Hon. David T. Thuma, United States Bankruptcy Judge.
Before the Court is plaintiff's complaint that its $30,000 claim against defendant is nondischargeable. After a trial on the merits, and for the reasons set forth below, the Court determines that the debt is nondischargeable.
The Court finds the following facts:
William Crawley is the President and owner of Plaintiff, a New Mexico corporation. Mr. Crawley has known Defendant for many years; the acquaintance started when Defendant helped get Mr. Crawley his first loan.
Defendant's background is in banking. He worked as a banker in California from about 1981 through 1999. Defendant's banking career ended when he plead guilty to 24 counts of grand theft of personal property (in the nature of fraud and embezzlement) and served several years in prison. After his release, Defendant moved back to New Mexico. Defendant started a "house flipping" business in 2007 or 2008.
The Court finds that Mr. Crawley was a credible witness. The Court finds that Defendant was not a credible witness.
Plaintiff owned a restaurant in Albuquerque, New Mexico known as Murphy's Mule Barn. In late July or early August 2015, Defendant investigated whether to buy the restaurant from Plaintiff.
The parties had about 20 telephone calls and five or six meetings to discuss the sale of the restaurant. Several of the meetings were in the restaurant. Defendant personally conducted a walk-through of the restaurant and was aware of the general condition of the equipment.
On September 10, 2015, Plaintiff and Loop DL, LLC signed an asset purchase agreement for the restaurant assets. Loop is wholly owned by Defendant. The agreement was drafted by Defendant's attorney, Tim Padilla. Plaintiff did not have counsel.
The agreed-upon purchase price was $350,000, of which $50,000 was allocated to the restaurants' physical assets (tables, chairs, stoves, refrigerators, etc.). Loop agreed to pay $30,000 at closing, $20,000 15 days after closing, and sign a note for the remaining $300,000. The note was to accrue interest at 4%.
Before the agreement was signed, Plaintiff and Defendant discussed a possible all cash sale. At that time, Defendant had a Swiss bank account with at least $220,000 on deposit. The parties ultimately decided to proceed as outlined above.
The purchase agreement was signed on the same day as the closing, i.e., September 10, 2015. Loop signed the $300,000 note and delivered a cashier's check for $30,000. However, at closing Defendant borrowed $15,000 from Plaintiff, so the net cash Plaintiff received was $15,000.
The note does not contain standard terms that protect the holder in the event of a default. For example, there is no
Defendant and Loop took possession of the restaurant immediately. Despite the prior visits to the restaurant, Defendant claims he was shocked by the condition of the restaurant and its equipment. Allegedly because of the poor condition of the equipment, Loop did not make the $20,000 payment due on September 25, 2015. The first note payment of $3,656.78 was due November 1, 2015. Loop did not make that payment, nor any subsequent note payments.
Defendant borrowed an additional $15,000 from Plaintiff before December 11, 2015, allegedly for payroll. The net effect of the second personal loan is that Plaintiff received no money for the restaurant.
Although allegedly withholding payments because of the condition of the restaurant equipment, Defendant never gave Plaintiff notice of default under the purchase agreement.
On January 29, 2016, Plaintiff sued Loop and Defendant in state court, case no. D-202-CV-2016-00656 ("State Court Action").
The action was tried on March 13 and 14, 2017, to Judge Valerie Huling. She found, inter alia:
Judge Huling also concluded:
On June 2, 2017, Judge Huling entered a money judgment in favor of Plaintiff against Loop for $347,194.27
Defendant/Loop operated the restaurant until the June 2, 2017, judgment was entered. Shortly thereafter, Defendant purported to perfect a security interest in the restaurant assets, and then "repossessed" the assets.
Post-judgment, Plaintiff went to the restaurant to see if there was any way to collect. While there, Plaintiff saw Defendant removing the restaurant equipment, furniture, and dishes. By the time Plaintiff gained access to the restaurant, little tangible property remained. Defendant/Loop later sold the assets and kept the proceeds.
On September 14, 2017, Defendant filed this chapter 7 case. Plaintiff brought this adversary proceeding on December 18, 2017.
Mr. Crawley was counting on the restaurant sale to finance his retirement. Because of Defendant's and Loops' failure to pay anything, Mr. Crawley, age 74, is forced to drive a truck to earn a living.
