Opinion
Case No. 99-11912-SSM Chapter 7, Adversary Proceeding No. 99-1200.
Date: May 31, 2000.
K. Stewart Evans, Jr., Esquire, Pepper Hamilton, LLP, Washington, DC, Counsel for the plaintiff.
Barry R. Lenk, Esquire, Leckey, Lenk Luketina, LLC, Counsel for the defendant.
MEMORANDUM OPINION
This is an action to determine the dischargeability of a $400,000 loan negotiated and personally guaranteed by the debtor. The debtor, it is urged, misrepresented both the purpose of the loan and his intent to honor his guarantee, and spent the money, not to jumpstart a new business venture, but to pay off the debts of a failing one. A trial was held in open court without a jury on March 30 and 31, 2000.
The plaintiffs were present by counsel. The debtor was present in person and was represented by counsel. At the conclusion of the trial, the court took the issues under advisement to review the evidence and the applicable law. For the reasons stated, the court determines that the debt is dischargeable.
Findings of Fact
The defendant, Haiwen You (the "debtor" or "Mr. You"), filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on April 14, 1999, and received a discharge of his dischargeable debts on September 5, 1999. Prior to the bankruptcy filing, Mr. You had been engaged in a number of business ventures that focused in one way or another on trade with China. His business partner was Raymond F. Scully, an attorney turned entrepreneur. Mr. You and Mr. Scully had direct or indirect ownership interests in a number of companies that operated out of the same suite of offices located at 1655 Ft. Myer Drive, Arlington, Virginia. The most important of these companies, in order of formation, were Sea Express, Inc; S Y Capital Co., LLC ("S Y"); American Premiere Furniture, Inc ("APF"); and American Premiere Products, LLC. ("APP").
Sea Express, which was formed in 1991, was engaged in ship chartering; its sole shareholders were Mr. You and Mr. Scully. S Y was formed in 1993 as an investment vehicle and holding company. Originally, Mr. You and Mr. Scully each owned a half-interest in the company, but at some point their interests were adjusted to reflect 70% ownership by Mr. You and 30% by Mr. Scully. APF was formed in 1994 as a joint venture between S Y and a Chinese company called the Shanghai Jin Jang (Group) Holding Company ("Jin Jang Group") to manufacture furniture for sale to hotels in China owned by the Jin Jang Group. Mr. You was president of APF, as well as a director. APP was formed in mid-1996 as a joint venture between S Y and a different Chinese conglomerate known as the Hua Ting (Group) Corporation ("Hua Ting Group"). According to an April 1996 business plan for S Y, the principal goal of APP was "to pierce the enormous office and residential markets in China" by exporting office and residential carpeting and "dual-function" furniture, such as wall beds and sofa beds. It appears that APP was set up as a separate company from APF partly because of concerns that the Marianis might claim a share of the export profits but mostly because the Hua Ting Group did not want to participate with the Jin Jang Group.
For a while, a family named Mariani also owned stock but later withdrew from the business. A portion of the stock was also owned by a Canadian company called South Shore Industries, Ltd.
The business plan for APP had been drawn up as early as April, but the formal incorporation did not occur until June, and the anticipated start-up date for operations was September.
The furniture manufacturing venture, APF, was not a success. S Y, which had no experience in manufacturing furniture, had arranged for APF to purchase an existing small furniture company in Lynchburg, Virginia, owned by the Mariani family. The Marianis were hired to manage the new company, and the operations were transferred to a larger plant in Blackstone, Virginia, which APF leased from a Canadian company called South Shore Industries, Ltd., under a rent-to-own contract.
From its inception, APF required monthly injections of cash to keep it alive. For the most part, the cash came from Sea Express's bank account but was treated as an advance by S Y. By September 1996, the advances to APF totaled nearly $3 million, and APF was, by any measure, insolvent.
