In re Ruben

(7th Cir. Dec. 23, 2014)

The Seventh Circuit affirms the district court’s reversal of the bankruptcy court’s order discharging the debtor’s obligation to pay costs pursuant to an arbitration award. The creditor sued the debtor in state court for fraud and negligence in managing a trust, of which the creditor was trustee. The parties then agreed to arbitrate, but the debtor filed a chapter 7 petition prior to commencement of the arbitration. After the creditor filed the nondischargeability action, the parties again agreed to arbitrate the negligence and fraud claims. All but the fraud claim was settled, and the arbitration panel then ordered that the debtor pay the arbitration costs, rather than deciding the fraud claim. The debtor refused to pay the costs, and the creditor sought an order from the bankruptcy court directing him to do so. The bankruptcy court declined, and the district court reversed. The debtor argued that the arbitration award for costs was a prepetition debt that should be discharged because it only arose as a result of the prepetition claims. The Seventh Circuit disagrees. The debtor chose to arbitrate post petition and thus assumed the risk that he would be liable for the costs. Further, the arbitration panel implied in its award that the debtor had committed fraud, and thus the prepetition debt would not likely have been dischargeable. Opinion below.

2014-12-23 – in re ruben