Plaintiff argues that Defendant's $30,000 debt is nondischargeable under § 523(a)(6), which applies to debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." To satisfy the "willful" element of § 523(a)(6), there must be both "an intentional act and an intended harm;
For a debtor's actions to be malicious, they must be intentional, wrongful, and done without justification or excuse. In re Deerman, 482 B.R. 344, 369 (Bankr. D.N.M. 2012) (citing Bombardier Capital, Inc. v. Tinkler, 311 B.R. 869, 880 (Bankr. D. Colo. 2004)).
It is an open question whether intentional breaches of contract can come within § 523(a)(6). 4 Collier on Bankruptcy ¶ 523.12 [1] states "Section 523(a)(6) generally relates to torts and not to contracts." Some cases have held that no breach of contract claim, intentional or otherwise, can come within § 523(a)(6). See, e.g., In re Best, 109 Fed.Appx. 1, 4 (6th Cir. 2004) (contract claim insufficient to § 523(a)(6) purposes; some tortious conduct must be shown). Other cases have held that in certain circumstances intentional contract breach cases fall within § 523(a)(6). In re Jercich, 238 F.3d 1202, 1206 (9th Cir. 2001); Wish Acquisition, LLC v. Salvino, 2008 WL 182241, *3-4 (N.D. Ill.2008) (same). See also In re Barton, 465 F.Supp. 918, 924 (S.D.N.Y. 1979) (discussing the case law); Texas v. Walker, 142 F.3d 813, 823-24 (5th Cir. 1998) (claim for breach of contract and tort of conversion may arise from the same set of facts, and hence may be nondischargeable under § 523(a)(6)).
The discussion in Rivera v. Moore McCormack Lines, Inc., 238 F.Supp. 233 (S.D.N.Y. 1965), is informative and often cited:
Rivera v. Moore-McCormack Lines, Inc., 238 F.Supp. at 234 (construing the predecessor to § 523(a)(6).
In the Tenth Circuit, the door is open to declaring certain intentional breach debts nondischargeable under § 523(a)(6). See, e.g., Sanders v. Vaughn (In re Sanders), 210 F.3d 390, at *2 (10th Cir. 2000) (unpublished) (nothing indicates the Supreme Court's intention to immunize debtors under § 523(a)(6) for willful and malicious breach of contact); In re Militare, 2011 WL 4625024, at *3 (Bankr. D. Colo. 2011) (a knowing breach of contract is not necessarily
The Court holds that there is nothing in the language of the Bankruptcy Code, including § 523(a), preventing a breach of contract judgment from being declared nondischargeable under § 523(a)(6), so long as the requirements of that subsection are met.
Here, the Court finds that Defendant, acting through Loop, concocted a scheme to take Plaintiff's restaurant assets without paying for them. At the time of closing and thereafter, Defendant extended the scheme to the $30,000 he personally borrowed from Defendant. The Court finds that neither Loop nor Defendant ever intended to repay Plaintiff. Thus, the Court finds that Defendant willfully injured Plaintiff, knowing, as he must have, that his actions would result in $30,000 in damages.
The Court also finds that Defendant's actions were malicious, in that they were wrongful, intentional, and taken without justification or excuse. The Court finds and concludes that the professed reason for withholding payment, i.e., the condition of the restaurant equipment, was known to Defendant before closing, and was a pretext. The Court finds that Defendant/Loop intended to close the purchase paying as little cash as possible, default on all payment obligations, and then either "re-trade the deal" or simply not pay at all.
The Court agrees with the case law that, in general, the failure to pay a debt does not come within § 523(a)(6). See, e.g., Byrnes v. King, 2010 WL 2733394, at *2 (Bankr. D.N.J. July 8, 2010) (party's failure to pay mortgage was insufficient to show party's intention of injury under § 523(a)(6)); In re Abdallah, 2012 WL 631845, at *1 (Bankr. M.D. Pa. Feb. 27, 2012) ("If the failure to pay a just debt were the only criteria that would qualify under this exception to discharge [§ 523(a)(6)], then no debt would ever be dischargeable. Congress clearly meant to limit this exception to acts done with the actual intent to cause injury."); In re Gucciardo, 577 B.R. 23, 38 (Bankr. E.D.N.Y. 2017) ("Absent evidence of intent to injure, and of malice, the failure to repay, even if combined with payment to other creditors, does not constitute a "willful and malicious act" under § 523(a)(6)"); In re Salzillo, 2013 WL 4525199, at *6 (Bankr. W.D. Tex. Aug. 27, 2013) ("The Defendant's failure to pay the Plaintiffs their money, while regrettable, is not proof in and of itself of willful and malicious injury."). It is and should be the rare breach of contract case that comes within § 523(a)(6).
