PER CURIAM.
Appellant Jon Philip Monson, II, (the "Debtor Monson") appeals from a final order of the U.S. District Court for the Middle District of Florida which affirmed the judgment of the Bankruptcy Court for the Middle District of Florida (the "Bankruptcy Court"). The Bankruptcy Court determined that $117,950 of the debt that Debtor Monson owes to Appellee Alfred Galaz (the "Claimant Galaz") is nondischargeable pursuant to 11 U.S.C. § 523(a)(6). After review and oral argument, we affirm.
Claimant Galaz's son is Raul Galaz. Debtor Monson and Raul Galaz met in federal prison in 2003. After they were released, Raul Galaz and Debtor Monson discussed partnering for a business venture—opening an Internet café in Hillsborough County, Florida.
On October 11, 2007, Debtor Monson and Creditor Segundo Suenos, LLC ("Creditor Segundo") entered into a Letter Agreement (the "Agreement"), which provided that Segundo would loan Monson $130,000 for the "funding, creation and management of an internet center" (the "Center"). Claimant Galaz signed on behalf of Segundo.
The Agreement between Debtor Monson and Creditor Segundo provided that the Center would "substantially rely[] on the use of sweepstakes participation in order to market its business." The Agreement stated that Monson's "intent is to form a limited liability company, under the name `Internet Depot, LLC,' in which [Monson is] the sole member (i.e., owner)." It further provided that Monson would personally manage "all aspects of the Center" on a full-time basis.
In consideration for the loan, Creditor Segundo would receive 40% of the Center's profit after Segundo recouped its loan in full. The Agreement provided that, in the event that the Center was not profitable or the parties otherwise agreed to terminate the business, "all material assets will be liquidated and first used to pay back any unrecouped portion of the loan[.]" To this end, Segundo was "entitled to file . . . any documents necessary to preserve a lien upon all equipment, fixtures, and assets of the Center." Debtor Monson agreed to "execute all documents presented to [him] in order to establish a lien upon such equipment, fixtures, and assets of the Center[.]" Additionally, the Agreement provided that "all significant equipment or fixtures" must bear a label "reading words to the affect [sic] of `Equipment owned by Segundo Suenos, LLC, on lease to Internet Depot, LLC.'"
The Agreement gave Segundo "free access" to all of the Center's records and required Segundo's approval for "[a]ny material decisions relating to the Center," such as the selection of vendors, the hiring of employees, and the signing of contracts. The Agreement provided that the parties jointly agreed not to open or be involved with "any additional sweepstakes Centers without the consent of the other party" and that, if the parties were to open additional centers, the Agreement's terms would apply.
Debtor Monson used the money he obtained from Creditor Segundo to buy computers, telephones, and other equipment needed to run the Center. He also oversaw the build-out of the Center's premises, which took three to four months. In February 2008, the Center opened for business.
Raul Galaz testified that Segundo obtained a valid security interest in the equipment, as evidenced by a Florida Uniform Commercial Code Financing Statement Form (a "UCC-1" form). The UCC-1 form is stamped "FILED" on February 18, 2008, but does not bear any signatures.
On April 21, 2008, law enforcement raided the Center and seized substantially all of its assets, based on allegations that the Center was engaged in illegal online gaming. During this raid, according to Debtor Monson, the equipment was mishandled and damaged. Monson was arrested, but he was never formally charged. In late August or early September of 2008, while the equipment was still in the possession of law enforcement, Debtor Monson received notice that Creditor Segundo wished to terminate its interest in the Center and was demanding liquidation of the Center's assets to repay the loan.
In October 2008, Debtor Monson and a partner formed a new entity, Southern Investments of Jacksonville, LLC ("Southern Investments") for the purpose of carrying on the business of operating computer sweepstakes games. Monson leased the Center's equipment to Southern Investments, which then used the equipment to open another internet center in Jacksonville, Florida. The lease agreement between Monson and Southern Investments acknowledged that the equipment formerly belonged to Internet Depot and that Segundo "has asserted a lien interest against the subject property which is purportedly secured by a UCC Financing Statement." The Jacksonville internet center opened in February 2009.
