Summary
holding that failure of a seller to pay over proceeds of sale to a lender secured by inventory does not constitute defalcation while acting in a fiduciary capacity
Summary of this case from In re McKnewOpinion
Case No. 96-21436-SCS, Adversary Proceeding No. 96-2112-S
July 18, 1997
William A. Lascara, Esquire, Lascara Associates, P.C., Norfolk, VA, of Counsel for the plaintiff
Robert V. Roussos, Esquire, Roussos and Langhorne, P.L.C., Norfolk, VA, of Counsel for the defendant
MEMORANDUM OPINION
This is an action to determine the dischargeability of $29,270 in loans made by the plaintiff, an automobile "floorplan" lender, to the defendant's business. A trial was previously held before Bankruptcy Judge David H. Adams of this court, but Judge Adams recused himself before judgment was entered and granted the defendant's motion for a new trial. The retrial was held on June 23, 1997, before the undersigned judge. This opinion constitutes the court's findings of fact and conclusions of law under F.R.Bankr.P. 7052.
Facts A.
The defendant, David A. Naff, filed a voluntary petition with his wife under chapter 7 of the Bankruptcy Code in this court on March 13, 1996, and received a discharge of his dischargeable debts on June 20, 1996. The plaintiff, CBR, Inc. ("CBR"), provided automobile floorplan financing to Eastern Sales Automotive, Inc. ("Eastern"), a used car dealership in Norfolk, Virginia. The debtor was the president and general manager of Eastern and signed the floorplan documents on its behalf. As will be discussed below in more detail, Eastern fell behind in its payments to CBR, and the debtor signed a forbearance agreement in which he acknowledged that Eastern was "out of trust" and personally guaranteed the payments owed by Eastern to CBR. Eventually, CBR brought suit against the debtor in state court and obtained a judgment. It is a portion of that judgment that CBR seeks to have determined nondischargeable under §§ 523(a)(2), (a)(4), and (a)(6), Bankruptcy Code, as being grounded in fraud, fiduciary defalcation, and willful and malicious injury to property.
B.
Robert M. Reed, the vice-president, secretary-treasurer, and 50% shareholder of CBR, testified that CBR has been providing floorplan financing to used car dealers in the Norfolk and Virginia Beach area since 1986. He explained that "floor plan" financing refers to loans made to car dealers for the purchase of inventory. When a dealer requests such financing, his practice is to investigate the dealer's financial statements, where it purchases its inventory, and how it sells its automobiles. If satisfied with the dealer's qualification, CBR will establish a line of credit for the dealer and make advances for the purchase of inventory secured by an assignment and physical delivery of the titles to the vehicles being purchased. When a particular vehicle is sold and the advance related to that vehicle paid off, CBR releases the certificate of title to the dealer.
Mr. Reed is also an attorney and a former law partner of Judge Adams.
The debtor approached CBR in 1988 about obtaining floorplan financing for Eastern. The debtor testified that he was the president, manager, and "bverseer" of Eastern but that his mother and father owned all the stock and were "the main persons controlling [Eastern]. "He had first become involved in used car sales in December 1984 but testified that he had no experience with floorplan financing prior to entering into the relationship with CBR. He initially contacted Robert Reed's father, Charles Reed, Sr., and subsequently meet with Robert Reed. At that meeting, Mr. Reed explained to him CBR's floorplanning terms. In particular, Mr. Reed explained that CBR would make loans for the lesser of a vehicle's fair market value or the price Eastern paid for the vehicle; that CBR would be paid when the vehicle was sold; and that monthly fees would be payable based on the amount of the advances.
These fees, which Mr. Reed in his testimony characterized as "analogous to interest," averaged roughly $1,000 per month over the period that CBR and Eastern did business.
CBR provided floorplan financing to Eastern over a period of a year and a half. Apparently, there was no master written agreement governing the overall relationship. Instead, as the debtor requested advances from CBR, each transaction would be evidenced by a one-page document entitled "Security Agreement" and Promissory Note." The top portion of each such document (the "Security Agreement") recited,
In consideration of the advance of value by CBR, Inc., to EASTERN SALES AUTOMOBILE at his place of business in the City of Norfolk . . . in the form of money or its equivalent in the amount of [amount shown in figures] as evidenced by the promissory note of Dealer made to CBR, Inc. in such amount of even date herewith and payable on demand . . . Dealer does hereby pledge, assign, transfer and sell to CBR, Inc., the following chattels[:]
This would be followed by a list of one to four automobiles each described by year, make, body or type, serial number, and "amount," together with a total for the "amount." That total was inserted in a form promissory note at the bottom of the document that contained the following language:
ON DEMAND, FOR VALUE RECEIVED, I promise to pay to the order of CBR, Inc., at its office in Virginia Beach, Virginia [the amount stated] plus floor plan fees at the rate of [a stated dollar amount] per month per automobile for each automobile held in inventory and covered by this Note and Security Agreement.
The security agreement contained the following additional language:
Dealer covenants and agrees with CBR, Inc., as follows, to-wit:
1. That Dealer warrants to CBR, Inc. that the security interest hereby created is a valid first lien upon the above described chattels for the amount of new value advanced as above recited.
2. That Dealer shall keep said chattels at his place of business, and that Dealer will not rent, drive, pledge, mortgage, or otherwise dispose of or encumber said chattels otherwise than in the normal course of Dealer's trade or business. . . .
3. That none of said chattels shall be sold to a buyer for less than the amount above stated. That the proceeds of any sale including chattels traded in and chattel paper shall be kept separate from all other funds or property and on demand shall be transmitted to CBR, Inc.,
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10. Dealer agrees to pay to CBR, Inc., fifty percent (50%) of the original amount loaned, plus all accrued and unpaid fees, on or before the date six (6) months after the date of this Security Agreement. Dealer agrees to pay to CBR, Inc. the remaining balance of any amount loaned, plus all accrued and unpaid fees, on or before the date twelve (12) months after the date of this Security Agreement.
It is undisputed that Eastern never had a separate or segregated bank account to hold the proceeds of sale from floorplanned vehicles. At the same time, it does not appear that CBR ever inquired or was particularly concerned as to the existence of such an account. Many of Eastern's sales were credit transactions, with Eastern taking back a promissory note from the customer secured by a recorded lien on the vehicle title. A number of those notes were sold or assigned to Robert Reed's father, Charles Reed, Sr. as collateral for unrelated loans to the dealership. Robert Reed acted as his father's agent for the purpose of collecting the funds due from Eastern in connection with those transactions.
Eastern apparently had the duty of collecting the monthly payments on the assigned notes and of transmitting them to Charles Reed, Sr.
