ERIC L. FRANK, Chief Judge.
In 2008, Debtor Danielle Rezykowski ("the Debtor") purchased a retail apparel store known as Circles, LLC ("Circles") from Robin Nakonetschny ("the Plaintiff"). The Debtor signed a promissory note for most of the purchase price. The note was secured by the assets of the business. In approximately late 2010 and early 2011, the Debtor conducted a "blow out" sale and closed the business. The Debtor opened a separate account for the proceeds from the blow out sale, but later took the money for herself, ostensibly for her own back wages. Shortly thereafter, the Debtor filed for individual chapter 7 bankruptcy relief.
The Plaintiff instituted this adversary proceeding against the Debtor requesting a determination that the Debtor's use of the proceeds from the blow out sale gave rise to a debt for willful and malicious injury that is excepted from discharge under 11 U.S.C. § 523(a)(6).
The crux of this dispute is whether the Debtor's payment to herself caused a "willful and malicious" injury to the Plaintiff; i.e., whether the Debtor's conduct was wrongful and whether she purposefully inflicted the injury or acted in such a manner that she was substantially certain that injury would result. See In re Singer, 2010 WL 3732944, at *5 (D.N.J. Sept. 17, 2010) (citing In re Conte, 33 F.3d 303, 305 (3d Cir.1994)).
Based on the evidence presented at trial, I find, by a preponderance of the evidence, that: the Debtor's appropriation of the sale proceeds was wrongful; she caused a willful and malicious injury to the Plaintiff's property rights; and the debt to the Plaintiff arising therefrom is nondischargeable under § 523(a)(6).
The Debtor filed her chapter 7 bankruptcy petition on December 23, 2011. The § 341 meeting of creditors was set for January 25, 2012. Thus, the deadline for filing objections to discharge or dischargeability was March 26, 2012. See Fed. R. Bankr.P. 4007(c).
In the preamble to the Complaint, the Plaintiff asserted an objection to the Debtor's discharge under § 727(a) in the Complaint. (Ex. D-5). In the numbered counts of her Complaint, however, the Plaintiff cited only to § 523(a)(2) and (a)(6). (Id.).
The Debtor filed a motion to dismiss the Complaint, listing numerous deficiencies, including legal insufficiency and lack of service of process. The parties settled the motion by allowing the Plaintiff leave to file an amended complaint. The Plaintiff filed an amended complaint ("the Amended Complaint") on July 12, 2012, (Doc. #8), asserting claims under 11 U.S.C. § 727(a)(2), (a)(3) and (a)(5). The Debtor filed her Answer to the Amended Complaint on June 18, 2012. (Doc. #10).
Trial of this adversary proceeding was held on February 1, 2013. At the conclusion of the trial, the Plaintiff abandoned her objections to the Debtor's discharge under § 727(a). (N.T. 10:53:41).
Post-trial briefing was completed on March 7, 2013.
1. In August 2005, Circles was organized as a limited liability company. (Ex. P-1 at 42).
2. Circles operated a retail children's clothing store at 5 South Main Street, Doylestown, Pennsylvania. (Id. at 14).
3. Sometime prior to April 2008, the Plaintiff entered into negotiations for the sale of Circles and specified business assets to the Debtor.
4. On April 16, 2008, the parties closed on the sale of Circles. The sale transaction was documented by several contracts, which included, inter alia, a business purchase agreement, promissory note, and security agreement. (See Ex. P-1).
5. The Business Purchase Agreement ("the BPA") provided for the sale of Circles by the Plaintiff to the Debtor for a purchase price of $58,244.67. (See id. at 13-26). Attached as exhibits to the BPA were a list of fixtures, assets and the inventory included in the sale. (Id. at 22).
6. As part of the recitals, the BPA stated that the Debtor "wishes to operate a retail children's clothing store and desires to acquire the business." (Id. at 14).
7. At the closing, the Debtor paid a down payment of $1,000.00 and executed a "Secured Promissory Note" ("the Note") in favor of the Plaintiff, in the principal amount of $57,244.67, with an interest rate of nine (9) percent. (Id. at 28-31).
8. The principal amount of the Note was to be repaid over sixty (60) months, beginning June 15, 2008. The initial six (6) monthly payments under the Note were at a reduced rate, with the balance of
9. Under the Note, the failure to make any payment of principal or interest within ten (10) days of the due date constituted a default. Upon default, the holder had the right to accelerate the Note and declare all amounts under the Note immediately due. (Id.).