Segundo alleged that Debtor Monson "absconded" with the equipment and opened this new business without Segundo's knowledge or consent. Further, according to Raul Galaz, Segundo had no knowledge of the deal Monson struck with law enforcement and had no idea what happened to the assets after they were retrieved from law enforcement, as Monson had simply disappeared and refused to return Galaz's calls or emails.
For his part, Debtor Monson testified that, once he received notice of Segundo's intent to terminate the Agreement, he believed the "entire agreement was over, finished, and done with." He did not think Segundo had a valid security interest in the equipment because he had no knowledge of the UCC-1 until after his arrest and he never signed any lien documents. He felt that, while Segundo had "claims" to the equipment, both he and other creditors of Internet Depot had claims to it as well. He believed that the equipment belonged to his business, Internet Depot, because it was purchased by Internet Depot. While Monson acknowledged that Segundo loaned him money, he testified that Segundo was "well aware of the fact . . . that this was a high-risk business. We all knew going into this thing we could get shut down. Which unfortunately, in my case, we were open 61 days and we were shut down. They knew the risk going in."
On February 18, 2009, Creditor Segundo filed a complaint against Debtor Monson in Texas state court, alleging breach of the Agreement and other state-law claims. On June 16, 2009, Debtor Monson and Creditor Segundo entered into a "Rule 11 Agreement" in the Texas state court case whereby Monson agreed to produce the equipment by July 30, 2009. The last item of that agreement read, "Remedy for Failure: Judgment for full amount of the claim: $130,000." The terms of this agreement were formally entered as an order in the Texas proceeding on August 19, 2009. On February 4, 2010, the Texas court entered an "Order Granting Seizure and Turnover of the Equipment," directing Monson to turn over certain listed equipment to Segundo by February 16, 2010.
On August 11, 2010, the Bankruptcy Court granted Monson's motion to turn over the equipment to Segundo, and the equipment was shipped to Segundo later that month.
On August 31, 2009, Debtor Monson filed for Chapter 7 bankruptcy. On December 4, 2009, Creditor Segundo filed an adversary proceeding in Monson's bankruptcy case.
In April 2011, Claimant Galaz purchased Segundo's claim against Monson. On June 2, 2011, the Bankruptcy Court substituted Claimant Galaz and Raul Galaz (the "Galaz Plaintiffs") for Creditor Segundo as plaintiffs in the adversary proceeding.
In July 2011, Claimant Galaz and Raul Galaz, as successors-in-interest to Creditor Segundo, filed a Second Amended Complaint against Debtor Monson. The complaint raised three counts. First, the Galaz Plaintiffs alleged that Monson obtained moneys and properties from Segundo by false pretenses, false representation and/or fraud and, thus, these debts were nondischargeable under 11 U.S.C. § 523(a)(2) (Count I). Second, the Galaz Plaintiffs alleged that: (1) Monson's actions constituted "fraud or defalcation while acting in a fiduciary capacity" (the "fiduciary claim"); and (2) Monson embezzled the Center's assets after the Texas court ordered their return to Segundo and, thus, these debts were nondischargeable under 11 U.S.C. § 523(a)(4) (Count II). Finally, the Galaz Plaintiffs alleged that Monson maliciously and willfully injured Segundo by "converting the Internet Center Assets for his own personal advantage" and, thus, these debts were nondischargeable under 11 U.S.C. § 523(a)(6) (Count III).
Monson answered, denying the operative allegations in the complaint and asserting eight affirmative defenses.
In July 2012, the Bankruptcy Court dropped Raul Galaz as a named party in the adversary proceeding based on its finding that Raul Galaz no longer had a personal stake in the outcome of the proceeding. The Bankruptcy Court allowed Claimant Galaz to continue as a named party.