Nevertheless, neither Mr. You nor Mr. Scully had completely given up hope for APF. In September 1996, Mr. You telephoned a business friend, Heng Can Zhao, in Shanghai, China. Mr. Zhao had been an officer of the Jin Jang Group (the other major owner of APF) but had since moved to another company. Mr. You asked him for assistance in obtaining a loan. Mr. Zhao in turn called a business friend of his, Pong Ho Chan, also known as Banko Chan, who was vice president of a joint venture known as Jin Hai — Jet Air International Forwarding Co., Ltd. ("Jin Hai"). Mr. Chan had been briefly introduced to Mr. You a year or two previously in New York, but was otherwise unfamiliar with Mr. You or his business. Mr. Zhao arranged a brief telephone call between Mr. You and Mr. Chan, during which Mr. You told Mr. Chan that his business was expanding, that he was forming a new venture, that he was in a temporary cash short position, and that he needed a loan of $400,000. Mr. Chan replied that he might be able to make the loan as long as there was a personal guarantee.
Mr. You testified that $400,000 was his estimate of the amount needed to keep APF going for the next few months. This is consistent with the August 1996 business plan prepared by Mr. Scully, which projected an operating loss for 1996 of $2,557,200 (on revenues of $5,546,200), or an average loss of $213,200 per month.
A few days later, Mr. Chan and Mr. You met at a restaurant in Shanghai, where, over dinner, Mr. You explained again that his business was expanding, that he was getting into new ventures, that he was in a cash short position, and that he needed a loan. There was no discussion as to the nature or name of any of Mr. You's businesses or their capital or organizational structure. Neither APF nor APP were ever named or discussed, nor did Mr. Chan ask any questions concerning Mr. You's new ventures. Mr. Chan explained at trial that he felt no need to inquire into those kinds of details or to ask for financial statements, because Mr. You had been recommended to him by Mr. Zhao, who was a highly respected businessman, and because Mr. You had agreed that he and Mr. Scully would guarantee the loan with their personal assets.
After the meeting, Mr. Chan obtained his superior's approval to make the loan and had his assistant obtain from Mr. You the account number and routing number to which the funds should be wire-transferred. Mr. You provided the assistant with the wiring information for APP's bank account in Virginia. The $400,000 was then wire-transferred to that account on September 10, 1996, by Jet Air (HK), Ltd., a Hong Kong affiliate of Jin Hai.
Jet Air (HK), Ltd., then invoiced Jin Hai for this sum in two "debit notes."
After Mr. You returned from China, he had a letter to Mr. Chan drawn up, dated September 20, 1996, signed by both himself and Mr. Scully. This letter, prepared on APP letterhead, read as follows:
We have received the transfer of the loan proceeds of $400,000 USD into our Company's account with Nations Bank, N.A., Richmond, Virginia, on September 12, 1996. On behalf of our Company, we thank you and very much appreciate your support for American Premier Products, LLC.
As discussed, the loan to the Company shall be for a term of one year from September 12, shall be interest free, and may be prepaid, in whole or in part, at any time prior to the end of the period. In addition to this loan being an obligation of American Premiere Products, LLC, this letter is also to serve as a personal guarantee, on our individual behalf, of payment in full within the prescribed period of time.
Notwithstanding the letter's characterization of the funds as being a loan to APP, the $400,000.00 was never recorded as a liability on the books of APP. Instead, Mr. You directed that it be treated as a personal loan to him. The accounting records that would explain how the money was actually spent and how it was recorded on the books of the various companies have not been located, but it would appear that the funds were posted as advances from Mr. You to S Y and then from S Y to APF.
At trial, he explained that he took this position because he believed the loan had been made as a personal favor.
In any event, the funds had been fully disbursed from APP's bank account before Mr. Scully (who was at home recuperating from heart surgery) was even aware they had been received, and it would appear that they were primarily used to pay existing debts of APF, including withholding tax liabilities.
There is no evidence that Mr. You was particularly aware of or concerned about potential "responsible officer" liability for unpaid withholding taxes. To the extent that the loan proceeds were first used to discharge those liabilities, it seems more likely that Mr. Scully or S Y's comptroller, Mary E. Walsh, was the moving force.