10. The Note included a confession of judgment clause which allowed the Plaintiff to confess judgment in the event of the Debtor's default. (Id.).
11. In connection with Note, the Debtor executed a "Security Agreement" ("the Security Agreement") for the repayment of the Note. (Id. at 32-37).
12. In the Security Agreement, the Debtor granted the Plaintiff a security interest in the business assets of the retail children's clothing store, including the inventory ("the Collateral"). (See id. at 32, 34).
13. The Security Agreement defined "Collateral" to include, inter alia:
(Id. at 33).
14. The Security Agreement incorporated the definition of "proceeds" under the Pennsylvania Uniform Commercial Code ("the Pa. UCC"),
15. The terms of the Security Agreement provided without qualification, that "without the prior written consent of the [Plaintiff], [the Debtor] shall not sell, lease or otherwise dispose of the Collateral." (Id.).
16. The Security Agreement did not include a provision requiring the Debtor to segregate or otherwise account for the proceeds of the sale of inventory.
17. The Debtor read the Security Agreement before executing it and testified that she understood it. (N.T. 9:17:50-9:19:28).
18. The Plaintiff filed a UCC Financing Statement on June 16, 2008 in Pennsylvania as notice of her security interest in Circles' assets. (Ex. P-1 at 46-47).
19. The Plaintiff attached to the UCC Financing Statement, an exhibit containing
20. The Debtor worked at Circles' retail shop full-time after she bought the business. When she first purchased Circles, the Debtor drew a salary of approximately $500.00 per week. (N.T. 9:50:25).
21. Notwithstanding the unqualified requirement in the Security Agreement, the Debtor did not obtain written permission from the Plaintiff prior to selling inventory in the ordinary course of business. Nevertheless, the Plaintiff acquiesced to the sale of inventory in the ordinary course without prior notice.
22. The Debtor ceased paying herself a salary from Circles sometime in 2009. (N.T. 9:49:50). To meet her personal financial expenses, the Debtor was employed at a restaurant until it closed approximately one (1) year prior to filing her chapter 7 bankruptcy petition. (N.T. 9:56:43, 10:20:05).
23. At some point, presumably in 2010, the Debtor decided to cease Circles' business operations because she was not generating enough money to support herself. (N.T. 10:19:00).
24. The Debtor conducted a liquidation sale ("the Liquidation Sale") prior to closing the business. (N.T. 9:21:02, 10:19:00).
25. The Liquidation Sale took place over several months beginning in late 2010.
26. The Debtor opened an account at Third Federal Bank ("the Third Federal Account"), and as the Liquidation Sale progressed, periodically deposited the money generated from the Liquidation Sale into the account.
27. The Liquidation Sale generated $21,519.00 in proceeds ("the Sale Proceeds"). (Ex. P-1 at 49).
28. The Sale Proceeds in the Third Federal Account were not commingled with funds from any other source. (N.T. 9:22:22).
29. Approximately $18,000.00 of inventory remained unsold after the Liquidation Sale. (N.T. 10:03:50).
30. Thereafter, Debtor did not sell the remaining inventory because she was told "not to touch it" by her lawyer, Joseph McGinley ("McGinley"). (N.T. 10:23:30).
31. On March 25, 2011, McGinley wrote to the Debtor's creditors, advising them of the existence of the $21,519.00 Sale Proceeds and proposing a global settlement.
32. The Plaintiff rejected the Debtor's offer to settle the outstanding balance on the Note. (N.T. 10:06:50).
33. On September 12, 2011, the Plaintiff entered a judgment by confession against the Debtor for non-payment under the Secured Promissory Note in the Pennsylvania Court of Common Pleas, Bucks County ("the CCP").
34. On September 15, 2011, the Debtor withdrew the entire balance from the Third Federal Account in the amount of $20,842.25. (Ex. D-1; N.T. 9:32:00).
35. The Debtor used the money that she withdrew from the Third Federal Account to pay herself unpaid salary for the years that she had not taken a salary from Circles. (N.T. 9:34:04, 9:50:30).
36. After withdrawing the funds from the Third Federal Account, the Debtor did not use any of the Sale Proceeds to repay the Debtor's obligations under the Note.
37. The Debtor exhausted the funds a few months after the § 341 Meeting of Creditors was held in her chapter 7 bankruptcy case. (N.T. 10:04:55).
38. The Debtor was aware of the confessed judgment against her and Circles
39. The Debtor also was aware that her conduct would cause injury to the Plaintiff's property rights when she withdrew the money from the segregated account to use for her own benefit.
