Opinion
No. 7-02-10754 MR, Adversary No. 02-1074 M
December 2, 2003
David N. Hernandez R., Albuquerque, NM, for Plaintiff
"Trey" Arvizu III, Roswell, NM, for Defendant
MEMORANDUM
THIS MATTER is before the Court on cross motions for summary judgment. Plaintiff filed its Complaint to Determine Dischargeability of Debt seeking a determination that certain attorneys' fees incurred in connection with Plaintiff's representation of Defendant in dissolution of marriage proceedings are non-dischargeable in Defendant's bankruptcy proceeding pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(6), and/ or (a)(15). Defendant requests summary judgment on Plaintiff's causes of action brought under 11 U.S.C. § 523(a)(2)(A) and (a)(6), and, should she prevail, requests an award of her attorneys' fees incurred in defending this adversary proceeding pursuant to 11 U.S.C. § 523(d).
Plaintiff likewise requests summary judgment on its causes of action brought under 11 U.S.C. § 523(a)(2)(A) and (a)(6). Neither party addresses Plaintiff's cause of action brought under 11 U.S.C. § 523(a)(15).
Having reviewed the motions and the response, considered the relevant case law and applicable bankruptcy code sections, and being otherwise sufficiently informed, the Court finds that an issue of material fact regarding Defendant's intent to defraud the Plaintiff precludes summary judgment on Plaintiff's 11 U.S.C. § 523(a)(2)(A) cause of action. The undisputed facts do not support a cause of action under 11 U.S.C. § 523(a)(6). The Court will, therefore, grant Defendant's motion for summary judgment on Plaintiff's 11 U.S.C. § 523(a)(6) cause of action, and dismiss that portion of Plaintiff's Complaint.
Summary judgment can be granted only when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Rule 56(c), Fed.R.Civ.P., as incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7056, F.R.Bankr.P.; Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 92 L.Ed.2d 265 (1986).
The debt at issue in this adversary proceeding consists of the attorneys' fees incurred during the course of Plaintiff's representation of Defendant in connection with dissolution of marriage proceedings.
Both parties assert that the undisputed material facts support summary judgment in their favor. The following relevant material facts are not in dispute:
1. In March of 2001, Defendant retained Plaintiff to represent her in a dissolution of marriage proceeding then pending in the Fifth Judicial District Court for the State of New Mexico. Complaint to Determine Dischargeability of Debt (" Complaint"), ¶ 4; Answer to Complaint ("Answer"), ¶ 1.
2. Plaintiff and Defendant agreed that the attorneys' fees owing to Plaintiff would be paid from the anticipated proceeds from the division of property awarded to Defendant under the marital settlement agreement. Complaint, ¶ 6; Answer, ¶ 1; and Plaintiff's Statement of Additional Undisputed Material Facts, contained in Response to Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment ¶ 2; Reply to Plaintiff's Response to Summary Judgment and Response to Plaintiff's Cross-Motion for Summary Judgment, ¶ 2.
3. Under the terms of the marital settlement agreement, Defendant was awarded, among other things, $220,000 from her former spouse's American Bar Association 401(k) account. Complaint ¶ 7; Answer, ¶ 1.
4. During the course of the divorce litigation, Plaintiff discussed with Defendant the amounts Defendant would need to withdraw directly from the 401(k) as a cash distribution to pay for certain anticipated expenses, including Plaintiff's attorney's fees. Plaintiff's Statement of Additional Undisputed Material Facts, contained in Response to Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment, ¶ 5; Reply to Plaintiff's Response to Summary Judgment and Response to Plaintiff's Cross-Motion for Summary Judgment, ¶ 5.
5. Defendant understood and agreed that the purpose of the marital settlement agreement was to enable her to pay her attorneys' fees and living expenses from the proceeds of the 401(k) account. Plaintiff's Statement of Additional Undisputed Material Facts, contained in Response to Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment, ¶ 7; Reply to Plaintiff's Response to Summary Judgment and Response to Plaintiff's Cross-Motion for Summary Judgment, ¶ 7.
