Opinion
Bankruptcy No. 99-30607 Chapter 7; Adversary No. 99-7054
November 24, 1999
ORDER
Presently before the Court is a Motion for Summary Judgment filed by the Plaintiff, Town Country Credit Union (Town Country), on October 13, 1999.
This matter arises by Complaint filed July 12, 1999, by which Town Country seeks to have an outstanding debt declared non dischargeable pursuant to sections 523(a)(2)(A),(B), (a)(4) and (a)(6). Also, without specifying any particular subsection, it alternatively seeks to have the Debtors denied a general discharge under section 727.
The Debtors are indebted to Town Country in the amount of $42,915.00 in consequence of a series of promissory notes secured by a security interest in certain farm equipment, crops, livestock and their products and proceeds. Prior to filing for relief under Chapter 7, the Debtors entered into a stipulation with Town Country by which they acknowledged the outstanding balance owing and also acknowledged that, without proper authorization, they sold unspecified amounts of livestock and grain pledged as collateral without surrendering the proceeds. They further agreed that judgment could be entered against them in the amount of $47,977.78 together with attorney's fees and costs; that certain collateral could be sold by Town Country and that any deficiency remaining after sale would be regarded as a non dischargeable debt pursuant to section 523(a)(2).
By its Complaint, Town Country asserts in its second claim for relief that the stipulation establishes that the indebtedness was incurred through fraud, deceit, or malicious conversion. In its first claim for relief Town Country asserts that at some point in time the Debtors made unauthorized sales of livestock and grain and failed to account for the proceeds. It is further alleged that the Debtors concealed ownership of unspecified persona! property serving as collateral and failed to disclose all assets in their schedules thereby establishing grounds for a general denial of discharge under section 727.
Answering, the Debtors admit they signed the stipulation but charge it is without effect in the bankruptcy case. They admit that a judgment was entered pursuant to the stipulation but deny all allegations of fraud, conversion, and concealment.
Pursuant to Rule 56(c). made applicable in bankruptcy proceedings by Rule 7056 of the Federal Rules of Bankruptcy Procedure, summary judgment is appropriate if there is no genuine issue as to any material fact or any conflicting inferences which might reasonably be drawn from those facts, which when viewed in a light most favorable to the party opposing the motion, demonstrate the moving party is entitled to judgment as a matter of law. Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986); In re Knodle, 187 B.R. 660 (Bankr. D.N.D. 1995).
Although Town Country's Complaint refers to section 727, its instant motion for summary judgment only asks that the Debtors' indebtedness to it be found non dischargeable pursuant to section 523. No reference is made at all to section 727 or to facts upon which such relief might be granted.
For a debt to be excepted from discharge under either section 523(a)(2)(A) or (B), the finds themselves must have been obtained by fraud in the inception. If such is the case, a creditor seeking relief under section 523 (a)(2)(A) must prove each of the following elements by a fair preponderance of the evidence:
(1) that the debtor made false representations;
(2) that at the time made the debtor knew them to be false;
(3) that the representations were made with the intention and purpose of deceiving the creditor;
(4) that the creditor justifiably relied on the representations;
(5) that the creditor sustained the alleged injury as a proximate result of the representations having been made.
In re Slominski, 229 B.R. 432 (Bankr. D.N.D. 1998).
For relief to lie under section 523 (a)(2)(B) the following criteria must be established by a fair preponderance of the evidence:
(1) that the debtor made a statement in writing;
(2) respecting the debtor's financial condition;
(3) which statement is materially false;
(4) which was made with the intent to deceive;
(5) which is recently relied upon by the creditor.
In re Kerbaugh, 162 B.R. 255 (Bankr. D.N.D. 1993).
To prevent a discharge under section 523(a)(4), Town Country must be able to prove by a fair preponderance of the evidence that the Debtors committed fraud or defalcation while acting in a fiduciary capacity, or that they committed embezzlement or larceny. To prevent a discharge under the fiduciary provision, the evidence must show that a fiduciary relationship existed and that the Debtors committed fraud or defalcation in the course of that fiduciary relationship. The definition of "fiduciary" for purposes of section 523(a)(4) is limited to instances involving express or technical trusts and thus is more narrowly defined in bankruptcy than under the general common law. With respect to the two alternate prongs; that is, embezzlement and larceny, the evidence must establish that there was a fraudulent appropriation of property of another by a person to whom such property has been entrusted or in whose hands it has lawfully come. Larceny differs from embezzlement in that larceny requires that the original taking of the property be unlawful. See generally In re Montgomery, 236 B.R. 914 (Bankr. D.N.D. 1999).