Generally speaking, the Bankruptcy Code seeks to promote two important policy interests: "to give the debtor a new financial start and to keep creditors on an equal playing field." In re Calabrese, 689 F.3d 312, 320 (3d Cir.2012). To achieve the objective of a fresh start, the Bankruptcy Code provides debtors a discharge of their prepetition debts.
Congress recognized, however, that the policy had to yield in some respects, to balance between the competing interests of debtors and creditors. The discharge is therefore, not absolute. The statutory exceptions to discharge are found in § 523(a). These exceptions are construed strictly against creditors and liberally in favor of debtors. E.g., In re Cohn, 54 F.3d 1108, 1113 (3d Cir.1995); In re Vidal, 2012 WL 3907847, *15 (Bankr. E.D.Pa. Sept. 7, 2012). A creditor objecting to the dischargeability of a debt bears the burden of proof. Cohn, 54 F.3d at 1113; In re Bittar, 2012 WL 1605160, *2 (Bankr.D.N.J. May 8, 2012). The creditor must establish the nondischargeability of the debt 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 re August, 448 B.R. 331, 357 (Bankr. E.D.Pa.2011) (citations omitted).
Section 523(a)(6) specifically excepts from discharge any debt for "willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). To invoke the 523(a)(6) exception, the creditor must prove not only that injury has resulted, but also that the debtor's conduct was both "willful" and "malicious." E.g., In re Vepuri, 2009 WL 2921305, at *8 (Bankr. E.D.Pa. Mar. 25, 2009).
A "willful" injury is an injury that is done deliberately or intentionally. In re Coley, 433 B.R. 476, 497 (Bankr.E.D.Pa. 2010) (citing Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (U.S.1998)). In Geiger, the Supreme Court clarified that § 523(a)(6) does not encompass reckless acts that lead to injury:
523 U.S. at 61-62, 118 S.Ct. 974.
In the Third Circuit, "actions taken for the specific purpose of causing an injury as well as actions that have a substantial
"Malice" is distinct from willfulness. The commonly-accepted definition of malice encompasses an injury that is "wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will." In re Jacobs, 381 B.R. 128, 138-39 (Bankr.E.D.Pa.2008); 4 Collier on Bankruptcy ¶ 523.12[2] (Alan N. Resnick and Henry J. Sommer eds., 16th ed. 2013). A plaintiff is not required to prove that the debtor acted with "specific malice." Conte, 33 F.3d at 308 (quoting St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1009 (4th Cir.1985)). In a § 523(a)(6) proceeding, a debtor may act with malice without bearing any subjective ill will toward the plaintiff/creditor or any specific intent to injure the same. In re Wooten, 423 B.R. 108, 130 (Bankr.E.D.Va. 2010); In re Davis, 262 B.R. 663, 670-71 (Bankr.E.D.Va.2001).
The Plaintiff's theory of the case is straightforward. The Plaintiff held a security interest in all of Circles' assets. According to the Plaintiff, without the Plaintiff's permission and with full knowledge and understanding of the Security Agreement, the Debtor disposed of business collateral by withdrawing the Sale Proceeds from the Third Federal Account and spending the money on personal living expenses, thereby destroying the Plaintiff's property interest in the Sale Proceeds.
The Debtor spins a more innocent version of the events. She acknowledges that she deposited the Sale Proceeds into a separate account and that later, just a few days after the confession of judgment was filed, she withdrew the funds and used them for her own benefit. However, the Debtor contends that she paid a lawful and valid claim to a creditor — outstanding salary to herself. The Debtor's argument can be distilled into two (2) distinct contentions: (1) the dissipation of the Sale Proceeds was not conversion, and (2) even if it were conversion, it was merely a technical conversion because preferring one creditor over another does not rise to the level of a willful and malicious injury.
I will address the issues in the order presented by the Debtor.
As stated earlier, under 11 U.S.C. § 523(a)(6), the element of maliciousness refers primarily to the wrongfulness of the conduct.
In this proceeding, I find that the Plaintiff has met her burden of proving that the Sale Proceeds of the Liquidation Sale were subject to the Security Agreement, and the terms of the Security Agreement restricted the Debtor from disposing of those proceeds without the prior written consent of the Plaintiff. Therefore, I conclude that the Debtor's appropriation and dissipation of the Sale Proceeds caused a "malicious" injury to the Plaintiff's property, within the meaning of 11 U.S.C. § 523(a)(6).
