Kraus Anderson Capital, Inc. v. Bradley (In re Bradley)
- Citation:
- ___F3d. ___(6th Cir. 2013); Case No. 13-8010 (March 26, 2014)
- Tag(s):
-
- Ruling:
- The Bankruptcy Appellate Panel (BAP) reverses the bankruptcy court's decision that the debt owed to the lender is dischargeable and remands for determination regarding the amount of damages. The BAP affirmed the bankruptcy court's conclusion that the elements of 11 U.S.C. §523(a)(4) were not met; but found that the lender had established that the debt was non-dischargeable pursuant 11 U.S.C. §523(a)(2)(A) and (a)(6).
The BAP based its decision to affirm the bankruptcy court’s holding that the elements regarding the embezzlement claim under 11 U.S.C. §523(a)(4) were not met upon the findings that “a mere lien or security interest does not rise to the level of ownership sufficient to support a claim under § 523(a)(4)'s embezzlement provision” and “[a]s owner of the collateral, the debtor remained the owner of its proceeds, even though both the collateral and its proceeds were subject to a security interest. No person can embezzle from himself.”
In addressing the willful and malicious injury claim pursuant to 11 U.S.C. §523(a)(6), the BAP found that the Plaintiff established all the elements required based upon the specific facts (stipulated to) and testimony in the record. That the Debtor knew of the subject liens and his duty to remit sale proceeds but converted those proceeds of the sales of collateral willfully and in “knowing disregard” (maliciously). Accordingly, the debt is non-dischargeable pursuant to 11 U.S.C. §523(a)(6).
In regards to the §523(a)(2)(A) claim, the BAP found that the Plaintiff also met all four required elements [(i) the debtor obtained money (or an extension, renewal, or refinancing of existing credit) through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (ii) the debtor intended to deceive the creditor; (iii) the creditor justifiably relied on the false representation; and (iv) its reliance was the proximate cause of the loss]. Elements (i) and (ii) were not disputed based upon the stipulated facts and testimony at trial. The BAP found that the bankruptcy court clearly erred in its ruling as to element (iii) by “imposing a duty upon the Lender to investigate the truthfulness of Debtor’s representations that is not required by law” and stated that “Lender’s reliance on Debtor’s misrepresentation of the equipment’s (collateral) status was, in fact, justifiable”. The BAP further found that the bankruptcy court clearly erred regarding element (iv) in holding that the Lender’s reliance upon the Debtor’s misrepresentations was not the proximate cause of the loss.
The BAP also found that the bankruptcy court failed to include additional stipulated facts in its opinion that dictated a different result on the merits. Accordingly, the bankruptcy court erred in not granting Plaintiff's Rule 7052 motion.
- Procedural context:
- On November 30, 2010, the Debtors, Dean R. Bradley and Cynthia E. Bradley, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On March 21, 2011, Plaintiff/Lender filed an adversary proceeding against Debtor Dean Bradley asserting the Debtor caused the Debtor’s company, Bradley Machinery LLC, to sell equipment “out of trust,” meaning without remitting the proceeds of the sale of collateral to Lender. Lender argued this constituted embezzlement under § 523(a)(4) and was a willful and malicious injury caused by the Debtor under § 523(a)(6). Lender also amended its complaint to add a cause of action under § 523(a)(2)(A) based upon false representations made in a settlement agreement previously reached by the parties. There were numerous stipulations of fact filed by the parties prior to trial. The bankruptcy court issued a memorandum opinion and order finding that the plaintiff had failed to show that the debt was non-dischargeable. Plaintiff then filed a motion to amend and make additional findings of fact and conclusions of law and to alter, amend, or vacate judgment, and the Debtor filed an objection thereto. The bankruptcy court denied the motion to alter or amend, and the plaintiff timely filed an appeal.
- Facts:
- As previously stated, there were three separate joint stipulations of fact and thirty three stipulated exhibits admitted at trial. The relevant facts cited by the BAP in its opinion are as follows:
Debtor owned Bradley Machinery, LLC. Plaintiff and Bradley Machinery entered into various loan and security agreements whereby Plaintiff provided financing for Bradley Machinery’s purchase of equipment used in Bradley Machinery’s business. The equipment purchased with the financing from Plaintiff was subject to security interests in favor of Plaintiff. Bradley Machinery was unable to pay its bills in the ordinary course of business and did not reveal this information to Plaintiff. Defendant informed Plaintiff that he had caused Bradley Machinery to sell certain equipment subject to Plaintiff’s security interest but did not pay the proceeds to Plaintiff. Defendant did not at that time disclose that three other pieces of equipment subject to Plaintiff’s security interests had been sold. A settlement agreement was agreed to by the Plaintiff, Bradley Machinery and the Debtor. Later, Defendant met with Plaintiff’s auditors for the purpose of verifying the location of equipment subject to Plaintiff’s security interests. Defendant lied to the auditors about the location of three pieces of equipment, and failed to tell them that the equipment had already been sold and was no longer in his possession or under his control. Defendant instead told the auditors that the equipment was leased and at certain job sites. Defendant knew that Plaintiff would rely on the information he provided to Plaintiff’s auditors.
- Judge(s):
- GEORGE W. EMERSON, Jr., Bankruptcy Appellate Panel Judge [Opinion]
GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge
C. KATHRYN PRESTON, Bankruptcy Appellate Panel Judge
ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!