Moving now to the statutory basis for recovery under section 523(a)(6) providing for the non discharge of any debt arising from willful and malicious injury, it must be noted that courts have very recently provided new contour to the meaning of the term "willflilness.' Willful and malicious are two distinct requirements that Town Country must establish by a preponderance of the evidence if it is to be successful. In the wake of Kawaauhau v. Geiger ___ U. S ___, 118 S.Ct. 974 (1998), the term "willful" now requires a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Thus, not only must the act be malicious but the evidence must show that the Debtors acted to intentionally injure Town Country not merely to commit a deliberate or intentional act that led to its injury. In re Scarborough, 171 F.3d 638 (8th Cir. 1999); In re Feist, 225 B.R. 450 (Bankr. D.N.D. 1998). Under this standard, the facts must establish that the Debtors' sale of livestock and grain was done with the express intent to injure Town Country as opposed to merely being an act which ultimately led to Town Country's injury.
Town Country's motion for summary judgment on each or all of the foregoing Code sections appears to be principally premised upon the stipulation and resulting judgment — a judgment which is best characterized as a consent judgment. The judgment is asserted to be res judicata of all issues essential to finding the debt non dischargeable. Considering the stipulated facts against the requisite elements of sections 523(a)(2)(A),(B),(a)(4) and (a)(6), causes the court to believe Town Country's section 523 cause of action is one which can only be based upon section 523(a)(6). Despite an express reference to section 523(a)(2), nothing in the stipulation suggests the Debtors, at loan inception, fraudulently induced Town Country to make the original loans, nothing suggests any facts pointing to a fiduciary relationship, embezzlement or larceny. Hence, the stipulation and resulting judgment have to be considered in the light of the requisite elements of section 523(a)(6) and whether the contents of the stipulation and judgment are to be accorded collateral estoppel effect.
In Olson v. United States, 170 B.R. 161 (Bankr. D.N.D. 1994), the court described in great detail the elements and policy implications underpinning application of the doctrine of collateral estoppel, noting that prior state court judgments have no res judicata effect in dischargeability actions. The United States Supreme Court has acknowledged, however, that the narrower doctrine of collateral estoppel (issue preclusion) may well apply in discharge proceedings to bar the relitigation of factual or legal issues that were determined in a prior proceeding. See Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654 (1991). In order for an issue to be give preclusive effect in a subsequent proceeding, the following elements must exist:
(1) the issues sought to be precluded must be the same issue as that involved in the prior action;
(2) the issue must have been actually litigated;
(3) the issue must have been determined by a valid and final judgment; and
(4) the determination of the issue must have been essential to the final judgment.
Stoebner v. Parry. Murray, Ward Moxley, 91 F.3d 1091, 1094 (8th Cir. 1996).
Consent judgments are problematical in the context of according them preclusive effect since they are usually attenuated documents shorn of any factual recitations. Hence, the Eighth Circuit once concluded that the doctrine of collateral estoppel does not apply where the issues sought to be precluded were determined by stipulation or consent judgment. Gall v. South Branch Nat. Bank of S.D., 783 F.2d 125 (8th Cir. 1986). An exception to this rule is where the consent decree or judgment incorporates factual findings necessary to the judgment from which one can discern that the issues are the same and were actually litigated. See Daily v. FDIC, 47 F.3d 365 (9th Cir. 1995); Klingman v. Levinson, 831 F.2d 1292, 1296 n. 3 (7th Cir. 1987); Graham v. IRS, 973 F.2d 1089 (3rd Cir. 1992). Conversely, consent judgments without factual support are not accorded collateral estoppel effect. See generally Matter of Poston, 735 F.2d 867 (5th Cir. 1984). To successfully maintain its present action, premised as it apparently is upon section 523(a)(6), Town Country must be able to establish that the debt outstanding was incurred through willful and malicious injury which is to say, that the Debtors intended the consequences of the act, not merely intended the act itself. Although the judgment is based upon a stipulation, the stipulation, in turn, does not establish the requisite elements necessary for non discharge under section 523(a)(6). All that can be gathered from the stipulation is that the Debtors sold pledged livestock and grain of unspecified amount and value without surrendering the proceeds. There is no admission of an intent to expressly injure Town Country by such action nor indeed is there any admission of an intent to injure the collateral. Furthermore, there is nothing within the stipulation from which the court could conclude that the conduct of the Debtors was malicious.
The stipulation may, however, have an evidentiary effect in that the Debtors cannot later take a position inconsistent with admissions set forth in the stipulation itself. Thus, while the elements of willfulness and maliciousness have not been established, it would be difficult for the Debtors later to deny that they sold grain and livestock pledged as collateral without proper authorization and failed to surrender the proceeds to Town Country. This is not enough, however, to render the resulting judgment nondischargeable under section 523(a)(6). Town Country must carefully consider its heightened burden of proof in the wake of the Gieger decision.
Accordingly, and for the foregoing reasons Town Country Credit Union's Motion for Summary Judgment is DENIED.