Opinion
Case No. 99-12506, Chapter 7, Adv. No. 99-1155.
February 26, 2001
ORDER GRANTING DEBTOR'S MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Debtor Robert Francis Vonderahe's motion for summary judgment (Doc. 30) and supporting documents and Plaintiff Daniel Schoener's response (Doc. 33).
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the general order of reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
The adversary proceeding brought by Schoener and others involves allegations of embezzlement, larceny and conversion. Schoener seeks a determination that his business investment with the Debtor be found nondischargeable under 11 U.S.C. § 523(a)(4) and/or (a)(6).
Waleed Fadayel, Sam Orlando, and Delores Orlando are separate additional plaintiffs. By agreed order, the parties agreed that the Schoener case was to be the "test case".
Summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. See Bankruptcy Rule 7056.
I.
The following facts are not in dispute.
Schoener became aware of the Debtor through a mutual friend. Schoener contacted the Debtor for the purpose of making an investment in the Debtor's condominium project at Palisades Point.
Sometime prior to April 9, 1991, Schoener loaned $50,000 to the Debtor. The loan is evidenced by an April 9, 1991 note which states that the loan "is given for the purpose and development of a real estate project named Palisades Point." The note also recites that the "indebtedness evidenced by this Note is secured by a Mortgage, dated same date." Also on April 9, 1991, the Debtor and his wife granted a mortgage to Schoener on property at 6227 High Cedar. The mortgage recites that it "is given . . . to secure payment of Dollars ($50,000) with interest as provided in a note of even date."
This is not the Palisades property. See Doc. 1, Ex. 10.
Schoener sent the mortgage to the Debtor's attorney to be recorded. However, at some point, the Debtor had a falling out with his attorney, and for reasons unknown, the mortgage was never recorded.
On or around June 25, 1992, Schoener loaned $25,000 to the Debtor. This loan is evidenced by a note which contains the same restriction that the money will be used for the Palisades project. The note makes no reference to a mortgage.
On March 24, 1994, the Debtor sold the High Cedar property. Schoener did not learn of the sale at the time.
On September 25, 1994 and November 21, 1994, the Debtor signed two notes in favor of Schoener for $25,000 and $100,000 respectively. The notes were "rollover" notes of the previous notes. Schoener testified at his deposition that he could have taken his money out, but that he chose to reinvest with the Debtor, albeit at a lower rate of return. Both new notes contain the restriction that the money will be used for the Palisades project. Neither of the new notes references a mortgage.
On June 16, 1995, Schoener loaned $50,000 to the Debtor. This loan is evidenced by a note which contains the same restriction that the money will be used for the Palisades development. The note does not reference a mortgage.
Throughout this time period, Schoener personally met with the Debtor on two occasions. Schoener checked on the Palisades condominium project every one to three months. The project was substantially completed. However, in late 1998, condominium sales began to slow causing cash flow difficulties. See Doc. 31. Ultimately, after exhausting all savings, the Debtor and his wife filed bankruptcy.
In his deposition, Schoener testified that "it appears as though he finished Palisades." See Doc. 28, p. 50. In his affidavit, the Debtor states that 90 out of 100 contemplated units were finished.
Schoener did not learn of the sale of the High Cedar property or that the mortgage had not been recorded until 1999.
II.
Embezzlement has been defined by the Sixth Circuit as "the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." In re Brady, 101 F.3d 1165, 1172-73 (6th Cir. 1996). To prove embezzlement under § 523(a)(4), a creditor must show that he entrusted property to the debtor, that the debtor appropriated the property for a use other than for which it was entrusted, and that the circumstances indicate fraud. Id. at 1173.
Larceny is established under § 523(a)(4) where it is shown that the debtor has wrongfully and with fraudulent intent taken property from its owner. In re Rose, 934 F.2d 901, 903 (7th Cir. 1991) (followed by In re Bustamente, 239 B.R. 770 (Bankr.N.D.Ohio 1999)). Embezzlement differs from larceny in that with embezzlement, the original taking is lawful. In contrast, with larceny, the fraudulent intent must have existed at the time of the taking. In re Bustamente, 239 B.R. at 776.
In order to except a debt under § 523(a)(6), a creditor must prove a willful and malicious injury. For an injury to be willful, the debtor must have intended not only his conduct, but the consequences of his conduct. Kawaauhau v. Geiger, 523 U.S. 57 (1988). Interpreting Kawaauhau, the Sixth Circuit has held that a debt is nondischargeable when the debtor "desires to cause the consequences of his act, or . . . believes that the consequances are substantially certain to result from it." In re Markowitz, 190 F.3d 455, 464 (6th Cir. 1999).
Under § 523(a)(6), a debtor is deemed to have acted maliciously when he acts in conscious disregard of his duties or without just cause or excuse. Murray v. Wilcox, 229 B.R. 411, 419 (Bankr.N.D.Ohio 1998). After the Supreme Court's decision in Kawaauhau, the few courts to address the issue are split as to whether "willful and malicious injury" is a unitary or a dual standard requiring proof of both a willful injury and a malicious injury. In re Moffitt, 252 B.R. 916, 922, fn. 5 (B.A.P. 6th Cir. 2000) (citations omitted). Until such time as the Sixth Circuit directly addresses the issue, this Court will assume that the term "malicious" has not been subsumed by the term "willful."