Before going to Shanghai, Mr. You had not discussed the issue of personal guarantees with Mr. Scully. After Mr. You returned and had the guarantee letter prepared, he told Mr. Scully that Mr. Chan had not asked for a guarantee, but that he (Mr. You) felt they ought to provide one as a courtesy. Mr. You convinced Mr. Scully there was no likelihood that he would be called upon to honor the guarantee, and Mr. Scully agreed to sign. At the time Mr. You signed the guarantee, he and his wife owned a house in McLean, Virginia, and a cooperative apartment in Arlington, Virginia. The house had been purchased in 1992 for $1,600,000, with the purchase being financed by a $1,000,000 mortgage.
In November 1994, the house was refinanced for $1,299,000, with a portion of the loan being used to pay off the cooperative apartment. The appraisal prepared at the time of the refinance reflected a fair market value for the house of $2,076,000. Mr. You testified that, based on the appraisal and what he thought the house and the cooperative were worth, he believed that he had sufficient equity so that he could sell the real estate if necessary to pay off the Jin Hai loan.
Notwithstanding the infusion of cash, APF's financial position did not improve, and APF closed the Blackstone plant in mid-December 1996, approximately 3 months after the Jin Hai loan was made. APP likewise did not prosper and was not able to repay the $400,000 loan when it became due. Jin Hai then sued Mr. You, Mr. Scully, and APP in the United States District Court for the Eastern District of Virginia. Mr. Scully eventually settled on undisclosed terms, and judgment was entered against APP.
The action was stayed as to Mr. You as a result of his bankruptcy filing. Jin Hai then commenced the present adversary proceeding to obtain a determination that Mr. You's liability on the loan is nondischargeable on the ground of fraud, fiduciary defalcation, embezzlement, and conversion.
Jet Air (HK), Ltd., which was the entity that actually wired the funds, is also a plaintiff.
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. Under 28 U.S.C. § 157(b)(2)(I), this is a core proceeding in which final judgments and orders may be entered by a bankruptcy judge. Venue is proper in this District under 28 U.S.C. § 1409(a). The defendant has been properly served and has appeared generally.
II.
Although Mr. You has been granted a discharge, certain types of debts are excluded from the effect of a chapter 7 bankruptcy discharge. Relevant to the present controversy, a chapter 7 discharge does not discharge an individual debtor from liability arising from the following types 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;
* * *
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
* * *
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;
§§ 523(a)(2)(A), (4), and (6), Bankruptcy Code. The burden of proof is on the objecting creditor to show that the debt falls within one of the exceptions to discharge, and the standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The court will separately address each of the exceptions asserted by the plaintiff.
A. Fraud
The elements of fraud under 11 U.S.C. § 523(a)(2) are as follows: "(1) a fraudulent misrepresentation; (2) that induces another to act or refrain from acting; (3) causing harm to the plaintiff; and (4) the plaintiff's justifiable reliance on the misrepresentation." Foley Lardner v. Biondo (In re Biondo), 180 F.3d 126, 133 (4th Cir. 1999). A misrepresentation as to the purpose to which a loan is to be put may be sufficient to bar discharge of the obligation. Writer v. Mistry (In re Mistry), 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. Gov't 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). Whatever the misrepresentation, it must have been relied upon. The standard of "justifiable" reliance requires more than simply actual reliance, but does not require that the reliance be objectively reasonable. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). A creditor may be justified in relying on a debtor's representation of fact "although he might have ascertained the falsity of the representation had he made an investigation." Id. at 70; 116 S.Ct. at 444 (internal quotation marks omitted). At the same time, 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." Id. at 71; 116 S.Ct. at 444 (internal quotation marks omitted).
In the present case, Jin Hai asserts two misrepresentations by Mr. You in connection with the loan: first, that the funds were to be used for a new venture, but were actually used to pay debts of APF; and second, that Mr. You, although signing the guarantee letter, never intended to honor his personal guarantee.
