EDWARD ELLINGTON, Bankruptcy Judge.
On December 26, 2007, Kenneth Harlan Jenkins d/b/a Metro Equipment (Debtor) signed a Promissory Note (Note) with Heritage Banking Group (Heritage) in which Heritage agreed to loan the Debtor $100,070.00. The Note provided for sixty (60) monthly loan payments in the amount of $2,041.04, beginning on January 25, 2008. Listed on the Note as security are the following pieces of equipment: "ONE MUNICIPAL LEAF/DEBRIS MANAGEMENT SYSTEM*CONCRETE CURBING MACHINERY*ONE E-Z GOLF CART W/CANOPY*ONE JOHN DEERE MULE*ONE GOOSE NECK LAWN TRAILER*ONE PORTABLE GENERATOR/WELDER."
In order to secure the Note, the Debtor also entered into a Commercial Security Agreement (Security Agreement) with Heritage on December 26, 2007. Attached as Exhibit A to the Security Agreement is the same list of equipment as on the Note, however, the list attached to the Security Agreement has more detail. Exhibit A to the Security Agreement states the following:
Trial Exhibit P-2 (Collectively, Equipment List).
At some point, the Debtor gave Heritage the same Equipment List with values of each piece of equipment either typed or handwritten next to each item.
The Debtor received a check on December 26, 2007, in the amount of $100,000.00. Trial Exhibit P-2.
Because of a slow-down in the Debtor's landscaping business, the Debtor formally requested on December 15, 2009, that Heritage modify the terms of the Note in order to lower his monthly payments. In December of 2009, the balance of the Note was $68,241.06. Heritage agreed to modify the terms of the Note. The Equipment List attached to the Note is also attached to the Request for Note Extension.
On March 15, 2010, the Debtor executed a Loan Extension/Modification Agreement (Loan Modification). The Loan Modification lowered the interest rate and extended the term of the Note to eighty-four months.
At some point after the Loan Modification was entered into by the parties, the Federal Deposit Insurance Corporation (FDIC) took over Heritage. On July 22, 2011, the FDIC filed a UCC3 Financing Statement Amendment in which the FDIC noted that Heritage's security interest in the Equipment had been assigned to Trustmark.
On May 8, 2014, the Debtor filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. In his Schedules (Schedules), on Schedule D — Creditors Holding Secured Claims, the Debtor lists the following for Trustmark:
Schedule D — Creditors Holding Secured Claims, Case No. 1401542EE, Dkt. #10, page 11 of 48, May 21, 2014.
Trustmark filed its Motion to Lift the Automatic Stay and to Direct Abandonment (Dkt. #8) on May 19, 2014, seeking to have the stay lifted as to the Equipment List. Trustmark alleged that the Debtor owed it $35,305.11 on the Note. On June 19, 2014, the Court entered the Order Lifting the Automatic Stay and Directing Abandonment (Dkt. #18) of the equipment on the Equipment List.
Trustmark subsequently commenced a replevin action in the County Court of Madison County, Mississippi. On August 15, 2014, the parties entered into an Agreed Final Judgment granting Trustmark immediate possession of the equipment on the Equipment List.
Trustmark commenced the above-styled adversary proceeding on July 29, 2014, with the filing of its Complaint Objecting to Discharge Pursuant to 11 U.S.C. § 727 and Dischargeability Pursuant to 11 U.S.C. § 523 (Adv. Dkt. #2).
On April 3, 2015, the Debtor filed his Second Amended Answer (Adv. Dkt. #46) (Answer). In his Answer, the Debtor denies that Trustmark loaned him the money to purchase equipment. The Debtor states that he informed Trustmark "that he did not intend to purchase certain collateral before and shortly after the loan was made in 2007."
A trial was held on the Complaint and Answer. At the conclusion of the trial, the parties were instructed to submit a briefing schedule after the transcript was received. After the final brief was filed, the Court took the matter under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(I).
In the case at bar, Trustmark alleges that the Debtor willfully sold its collateral, therefore, its debt is nondischargeable pursuant to § 523(a)(6). Section 523(a)(6) provides as follows:
11 U.S.C. § 523(a)(6).
In order to prevail under § 523(a)(6), a party must prove that the debt is nondischargeable by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L. Ed. 2d 755 (1991).
In the Court of Appeals for the Fifth Circuit, the case law pertaining to § 523(a)(6) has evolved over the years. An early case addressing § 523(a)(6) was Kawaauhau v. Geiger, 523 U.S. 57 (1998). In Kawaauhau, the United States Supreme Court stated that "[t]he word `willful' in (a)(6) modifies the word `injury,' indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Further, "debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6)." Id. at 64. The Supreme Court reiterated the policy considerations for confining § 523(a)(6) to circumstances that benefit "a typically more honest creditor." Bullock v. BankChampaign, — U.S. —, 133 S.Ct. 1754, 1761 (May 13, 2013).
In Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598 (5th Cir. 1998), the Fifth Circuit extended Kawaauhau's reasoning. The court in Miller refined the definition of willful and malicious and held that "either objective substantial certainty [of injury] or subjective motive [to injure] meets the Supreme Court's definition of `willful . . . injury' in § 536(a)(6)." Miller, 156 F.3d at 603. The Miller court rejected the definition of malicious to mean an act without just cause or excuse. Rather, the Fifth Circuit adopted an "implied malice standard" and held that malicious was an act done with the "actual intent to cause injury." Id. at 606 (citation omitted).
Several years later, the Fifth Circuit further addressed and refined its definition for willful and malicious in § 523(a)(6) in Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504 (5th Cir. 2003):
In re Williams, 337 F.3d at 509.
Consequently, under Fifth Circuit jurisprudence, in determining whether an injury is willful and malicious, a debtor must have acted with "an objective substantial certainty of harm"
In Randall v. Atkins (In re Atkins), 458 B.R. 858 (Bankr. W.D. Tex. 2011), the debtor borrowed money from a creditor to purchase 337 scooters. The debtor received the funds to purchase the 337 scooters, but he only purchased 290 scooters. The creditor objected to the debtor's discharge under § 727 and § 523(a)(6). In applying the objective test, the court found that the creditor failed to produce any evidence to show that the debtor intended to harm the creditor. Under the subjective test, however, the court found that "[the debtor] should have known that the failure to purchase all of the scooters and/or retain the loan proceeds placed the [creditor] at risk." Atkins, 458 B.R. at 880.
Similar to the debtor in Atkins, the Debtor's testimony at trial shows that his conduct was not willful and malicious under the objective test. Trustmark failed to produce any evidence to show that the Debtor intended to harm Trustmark. The Debtor testified that he intended to repay the loan in full, and the Court found this testimony to be credible. Further, the Court notes that the Debtor did pay down a substantial portion of the original note, but the Debtor's economic situation was such that he was unable to pay the entire balance owed.
Under the subjective test, however, the Court finds that Trustmark has shown that the Debtor acted deliberately and intentionally with knowing disregard of Trustmark's rights. At trial, the Debtor testified that he signed the Note and Security Agreement and that the purpose of the loan was for the purchase of equipment. (Trial Tr. at 24-25). The Debtor also acknowledged that it was his handwriting on the Equipment List introduced at trial as Exhibit P-7 which shows a total value of $126,175.00 for the equipment he was seeking to purchase and which was to serve as collateral for the Note. The Debtor further testified that at the time he signed the Note and Security Agreement, he had already purchased all of the equipment except the leaf and debris equipment and the concrete curbing machinery. (Trial Tr. at 25-31).
When the Debtor entered into the Loan Modification, the Debtor testified that the same Equipment List that was attached to the Security Agreement was attached to the Loan Modification and that he understood that the Equipment List was suppose to secure the Loan Modification. (Trial Tr. at 33). The Debtor also certified that nothing had changed from the time he had entered into the Note. Trial Exhibit P-5.
But, contrary to what he led the bank to believe when entering into the Loan Modification, the Debtor had never purchased the concrete curbing machinery or the leaf and debris system. Further, the Debtor testified that when he entered into the Loan Modification, he had already sold the golf cart, trailer, and the mule, but he did not disclose this to Trustmark. (Trial Tr. at 33-36). At the time of the Loan Modification, the only collateral the Debtor still had in his possession was the welder, which the bank eventually picked up and sold. (Trial Tr. at 36).
When questioned about his understanding of the purpose of the loan and the reasons Trustmark wanted a security interest in the collateral, the Debtor testified:
(Trial Tr. at 37-38).
Consequently, the Court finds that the Debtor should have known that his failure to purchase the leaf and debris system and the concrete curbing machinery and/or retaining the proceeds from the loan would put Trustmark at risk of not being repaid. Further, the Debtor not only failed to honor the terms of the Note, but when he entered into the Loan Modification, he continued to represent to Trustmark that he had purchased the leaf and debris system and the concrete curbing machinery and that he still had all of the equipment on the Equipment List.
The Court does not find credible the Debtor's testimony that shortly after he signed the Note, he informed Trustmark that he did not purchase the leaf and debris system and the concrete curbing machinery.
Consequently, the Court finds that the Debtor was aware that his actions were "at least substantially certain to result in injury to"
Having found that the Debtor's indebtedness to Trustmark is nondischargeable under § 523(a)(6), the Court must determine the amount of Trustmark's damages. Trustmark argues that the Debtor's failure to purchase the leaf and debris system and the concrete curbing machinery was a conversion of the proceeds of the Note, and therefore, Trustmark is entitled to a judgment for the unpaid indebtedness.
