Busseto Foods, Inc. v. Laizure (In re Laizure), 548 F.3d 693 (9th Cir. 2008)

In Busseto Foods, Busseto Foods, Inc.’s former CFO Charles Laizure was required to make payments to Busseto after admitting to embezzling large sums of money from the company. Laizure filed for bankruptcy within 90 days of making his final payment to Busseto. The trustee sought to avoid this last payment under Bankruptcy Code section 547. The trustee and Busseto eventually reached a settlement pursuant to which Busseto agreed to return some of Laizure’s last payment to the trustee.

Busetto filed a proof of claim against Laizure for the amount it paid the trustee and sought a declaratory ruling that pursuant to Bankruptcy Code section 523(a)(4), the debt owed to Busseto was not dischargeable. Bankruptcy Code section 523(a)(4) states that a debt arising from “fraud … embezzlement, or larceny” is not discharged in bankruptcy. The Bankruptcy Court for the Eastern District of California denied Busetto’s request for a declaratory judgment, reasoning that Bankruptcy Code section 502(h), which states that a claim arising out of an avoidance action “shall be determined, and shall be allowed . . . or disallowed . . . the same as if such claim had arisen before the date of the filing of the petition,” only preserves claims against the estate and does not revive claims against the debtor personally. The Ninth Circuit Bankruptcy Appellate Panel agreed.

The Court of Appeals for the Ninth Circuit reversed, citing the language of section 523(a), which states that a claim subject to the section (for example the claim against Laizure) “does not discharge an individual debtor from any debt”

arising from fraud or embezzlement. The court explained that the broad term “any debt” seems to apply to all claims against the debtor, including personal claims, should a court find a claim to be non-dischargeable. Thus, the Court of Appeals ruled that if a claim is determined to be nondischargeable under section 523(a), section 502(h) permits that claim to be reinstated and brought

against the debtor personally.

In addition to the statutory support for its holding, the Court found that this conclusion best advances the policies of the Bankruptcy Code. The Court stated that a contrary result would encourage debtors to pay their non-dischargeable debts and soon after file for bankruptcy protection, thus avoiding the non-dischargeable nature of their debt