Addressing first the use of the funds, the evidence is by no means clear that Mr. You made any specific representation as to how the funds would be spent other than to cover a "cash short position." Part of the difficulty the court faces is that the discussions between Mr. Chan and Mr. You were conducted in Chinese. Although both Mr. Chan and Mr. You are reasonably fluent in English — Mr. Chan perhaps more than Mr. You — the nuances of their discussion may well have been lost in the retelling. According to Mr. Chan, he was told that Mr. You's business was expanding; that he was pursuing new ventures; that was in a cash short position; and that he needed a loan. However, Mr. You did not — at least as Mr. Chan relates the conversation — expressly state that the funds were to be used to pay the expenses of the new venture.
It is, of course, wholly possible that Mr. You intended to imply considerably more than he expressly stated. In particular, a reasonable listener might have been led to believe that the "cash short position" resulted from the expansion into new ventures and that the loan was needed to address the cash needs of the new venture. But taking the statements by Mr. You at face value, it is not clear that there was any misrepresentation. Mr. You's "business," in terms of direct equity ownership, was Sea Express and S Y. The latter, as noted, was an investment holding company, and it was through S Y that Mr. You and Mr. Scully "owned" APF and APP. The April 1996 business plan for S Y discusses APF and APP essentially as though they were divisions of S Y, and it seems clear that both Mr. You and Mr. Scully thought of them in that way. Thus, the representations that Mr. You's "business" (a) was expanding into new ventures and (b) was in a "cash short position" were literally true.
To be sure, Mr. You did not reveal the actual extent to which his business was "cash short." Indeed, it might be argued that the representation that he needed a loan of $400,000 implied an operating deficit in about that range, when in fact APF was nearly $3 million in debt. However, a misrepresentation as to the financial condition of the debtor or of an insider of the debtor is not a basis for nondischargeability unless the misrepresentation is in writing. Compare, 11 U.S.C. § 523(a)(2)(A) with § 523(a)(2)(B); Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060 (4th Cir. 1984) (false oral statement that collateral being offered as security was unencumbered was a statement concerning the debtor's financial condition and therefore was not a basis for holding the debt nondischargeable because it was not in writing). Accordingly, even if the failure to reveal the full extent of APF's financial distress could be deemed a misrepresentation by omission, it cannot constitute a basis for nondischargeability.
Additionally, the standard of reliance for a false statement respecting financial condition is the objective standard of reasonable reliance, not merely justifiable reliance.
But the real problem is that, even if Mr. You's statements were construed as a representation that the funds were to be used solely to cover expenses of the new venture, the evidence simply does not show any actual reliance on the intended use of the funds. Mr. Chan's testimony was quite clear that in making the loan he relied on two things: the implied vouching of Mr. You's financial standing and character by Mr. Zhao; and Mr. You's willingness to provide a guarantee. Mr. Chan did not know anything of Mr. You's business, and in particular did not know the name and number of his companies, or whether their finances were separate or intertwined. He did not care, because Mr. Zhao had recommended Mr. You, and because Mr. You had agreed to guarantee the loan. Because there was no actual reliance on the particular use Mr. You's business was to make of the funds, the debt is not excluded from discharge under § 523(a)(2)(A) even if Mr. You's statements were construed as a representation that the funds would solely be used to support the new venture.
That leaves for consideration the argument that Mr. You, although signing the written guarantee, never had any intent to honor it. Mr. You testified that, based on what he believed the equity in his house to be, he thought he would be able to sell the house and repay the Jin Hai obligation if need arose. He clearly did not expect that he would have to do so, but a guarantor's expectation or belief that he will not actually be called upon to honor a guarantee does not turn an otherwise legally-enforceable guarantee into a sham. Jin Hai lays great stress on Mr. You's statement to Mr. Scully that Mr. Chan had not asked for a guarantee, and that the guarantee letter was simply a courtesy. Mr. You may well have believed that Mr. Scully would not actually be called upon to pay the debt; nevertheless, his statement that Mr. Chan had not asked for a guarantee was simply not true. Even so, the party who was misled was Mr. Scully, not Jin Hai. Whatever adverse inferences may be drawn from that misstatement are simply too weak to sustain a finding that Mr. You intended from the outset not to pay the debt if he were called upon to do so. Accordingly, the court concludes that fraud has not been proven, and judgment will therefore be entered for the debtor on Count I.
