Opinion
Case No. 98-17168, Chapter 7 Adv. No. 99-1074.
February 7, 2001
ORDER RE: DISCHARGEABILITY OF DEBT
Plaintiff Cynthia Scull Yunger ("Scull") initiated this adversary proceeding against the Defendant-Debtors Donald Barden Woodby, II ("Bart Woodby") and Shelley Elizabeth Woodby under 11 U.S.C. § 523(a)(2), 523(a)(6), and 548. Scull alleges that Bart Woodby made false representations to her for the purpose of deceiving her into loaning $95,000 to the Woodbys' sign business. Scull also alleges that the Woodbys converted her collateral. The matter came on for trial on January 17, 2001.
Scull withdrew her claim under § 548 at the trial.
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). This decision constitutes findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
Shelley Woodby was the owner of Shelby Signs, a sole proprietorship in her name only. Bart Woodby was generally responsible for the business operations. Brian Yunger worked for the Woodbys' sign business. Scull was romantically involved with Yunger.
In May 1998, Scull and Yunger married.
In January 1997, Scull loaned $10,000 to the Woodbys for the purpose of stocking a bucket truck that would allow for the servicing of certain signs. Scull testified that she initiated this loan. The loan had an underlying purpose of insuring that her boyfriend, Yunger, maintained his employment with the Woodbys since Yunger was to be the sign servicer. Scull requested that Bart Woodby not tell Yunger about this loan because she did not want to appear as "meddling." There was no paperwork for this loan.
In February 1997, Bart Woodby approached Scull for the purpose of acquiring money to market an "Admarq" sign. Admarq is a unique design in that it is a neon sign with changeable lettering. It was Bart Woodby's fervent belief that these signs would be very attractive to small businesses and that the Admarq sign business would be very profitable. Scull testified that she "bought into the excitement" and gave Bart Woodby $10,000 that day. There was no paper work for this loan, however, Scull and Bart Woodby discussed that Scull would be paid back as the Admarq signs were rented at a rate of $10 per sign per month for six months and then $5 per sign per month forever.
Bart Woodby heavily relied on Yunger's marketing skills to help him develop the Admarq business. Yunger was also very excited about this business. Based upon Scull's discussions with Yunger, Scull became aware that additional money was needed for the Admarq project. Thereafter, in May 1997, Scull approached Bart Woodby for the purpose of loaning an additional $75,000 amount. As with the first $10,000 loan, Scull testified that she initiated the $75,000 loan. Again, there was a discussion that Scull would be repaid as the AdMarq signs were rented. However, before Scull would loan such a large amount of money, Scull had her attorney draft a security agreement.
The security agreement was signed by Scull, Bart Woodby, Shelley Woodby, and by Bart Woodby on behalf of "Shelby Signs/AdMarq Corporation". The security agreement stated that the money loaned was to be used either to purchase or manufacture the signs or to carry already owned signs. The security agreement stated that Scull was granted a security interest in ". . . all Signs on which the purchase price is paid in whole or in part with the proceeds of any loans made by [Scull] . . . all Signs specified in the Schedules . . . all proceeds of all sales and other dispositions of all Signs in which [Scull] has a security interest . . ." The security agreement also states that "all equipment, accessories, and parts at any time attached to the Pledged Signs or used in connection with the Pledged Signs shall be deemed to be part of the Pledged Signs."
The security agreement prohibits the encumbrance of the pledged signs in any manner.
Scull and Bart Woodby contemplated an eventual manufacture of 520 Admarq signs that would serve as the basis for the monthly rental payments to Scull.
From this point on it appears the parties had a mutual misunderstanding. Scull believed that the Admarq signs were only to be rented and that this would provide her with a substantial income stream for the rest of her life. On the other hand, Bart Woodby intended that the Admarq signs were to be sold all along but that he would urge a client to rent a sign prior to purchasing a sign. The security agreement is ambiguous on this issue in that it has numerous references to the sale of signs but also prohibits the sale of signs. We note that because the security agreement was drafted by Scull's attorney, any ambiguities should be construed against her.
Bart Woodby referred to this as "try before you buy".
Financing statements were apparently never prepared, signed or recorded. Thus, Scull's security interest in the signs never became perfected.
In May 1997, Scull authorized a first draw against the $75,000 loan in the amount of $37,000 for the purpose of paying off old debts of Shelby Signs so that all attention could be devoted to the Admarq business. Thus, Scull knew that this draw was not used to purchase, manufacture or carry Admarq signs.