With respect to the floorplan advances, Robert Reed testified that he would meet with the debtor, who had the titles to the vehicles and who would provide Mr. Reed with the dollar "amount" of the advance for each vehicle. Mr. Reed assumed the "amount" to be the lesser of fair market value or Eastern's cost, but undertook no independent investigation as to the value of the vehicles. He testified he relied on the representation in the security agreement that CBR would get a first lien on the cars and that the cars would not be sold for less than the floorplan amount.
In late 1989, Eastern began falling behind in its floorplan payments to CBR. Mr. Reed went to the dealership on January 17, 1990, with his brother, Charles Reed, Jr. "the other 50% owner of CBR" to discuss the situation with the debtor and to take a physical inventory of the floorplanned vehicles. At that meeting, the debtor told Robert Reed that he was getting out of the used car business and into the real estate business, and Mr. Reed noticed that there were very few vehicles on the lot. Mr. Reed testified that when he started to go out on the lot to check the vehicles, the debtor admitted that none of the floorplanned vehicles were there. Mr. Reed also testified that the debtor admitted that seven of the vehicles had been sold without the proceeds of sale having been paid over to CBR and that another six of the cars had already been sold to customers prior to the time CBR had advanced the funds for Eastern to purchase them. Charles Reed, Jr., testified that the debtor admitted at the meeting that he had sold six or seven cars and had "spent" the money without paying CBR and that he had floorplanned cars he had already sold. Charles Reed, Jr., further testified that none of the thirteen vehicles on which sums were owed were on Eastern's lot. The debtor testified at trial that he made no such admissions and that many of the floorplanned vehicles were still on the lot at that time. Having had an opportunity to hear the witnesses testify and assess their demeanor, the court finds the testimony of Robert and Charles Reed to be more credible than that of the debtor, and accordingly, the court finds that the debtor made the admissions in question and that none of the floorplanned vehicles was then on the lot.
While it may not have been on the lot, one of the vehicles "a 1986 Ford Tempo" was clearly still around somewhere, since Department of Motor Vehicle records reflect that two months later (March 13, 1990), it was sold by Eastern to Raymond Naff, the debtor's father, for $1,750.
After Mr. Reed learned that the vehicles had been sold, he had discussions with the debtor and the debtor's father, Raymond Naff, about paying the amounts owed to CBR. Mr. Reed prepared a draft settlement agreement which was sent to the debtor for review. A meeting took place on February 12, 1990, at which Mr. Reed, the debtor, and the debtor's father discussed the terms of the agreement. The settlement agreement recited that Eastern owed CBR $27,980.00 in principal and $1,290.00 in fees under the floorplan arrangement and that Eastern was "out-of-trust with respect to the floorplan." Attached to the Settlement Agreement was an exhibit listing 13 specific vehicles and the amount due with respect to each vehicle. The Settlement Agreement acknowledged that CBR had a right of immediate payment of the sums due but allowed Eastern to pay the total sum, with interest on the unpaid balance at 2% per month, over a ten month period ending December 31, 1990. The agreement further provided that the debtor and his father personally guaranteed the debt. Both the debtor and his father signed the agreement. Mr. Reed testified that the phrase "out of trust" means that the dealer has sold inventory without paying off the debt related to that inventory. The debtor testified that he had no idea, when he signed the agreement, what the term "but of trust" meant and that he had never heard the term before, notwithstanding that he had been in the automobile sales business for six years at that point. Again, having had an opportunity to hear his testimony and observe his demeanor, the court simply does not credit the debtor's assertion that he did not understand the meaning of "out of trust."
The debtor had not been contractually liable on the floorplan advances prior to signing the settlement agreement. Mr. Reed testified, however, that he felt CBR "could impose personal liability" on the debtor because of the debtor's personal involvement in the transactions.
After the Settlement Agreement was signed, CBR released some of the titles to Eastern at the debtor's request "because the cars were no longer on the lot," and Mr. Reed believed that CBR's unperfected security interest would not have been effective against the customers who had purchased the cars from Eastern. For reasons that are not entirely clear, CBR still holds the titles to seven vehicles, although Mr. Reed testified that he did not believe simply holding a title gave CBR any rights against third parties who had purchased the vehicles or any ability to repossess and sell those vehicles.
Beginning in March 1990, Eastern and the debtor made irregular payments to CBR over an approximately four-year period on account of the sums due under the Settlement Agreement. In addition, the debtor owed money to Charles Reed, Sr., on two delinquent promissory notes for loans made to the dealership, and Robert Reed was collecting the payments on those notes as agent for his father. As payments were received, Robert Reed allocated 50% of them to the settlement agreement and 50% to the two promissory notes. The payments themselves, which for the most part consisted of checks made payable to CBR, were not accompanied by any direction with respect to how they were to be applied. On May 3, 1990, Mr. Reed mailed the debtor a letter that enclosed "amortization schedules" for the payments due CBR under the Settlement Agreement and for the payments due on the two promissory notes. Each schedule showed both the "scheduled repayments" and the "actual repayments," the latter reflecting how the payments received had been allocated among the three obligations. An updated set of schedules was mailed to the debtor on September 21, 1990. No protest was registered by the debtor to the allocation of payments. Although the debtor testified that he had not received either set of schedules, the court does not find his denial credible and finds that the schedules were sent and received and that they put the debtor on notice as to how the payments were being applied.
Because the principal due under the settlement agreement was greater than the principal due on the two notes, and because the interest rate under the settlement agreement was higher than the interest rate specified in the notes, this allocation resulted in a substantial paydown of the principal balance of the notes while barely making a dent in the principal balance due under the settlement agreement.
On January 27, 1994, Mr. Reed sent the debtor and Raymond Naff a letter stating that the principal balance then due under the Settlement Agreement was $27,519.82 and on the two notes was $8,613.77. The total "accrued but unpaid interest" was recited to be in excess of $19,000. The letter offered to waive all of the "accrued but unpaid interest" if the principal balance was paid in full by September 1, 1994. In the interim, the letter offered to reduce the interest rate to 10%, payable monthly, beginning February 15, 1994. This terms of this offer were reiterated in a letter dated August 3, 1994. The debtor and his father made the interim interest payments through September 1, 1994 but made no further payments after that, nor did they pay off the principal.
The debtor had told Mr. Reed that he expected to be able to make the payment from the impending sale of a motel with respect to which the debtor was acting as broker.
These were allocated by Mr. Reed pro rata among the three obligations.