Both Debtor Monson and Claimant Galaz filed motions for summary judgment, which the Bankruptcy Court granted in Monson's favor as to the fiduciary claim but denied in all other respects. On October 23, 2014, the Bankruptcy Court held a one-day bench trial.
On January 9, 2015, the Bankruptcy Court entered its Memorandum Opinion. The Bankruptcy Court explained that, while Creditor Segundo filed the complaint in 2009 to determine the dischargeability of the debt owed by Debtor Monson under the Agreement, the Galaz Plaintiffs were "substituted for Segundo as the plaintiffs" in June 2011, and, as of July 2012, Claimant Galaz was the sole named plaintiff in the action.
Turning to the issue of nondischargeability, the Bankruptcy Court noted that, while the "fundamental purpose of the Bankruptcy Code is to afford financial relief to honest but unfortunate debtors," the exceptions to discharge contained in Section 523(a) of the Code "prevent a debtor from avoiding the consequences of his wrongful conduct by filing a bankruptcy case." The Bankruptcy Court further explained that a creditor objecting to the dischargeability of the debt under § 523(a) bears the burden of proof.
As to Count I, the Bankruptcy Court explained that, to establish a claim under § 523(a)(2)(A), a creditor must show that, at the time the promise was made, the debtor knew that he could not fulfill the promise or had no intention of fulfilling the promise. The Bankruptcy Court determined that the evidence here did not establish "that the Debtor [Monson] intended to deceive Segundo at the time that he signed the Letter Agreement and obtained the loan." The Bankruptcy Court pointed out that Monson performed "a number of his obligations" under the Agreement, including overseeing the construction and management of the Center, and that the Center opened for business four months after the Agreement was signed. The Bankruptcy Court held, however, that the evidence did not establish that Monson withheld the Center's financial information from Segundo, that he took unauthorized draws from the loan proceeds, or that he refused to sign the documents necessary to perfect Segundo's interest in the equipment. Therefore, the Bankruptcy Court held, the evidence did not establish that the debt owed to Claimant Galaz, as successor-in-interest to Creditor Segundo, was nondischargeable as a debt for fraud under § 523(a)(2).
As to Count II, the Bankruptcy Court explained that, to establish a claim under § 523(a)(4) for embezzlement, Claimant Galaz, as successor-in-interest to Creditor Segundo, must show that Segundo owned the property that was taken and that Monson took it with fraudulent intent. The Bankruptcy Court determined that the evidence did not establish embezzlement for two reasons. First, the evidence demonstrated that Monson believed that Internet Depot owned the equipment and that no valid security agreement was ever signed, the financing statement was deficient, and Segundo's security interest was therefore invalid. Second, the evidence did not establish that Segundo was the owner of the Center's equipment or that Monson ever believed that Segundo held a valid security interest in the equipment after it was retrieved from law enforcement. Thus, the Bankruptcy Court held that the evidence did not establish that the debt owed to Claimant Galaz, as successor-in-interest to Creditor Segundo, was nondischargeable under § 523(a)(4).
As to Count III, dealing with nondischargeability under § 523(a)(6) for "willful and malicious injury," the Bankruptcy Court first wrote that "a debtor must commit some type of intentional tort directed against the claimant or his property" for a debt to be nondischargeable. Further, the injury must be both "willful, meaning that the injury itself was intended, and malicious, meaning that the debtor was conscious of his wrongdoing." The Bankruptcy Court determined that the evidence showed that Debtor Monson "knew that he damaged Segundo's right to recover its loan when he removed the Center's assets from Hillsborough County to Jacksonville, Florida, and used the assets in a new business created with a new business partner."
In reaching this conclusion, the Bankruptcy Court relied on specific record facts, which it summarized as follows:
In sum, the Bankruptcy Court found that Debtor Monson's conduct constituted a willful and malicious injury to Creditor Segundo within the meaning of § 523(a)(6) because Monson injured Segundo's right to recover its loan, the injury was intended, and Monson was conscious of his wrongdoing. Thus, the debt was nondischargeable under § 523(a)(6).