On June 16, 1997, Scull authorized a second draw in the amount of $5,000 to purchase transformers from a Canadian company and to reimburse both Bart and Shelley Woodby for their expenses incurred in their trip to Canada to purchase the transformers. Thus, Scull knew that the portion of this draw to reimburse the Woodbys for their expenses did not result in the manufacture of Admarq signs.
In June or July 1997, the business suffered an unexpected setback when the "neon man" quit. Thereafter, Bart Woodby made a business decision to purchase neon equipment and perform the neon work in house. This also necessitated moving the business to a larger location. Scull was generally aware of these changes at the business. Thus, on July 8, 1997, Scull authorized a third draw in the amount of $13,000 for the purpose of purchasing neon equipment. The check register for Shelby Signs shows that three neon equipment purchases totaling $12,473.49 were made between July 9 and 18, 1997.
On July 11, 1997, Scull authorized a fourth draw in the amount of $20,000 for the purpose of establishing a relationship at Northside Bank to enable the business to accept credit card purchases. The Woodbys presented evidence that $5,000 was used for this purpose. Bart Woodby explained that the balance of the money was used to finish out the new, larger shop.
On July 15, 1997, Scull received her first and only payment from the Woodbys in the amount of $225. The check was drawn on an account in the name of "Shelley E. Woodby dba Shelby Signs". Bart Woodby signed the check as "Shelley Woodby". It was the apparent priactice for Bart Woodby to sign all of the business checks even though all of the business accounts were in Shelley Woodby's name.
Scull testified that she was "always asking about the signs". However, she offered somewhat contradictory testimony that as late as July, 1997, she was "really not expecting" any payments on her loans. She also testified that she never received an accounting. However, in this regard, she also offered somewhat contradictory testimony that in response to her questions about the business that Bart Woodby would "spin his story and I'd get excited again."
In late August 1997, the relationship between Yunger and Bart Woodby soured. In late September or early October 1997, Yunger left the business. Bart Woodby continued his attempts to market the Admarq signs but with little success. As of July 1997, only nine Admarq signs had been rented. One other rental agreement was signed in October 1998.
On November 29, 1997, Scull made a written demand for payment of all the "promissory notes" totaling $95,000. In January 1998, Scull initiated an adversary action against the Woodbys in state court. In their answer, the Woodbys contended that they only had to repay Scull as certain Admarq signs were manufactured and rented.
There were never any signed promissory notes. Although the security agreement included a procedure for the signing of promissory notes, the parties apparently dispensed with this procedure.
At some point after Scull's last advance, the Woodbys transferred all their business assets from Shelby Signs to a new business entity which they called Sign City. Shelley Woodby was the sole shareholder of Sign City and an officer of the corporation.
In September 1998, the Woodbys, now doing business as Sign City, were successful in obtaining a $50,000 loan from Provident Bank. As a part of the Provident transaction, Bart Woodby and Shelley Woodby granted to Provident a blanket security interest in all of the business assets, including the Admarq signs.
In a separate adversary proceeding, this Court found this debt to be nondischargeable under § 523(a)(2)(B) as to Bart Woodby because of the mischaracterization of the $95,000 debt to Scull on the financial statement submitted to Provident. See Adv. No. 99-1043.
On or about October 15, 1998, Scull filed a motion for a prejudgment attachment in the state court action. After it appeared that Scull might be successful in the attachment, the Woodbys filed their chapter 7 bankruptcy petition on November 23, 1998. Sign City filed a chapter 7 bankruptcy petition on the same date.
As to ultimate success of the Admarq business, Bart Woodby offered uncontradicted testimony that ten (10) Admarq signs were rented, that seventeen (17) Admarq signs were sold, that thirty (30) Admarq signs were in inventory, and that there were components for forty (40) Admarq signs in inventory. The eventual disposition of the Admarq signs is not clear. Provident did file a motion for relief from stay in the bankruptcy case of Sign City based on its security interest in the business assets. See Case No. 98-17169, Doc. 10. There is no evidence that the Admarq signs were administered as assets in either the Woodbys' bankruptcy case or the Sign City bankruptcy case.
