523(a)(6).”

Brown filed his answer and affirmative defenses on June 27, 2024, asserting that Tumanov’s claim that the section 523(a)(6) discharge exception applies “is barred in whole or in part to the extent Defendant [Brown] did not cause the alleged harm.”

The Bankruptcy Court Grants Preclusive Effect of the Final Judgment and Enters Summary Judgment Denying Discharge

Tumanov alleged in the Adversary Complaint that the bankruptcy court should not relitigate the assault and battery charges and instead should rule that the Final Judgment satisfied the “willful and malicious” requirement under section 523(a)(6) of the Bankruptcy Code. In support, Tumanov filed a motion in the adversary proceeding requesting that the bankruptcy court give preclusive effect to the Final Judgment and enter summary judgment finding that the Final Judgment was not dischargeable. Tumanov argued that the following four collateral estoppel elements under Florida law give preclusive effect to the Final Judgment:

1. Issue at stake must be identical to the one decided in the prior litigation: Pursuant to the Final Judgment, Brown was found to have intentionally and deliberately acted against Tumanov and conducted such actions with specific intent to harm Tumanov wrongfully and without just cause, which under Supreme Court and Eleventh Circuit precedent, is proof of “willful” and “malicious” injury.
2. The issue must have been actually litigated in the prior proceeding: Brown had the opportunity to litigate the issue in Florida state court, was served the necessary notices and pleadings, and chose not to defend the action.
3. The prior determination of the issue must have been a critical and necessary part of the judgment in that earlier decision: The Final Judgment admits the truth of all of Tumanov’s allegations in the Adversary Complaint.
4. The standard of proof in the prior action must have been at least as stringent as the standard of proof in the later case: In both the Florida state court and adversary proceeding, the standard of proof is the “preponderance of the evidence.”

Accordingly, Tumanov argued that Brown should be collaterally estopped from relitigating the Final Judgment and that he was entitled to an order finding that the Final Judgment was non-dischargeable under section 523(a)(6) of the Bankruptcy Code. In response, Brown filed an objection asserting that section 523(a)(6) was not satisfied because the Final Judgment did not find either (i) that Brown willfully intended to injure Tumanov or (ii) that Brown acted maliciously with respect to any alleged injury to Brown. 

On October 15, 2024, the bankruptcy court entered an order granting Tumanov’s motion for preclusive effect and for summary judgment. Three days later, the bankruptcy court entered an order holding that all indebtedness Brown owes or will owe to Tumanov pursuant to the Final Judgment is non-dischargeable under section 523(a)(6) of the Bankruptcy Code.

Takeaways

Notwithstanding that the Florida state court never used the words “willful” or “malicious” in the Final Judgment, the bankruptcy court agreed with Tumanov that the Florida state court’s findings satisfied section 523(a)(6)’s discharge exception for “willful and malicious injury.” Although Tumanov was successful, the better course of action is for plaintiff’s attorneys to expressly include “willful and malicious” language in any default or final judgment to (i) significantly reduce the possibility that the judgment can be discharged in a subsequent bankruptcy case and (ii) add meaningful leverage if the judgment debtor threatens to file bankruptcy.

Moreover, for professionals representing companies in Subchapter V, more circuits are beginning to hold that the section 523(a) discharge exception applies to companies, not merely individuals (see In re GFS Indus. LLC, 99 F.4th 223 (5th Cir. 2024); In re R&W Clark Const., Case No. 24-01463 [Docket No. 15] (N.D. Ill. Nov. 14, 2024); In re Van’s Aircraft Inc., Case No. 24-06011, 2024 BL 200305 (Bankr. D. Ore. June 11, 2024); In re Cleary Packaging LLC, 36 F.4th 509 (4th Cir. 2022)). Accordingly, questions concerning whether prepetition judgments and orders should be deemed as findings of “willful and malicious injury” may become more prevalent in corporate cases. Proactively staying apprised of section 523(a)(6) developments could provide tremendous value for clients considering whether to file Subchapter V cases, especially if Congress increases the debt limit back to $7.5 million. Lastly, bankruptcy practitioners would be well served to follow a similar strategy to that which Tumanov implemented in his adversary proceeding against Brown. Almost immediately upon Brown’s filing for bankruptcy, Tumanov filed an adversary proceeding for a declaratory judgment concerning the non-dischargeability of the Final Judgment. He then immediately sought preclusive effect of the Final Judgment and entry of a summary judgment that his debt could not be discharged. Throughout the adversary proceeding, Tumanov controlled the pace and narrative of the proceeding and the relief being sought. Now, Tumanov is seeking derivative standing in the main bankruptcy case to assert fraudulent conveyance actions against Brown, and the United States’ Trustee Office is seeking to expand the duties of the Subchapter V Trustee to investigate Brown’s property interests, transfers of real property, and monthly income. Notwithstanding Brown’s downfall from Super Bowl champion, his plight is an important reminder to always consider the potential limitations of bankruptcy and the strategies available to creditors.