The Bankruptcy Court then proceeded to calculate the amount of the nondischargeable debt as the original loan amount of $130,000, less the value of the equipment that was returned to Segundo in 2010, yielding a total figure of $117,950. The Bankruptcy Court wrote that it reached this conclusion for two reasons. First, it was consistent with the purpose of § 523(a), which is to prevent debtors from avoiding the consequences of their wrongful conduct. In such situations, the Bankruptcy Court determined, it was appropriate for all debts arising from the willful or malicious act to be nondischargeable and that "excepting punitive damages from discharge under § 523(a)(6) is not inconsistent with the Bankruptcy Code's `fresh start' policy[.]" Second, the Bankruptcy Court determined that Monson had "stipulated in a separate state court action that the amount of the damages for his failure to return the equipment to Segundo was $130,000." In support, the Bankruptcy Court pointed to the June 16, 2009 Rule 11 Agreement that the parties signed in the Texas state court action.
Thus, in its Final Judgment, the Bankruptcy Court entered judgment in favor of Debtor Monson on Counts I and II, concluding that "the debt owed by the Debtor [Monson] to Alfred Galaz is not nondischargeable pursuant to § 523(a)(2) or § 523(a)(4) of the Bankruptcy Code." As to Count III of the complaint, the Bankruptcy Court entered judgment "in favor of the Plaintiff, Alfred Galaz, and against the Debtor [Monson]," and directed that $117,950 of the debt was nondischargeable under § 523(a)(6) of the Bankruptcy Code.
Debtor Monson appealed the Bankruptcy Court's order to the district court, arguing that the Bankruptcy Court erred in deciding that he committed a willful and malicious injury under § 523(a)(6). Claimant Galaz, as successor-in-interest to Creditor Segundo, cross-appealed, arguing that Monson did in fact commit fraud and embezzlement, as defined in 11 U.S.C. § 523(a)(2) and (a)(4), and that the Bankruptcy Court erred in ruling that Monson did not.
The district court held that the Bankruptcy Court's factual findings as to the § 523(a)(2) and (a)(4) counts were not clearly erroneous. Turning to the § 523(a)(6) count, the district court pointed out that Monson did not challenge the Bankruptcy Court's enunciated factual findings with respect to § 523(a), and it concluded that these findings were "well-supported" by the record. Thus, the district court did not revisit these factual findings, but limited its review to whether "the pertinent willful and malicious acts are the type contemplated by § 523(a)(6) to render a debt nondischargeable."
The district court held that, while the Bankruptcy Court erred in finding that tortious conduct is a necessary prerequisite for a finding of nondischargeability under the section, such conduct is "certainly one avenue available to a bankruptcy court in establishing nondischargeability." And while the Bankruptcy Court did not enunciate which tort it relied on in reaching its conclusion, the district court held that, in any event, "Monson's actions injured Segundo because those actions deprived Segundo of access to the collateral, and such injury was substantially likely to occur."
The district court rejected Monson's argument that his actions were an "efficient breach of the contract" under 11 U.S.C. § 365(a) because § 365(a) requires court approval, which Monson did not show here. The district court also approved of the damages amount calculated by the Bankruptcy Court, writing that case law supported a punitive damages award and that the Bankruptcy Court properly considered the parties' stipulated damages amount of $130,000. Therefore, the district court affirmed the Bankruptcy Court's Opinion and Final Judgment.
Monson, alone, has appealed the district court's determination to this Court.
We review a bankruptcy court's findings of fact for clear error.
755 F.3d 1285, 1288 (11th Cir. 2014). Where the district court has affirmed the bankruptcy court's findings, we apply this clearly erroneous standard with "particular rigor."
"A Chapter 7 debtor is generally entitled to a discharge of all debts that arose prior to the filing of the bankruptcy petition. But this `fresh start' policy is only available to the `honest but unfortunate debtor.'"