In September 1995, CBR brought an action against the debtor in the Circuit Court of the City of Virginia Beach seeking $43,919.76 in damages for breach of the settlement agreement (Count I) and $12,879.92 due under the two promissory notes, which by that time had been assigned to CBR. Mr. Naff did not defend the action, and on January 26, 1996, a default judgment was entered against him in the amount of $56,799.68 plus attorneys fees of $4,305.00.
This sum consisted of $27,520.02 in principal and $16,399.74 in accrued interest through August 7, 1995.
At the trial of this adversary proceeding, Robert Reed presented an accounting showing the allocation of approximately $20,000 in payments that had been paid on account of the Settlement Agreement and the two notes. With respect specifically to the Settlement Agreement, his accounting showed that $459.98 had been credited against principal and $12,895.65 against interest. Based on his computations, he testified that the principal balance due under the Settlement Agreement was $27,520.02 and that accrued but unpaid interest through June 23, 1997 (the date of trial) was $32,914.77.
Other relevant facts will be discussed in connection with the issues to which they relate.
Conclusions of Law and Discussion I.
This court has subject-matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. The defendant has been properly served and has appeared generally. Under 28 U.S.C. § 157(b)(2)(I), this is a core proceeding in which final judgments or orders may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158. Venue is proper in this district under 28 U.S.C. § 1409(a).
II.
Under § 523(a), Bankruptcy Code, a chapter 7 discharge does not discharge a debtor from certain types of debts. Relevant to the present action, these include the following type of debts:
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
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(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; [and]
* * *
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;
The transactions at issue involve loans made by CBR to Eastern from June 23, 1989 through December 29, 1989, for the purchase of 13 automobiles for Eastern's inventory. Each financing transaction, as noted above, was evidenced by a security agreement and promissory note. Count I of the complaint alleges that with respect to seven of the vehicles financed by CBR, Eastern subsequently sold the vehicles but kept the sales proceeds and did not apply them to the secured indebtedness as required by the terms of the security agreement. The principal amount due on those notes is alleged to be $13,239.00. The complaint alleges that the debtor's liability for that sum is nondischargeable under §§ 523(a)(4) and (a)(6). Count II of the complaint alleges that with respect to six of the vehicles financed by CBR, Eastern had already sold the vehicles at the time the funds were advanced. The principal amount due on the notes for those vehicles is alleged to be $14,741.00. The complaint alleges that the debtor's liability for that sum is nondischargeable under § 523(a)(2)(a). The plaintiff has the burden of proof, and the standard of proof is by a preponderance of the evidence. Grogan v. Gamer, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
III.
As a threshold issue, the debtor asserts that all of CBR's dischargeability causes of action are barred by the applicable Virginia statute of limitations. This argument was advanced by motion for summary judgment which was argued at trial prior to the presentation of the evidence and was denied by the court for reasons stated orally on the record. Some further discussion of the issue is nevertheless appropriate in order to place the remaining issues in context.
A.
The debtor's statute of limitations argument, stripped to its essentials, is that the causes of action asserted in the nondischargeability complaint all accrued in 1989 and that the applicable statutes of limitation in Virginia for fraud and conversion had not only all expired by the time the debtor filed bankruptcy, but had expired even prior to the time CBR brought suit against the debtor in state court on its contract claim. Under Va. Code Ann. § 8.01-243(A), the statute of limitations for actions grounded in fraud is two years. The statute of limitations for torts resulting in injury to property is five years. Va. Code Ann. § 8.01-243(B). Hence, there can be no doubt that, had the debt not previously been reduced to judgment, there would now be no liability to be excepted from discharge.
Va. Code Ann. § 8.01-243(A) states: "Unless otherwise provided in this section or by other statute, . . . every action for damages resulting from fraud, shall be brought within two years after the cause of action accrues." Under Va. Code Ann. § 8.01-249(1), a cause of action for fraud accrues "when such fraud . . . is discovered or in the exercise of due diligence reasonably should have been discovered[.]" In the present case, there can be no doubt that CBR became aware of the fraud at the latest on January 17, 1990.
Va. Code Ann. § 8.01-243(B) states: "Every action for injury to property . . . shall be brought within five years after the cause of action accrues."
In this case, however, the underlying debt was reduced to judgment, and under Virginia law that judgment was unquestionably still enforceable at the time the bankruptcy petition was filed. Va. Code Ann. § 8.01-251. That the judgment was obtained based on a contract rather than tort cause of action is immaterial. In Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), the Supreme Court held that if a creditor with both a contract and a fraud claim obtains judgment only on the contract claim in a pre-bankruptcy action, the creditor is not estopped from asserting, when the debtor later files for bankruptcy relief, that the debt is nondischargeable based on fraud. The Court reasoned that dischargeability is simply not an issue in a pre-bankruptcy action to liquidate a debt, and that so long as the debtor is solvent, the creditor may prefer a simple contract suit to complex tort litigation. Id. at 137 n. 8, 99 S.Ct. at 212 n. 8. Accordingly, the Court held that a creditor is not required "to engage in hypothetical litigation in an inappropriate forum" to protect its right, in a later bankruptcy, to obtain a determination of nondischargeability. Id. at 137-39, 99 S.Ct. at 2212-13.
Va. Code Ann. § 8.01-251(A) states in relevant part as follows: "No execution shall be issued and no action brought on a judgment . . . after twenty years from the date of such judgment [.]"
B.
The statute of limitations was not an issue in Brown v. Felsen. That issue was, however, squarely raised in the leading case of RTC v. McKendry (In re McKendry), 40 F.3d 331 (10th Cir. 1994). In that case, the Resolution Trust Corporation was the holder, as receiver for an insolvent savings and loan association, of a deficiency judgment against the debtor obtained after foreclosure of a mortgage. The debtor then filed a chapter 7 bankruptcy petition, and the RTC brought a nondischargeability complaint under § 523(a)(2) of the Bankruptcy Code. The debtor successfully moved in the bankruptcy court for dismissal on the ground that any action for fraud was barred by the Colorado 3-year statute of limitations for fraud. On appeal, the Tenth Circuit reversed, holding that F.R.Bankr.P. 4007(c), rather than the state statute of limitations for fraud, governed the time within which a creditor could bring a nondischargeability action. Under § 523(c), Bankruptcy Code, and F.R.Bankr.P. 4007(c), a debt asserted to be nondischargeable under §§ 523(a)(2), (a)(4), (a)(6), or (a)(15) of the Bankruptcy Code is nevertheless discharged unless, within 60 days of the first date set for the meeting of creditors in the bankruptcy case, the creditor files in the bankruptcy court a complaint to determine dischargeability and thereafter obtains a judgment of nondischargeability. Since the complaint in McKendry was filed within the 60-day period specified by F.R.Bankr.P. 4007(c), the Court of Appeals, after a detailed review of Brown v. Felsen, held that the state statute of limitations was not a bar. In reaching this conclusion, the Court noted:
The bankruptcy court, after notice and a hearing, may extend the 60-day period "for cause," but only if the motion for extension is made before the time has expired. F.R.Bankr.P. 4007(c).