6. Defendant rolled over the funds from the 401(k) account into an IRA, after first taking a cash distribution in the approximate amount of $20,000. See Transcript of Deposition of Melissa Terry, p. 25, attached as Exhibit 4 to Response to Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment.
7. Defendant did not pay Plaintiff its outstanding attorneys' fees from the 401(k) account, or otherwise. Complaint, ¶ 9; Answer ¶ 1; and Reply to Plaintiff's Response to Summary Judgment and Response to Plaintiff's Cross-Motion for Summary Judgment, p. 2, ¶ 11 — 19.
8. Defendant filed her petition for Chapter 7 bankruptcy relief on February 1, 2002, listing Plaintiff as an unsecured creditor with a claim in the amount of $25,500. 00.
DISCUSSION Plaintiff's claim under § 523(a)(2)(A)
Pursuant to § 523(a)(2)(A), debts for money or services are not dischargeable if they are obtained through "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A). To prevail on a cause of action under this section, the plaintiff must prove the following elements by a preponderance of evidence: (1) the debtor made a false representation; (2) the representation was made with the intent to deceive the creditor; (3) the creditor relied on the representation; (4) the creditor's reliance was [justifiable]; and (5) the debtor's representation caused the creditor to sustain a loss. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996); Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing "justifiable" standard of reliance); Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (establishing preponderance of evidence standard of proof for dischargeability actions).
Defendant asserts that a future promise to pay cannot form the basis of a non-dischargeability claim under § 523(a)(2)(A) because false representations under that section generally apply to misrepresentations of past or present facts. See Garza v. Baker (In re Baker), 139 B.R. 692, 694 (Bankr. N. D. Ohio 1992) (noting that promise of future conduct is insufficient basis for non-dischargeability under § 523(a)(2)(A), even when there is no excuse for subsequent breach) (citations omitted); Kuper v. Spar (In re Spar), 176 B.R. 321, 327 (Bankr. S.D. N.Y. 1994) (false representations under § 523(a)(2)(A) must "`encompass statements that falsely purport to depict current or past facts.'") (quoting In re Roeder, 61 B.R. 179, 181 (Bankr. W. D. Ky. 1986)). Defendant reasons further that a broken promise to pay is merely a claim for breach of contract, which does not constitute fraud for purposes of non-dischargeability under § 523(a)(2)(A). The Court agrees that the mere failure to pay, even with no justification or excuse, does not support a claim for non-dischargeability of debt under § 523(a)(2)(A). See 4 Collier on Bankruptcy ¶ 523.08[1][d] (Alan N. Resnick and Henry J. Sommer, eds., 15th ed. rev. 2003) (noting that "The failure to perform a mere promise is not sufficient to make a debt nondischargeable [under § 523(a)(2)(A)], even if there is no excuse for the subsequent breach."). However, as noted by the Bankruptcy Court for the District of Minnesota, "While a promise to pay is ordinarily not a misstatement of present or past fact, a promise to pay without the present intention to do so could violate § 523(a)(2)(A)." Shea v. Shea (In re Shea), 221 B.R. 491, 497 (Bankr. D. Minn. 1998) (citing McCrary v. Barrack (In re Barrack), 217 B.R. 598, 606 (9th Cir. B. A. P. 1998) (Noting that "`[A] promise made with a positive intent not to perform or without a present intent to perform satisfies § 523(a)(2)(A).'") (quoting Rubin v. West (In re Rubin), 875 F.2d 755, 759 (9th Cir. 1989)). See also, Chevy Chase Bank v. Kukuk (In re Kukuk), 225 B.R. 778, 786 (10th Cir. B. A. P. 1998) (noting within the context of the dischargeability of credit card debt that "An implied representation of intent to repay will be fraudulent if the credit card issuer demonstrates that at the time the debtor used a credit card he or she had no intent to repay the debt incurred.") (citations omitted). Therefore, if Plaintiff can show that Defendant made an affirmative representation that she was going to pay Plaintiff's attorneys' fees without the intention at that time of ever doing so, Plaintiff can sustain a cause of action under § 523(a)(2)(A).