In order to except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements: 1) that the debtor obtained money through a material misrepresentation that the debtor knew was false or that was made with gross recklessness as to its truth; 2) that the debtor intended to deceive the creditor; 3) that the creditor justifiably relied on the false representation; and 4) that the reliance was the proximate cause of loss. In re Rembert, 141 F.3d 277, 280-81 (6th Cir. 1998). Whether a debtor possessed an intent to defraud a creditor is measured by a subjective standard. Id. at 281 (citing Field v. Mans, 516 U.S. 59, 70-72 (1995)).
In her fraud claim, Scull contends that the representations made by Bart Woodby that he would use the money to make 520 Admarq signs was false.
A. The January 1997 $10,000 Loan
We find that Bart Woodby made no misrepresentations to induce Scull to make this loan and that Scull did not rely on any such misrepresentations. To the contrary, Scull initiated this loan for the underlying purpose of keeping her boyfriend employed. There is no evidence that this money was not used for its intended purpose. Also, it was clear from Scull's testimony that this money was never intended to be used to manufacture any Admarq signs.
For these reasons, Scull's fraud claim against Bart Woodby regarding this loan fails.
B. The February 1997 $10,000 Loan and the $75,000 Loan
We find that Bart Woodby made no misrepresentations to induce Scull to make any of these loans. Indeed, Scull testified that she initiated the $75,000 loan. Nor is there any evidence that Scull relied on any misrepresentations. Rather, her credible trial testimony indicated that she was as caught up in the excitement of the Admarq business as were Bart Woodby and Yunger. The business simply failed.
Further, Scull has failed to prove that the money was not used for its intended purpose. There is no dispute that approximately 97 Admarq signs were either manufactured or represented by parts in inventory. Another large portion of the money was used to generally advance the Admarq business, with Scull's authorization. Money was also used to cope with the unexpected loss of the "neon man".
Scull contends that after each of her loans to the Woodbys that the Woodbys made withdrawals for their personal use from the business account. This appears to be true. But it is also true that there were deposits into the business account from sources other than Scull. See Plaintiff's Exhibit 16. Under the facts of this case, this "proximity" argument is insufficient to prove fraud under § 523(a)(2).
It also appears that between April and July 1997, Bart Woodby made cash advances to Yunger totaling $8,885. We do not need to decide whether Scull was aware of these advances. However, the diversion of these funds was certainly not for the Woodbys' personal use.
For these reasons, Scull's fraud claim against Bart Woodby regarding these loans fails.
C. Shelley Woodby
Scull's complaint alleges that only Bart Woodby made any false representations.
Accordingly, Scull's claim sounding in fraud against Shelley Woodby must necessarily fail.
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).
In her willful and malicious injury claim, Scull contends that the Woodbys' pledging of her collateral to Provident in violation of the security agreement, the Woodbys' failure to properly tag her collateral, the Woodbys' failure to provide an accounting, and the Woodbys' use of her money for non-business purposes constitute conversion and a willful and malicious injury under § 523(a)(6).
A. The January 1997 $10,000 Loan
Scull testified that this loan had nothing to do with the Admarq signs and was not covered by the security agreement.
Accordingly, Scull's allegations of conversion regarding this loan fails.
B. The February $10,000 Loan and the $75,000 Loan
Although the security agreement between the Woodbys and Scull contained ambiguities, it was clear in that the Woodbys were granting a security interest in the Admarq signs to Scull and that the Admarq signs were not to be otherwise encumbered. Therefore, the Woodbys' pledge of the Admarq signs as collateral to Provident was conversion. Therefore, the issue is whether the Woodbys committed the conversion with the requisite intent under § 523(a)(6).
The fact that the conversion took place after the filing of Scull's state court action is circumstantial evidence that the Woodbys intended to deprive Scull from receiving repayment on her loans. The pledge of the Admarq signs to Provident interfered with Scull's ability to repossess the signs and jeopardized her expected receipt of rentals from the Admarq signs. The Woodbys' intent to damage Scull is further supported by their unexplained transfer of all the business assets from Shelby Signs to Sign City subsequent to the last Scull loan.
Even though Scull's security interest was unperfected, it was still a valid security interest as between the Woodbys and Scull.
Bart Woodby testified that he believed he could pledge the Admarq signs to Provident because his attorney had told him that the security agreement was unenforceable. However, in a separate adversary proceeding before this Court, Bart Woodby testified that at the time of the Provident loan, Scull did have a security interest in the Admarq signs, but only after the signs were manufactured. This testimony is contradictory. Bart Woodby also testified in the separate proceeding that no such signs had been manufactured. This is contradictory to the Woodbys' main defense in this case that Scull's loan money was used to manufacture Admarq signs. Thus, we find Bart Woodby's testimony in this regard not credible.