[t]here is a fundamental flaw in the debtor's position in that it fails to recognize the distinction between a suit brought under state law to enforce state created rights and a suit filed in bankruptcy court to determine dischargeability issues under § 523(a) of the Bankruptcy Code. In bankruptcy court, there are two separate and distinct causes of action: "One cause of action is on the debt and the other cause of action is on the dischargeability of that debt, a cause of action that arises solely by virtue of the Bankruptcy Code and its discharge provisions." Brockenbrough v. Taylor (In re Taylor), 54 B.R. 515, 517-518 (Bankr.E.D.Va. 1985).
40 F.3d. at 336, quoting In re Moran, 152 B.R. 493, 495 (Bankr.S.D.Ohio 1993). The McKendry court therefore held that there were two distinct issues in a nondischargeability proceeding:
The first, the establishment of the debt itself, is governed by the state statute of limitations "if suit is not brought within the time period allotted under state law, the debt cannot be established. However, the question of the dischargeability of the debt under the Bankruptcy Code is a distinct issue governed solely by the limitations period established by bankruptcy law.
The same conclusion was recently reached by the Ninth Circuit in Lee-Brenner v. Gergely (In re Gergely), 110 F.3d 1448 (9th Cir. 1997), where the Court held that a creditor could maintain a dischargeability action under § 523(a)(2) against a physician who had allegedly misrepresented the need for an amniocentesis, even though the applicable California statute of limitations for fraud had expired. In Gergely, the creditor had obtained a malpractice judgment against the debtor prior to the bankruptcy filing, and the Court held, following both McKendry and its own prior opinion in Matter of Gross, 654 F.2d 602 (9th Cir. 1981) (decided under former Bankruptcy Act of 1898) that "the expiration of a state statute of limitations on fraud actions does not affect an action for nondischargeability if there is a valid judgment" because the creditor "is not seeking a new money judgment based on fraud; he is litigating the issue of dischargeability . . . and the timeliness of the petition is governed by the Bankruptcy Rules." Id. at 1453 (internal quotes omitted).
C.
There are indeed a few contrary cases holding that where a creditor, at the time it moves to liquidate its claim, has only a contract claim, it cannot seek in a subsequent bankruptcy to have the debt excepted from discharge based on fraud or conversion. The clearest statement of this position is In re Toylor, 137 B.R. 925 (Bankr. S.D. Ind. 1991). In Toylor, the court held that a nondischargeability action by the United States under §§ 523(a)(2) and 523(a)(6) of the Bankruptcy Code based on payment of veteran's benefits to which the debtor was not entitled was barred by the applicable 6-year non-bankruptcy statute of limitations for tort actions brought by the United States. The erroneous payments were made in late 1975. The United States had brought a suit in contract against the debtor in 1983 for recovery of the overpayments and ultimately obtained a default judgment in 1985. The debtor filed his bankruptcy petition in 1991. The bankruptcy court noted that when the United States had brought its suit in 1983, the statute of limitations had already run on any tort cause of action and "all [the United States] had left was the contract claim, which was not time barred . . . (presumably because of partial payments or acknowledgment of debt)." Id. at 928.
28 U.S.C. § 2415(b). ("[E]very action for money damages brought by the United States . . . which is founded upon a tort shall be barred unless the complaint is filed within three years after the right of action first accrues: Provided, That . . . an action to recover for diversion of money paid under a grant program; and an action for conversion of property of the United States may be brought within six years after the right of action accrues. . . ."
The court in Toylor acknowledged that under Brown v. Felsen, a creditor's election to bring suit against a debtor only in contract did not bar it from later asserting one of the tort-type grounds for nondischargeability under § 523 of the Bankruptcy Code. The court nevertheless reasoned that "the premise of Brown v. Felsen is that a creditor should be free to choose between contract and tort remedies in a debt liquidation action without waiving its rights in a future hypothetical bankruptcy," and that Brown "does not suggest that a creditor who has only a viable contract claim at the time of the debt liquidation action may later resurrect a time-barred tort claim as a basis for nondischargeability after the debtor seeks bankruptcy relief." Id. (emphasis in original). On that basis, the Toylor court ruled that the dischargeability complaint, which was grounded in fraud and conversion, was barred. Accord, In re Dunn, 50 B.R. 664 (Bankr. W.D. N.Y. 1985) (dischargeability complaint under § 523(a)(6) based on conversion dismissed where New York statute of limitations on tort action had expired and only contract claim remained).
D.
The Fourth Circuit has not ruled on this issue. This court is persuaded, however, that the Fourth Circuit would follow McKendry and Gergely rather than Toylor. Here, there can be no question that the applicable Virginia statutes of limitation for fraud and for tortious injury to property had expired prior to the time CBR brought suit against the debtor and that CBR's only viable claim at that point was its contract claim based on the settlement agreement. Nevertheless, given what even Taylor concedes to be "the premise of Brown v. Felsen . . . that a creditor should be free to choose between contract and tort remedies in a debt liquidation action without waiving its rights in a future hypothetical bankruptcy," it follows that a creditor having both contract and tort claims should be equally free to work with a debtor "as CBR did here over a four-year period " without having to rush to court prematurely and file suit before the statute of limitations expires on its tort causes of action solely to preserve its rights in a future hypothetical bankruptcy. The court concludes, therefore, that so long as there exists, on the date the bankruptcy petition was filed, a legally enforceable claim, the time within which the creditor may seek a determination that the debt is non-dischargeable under one of the exceptions in § 523 of the Bankruptcy Code is governed by the Bankruptcy Rules and not by any non-bankruptcy statute of limitations. Accordingly, the fact that CBR chose to delay filing suit until after its tort causes of action were time-barred does not prevent it, in a subsequent bankruptcy, from showing the true character of the debt so long as its complaint to determine dischargeability is filed (as it was) within the period specified in F.R.Bankr.P. 4007(c).
E.