The uncontradicted evidence presented at trial established that the Debtor granted the Plaintiff a security interest in the assets of Circles as collateral for repayment of the Note. The Security Agreement defined the Collateral to include "proceeds... of any of the foregoing, including, but not limited to ... any and all ... inventory...." (Ex. P-1 at 33). Further, the Agreement incorporated the definition of "proceeds" under the Pa. UCC, which is defined as "[w]hatever is acquired upon the sale, lease, license, exchange or other disposition of collateral." 13 Pa.C.S. § 9102. The Pa. UCC automatically grants a security interest in the identifiable proceeds of any collateral that has been sold. See 13 Pa.C.S. § 9315(a)(2) ("a security interest attaches to any identifiable proceeds of collateral").
The Debtor testified that as she liquidated the inventory of Circles she deposited the money into a separate account at Third Federal Bank. The funds derived from the Liquidation Sale were proceeds of the Collateral. The Sale Proceeds therefore, were identifiable and governed by the Security Agreement and, as a secured creditor, the Plaintiff had a property interest in the Sale Proceeds.
The next question is whether the Debtor wrongfully converted the Sale Proceeds under the terms of the Security Agreement.
The terms of the Security Agreement restricted the Debtor from disposing of the Collateral without the advance written permission of the Plaintiff. Paragraph 3(b) of the Security Agreement provided that the Debtor "shall not sell, lease or otherwise dispose of the Collateral." Oddly, there is no qualification to this provision even though the Collateral includes Circles' inventory, an item, especially in the retail industry, that changes and fluctuates on a daily basis as it is bought by and sold to consumers.
The Debtor operated Circles for approximately two (2) years after she acquired the business, selling inventory in the ordinary course of business. Given the unqualified scope of ¶ 3(b) of the Security Agreement, the Debtor arguably violated the provision each time she sold inventory without the prior written consent of the Plaintiff. However, there is no evidence to suggest that the Plaintiff notified the Debtor that she was in violation of the
Other indicia in record tend to suggest that the parties did not intend a flat prohibition on all sales of inventory. For example, the stated intention in the BPA — that the Debtor was purchasing Circles to run it as her own business — certainly implies that it was within the contemplation of the parties that the Debtor would sell the inventory. Similarly, the inclusion of a provision creating a floating lien on inventory in the Security Agreement, likewise hints that Circles' inventory would be turned over and replaced. (See Ex. P-1 at 33) ("present and future inventory ... including goods held for sale or lease").
However, there is no reason to believe that the Debtor's authority to sell inventory without prior approval extended to out of the ordinary course of business transactions, such as a going-out-of-business sale. And, even if it did, such authority could not extend to disposition of the proceeds of the sale (which was Plaintiff's collateral) without the Plaintiff's consent. Such a result would be completely at odds with the purpose of the Security Agreement.
Therefore, once Circles ceased operations, the Debtor was required to obtain the Plaintiff's written consent to dispose of the collateral. This obligation to obtain the Plaintiff's consent encompassed the use of the Sale Proceeds to pay herself the alleged overdue salary.
A security interest in collateral may be the subject of an action for conversion. Chrysler Credit Corp. v. Smith, 434 Pa.Super. 429, 643 A.2d 1098, 1100 (1994). "When a debtor disposes of collateral which has been subjected to a perfected security interest, the secured party may bring an action against the debtor on the original debt or to collect the proceeds from a sale of the collateral, or he may proceed against the transferee of the collateral in replevin or in trespass for conversion." Id. (citing First Pennsylvania Banking & Trust Co. v. Liberati, 282 Pa.Super. 198, 422 A.2d 1074, 1077 (1980)).
Pennsylvania law
When the Debtor utilized the Sale Proceeds to pay an alleged unsecured debt to herself (in the form of back salary), she deprived the Plaintiff of her right to the collateral. The transaction was without legal justification and constituted a conversion of the Plaintiff's security interest. The Debtor's conduct was wrongful and therefore, malicious within the meaning of 11 U.S.C. § 523(a)(6).
As the Supreme Court cautioned in the seminal case of Davis v. Aetna Acceptance Co., not every act of conversion is assumed to be willful and malicious:
293 U.S. 328, 332, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (citations omitted).
As another court has explained,
In re Armstrong, 2006 WL 2850527, at *11 (Bankr.D.Idaho Oct. 3, 2006).