This Court has explained that a debtor commits a "willful" injury when "he or she commits an intentional act the purpose of which is to cause injury or which is substantially certain to cause injury."
Here, the Bankruptcy Court's factual determinations are well supported by the record evidence. The Bankruptcy Court did not err in finding that Claimant Galaz, as successor-in-interest to Creditor Segundo, showed, by a preponderance of the evidence, that Monson committed a willful and malicious injury within the meaning of § 523(a)(6).
Monson committed a willful injury because his action of absconding with the Center's equipment and using it to open a new internet center was an "intentional act the purpose of which [was] to cause injury or which [was] substantially certain to cause injury."
Monson argues that applying this tort-like standard to breaches of contract would "dramatically expand the number of nondischargeable debts and diminish the scope of the bankruptcy discharge" and advocates that "tort or tort like actions" are required for nondischargeability under § 523(a)(6). We have previously considered and rejected this argument.
Here, Monson received a Termination Letter and/or a Termination Agreement from Segundo in late August or early September of 2008 that notified him of Segundo's intention to terminate the Agreement and demanded that he return the Center's assets or immediate liquidate them in order to repay the $130,000 loan. Yet within just a few months, Monson used the Center's equipment to open a new internet center with a different partner in another part of Florida. While there is conflicting evidence about whether Monson kept Segundo informed of his new venture in Jacksonville, it is undisputed that Monson knew Segundo was asserting its right to repayment of the loan and that Segundo never sanctioned the new internet center in Jacksonville.
Further, although the parties hotly contest whether Segundo ever perfected its security interest in the equipment and/or whether Monson was aware of such an interest at the time the Center launched, Monson admits that he became aware of at least a "purported" security interest after his arrest in April 2008. The evidence is also undisputed that, knowing of Segundo's purported security interest, Monson nevertheless retrieved the equipment, relocated it to a different part of the state, and used it to open a new business, all without notice to, or permission from, Segundo. Bankruptcy courts within this Circuit have held that, whether or not a lienholder's security interest is properly perfected or recorded, where the debtor has knowledge of the lienholder's claim and subsequently sells or disposes of the property at issue without notice to the lienholder, that act constitutes a willful and malicious injury under § 523(a)(6).
Thus, Monson knew that his actions were at least substantially certain to cause injury to Segundo's ability to seek repayment of its loan.
Monson also committed a malicious injury because the injury was wrongful, without just cause, and excessive.
First, the Bankruptcy Court was free to imply malice because a preponderance of the evidence suggests that Monson's acts were "wrongful and without just cause."
Monson makes various excuses for his behavior, including: (1) Segundo knew what they were entering into a high-risk venture, and so once their business got closed down by law enforcement, the Agreement between them became null and void; (2) other creditors had claims or potential claims against the equipment; (3) Segundo never owned or had a valid security interest in the equipment; (4) Segundo did not assist Monson in retrieving the equipment from law enforcement; and (5) Segundo did not adequately protect its collateral.
Further, Monson's behavior falls outside of the sort of reckless or unfortunate but non-malicious acts that this Court have previously held do not rise to the standard of a willful and malicious injury under § 523(a)(6).
Finally, a preponderance of the evidence suggests that Monson's acts were "excessive" because it is undisputed that he retrieved all of the seized equipment from law enforcement and that he used at least "some" of it to open the new internet center in Jacksonville.
For the foregoing reasons, we affirm the district court's order affirming the Bankruptcy Court's determination that $117,950 of the debt Monson owes to Claimant Galaz is nondischargeable under § 523(a)(6).
The Bankruptcy Court cited Plaintiff's Trial Exhibit 35 in support of this evidence, but this exhibit is so poorly copied as to be largely illegible. Raul Galaz, however, read this portion of the letter into evidence at trial. Debtor Monson admitted having received this "Termination Letter" and/or a "Termination Agreement" from Segundo on August 28, 2008.