The two cases cited by the debtor, Maneval v. Davis (In re Davis), 155 B.R. 123 (Bankr. E.D. Va. 1993) (Shelley, J.) and L R Associates v. Curtis, 194 B.R. 407 (E.D. Va. 1996) (Jackson, J.), are not to the contrary. In Davis, the minority investors in a closely-held corporation formed by the debtor sought a determination of nondischargeability on the ground that they were induced to purchase their shares as a result of the debtor's fraudulent representations. The minority shareholders had complained to the Virginia State Corporation Commission, which found that the debtor had violated various provisions of the Virginia Securities Act, Va. Code Ann. 13.1-501 et seq., including failure to register shares under the Act and omitting to state a material fact in connection with the sale of the shares. The minority shareholders subsequently brought an action against the debtor in state court for fraud and obtained a default judgment. Approximately two years later the debtor filed for bankruptcy. The opinion noted that the minority shareholders had been aware of the alleged fraud in 1986, more than four years before they brought the action in state court that resulted in the default judgment. Id. at 129. Additionally, at the time the state court action was brought, the Virginia two-year statute of limitations on a private right of action under the Virginia Securities Act had already expired. Id. at 133. Nevertheless, because the statute of limitations is an affirmative defense and had not been pleaded in the state court action, the bankruptcy court found that it had been waived. Id. at 134. The bankruptcy court accordingly reviewed the evidence to make an independent determination on the issue of fraud. Id. Since the plaintiff bore the burden of proof, and since the court found the evidence of actual intent to defraud was equivocal, the court found that the debt was dischargeable. Id. Thus, even though the court found that the state statute of limitations had run on the fraud claim before the state court lawsuit was brought, the court did not find for the debtor on that basis. It is simply a misreading of the case to assert that it stands for the proposition that a state statute of limitations would bar a § 523(a)(2) dischargeability action for fraud if the state court judgment order "reflects no findings which would support the allegations of fraud." Memorandum in Support of Motion for Summary Judgment, p. 2. Indeed, the court in Davis expressly held, "[T]his court will not bar a plaintiff who elected certain remedies in bringing a state law claim to judgment from presenting evidence in a dischargeability proceeding to support a contention that the debtor procured the debt through fraud. § 155 B.R. at 133.
The debtor also relied at trial upon Shannon v. Russell (In re Russell), 203 B.R. 303 (Bankr. S.D. Cal. 1996). The court concurs with plaintiff's counsel, however, that the precedent upon which Russell relies was overruled in Gergely.
L R Associates, the second case relied on by the debtor, is equally inapposite. In that case, the creditor had obtained a default judgment against the debtor for fraud, and, when the debtor subsequently filed for bankruptcy approximately a year later, sought a determination of nondischargeability. The bankruptcy court, relying on M M Transmissions, Inc. v. Raynor (In re Raynor), 922 F.2d 1146 (4th Cir. 1991), held that the default judgment was not entitled to collateral estoppel effect, denied the creditor's motion for summary judgment which was grounded in collateral estoppel, and set the matter for trial. At the trial, the creditor's attorney "indicated to the Bankruptcy Court that it believed that if the Bankruptcy Court did not recognize the collateral estoppel effect of the default judgment, the claim would be time-barred by the applicable statute of limitations." Id. at 409. The opinion is silent as to whether the bankruptcy court expressly concurred in that view or simply accepted the creditor's representation. The opinion simply notes, without elaboration, "Thus, the Bankruptcy Court also ordered the complaint dismissed." Id.
On appeal, the only issue argued by the parties and discussed by the District Court was the issue of collateral estoppel. Although the opinion does state in passing that the debtor "did not need to litigate the issue of fraud before the Bankruptcy Court because the statute of limitations for challenging the discharge had expired," there is no analysis or discussion of the issue, and the District Court explicitly stated that the only question before it was "whether the Bankruptcy Court erred in finding that the state court's judgment itself did not preclude discharge of this debt." Id. at 410. The District Court concluded that collateral estoppel did not apply and that, therefore, "taking into consideration the representations of counsel concerning the statute of limitations," the bankruptcy court had correctly dismissed the complaint. Id. at 411 (emphasis added). What is clear is that neither the bankruptcy court nor the District Court made an independent legal analysis of whether a § 523(a)(2) action was time-barred, since counsel for the creditor had conceded the point. The fact, however, that the creditor's attorney capitulated on a debatable point does not transform the District Court's opinion "which never reaches the issue" into a holding that a state statute of limitations applies to bankruptcy discharge litigation.
F.
In short, based on Brown v. Felsen, In re McKendry, and In re Gergely, this court holds that where a creditor has reduced its claim against the debtor to judgment prior to bankruptcy, regardless of whether the creditor has proceeded in contract or tort, the time within which the creditor may seek a determination that the debt is non-dischargeable under one of the exceptions in § 523, Bankruptcy Code, is governed by bankruptcy law and not by any non-bankruptcy statute of limitations for fraud, conversion, or the like, even if the applicable state statute of limitations for such torts had expired at the time the creditor reduced its debt to judgment. The fact that CBR elected to forego its underlying fraud and conversion causes of action and rely on the settlement agreement does not prevent it in a subsequent bankruptcy from showing the true character of its claim. Accordingly, the debtor's statute of limitations defense is rejected.
Of course, if the claim has never been reduced to judgment and there is no enforceable debt because the statute of limitations has run on every theory of recovery, there would be no underlying liability, and hence nothing to be excepted from discharge.
A separate order has previously been entered denying the motion for summary judgment.
IV.
Only brief discussion is required with respect to two other defenses raised by the debtor in his summary judgment motion and again in a motion for judgment as a matter of law under F.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(c) made at the close of the plaintiff's evidence. The debtor, without any citation of authority, broadly asserts that the Settlement Agreement constituted a "waiver," "compromise," or [a]ccord and satisfaction" of CBR's underlying tort claims against the debtor. Nothing in the language of the agreement, moreover, even remotely supports such an interpretation. The Settlement Agreement waives no claims. It recites that Eastern is "out of trust" on its floorplan, that certain sums are due, and that CBR has a legal right of immediate payment. The agreement gives Eastern ten months to pay that amount, with interest. Notably lacking is any language suggesting release, or for that matter compromise, except with regard to the time of payment. The only evidence suggesting any offer of compromise is the much-later letter of January 27, 1994, in which CBR agreed to waive all then-accrued and unpaid interest, provided the principal amount of $27,519.82 was paid by September 1, 1994, and interest payments at a reduced rate were made in the interim. Although the debtor made the interim interest payments, he did not pay the principal. Put simply, partial payment pursuant to an offer of compromise expressly conditioned on full performance does not constitute an accord and satisfaction. Martin v. Breckenridge, 14 F.2d 260 (4th Cir. 1926) (in the case of an accord and satisfaction, it is not the new promise itself but the performance of the new promise that is accepted as a satisfaction); In re Koushel, 6 B.R. 315 (Bankr. E.D. Va. 1980) (no `satisfaction' unless the agreement is performed). While the debtor here made payments in partial performance of the Settlement Agreement, the evidence is clear that substantial payments required under the agreement have not been made. For that reason, the court cannot find that there has been a waiver, compromise, or accord and satisfaction.
