Embezzled Money Can’t Be Discharged in Bankruptcy

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By Diane Davis

A businessman who fraudulently kept tens of thousands of dollars accidentally transferred to his company can’t wipe out that debt in bankruptcy, the U.S. Bankruptcy Court for the Northern District of Georgia held March 6 ( EBF Holdings, LLC v. Favors (In re Favors) , 2017 BL 68818, Bankr. N.D. Ga., No. 15-10350-WHD, 3/6/17 ).

Bankruptcy Code Section 523(a)(4) doesn’t allow a debt to be discharged, or excused, in cases that include fraud, embezzlement or larceny, Judge W. Homer Drake wrote.

The court found that in this instance, Daniel Favor of Miracle Transportation, LLC lawfully acquired some $100,000 through the accidental transfer by EBF Holdings, LLC in 2014.

But his decision to ultimately keep about three-quarters of the money, spending some of it on a car and a tow truck, after being asked to return it all was fraudulent, and the debt would fall under embezzlement, the court said.

“This conduct is highly indicative of an intent to deprive EBF of its property by attempting to hide it,” the court said “In light of the Debtor’s knowledge and his conduct, the Court concludes that the Debtor misappropriated the $74,000 with fraudulent intent, and therefore the debt is non-dischargeable,” the court said.

“Here, the Court finds that the $74,000 is a debt for embezzlement,” the court said.

EBF Holdings agreed to acquire payment rights from Miracle Transportation for $10,520, which was to be wired. An EBF employee, however, erroneously wired $109,520 to Miracle’s account.

EBF tried to stop the transaction but couldn’t. It contacted Favor to inform him of the error and asked for it to be returned.

Although Favor gave EBF the impression that the money would be returned, he kept it and spent some on a car and a tow truck.

After EBF’s attorney demanded the funds be returned, Favor’s brother gave back $25,000. Favor then filed for Chapter 7 bankruptcy, and obtained the discharge.

In Chapter 7 bankruptcy, a debtor’s assets that cannot be kept are liquidated and the proceeds distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, which effectively wipes out debt.

EBF argued that Favor shouldn’t be able to discharge the unreturned money.

Philip S. Coe represented EBF Holdings, LLC; Daniel Favors represented himself; Kan & Clark, LLP previously represented Favors.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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