To determine whether there has been a wilful and malicious injury in collateral conversion cases, the court must analyze each set of circumstances on a case-by-case basis and determine whether the conversion is in the nature of an intentional tort or whether the conversion is the result of a negligent or reckless tort. Coley, 433 B.R. at 501; see also In re Whiters, 337 B.R. 326, 345 (Bankr.N.D.Ind. 2006); In re Kidd, 219 B.R. 278, 284 (Bankr.D.Mont.1998).
Under Conte, voluntary, deliberate actions that are substantially certain to cause injury are "willful" within the
The Debtor acknowledged that she was aware of the Security Agreement and testified that she understood its meaning. At minimum, she understood that the Plaintiff had rights in the collateral that she had some duty to preserve. Indeed, the Debtor went to some expense, all the way through the trial date, to store and preserve the unsold inventory that continues to constitute the Plaintiff's collateral. While the record is less explicit whether she understood that any duty she may have had to preserve the business inventory also required her to preserve the Plaintiff's security interest in the proceeds of the inventory (i.e., the Sale Proceeds), I find, by a preponderance of the evidence, that she did. I reach this conclusion for several reasons.
First, if the Debtor understood that the Plaintiff was secured by the collateral, it is more likely than not that she also understood that the Plaintiff was secured by the Sale Proceeds generated by the collateral. This may not be invariably true for every person who grants a creditor a security interest in personal property. But in this proceeding, the Debtor testified that she read and understood the Security Agreement. I will grant that this testimony was curt and general. Significantly, however, she did not testify or present any evidence that she did not understand that the Plaintiff's lien extended to the Sale Proceeds generated by the sale of the inventory. Given her testimony that she read and understood the Security Agreement, she had the burden of producing contrary evidence on the issue.
Second, her segregation of the Sale Proceeds in a separate bank account demonstrates an awareness that she did not have the right to commingle the funds with her own personal assets or withdraw the funds for her own benefit and to the detriment of Circles' creditors. This supports the inference that she was aware that other creditors had an interest in the proceeds from the inventory. From there, it is not a great leap to conclude that she understood that creditors with "liens" on the original collateral — which she knew included the Plaintiff — had the strongest claim to fund. Again, given her testimony regarding her knowledge and understanding of the Security Agreement, that is the most natural inference to draw and the Debtor presented no evidence to the contrary.
Third, even if I were to assume that, at the time she was depositing the Sale Proceeds into the Third Federal Account, and segregating those funds, she did not fully understand the Plaintiff's prime position in Sale Proceeds, that could no longer have been true months later when she committed the injurious act — the withdrawal of the money from the account for her own benefit, purportedly as back salary. The March 25, 2011 letter the Debtor's counsel, Joseph McGinley, sent to Circles' creditors supports this conclusion. See Findings of Fact No. 31 & n. 9, supra.
In the March 25, 2011 letter, McGinley stated that he had previously communicated with the Plaintiff's attorney Michael Brooks; he also stated in the letter that "[s]everal creditors" asserted that they held "UCC liens." Based on his communication with Brooks, McGinley undoubtedly was aware of the existence of the Plaintiff's security interest in the business assets and inventory. Since it is fair to assume that McGinley discussed with the Debtor the nature of the competing claims of her creditors and her options in proposing a global settlement before sending the letter to the creditors, it is also fair to infer that the Debtor was aware of the Plaintiff's preferred position in the Sale
Finally, when considering whether the Debtor's actions were "willful" within the meaning of § 523(a)(6), I cannot overlook the timing of the Debtor's withdrawal of the funds from the Third Federal Account. It cannot be mere coincidence that just a scant three (3) days after the Plaintiff confessed judgment against her, the Debtor withdrew all of the Sale Proceeds, treating those funds as unpaid back salary owed from many months earlier. Prior to the confession of judgment, the Debtor preserved the Third Federal Account virtually untouched for months. See n. 11, supra. The Debtor appropriated the entire account for her own benefit just as the Plaintiff was taking legal steps to realize the proceeds of the inventory collateral.
The timing certainly suggests an awareness that the Debtor was placing her own interests ahead of the Plaintiff's. Given my prior conclusion that the Debtor understood that the Plaintiff had a security interest in the Sale Proceeds, the Debtor also must have understood that her actions were both contrary to the Plaintiff's rights in the Sale Proceeds and would necessarily cause injury to those rights.
The final issue is the amount of the debt that is excepted from discharge in the Debtor's chapter 7 bankruptcy case.