These additional defenses were not addressed in the written summary judgment motion but were raised in oral argument.
"The word" compromise, ". . . means agreement to terminate a controversy." Gunn v. Richmond Community Hospital, 235 Va. 282, 367 S.E.2d 480 (1988). Although titled [S]ettlement Agreement,"the agreement in question here would be more aptly described as a forbearance agreement, since no rights to payment are given up but rather the time for performance is extended.
"Accord and satisfaction is a method of discharging a contract or cause of action, whereby the parties agree to give and accept something in settlement of the claim or demand of the one against the other, and perform such agreement, the `accord' being the agreement and the `satisfaction' its execution or performance." Atkins v. Boatwright, 204 Va. 450, 132 S.E.2d 450 (1963).
V.
The court next considers whether the plaintiff has carried its burden of proof with respect to its fraud, fiduciary defalcation, and conversion grounds of nondischargeability.
A. Fraud Under § 523(a)(2)
As noted above, § 523(a)(2), Bankruptcy Code, excepts from discharge debts
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]
To establish fraud under § 523(a)(2)(A), the following five elements must be proven:
1. That the debtor made representations;
2. That at the time the representations were made the debtor knew them to be false;
3. That the debtor made the representations with the intention and purpose of deceiving the creditor;
4. That the creditor justifiably relied on the representations; and
5. That the creditor sustained the alleged injury as a proximate result of such representations.
Field v. Mans, U.S. § 116 S.Ct. 437, 440, n. 4, 133 L.Ed.2d 351 (1995). The standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
The plaintiff, as noted above, contends that with respect to six of the floorplanned vehicles, the debtor had already sold them at the time it borrowed money from the plaintiff for the purported purpose of purchasing them for its inventory. The testimony of Robert Reed and Charles Reed, Jr. that the debtor admitted as much on January 17, 1990, is directly corroborated, in the case of five of the vehicles, by the titles introduced into evidence showing that Eastern had sold them, and retained a lien, prior to the date CBR made advances to Eastern for their purchase. With respect to one of the vehicles, the certificate of title is somewhat more ambiguous: it clearly shows the vehicle having been sold to a retail customer, and the retention of a lien by Eastern, approximately a year before CBR advanced the funds for its purchase, but the lien is shown as having been released approximately four months after the sale and eight months prior to the loan. Although the dates on the title are consistent with a sale and repossession "thus not entirely ruling out the possibility that Eastern still had the car when the loan was made" they are equally consistent with the testimony of Robert Reed and Charles Reed, Jr., that the car was not on the lot on January 17, 1990. At trial, the debtor in his testimony essentially conceded that four of the vehicles had been sold before they were floorplanned, although with respect to one of the vehicles he attempted to justify the transaction by explaining, after admitting that the car "was not on the lot,"that" [CBR] had the title, and we owed the money," and with respect to another of the vehicles, "We used the title as collateral for that loan." Although the evidence is therefore not without conflict, the court finds from the weight of the evidence that all six of the vehicles in question had already been sold to retail customers at the time they were floorplanned.
A 1982 Chevrolet pickup, 1983 Mercury Cougar, 1979 Chrysler Newport, 1985 Renault Alliance, 1984 Plymouth Reliant, and 1983 Dodge Charger.
These vehicles are the 1982 Chevrolet pickup, the 1983 Mercury Cougar, the 1979 Chrysler Newport, the 1985 Renault Alliance, and the 1984 Plymouth Reliant. On four of the titles, the lien on the title in favor of Eastern was not shown as released when the title was delivered to CBR. On one of the titles, Eastern's lien was shown as released the same day the CBR advance was made. Robert Reed testified that the debtor signed the lien release after he (Mr. Reed) brought the unreleased lien to the debtor's attention.
The 1983 Dodge Charger.
The 1982 Chevrolet pickup, the 1979 Chrysler Newport, the 1985 Renault Alliance, and the 1984 Plymouth Reliant.
The 1979 Chrysler Newport.
The 1985 Renault Alliance.
Misrepresentation of the purpose for which loan proceeds will be used can constitute a false representation for the purpose of § 523(a)(2). Writer v. Mistry (In re Mis try), 77 B.R. 507, 511 (Bankr. E.D.Pa. 1987) (false representation that loaned funds would be put in a bank account, when debtor intended instead to invest them in volatile commodities market); Allegheny Co. U.S. Govt Employees F.C.U. v. Wimbish (In re Wimbish), 95 B.R. 379 (Bankr. W.D.Pa. 1989) (false representation that loan proceeds would be used for home improvements when debtor intended to use them to cure mortgage arrearage). While it is true that nothing in the written loan document expressly warrants or represents that the money being loaned will be used solely to purchase vehicles for inventory, such a representation is clearly implied from the nature of floorplan financing — which, despite his protestations to the contrary, the court finds the debtor understood — as well as the express language in the Security Agreement that CBR would receive and retain a first lien on the vehicles listed until they were sold. There is no question that CBR relied on the fact that it was to have a first lien against the vehicle in extending credit and that it would not have made an unsecured loan to Eastern. There is also no question that the debtor was aware that CBR would not make a loan with respect to a vehicle that had already been sold, and that the debtor deliberately deceived CBR by representing that the loan proceeds were to be used to purchase the vehicles in question for inventory.
CBR, unlike Robert Reedy's father, Charles Reed, Sr., was not in the business of "buying paper," that is, purchasing notes taken back by the dealership when it sold cars to retail customers.
The issue of whether CBR's reliance on those representations was "justifiable," as required by Field v. Mans, supra, is a closer question in light of the fact that all six of the titles reflected on their face that they had been sold by Eastern to third parties prior to the date the loan documents were signed and five of the titles showed an unreleased lien in favor of Eastern. As the Supreme Court noted in Field v. Mans,
As noted above, one of those liens was released by the debtor when Robert Reed called it to his attention at the time the loan was made.
[A] person is "required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation. Thus, if one induces another to buy a horse by representing it to be sound, the purchaser cannot recover even though the horse has but one eye, if the horse is shown to the purchaser before he buys it and the slightest inspection would have disclosed the defect. On the other hand, . . . a defect that any experienced horseman would at once recognize at first glance may not be patent to a person who has had no experience with horses." A missing eye in a `sound' horse is one thing; long teeth in a "young" one, perhaps, another.