The Court finds and concludes that this is one of the rare cases. Defendant's failure to repay was not the result of inability to pay, as is usually the case in bankruptcy. Rather, it was the culmination of a scheme to deprive Plaintiff of its cash and restaurant, preying on Defendant's eagerness to sell the restaurant and finance Mr. Crawley's retirement. All of the trial evidence: the long-standing friendship between Debtor and Mr. Crawley; Mr. Crawley's lack of sophistication and lack of representation; Mr. Crawley's eagerness to sell the restaurant; the one-sided terms of the purchase agreement and promissory note; borrowing of $15,000 on the closing date; borrowing another $15,000; the complete failure to pay, or attempt to pay, any amounts due; the last-minute security agreement and repossession; the failure to use the Swiss bank account money to pay any part of the debt; and Defendant's general lack of credibility, all point to the fact that Defendant's failure to repay the $30,000 loan was a willful and malicious injury to Plaintiff and its property.
A final judgment from another court can have a preclusive effect in a subsequent bankruptcy case. In re Crespin, 551 B.R. 886, 895 (Bankr. D.N.M. 2016). Preclusion can occur in two forms: claim preclusion and issue preclusion.
1.
In Brown v. Felson, the Supreme Court stressed "that the bankruptcy court has exclusive jurisdiction to determine the nature of a debt for dischargeability purposes, and concluded that applying res judicata [claim preclusion] to the dischargeability decision would undercut that jurisdiction." In re Crespin, 551 B.R. at 896-97. Claim preclusion principles therefore cannot prevent a bankruptcy court from determining the dischargeability of debts. Thus, Judge Huling's judgment is res judicata on the amount Defendant owes Plaintiff, but not on whether the debt is nondischargeable under § 523(a)(6).
2.
Here, Defendant did not plead res judicata as an affirmative defense. Defendant did, however, file a motion for summary judgment, arguing that Judge Huling's finding regarding Defendant's state of mind precluded a § 523(a)(6) judgment. Although the Court denied the motion, issue preclusion was raised by the Defendant and will be addressed.
The Judge Huling's key findings are:
The Court concludes that entry of a nondischargeability judgment against Defendant personally under § 523(a)(6) on the $30,000 debt is not precluded by Judge Huling's findings or conclusions. First, Judge Huling's ruling about Defendant's state of mind relates to Loop's default under the note and purchase agreement, not to Defendant's failure to repay the $30,000 personal loan. Judge Huling never addressed why Defendant did not pay back the $30,000. As best the Court can tell, Plaintiff did not ask for punitive damages for this failure to pay, only for Loop's failure to pay for the restaurant assets.
Second, the standards for assessing punitive damages for intentional breach of contract in New Mexico are unclear and are difficult to compare to the willful and malicious standards under § 523(a)(6). In Bogle v. Summit Investment Co., LLC, 137 N.M. 80, 107 P.3d 520 (Ct. App. 2005), the Court of Appeals held:
137 N.M. at 90, 107 P.3d 520. This rather vague standard contrasts with the well-defined willful and malicious standard in § 523(a)(6). It is difficult to apply Judge Huling's on punitive damages against Loop to the § 523(a)(6) action against Defendant.
Based on all of the trial evidence, the Court concludes that Judge Huling' findings and conclusions may preclude a § 523(a)(6) judgment against Loop (had Loop filed its own bankruptcy case, for example), but do not preclude Plaintiff from proving, as it did, that Defendant's failure to repay the $30,000 was willful and malicious.
Plaintiff succeeded in the difficult task to proving that a debt for breach of contract is nondischargeable under § 523(a)(6). The state court's findings of fact do not preclude this conclusion. A separate judgment will be entered.