In her post-trial memorandum, the Plaintiff suggests that the confessed judgment should be determined to be nondischargeable and directs the court to consider cases from outside of this district that hold the full amount of the debt to be nondischargeable. The Debtor argues that none of the debt is nondischargeable, but if the court were to hold otherwise, she contends the amount is limited to the converted proceeds less expenses for the Debtor's attorney's fees of $4,000.00 and the costs of storage of the inventory of $1,900.00.
I find that the nondischargeable debt is the converted amount of the Sale Proceeds — not the full amount of the Note. See Ricci, 2003 WL 25932297, at *8 ("[R]ecovery cannot exceed the value of the security interest in the collateral or the value of the collateral at the time of the conversion"). Only those debts that arise out of the same course of conduct that caused the injury are nondischargeable. See In re Kates, 485 B.R. 86, 111-12 (Bankr.E.D.Pa. 2012) (collecting cases).
The Plaintiff presented no evidence that the original debt itself was created through a willful and malicious injury or that the Debtor acted willfully and maliciously when she breached her obligation to repay the Note. Rather, the conduct that created a debt for willful and malicious injury was the diversion of the proceeds of the sale of the Plaintiff's collateral.
As for the Debtor's fees and costs, it is unclear what the underlying rationale is for the $4,000.00 in attorney's fees to be excluded from the nondischargeable debt. There is no basis in the Bankruptcy Code to exclude the Debtor's attorney's fees when calculating the amount of the nondischargeable debt. The same is true for the costs the Debtor incurred in storing the inventory.
For these reasons, I find that the Sale Proceeds in the amount of $20,842.25 were converted as a result of the Debtor's willful
For the reasons set forth above, I will enter an order determining that the Debtor's debt to the Plaintiff is nondischargeable in the amount of $20,842.25.
It is hereby
The debt owed by the Debtor arising from her failure to remit the proceeds of the Liquidation Sale in the amount of $20,842.25 is
trade debt $4,532.62 personal lenders 14,947.00 landlord; Comcast 9,738.37 business seller (i.e., Plaintiff) 42,726.00
McGinley proposed to use the Sale Proceeds to pay all creditors, other than the Plaintiff, 50% of their respective claims, leaving "$6,911, plus the unsold inventory" for the Plaintiff. Presumably, McGinley believed that the value of the inventory would result in the Plaintiff, too, receiving about 50% of her claim.
In the March 25, 2011 letter, McGinley also stated that:(1) that he had previously communicated with the Plaintiff's attorney Michael Brooks; and (2) "[s]everal creditors" asserted that they held "UCC liens."
(N.T. 9:34:04).
Because the Debtor testified unequivocally that she deposited and withdrew the funds from the Third Federal Bank account and there is no evidence that McGinley was ever in possession of the Sale Proceeds, I infer from the phraseology of the Debtor's testimony (i.e., that she was "given" the money) that McGinley told her that she could apply the funds towards her unpaid salary.
Several courts in this circuit have held that the subjective standard is applicable under the reasoning of Conte. See In re Gotwald, 488 B.R. 854, 866 (Bankr.E.D.Pa.2013) (collecting cases).
In any event, the key point here is that nothing in McGinley's letter suggests that he (and by extension, the Debtor) believed that the Sale Proceeds were unencumbered funds. McGinley was aware that the Plaintiff claimed a lien position in the segregated Sale Proceeds. And, again, the Debtor did not develop any evidence to suggest that she was unaware of this fact that was known to her lawyer or that she disputed the validity of the lien or the Plaintiff's senior rights in the funds.
As I recently explained in Gotwald,
488 B.R. at 872-73 (internal citations and footnote omitted).
The Debtor did not sufficiently develop the record to support this defense.
There is no evidence regarding her discussions with McGinley to negate the evidence that she understood that the Plaintiff held a lien on the proceeds and that her appropriation of the Sale Proceeds would injure the Plaintiff's property. Other than testifying that she was given the money by counsel (which I have interpreted to mean that counsel told her that she was a creditor of Circles and therefore, could take the Sale Proceeds for herself), the Debtor did not provide any details regarding the advice that she was given. Nor did she harmonize her asserted right to dispose of the Sale Proceeds with her simultaneous reliance on legal advice that she could not dispose of the unsold inventory. If she could pay herself the Sale Proceeds, why did she have to continue to store the inventory, rather than selling it to pay her creditors? Her bare bones testimony on the subject is inadequate.
As in Gotwald, given the evidence presented from which it is fair to infer the Debtor's "willfulness," and absent further details regarding McGinley's legal advice, I am unable to find that the advice caused the Debtor to lack the requisite scienter for a willful and malicious injury.