116 S.Ct. at 444 (internal citation omitted). Clearly, anyone with experience in the automobile floorplan business would understand the necessity of inspecting title documents. Robert Reed testified that he had accepted the debtor's explanation, with respect to at least one of the titles, that the car had been repossessed after a prior sale, and Mr. Reed went through with the loan only after the debtor released the lien in favor of Eastern shown on the title. Mr. Reed testified that it was not unusual that a repossessed car would still be titled in the original purchaser name. He further testified that, although CBR would not make a loan without receiving a title, in some cases it was necessary, as a practical matter, to loan the funds prior to actually receiving a certificate of title, since Eastern "or at least so the debtor represented" could not obtain a title from its seller prior to paying for the vehicle with the proceeds of the CBR loan. In such cases, the titles would be delivered to CBR several days after the loan was made. Apparently those titles were not always closely examined and were simply placed in the loan file. Nevertheless, given all the circumstances, the court finds that CBR's reliance on the debtor's representation that the loan proceeds would be used to purchase inventory for resale was justifiable.
The 1983 Mercury Cougar. The title reflected it had been sold to a customer, and a lien recorded in favor of Eastern, on February 15, 1989. CBR loaned $2,499 for its purchase eight months later, October 11, 1989.
There remains, finally, the issue of damages. Where a lender is induced to make a loan on the basis of a misrepresentation by the debtor and that loan is not repaid, the appropriate measure of damages is the unpaid amount of the loan. Even though CBR still has physical possession of title certificates with respect to some of the vehicles, it does not appear that mere possession of the title would give CBR any rights against a vehicle sold to a bona fide retail purchaser. The amounts loaned by CBR on the six vehicles in question totaled $14,741. Under the Settlement Agreement, the debtor agreed to repay this sum with interest at 2% per month on the unpaid balance. As noted above, significant payments were made over a four-year period. The court accepts Mr. Reed's calculations showing the allocation of payments to principal and interest and finds that the remaining principal amount applicable to the six cars in question is $14,498.66. Accordingly, judgment will be entered on Count II determining such sum to be nondischargeable under § 523(a)(2), Bankruptcy Code.
Mr. Reed testified this was his understanding of the law. The debtor offered no evidence or legal authority to the contrary. For the purpose of the present opinion, the court assumes Mr. Reed is correct. See Va. Code Ann. § 8.9-307(1) (buyer in ordinary course takes free of security interests created by seller); GMAC v. Frank Meador Leasing, Inc., 6 B.R. 910 (Bankr. W.D. Va. 1980) (sale in ordinary course of business extinguished floor-plan lender's security interest in automobile).
B. Defalcation by a Fiduciary Under § 523(a)(4)
Section 523(a)(4), Bankruptcy Code, excepts from discharge debts arising from "fraud or defalcation while acting in a fiduciary capacity." The plaintiff contends" although not with much fervor, in light of the extensive case law to the contrary "that this exception is applicable with respect to seven floorplanned vehicles that were sold by the debtor without payment being made to CBR. CBR points to the language in the security agreement requiring the proceeds of sale to be kept segregated, thereby" it is argued "making the debtor a "fiduciary" with respect to the proceeds of sale.
The primary difficulty with the plaintiff's argument is that the term "fiduciary" as used in § 523(a)(4) is restricted to "the class of fiduciaries including trustees of specific written declarations of trust, guardians, administrators, executors or public officers and, absent special considerations, does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners." Sager v. Lewis (In re Lewis), 94 B.R. 406, 410 (Bankr. E.D. Va. 1988) (Shelley, J.); Matter of Marchiando, 13 F.3d 1111 (7th Cir. 1994), cert. denied sub nom Illinois Dept. of the Lottery v. Marchiando, "U.S.", 114 S.Ct. 2675, 129 L.Ed.2d 810 (constructive, resulting, or implied trusts do not come within reach of § 523(a)(4); hence, lottery ticket seller not "fiduciary" within meaning of § 523(a)(4) so as to make debt from failure to turn over proceeds from ticket sales nondischargeable). Put another way, the mere failure by a seller of goods to pay over the proceeds of sale to a lender secured by inventory does not constitute [d]efalcation while acting in a fiduciary capacity-for dischargeability purposes. Davis v. Aetna Acceptance Corp., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (Cardozo, J.) (automobile dealer's failure to remit proceeds of sale from floorplanned automobile to lender did not constitute [d]efalcation while acting . . . in any fiduciary capacity "under former Bankruptcy Act of 1898 even though dealer had executed" trust receipt" for vehicle in favor of secured lender); American General Finance, Inc. v. Heath (In re Heath), 114 B.R. 310 (Bankr. N.D. Ga. 1990); Standard Bank Tr. Co. v. laquinta (In re laquinta), 95 B.R. 576 (Bankr. N.D. Ill. 1989); First American Nat'l Bank v. Mullins (In re Mullins), 64 B.R. 287 (Bankr. W.D. Va. 1986). Accordingly, the plaintiff has not carried its burden of proof with respect to its § 523(a)(4) cause of action and that cause of action will be dismissed.
C. Willful and Malicious Injury to Property
Finally, § 523(a)(6), Bankruptcy Code, excepts from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." In this case, CBR, as noted above, alleges that the debtor sold seven floorplanned vehicles in which CBR had a security interest and kept the proceeds of sale instead of remitting them to the creditor as required by the terms of the floorplan agreement. "Willful." as used in § 523(a)(6), means "deliberate or intentional." St. Paul Fire Marine Ins. Co. v. Vaughn, 779 F.2d 1003 (4th Cir. 1985). The requirement that the conduct be "malicious" does not require that a debtor bear subjective ill will toward, or specifically intend to injure, his or her creditor; it is sufficient that a debtor's injurious act is done [d]eliberately and intentionally in knowing disregard of the rights of another." First Nat Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664 (4th Cir. 1995). Conversion can constitute a willful and malicious injury to property for the purpose of § 523(a)(6). Davis v. Aetna Acceptance Co., supra, at 331-332, 55 S.Ct. at 153 (decided under former Bankruptcy Act of 1898); Harmon v. Scott (In re Scott), 203 B.R. 590, 598 (Bankr. E.D. Va. 1996); Richmond Metropolitan Hosp. v. Hazelwood (In re Haselwood), 43 B.R. 208, 213 (Bankr. E.D. Va. 1984). As the Supreme Court cautioned in Davis, however,
A 1986 Ford Tempo, 1983 Datsun Sentra, 1985 Chevrolet Citation, 1984 Chevrolet Chevette, 1983 Chevrolet Cavalier, 1984 Ford Escort, and a second 1983 Chevrolet Cavalier.