The Court agrees with the Debtor that in the Fifth Circuit, in order to determine the appropriate damages under § 523(a)(6), Modicue controls. In Modicue, the creditor loaned the debtor money, and in exchange, the debtor gave the creditor a security interest in certain collateral. Subsequently, the debtor sold the collateral at a rummage sale without informing the creditor and without tendering the proceeds from the sales to the creditor. The Fifth Circuit held that "the wrongful sale or conversion of encumbered property by the debtor"
In finding that the appropriate measure of damages is the fair market value at the time the property was sold, the Fifth Circuit found:
Modicue, 926 F.2d at 453.
The only evidence offered as to the value of the collateral the Debtor had disposed of was the testimony of the Debtor. The Debtor testified that he sold the golf cart for $1,500.00 (Trial Tr. at 34); sold the trailer for between $1,100.00 to $1,200.00 (Trial Tr. at 34); and sold the John Deere mule for between $400.00 to $500.00 (Trial Tr. at 36). Applying Modicue, the Court finds that Trustmark should be granted a nondischargeable judgment for the value of the collateral the Debtor disposed of in the following amounts:
As for the two pieces of equipment the Debtor never purchased with the loan proceeds, the leaf and debris system and the concrete curbing machinery, Trustmark alleges that its damages should be the purchase price the Debtor listed for the two pieces of equipment on Trial Exhibit P-7. In support of this position, Trustmark cites the case of Atkins.
The Court finds that Atkins is distinguishable from the case at bar. The debtor in Atkins did misuse the proceeds of a loan by failing to purchase all of the scooters he told the bank he was going to purchase, however, there is no indication that the Atkins' court applied Modicue to determine the amount of damages. Unlike the case at bar, the Atkins court found that the debt was nondischargeable not only under § 523(a)(6), but also under § 523(a)(4), § 727(a)(2), § 727(a)(5) and § 727(a)(7). In calculating damages, the Atkins court was not limited by Modicue since Modicue only applies to § 523(a)(6). Instead, the Atkins' court denied the discharge and found the outstanding balance owed by the debtor to be nondischargeable. Consequently, the Court finds that Atkins does not stand for the proposition that if a debtor fails to purchase collateral, damages under § 523(a)(6) would be the purchase price of the collateral the debtor failed to purchase.
The parties do not cite any cases with the same fact scenario as the case at bar-neither party submitted cases to the Court where the amount of damages under § 523(a)(6) was determined to be the purchase price of collateral a debtor failed to purchase. In its research, the Court has not found any cases on point either.
The Court considered the testimony of the Debtor where he: (1) admitted that he knew that the bank would not have made the initial loan if it had known he was not going to purchase all of the collateral,
According to Trial Exhibit P-7 the purchase price of the two pieces of collateral the Debtor failed to purchase totaled $76,475.00. Adding $76,475.00 to the value of the collateral sold by the Debtor, $3,100.00, the Court finds that the amount of damages under Modicue would be $79,575.00. The Debtor has, however, paid down the Note and only owes Trustmark $35,765.21. Consequently, the Court finds that pursuant to Modicue, Trustmark is entitled to a nondischargeable judgment under § 523(a)(6) in the total amount of $35,765.21.
In the Fifth Circuit, it is clear the wrongful sale or conversion by a debtor of encumbered property is a willful and malicious injury as contemplated by § 523(a)(6). Modicue, 926 F.2d at 453. The Debtor testified that he disposed of the golf cart, trailer and John Deere mule without notifying Trustmark or turning the entire proceeds over to Trustmark. Consequently, Trustmark has met its burden under § 523(a)(6) as to this collateral.
The Debtor testified that he understood that the purpose of the loan was to allow him to purchase equipment for his business which would be collateral for the Note. But, the Debtor never purchased the leaf and debris system or the concrete curbing machinery. The Court finds that the Debtor knew or should have known that his actions were "at least substantially certain to result in injury to"
Under Modicue, the appropriate measure of damages under § 523(a)(6) is the value of the collateral Trustmark was denied by the Debtor's wrongful conduct of selling its collateral and of converting the proceeds of the loan by failing to purchase the equipment he said he was purchasing. The Debtor received $3,100.00 when he disposed of the golf cart, trailer and John Deere mule. As for the leaf and debris system and the concrete curbing machinery, the Court finds that the amount of the injury to Trustmark is $76,475.00-the stated purchase price of the two pieces of collateral. Consequently, the injury to Trustmark totals $79,575.00.
Considering that the total amount owed to Trustmark is considerably less than $79,475.00, the Court finds that Trustmark is entitled to a nondischargeable judgment in the amount $35,765.21—the balance of the loan as of July 29, 2014.
To the extent the Court has not addressed any of the parties' arguments or positions, it has considered them and determined that they would not alter the result.
A separate judgment consistent with this Opinion will be entered in accordance with Rules 9014 and 9021 of the Federal Rules of Bankruptcy Procedure.