Adv. No. 99-1043.
The Woodbys also contend that because Scull never tried to repossess the Admarq signs that she never relied on her security agreement. However, the Woodbys have cited no caselaw supporting their proposition that reliance of a secured party is an element of a secured transaction. Furthermore, there is no evidence that the Woodbys offered to turnover the Admarq signs to Scull when she made her demand for payment on the loans. Cf. In re Endicott, 254 B.R. 471.
Thus, we conclude that the Woodbys' actions were without just cause or excuse.
Accordingly, we find that Scull has satisfied the elements of § 523(a)(6) with regard to these loans.
C. Shelley Woodby
Shelley Woodby signed the security agreement with Scull and she signed the security agreement with Provident. She had knowledge of the Scull loans and the Provident loan. She was aware of Scull's lawsuit against her in state court to collect the $95,000 amount.
Shelley Woodby testified that she was "not involved" with the business and that she only did odd jobs for the business. However, the business was initially a sole proprietorship in her name only and when the business incorporated, she was the sole shareholder and an officer of the corporation. All the business accounts were in her name and she authorized Bart Woodby to forge her name to all business checks "for practical purposes." She went on a business trip to Canada with Bart Woodby for the purpose of purchasing special transformers integral to the Admarq product. Shelley Woodby considered herself the "owner" of the business and she justified her $18,000 annual salary accordingly. Also, as the owner of the business, she benefitted directly from the Scull loans.
The majority of courts do not recognize imputed liability under § 523(a)(6). See In re Maltais, 202 B.R. 807 (Bankr.D.Mass. 1996). However, the Sixth Circuit has found that fraud may be imputed to another partner under § 523(a)(2) where the fraud is perpetrated in the ordinary course of the partnership business and where both partners share in the monetary benefits of the fraud. In re Ledford, 970 F.2d 1556 (6th Cir. 1992), cert. denied, 507 U.S. 916 (1993).
In the present case, the facts indicate more than just a willful and malicious injury perpetrated in the ordinary course of the business by Bart Woodby that created a benefit for Shelley Woodby. See In re Ledford, 970 F.2d 1556. In view of Shelley Woodby's complete ownership of the business and her direct benefit from the Scull loans, her knowledge of and signature on both the Scull and Provident security agreements, as well as her knowledge of the pending state court action by Scull against her, we find that when Shelley Woodby granted to Provident Bank a security interest in the Admarq signs, that she did so with the intent to harm Scull and without just cause or excuse.
Accordingly, we find that Scull has satisfied her burden of proof with regard to the elements of § 523(a)(6) with regard to these loans as against Shelley Woodby as well.
In view of the above conclusion, it is not necessary for the Court to address Scull's other contentions relative to her conversion claim.
D. Damages
The measure of damages when collateral is converted is the retail value of the collateral at the time of conversion. In re Chlebowski, 246 B.R. at 645. The parties presented no evidence of the retail value of the Admarq signs. Both Scull and Bart Woodby testified that the production cost of an Admarq sign was approximately $200. The fact that the Admarq business failed to flourish and the fact that so few Admarq signs were ever sold suggests that a precise retail value of the signs would be difficult, if not impossible, to determine. Accordingly, we find it appropriate and realistic to use the production cost in the measure of damages.
Ninety-seven Admarq signs were manufactured, sold or represented by parts in inventory. Scull's security interest covered the Admarq signs, the proceeds from the sale of the Admarq signs, and parts used in connection with the Admarq signs. Accordingly, we find that Scull was damaged by the conversion in the amount of $19,400.
97 signs at $200 per sign is $19,400.
Scull has requested prejudgment interest and legal fees in her complaint. No basis for this relief has been shown.
III. CONCLUSION
The relief sought in the complaint is hereby granted in accordance with this Order.
JUDGMENT ENTRY
In accordance with the Order entered contemporaneously herewith, the debt due from Donald Barden Woodby, II and Shelley Elizabeth Woodby to Cynthia Scull Yunger is found to be NON-DISCHARGEABLE and judgment is hereby rendered against Donald Barden Woodby, II and Shelley Elizabeth Woodby in favor of Cynthia Scull Yunger in the amount of $19,400.00.
IT IS SO ORDERED.