While not every act of conversion results in a nondischargeable debt under § 523(a)(6), deliberate acts of conversion have long resulted in nondischargeable debts. Compare McIntyre v. Kavanaugh, 242 U.S. 138, 141 (1916) (cited in Kawaauhau) (unauthorized sale of stock held as collateral by brokers); In re Chlebowski, 246 B.R. 639 (Bankr.D.Ore. 2000) (pawning of collateral with no chance of redemption); In re Williams, 233 B.R. 398, 405 (Bankr.N.D.Ohio 1999) (intentional withdrawal of proceeds from joint account when plaintiff had right to possess all funds as payment for services) with Davis v. Aetna Acceptance Corp., 293 U.S. 328, 332 (1934) (cited in Kawaauhau) (innocent conversion where debtor had honest but mistaken belief, engendered by course of dealing, that powers were enlarged); In re Endicott, 254 B.R. 471 (Bankr.D.Idaho 2000) (sale of collateral not conversion when debtor first offered to return collateral to secured lender); In re Wincher, 210 B.R. 286 (Bankr.E.D.Mich. 1997) (sale of collateral not conversion when debtor unaware of security agreement).
III.
Schoener's larceny, embezzlement, and conversion claims against the Debtor are based on several underlying contentions.
Schoener first contends that the Debtor failed to use Schoener's investment money for the development of the Palisades project. Specifically, Schoener contends that the Debtor used Palisades assets as collateral to secure loans for another condominium project developed by the Debtor, that Palisades monies were loaned to other business entities of the Debtor, and that Palisades monies were used to pay certain personal expenses of the Debtor. In this regard, Schoener also contends that the Debtor failed to disclose his obligations to Schoener when the Debtor submitted financial statements to Provident Bank and Huntington Bank in October 1991 and August 1998 respectively.
Assuming, arguendo, these contentions are true, they do not support Schoener's conclusion that the Debtor committed larceny, embezzlement or conversion of Schoener's funds. Most importantly, the Palisades project was completed. It was, apparently, just not as profitable as expected. Also, Schoener testified at this deposition that he had no proof that his investment money was not used for the Palisades project other than the fact that he was not repaid by the Debtor. Further, the restrictive language in the notes that the investment money was to be used for the "purpose" and "development" of the Palisades project is very broad. The notes contain no prohibition of cross-collateralization and, in any event, Schoener never had a security interest in any Palisades assets. The Court also notes that the obligor on the notes was the individual Debtor and not a Palisades business entity. Lastly, while the Debtor's failure to disclose to Provident and Huntington his liability to Schoener may have been fraudulent as to those banks, it was not fraudulent as to Schoener.
For these reasons, we conclude that Schoener has failed to state a claim under § 523(a)(4) or (a)(6) with regard to his contention that the Debtor fraudulently misappropriated Schoener's funds.
Schoener also contends that the Debtor failed to record the mortgage on the High Cedar property.
The mortgage was for Schoener's benefit and with that benefit came some responsibility. Regardless of the level of Schoener's financial sophistication, it is clear from his deposition testimony that he had granted at least three mortgages in the past to various lenders and that he knew it was the lender that usually recorded the mortgage. However, Schoener chose to send the mortgage to the Debtor's attorney for recording. Further, Schoener did not follow up to see if the mortgage had been recorded. Importantly, and fatal to Schoener's claim, is that it was the Debtor's attorney and not the Debtor who failed to record Schoener's mortgage.
Thus, the fact that the mortgage was not recorded is not proof of larceny, embezzlement or intentional conversion on the part of the Debtor.
Lastly, Schoener contends that the Debtor sold the High Cedar property without telling him about the sale. Whether or not the mortgage was perfected and effective against subsequent lienholders, the mortgage was still valid as between the Debtor and Schoener. An intentional sale of collateral, without just cause or excuse, may qualify as intentional conversion under § 523(a)(6). See McIntyre, 242 U.S. 138; Cf. In re Endicott, 254 B.R. 471; In re Wincher, 210 B.R. 286.
However, it was only the April 9, 1991 note that was secured by the mortgage. In September and/or November, 1994, Schoener reinvested the initial $50,000 of principal and $36,164.38 of interest from the April 1, 1991 note with the Debtor in the form of "rollover" notes. See Doc. 29. Thus, Schoener was paid in full on his only secured note. Therefore, the sale of the High Cedar property, even if it was conversion, caused no damage to Schoener.
We note that the Debtor contends that the mortgage issue is governed by the four year state statute of limitations and, therefore, that Schoener's claim is time barred. Because Schoener's claims arise under § 523(a)(4) and (a)(6), it is the sixty day time limitation in Bankruptcy Rule 4007(c) that is controlling. See In re McKendry, 40 F.3d 331 (10th Cir. 1994). Thus, the Debtor's contention that Schoener's claim is time barred has no merit.
IV.
In conclusion, the Debtor's motion for summary judgment is hereby GRANTED.
IT IS SO ORDERED.