An Odd “Willful And Malicious Injury” Case Under § 523(a)(6) (Adair v. Stutsman)

This has got to be one of the oddest § 523(a)(6) “willful and malicious injury” cases out there:

Adair v. Stutsman Construction, L.L.C., Case No. 24-30273 (5th Cir., decided May 20, 2025).

Summary of Case

Debtor contracts with Contractor to repair flood damage to Debtor’s home.

Contractor does the agreed-upon work. The total price is $179,761.90, payable in four installment as the work progresses.

Debtor gets a loan from a mortgage company to pay the repair costs. The mortgage company sends each of the four installment checks to Debtor with the names of both Debtor and Contractor on each check as co-payees.

On each occasion of issuing the four checks, a mortgage company inspector gives a thumbs-up on Contractor’s work.

Debtor endorses each of the first three checks and gives them to Contractor.

But on the fourth check, in the amount of $71,755.48, Debtor refuses to pay any portion thereof to Contractor, claiming the repairs were done poorly. Debtor also refuses Contractor’s offer to fix any remaining problems.

What Debtor does, instead, is:

asks the mortgage company whether depositing the check in Debtor’s account, without obtaining Contractor’s endorsement, would be illegal; and
then, does exactly that.

So, Contractor sues Debtor in a Louisiana state court. When Debtor fails to appear for trial, Contractor gets a default judgment for the amount of the fourth check, with interest, etc.

So, Debtor files a Chapter 13 bankruptcy, seeking to discharge the default judgment.

Contractor files a Complaint in Debtor’s bankruptcy, under § 523(a)(6), seeking to have the default judgment declared nondischargeable for “willful and malicious injury.”

In response, Debtor argues that Contractor is barred from obtaining such relief because of “unclean hands.”

The Bankruptcy Court rejects Debtor’s defense and finds Contractor’s judgment to be nondischargeable for “willful and malicious injury” under § 523(a)(6).

“Unclean Hands” Defense

Debtor’s “unclean hands” defense is raised in defending against nondischargeability. Such defense is based on the following:

Contractor is a licensed Louisiana construction company, but that license allows Contractor to charge only up to $75,000 for home repairs;
Debtor files a complaint with the Louisiana State Licensing Board, alleging that Contractor engaged in unlawful home repairs because the total contract price with Debtor exceeded the $75,000 limitation on Contractor’s license;
Contractor claims a belief that, by dividing the project into four phases with a price less than $75,000 for each phase, there is no violation;
the Licensing Board’s investigator finds that Contractor performed work for $179,761.90 and recommends citations against Contractor for, (i) operating without a license, and (ii) violating mold remediation regulations; and
Contractor pleads guilty to both violations.

So, in the nondischargeability adversary, Debtor moves to dismiss Contractor’s Complaint because of Contractor’s “unclean hands” (i.e., for Contractor’s lack of a proper license and the inadequate workmanship).

The Bankruptcy Court rejects that defense, finding it to be precluded by the default judgment, and declares the default judgment to be nondischargeable under § 523(a)(6).

On appeal, the U.S. District Court for Louisiana affirms. So, Debtor appeals to the Fifth Circuit Court of Appeals.

Fifth Circuit Action

At the Fifth Circuit, a three-judge panel hears the appeal. The result is:

two judges reverse and remand to the Bankruptcy Court to consider Debtor’s unclean hands defense; but
the other circuit judge dissents, declaring that Debtor “deposited the check despite knowing the work was essentially complete” and that such conduct “was willful and malicious . . . making the debt nondischargeable.”

–Two-Judge Majority

The two-judge majority says the Bankruptcy Court erred in ruling that the unclean hands defense is precluded by the state court judgement.

Issue preclusion applies when “the first court has made specific, subordinate, factual findings on the identical dischargeability issue in question . . . and the facts supporting the court’s findings are discernible from that court’s record.”

There can be no issue preclusion on the unclean hands defense because:

a default judgment is not “actually litigated”;
the one-page default judgment has no findings of fact or conclusions of law—it simply awards damages for the value of the final check with interest, fees, and costs; and
the record contains nothing about the potential uncleanliness of Contractor’s actions.

The Bankruptcy Court also erred because Debtor’s unclean hands defense was not available in the Louisiana state court proceedings. Additionally, Louisiana law provides that a contract is absolutely null when it violates a rule of public order, as when the object of a contract is illicit or immoral.

So, the Fifth Circuit vacates the judgment of the bankruptcy court and remands the case to the Bankruptcy Court to consider Debtor’s unclean hands defense.

–One-Judge Dissent

The one-judge dissenting opinion says:

“I respectfully disagree with the majority’s conclusion that the bankruptcy court erred in applying res judicata” to Debtor’s unclean hands defense;
Debtor’s defense in both proceedings rested on the same factual premise—that Contractor lacked the license required for construction projects exceeding $75,000;
the core question is whether Contractor’s lack of licensure excused Debtor’s nonpayment, which issue was fully available in state court—Debtor simply chose not to raise it;
the Bankruptcy Court rightly rejected the “unclean hands” argument—that the state court litigation ended in a bare, one-page default judgment with no findings of fact or conclusions of law is beside the point;
the unclean hands issue could have been adjudicated in state court but went unraised—entirely due to Debtor’s inaction; and
“Res judicata bars a second bite at the apple.”

The record supports the conclusion that Debtor’s debt arose from a willful and malicious injury:

there is no evidence that Contractor acted fraudulently or in bad faith;
Contractor may have lacked the license required for the full scope of the project—but:
- Contractor believed the project could be lawfully divide into smaller phases, each under the $75,000 threshold permitted by its existing license;
- even if that belief was mistaken, nothing suggests it was dishonest;
nothing in the record suggests any deficiency in Contractor’s work or any action taken in bad faith—any remaining tasks were minor, routine “punch list’ details that Contractor offered to fix;
the Bankruptcy Court found the testimony of Contractor’s manager more credible than Debtor’s testimony—and since this case largely turns on the relative credibility of the witnesses, there is no basis to second-guess the findings of Bankruptcy Court and its first hand observation of the witnesses;
the record offers no support for the decision of Debtor to withhold more than $70,000, when Debtor knew that little—if any—work remained;
Debtor also knew the mortgage company had inspected the property and certified the job as complete;
yet, Debtor withheld payment, rejected Contractor’s repeated offers to resolve any remaining issues, and instead chose to keep the money.
Debtor claims he needed the funds to hire new contractors to fix the defective work . . . but Debtor admits spending only $4,000 on such fixes—far less than the $70,000 withheld;
Debtor later testifies to spending an additional $20,000 in cash, but the Bankruptcy Court finds that assertion “rather incredible”; and
Debtor acknowledged that some appliances were never replaced and failed to produce photographic evidence of any actual repairs.

But most telling, the Dissent declares, is this revelation in trial testimony:

Debtor contacted his bank before depositing the fourth check—to ask whether making such a deposit would be illegal;
as the Bankruptcy Court rightly concluded, this shows that Debtor “knew what he was doing was questionable, perhaps even illegal”; and
by depositing the check, Debtor knowingly breached the contract with substantial certainty that Contractor would be harmed.

Such conduct is willful and malicious, under § 523(a)(6), making the debt nondischargeable.

Conclusion

Yep. That case is a doozy.

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