[A] willful and malicious injury does not follow as of course from every act of conversion, without reference to the circumstances. There may be a conversion which is innocent or technical, an unauthorized assumption of dominion without willfulness or malice. There may be an honest but mistaken belief, engendered by a course of dealing, that powers have been enlarged or incapacities removed. In these and like cases, what is done is a tort, but not a willful and malicious one.
Id. at 332, 55 S.Ct. at 153 (internal citations omitted).
In Davis, the Supreme Court held that the dealer's act in selling the floorplanned automobile in the ordinary course of business, while giving rise to a liability in trover to the secured lender under Illinois law, did not constitute a willful and malicious injury. Since the case below had focused solely on the disposition of the automobile itself and not the proceeds of sale, the Court expressed no view with respect to the latter. Id. at 334-35, 55 S.Ct. at 154 ("No question as to a cause of action arising from a conversion of the proceeds of the sale with willfulness and malice as distinguished from one arising from the conversion of the car itself is before us on this record.")
In the present case, there is no question that Eastern had granted CBR a security interest in the vehicles it purchased with CBR's funds and that the debtor understood that when Eastern sold a floorplanned vehicle, the proceeds of sale, in an amount sufficient to pay off the advance made with respect to that vehicle, had to be paid to CBR. The debtor, in his testimony, admitted as much, but then attempted to undercut the force of that admission by suggesting that the course of dealing between Eastern and CBR allowed Eastern to simply "trade titles," that is, to substitute collateral, so that when a vehicle was sold, Eastern could, in lieu of paying the proceeds of sale to CBR, provide CBR instead with the title to another car to hold. Robert Reed's testimony, which the court finds to be more credible than that of the debtor, disavows any such practice with respect to CBR's loans. Mr. Reed does acknowledge that a practice of substituting collateral existed with respect to the loans made by his father, which were secured by promissory notes taken back by Eastern when it sold automobiles to customers. Although the debtor in his testimony attempted to portray himself as unsophisticated in the car business and confused by the multitude of transactions between Eastern on the one hand, and CBR and Charles Reed, Sr. (both represented by Robert Reed) on the other, the court finds that he fully understood the difference between the inventory or floorplan financing provided by CBR and the receivables financing provided by Charles Reed, Sr. and knew that CBR's security interest in a floorplanned vehicle extended to the proceeds from the sale of such vehicle. The court further finds that the debtor's use of the proceeds of sale to pay business expenses was intentional and was done in knowing disregard of CBR's rights.
There is no argument here that the sale of the car itself was improper or in violation of the security agreement. Rather, it is the conversion of the proceeds le that is relied upon as the basis for nondischargeability.
As discussed above, the court credits the testimony of Robert Reed and Charles Reed, Jr., that the debtor admitted on January 17, 1990, that he had sold floorplanned vehicles without paying CBR the amounts it was due from the proceeds of sale. The debtor at trial testified that he was "not sure" or did not know what happened to a number of the vehicles in question. He did testify, with respect to that the 1984 Plymouth Reliant, that the purchaser "has paid the note off," and, with respect to the 1985 Renault Alliance, that the purchaser "has cleared her account." In any event, having considered and weighed all the testimony, the court has little difficulty in finding that Eastern sold the 1983 Datsun Sentra, 1985 Chevrolet Citation, 1984 Chevrolet Chevette, 1983 Chevrolet Cavalier, 1984 Ford Escort, and the second 1983 Chevrolet Cavalier without paying CBR.
The 1986 Ford Tempo requires separate discussion. The title documents introduced in evidence reflect that Eastern was still the record owner of the vehicle on the date the Settlement Agreement was signed. As discussed above, the court accepts the testimony of Robert Reed and Charles Reed, Jr., that the car was not physically on Eastern's lot on January 17, 1990, but it was obviously stored someplace and had not then been sold. The title documents do reflect that on March 13, 1990, Eastern sold the Tempo to the debtor's father, Raymond Naff, for $1,750, and that he subsequently sold the car to a third party on May 3, 1994. The debtor asserted at trial that $1,750 had been paid to CBR for the release of the title at the time the car was sold to Raymond Naff. Apparently CBR did release the certificate of title to Eastern, since it was included among the documents submitted to the Department of Motor Vehicles at the time the Tempo was registered in Raymond Naff's name. The exhibits showing payments by the debtor reflect a total of $1,500 paid on May 10, 1990 and an additional $2,000 on May 25, 1990. Of this sum, $1,750 was credited by Robert Reed to the Settlement Agreement. On the purely factual issue of whether CBR received payment for this vehicle when it was sold to Raymond Naff, the court finds that the evidence is at least equivocal. Since the plaintiff has the burden of proof, the court concludes that a willful and malicious injury has not been shown with respect to the Tempo.
Although the original sum advanced by CBR for the Tempo was $3,499.00, the exhibit attached to the Settlement Agreement reflects that the principal had been paid down to $1,749.00, presumably in consequence of the requirement in the Security Agreement that 50% of the floorplanned amount had to be paid after the car had been on the lot 6 months.
There remains finally the question of damages with respect to the six other vehicles. The debtor is correct in his argument that the measure of damages is not the amount of the loan but the value of what was converted. In re Iaquinta, supra, at 581 ("The fair market value of the converted collateral is the appropriate measure of damages for conversion."). The plaintiff offered no direct evidence of the value of the collateral, but the plaintiff's evidence does fairly permit an inference that the collateral was worth at least the amount that was advanced. Robert Reed testified he told the debtor that advances would be made for the fair market value of the vehicles or Eastern's cost, whichever was less. The "amount" figure for the advances was supplied by the debtor himself. Charles Reed, Jr., testified that the "amount" shown in the floorplan documents was "what [the debtor] told me he had paid for the car." Under the particular facts of this case" and in the absence of any evidence showing that the collateral had declined in value after the funds were advanced "the amounts actually advanced by Eastern are a reasonable indication of the fair market value of the vehicles at the time they were sold and the proceeds converted by the debtor. Accordingly, the court finds that CBR has carried its burden of showing damages from a willful and malicious injury to its property rights in the amount of $11,490, that being the amount of the advances for the six vehicles in question other than the Tempo. Accordingly, judgment will be entered in the plaintiff's favor on Count I determining such amount to be nondischargeable.
VI.
A separate judgment will be entered determining that the judgment previously obtained by the plaintiff is nondischargeable under" § 523(a)(2) and (a)(6), Bankruptcy Code, in the amount of $26,998.66, together with interest on such sum as awarded by the state court.