The undisputed facts do not conclusively demonstrate the requisite evidence of intent to defraud. Therefore, summary judgment cannot be entered in favor of Plaintiff. Intent to defraud, or misrepresentation under § 523(a)(2)(A) can be inferred from circumstantial evidence. See In re Deil, 277 B.R. 778, 782 (Bankr. D. Kan. 2002) (" The fraudulent intent element need not be shown by direct evidence, but may be inferred from the totality of the circumstances.") (citation omitted). In fact, circumstantial evidence is often all that is available from which to infer fraudulent intent, "since a debtor will rarely admit a lack of intention to repay." Kukuk, 225 B.R. at 786 (citing Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10th Cir. 1996). Ultimately, a finding of fraudulent intent within the meaning of § 523(a)(2)(A) must be based on the totality of circumstances. Young, 91 F.3d at 1375.
Here, the alleged mis-representation consists of Defendant's agreement and continuing assurances to Plaintiff that she would pay Plaintiff's attorneys fees from the proceeds awarded to Defendant under the marital settlement agreement, including the 401(k) account. Defendant asserts that any of Defendant's actions taken after October 2001 are irrelevant because Plaintiff did not provide legal services to Plaintiff after that time. But, this kind of circumstantial evidence is relevant to the determination of whether the requisite fraud is present to find the debt at issue non-dischargeable. See Mccrary v. Barrack (In re Barrack), 217 B.R. 598, 607 (9th Cir. B. A. P. 1998) (For discharge purposes "`Fraudulent intent may be established from circumstantial evidence, or by inferences drawn from a course of conduct.'") (quoting In re Devers, 759 F.2d 751, 753-54 (9th Cir. 1985)).
Defendant's ultimate failure to pay combined with her conduct after she received the proceeds from the 401(k) account may support the inference that she intended to defraud Plaintiff at the outset. See Deil, 277 B.R. at 782-783 (court "`may consider subsequent conduct to the extent that it provides an indication of the debtor's state of mind at the time of the actionable representations.'") (quoting Groetken v. Davis (In re Davis), 246 B.R. 646, 652 (B. A. P. 10th Cir. 2000). However, even though Defendant does not dispute that she failed to pay Plaintiff from the proceeds of the property division under the marital settlement agreement, this undisputed fact is insufficient evidence of Defendant's intent for purposes of summary judgment in favor of Plaintiff. Likewise, Defendant is not entitled to summary judgment because Plaintiff may be able to show at trial that Defendant's promise to pay Plaintiff's attorneys' fees was made without the then present intent to do so. Ultimately, Defendant's demeanor and credibility is critical to the Court's consideration of the circumstantial evidence of intent to defraud. See Kukuk, 225 B.R. at 789 (" the demeanor and credibility of the debtor is so important to determining intent").
Defendant also asserts that Plaintiff could not have justifiably relied on a representation to pay attorneys' fees from the 401(k) account, because a pledge of an exempt asset, such as a 401(k) retirement account, is unenforceable. But cf. Raymond v. Raymond (In re Raymond), 210 B.R. 710, 714 (Bankr. E. D. Va. 1997) (finding that debtor willfully and maliciously used funds with actual knowledge of former spouse's security interest in IRA). Whether Defendant could grant Plaintiff a security interest in an exempt asset is not determinative of the reliance element under the circumstances present here. The alleged misrepresentation is Defendant's representation of her intent to pay Plaintiff's attorneys' fees from the proceeds awarded under the marital settlement agreement, when, in fact, she never intended to do so. Whether Plaintiff justifiably relied on Defendant's representation is a question of fact that cannot be resolved based on the undisputed facts now before the Court.
As analyzed above, genuine issues of material fact exist with regard to Defendant's intent to defraud Plaintiff and Plaintiff's reliance on Defendant's representations. Summary judgment, therefore, cannot be granted. The Court will enter an order denying Plaintiff's Motion and Defendant's Motion as to Plaintiff's claim under § 523(a)(2)(A).
Plaintiff's claim under § 523(a)(6)
Section 523(a)(6) excepts from discharge those debts incurred "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 prevail on a cause of action brought under 11 U.S.C. § 523(a)(2)(6), Plaintiff must show that the Defendant intentionally or deliberately injured the Plaintiff "without justification or excuse." See In re Gagle, 230 B.R. 174, 180 (Bankr. D. Utah 1999) (quoting Dorr, Bentley Pecha, CPA's, P. C. v. Pasek (In re Pasek), 983 F.2d 1524, 1527 (10th Cir. 1993)). To be "willful" within the meaning of 11 U.S.C. § 523(a)(6), Defendant must intend to injure the Plaintiff or property of the Plaintiff. See Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998) ("nondischargeability [under § 523(a)(6)] takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.") (emphasis in original); see also Gagle, 230 B.R. at 179 (discussing Geiger). The Tenth Circuit has applied § 523(a)(6) to cases where the defendant converted property subject to a creditor's security interest. See, e. g., Coats State Bank v. Grey (In re Grey), 902 F.2d 1479, 1481 (10th Cir. 1990) (per curium) (finding that debtor's sale of collateral subject to creditor's security interest was willful and malicious within the meaning of § 523(a)(6)); C.I.T. Fin. Serv. v. Posta (In re Posta) 866 F.2d 364, 368 (10th Cir. 1989) (applying § 523(a)(6) to defendants' sale of creditor's collateral, but concluding that absent a showing that defendants had any knowledge that the sale would violate the terms of the security interest, defendants actions did not constitute the requisite willful and malicious harm necessary for non-dischargeability under § 523(a)(6)). See also Bank of Western Oklahoma v. Cantrell (In re Cantrell), 208 B.R. 498, 502 (B. A. P. 10th Cir. 1997) (applying Pasek and Posta and concluding that defendant's sale of cattle with knowledge of creditor's rights without justification or excuse in violation of creditor's security interest violated § 523(a)(6)).
The facts alleged by Plaintiff do not support a cause of action under § 523(a)(6). Defendant's failure to pay the attorneys' fees, absent any indication that Defendant specifically intended to harm Plaintiff or Plaintiff's property does not satisfy the "willful or malicious" requirement for non-dischargeability under § 523(a)(6). In other words, the alleged facts do not indicate that Defendant knew that the consequences of non-payment would specifically harm Plaintiff and that Defendant specifically intended the consequential harm. See Pasek, 983 F.2d at 1527 (finding that defendant must act "without justification or excuse and with full knowledge of the specific consequences of his conduct . . . knowing full well that his conduct will cause particularized injury" for the debt to be non-dischargeable under § 523(a)(6)).
In addition, unlike the conversion cases cited above, Plaintiff did not have a security interest in the 401(k) account. The engagement letter for Plaintiff's representation of Defendant, a copy of which is attached to Plaintiff's Proposed Findings of Fact and Conclusions of Law as Exhibit 1, includes a Lien Securing Fees which purports to grant Plaintiff a security interest in Defendant's assets and property to secure payment of Plaintiff's attorneys' fees, but it is unsigned. Plaintiff also admits that "there is no security interest per se" at page 19 of its brief.
For the foregoing reasons, Plaintiff cannot sustain a claim under § 523(a)(6). Plaintiff's alleged intentional failure to pay fails to support an inference that Defendant willfully and maliciously intended to harm Plaintiff or property of the Plaintiff within the meaning of § 523(a)(6). Defendant is, therefore, entitled to summary judgment on this issue. Accordingly, the Court will enter an order granting in part Defendant's Motion, and dismissing Plaintiff's cause of action under § 523(a)(6).
Finally, Defendant has asserted a claim for recovery of attorneys' fees under § 523(d) as part of her motion for summary judgment. Having denied the cross-motions for summary judgment on the cause of action under § 523(a)(2)(A), the Court cannot at this time rule on Defendant's request for fees under § 523(d).