B. Defalcation by a fiduciary
Jin Hai's second ground for excepting the debt from discharge is that Mr. You's conduct in using the loan proceeds to pay APF's debts constitutes defalcation by a fiduciary. In particular, Jin Hai argues that under Virginia law, the directors of an insolvent corporation are fiduciaries for the creditors of a corporation, and that Mr. You, by using the funds either to repay his own loans to APF or to pay APF obligations on which he was personally liable, breached his duty as a fiduciary.
There are a number of problems with this theory. First, it has been rather consistently held that the term "fiduciary" as used in § 523(a)(4) is restricted to trustees under express trusts, guardians, administrators, executors or public officers and, absent special circumstances, does not extend to the broader class of fiduciary relationships recognized by state law, such as agents, bailees, brokers, factors, and partners. Sager v. Lewis (In re: Lewis), 94 B.R. 406 (Bankr.E.D.Va. 1988) (holding that former business partner was not a "fiduciary" within the meaning of § 523(a)(4)); see also Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed 393 (1934) (failure by automobile dealer to pay floorplan lender out of sales proceeds did not constitute defalcation by a fiduciary, even though dealer executed "trust receipt," because exception to discharge for fiduciary defalcation relates to technical trusts, and not to those implied by contract) (decided under former Bankruptcy Act of 1898); Matter of Marchiando, 13 F.3d 1111 (7th Cir. 1994), cert. denied sub nom. Illinois Dept. of the Lottery v. Marchiando, 512 U.S. 1205, 114 S.Ct. 2675, 129 L.Ed.2d 810 (1994) (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). But see United Virginia Bank v. Fussell (In re Fussell), 15 B.R. 1016 (W.D.Va. 1981) (holding that the term "fiduciary" includes the relationship of a corporate officer to the corporation and its creditors).
In Fussell, the debtor, in negotiating a loan for a closely-held corporation in which he was a director and the majority shareholder, had expressly agreed in writing to subordinate his own loans to the loan the bank was making. Nevertheless, when the corporation became insolvent, he caused his own loan to be repaid, leaving the bank high and dry. It was in this context that the District Court held that the debtor's actions constituted a fiduciary defalcation and made his debt to the bank nondischargeable. The facts in the present case are very different, since here there was no violation of an express written subordination agreement.
Additionally, even if the term "fiduciary" in § 523(a)(4) were construed to include the directors of an insolvent corporation vis-a-vis its creditors, Jin Hai was not a creditor of APF. Jin Hai argues that, because Mr. You freely transferred funds back and forth between the various companies as the need arose, the separate existence of APF should be disregarded, and APF should be treated as the alter ego of APP. Thus, Jin Hai urges that because it was a creditor of APP, it was also a creditor of APF, and since APF was insolvent, Mr. You owed Jin Hai a fiduciary duty, in his capacity as director of APF, to use APF's funds only to repay APF's debts. Assuming that the syllogism could be carried this far, the argument nevertheless fails because there is no evidence that APF's assets were used other than to pay APF's debts. The debtor testified that the $400,000 loan request was based on his estimate of the amount needed to keep the business going for the next few months. APF, as noted, continued to operate the Blackstone, Virginia, factory for another three months. Thus, it seems highly likely that the loan proceeds were used to pay the ordinary operating expenses of APF during that period. Jin Hai speculates that part of the loan proceeds may have been used to repay S Y (and through it, Mr. You) a portion of the advances S Y had previously made. However, there is not only no evidence to that effect, it simply does not seem probable, given the ongoing cash needs of the Blackstone factory. It may very well be that some of the APF debts that were paid were obligations (such as employee withholding taxes) upon which Mr. You had personal liability. Assuming, without deciding, that an unpaid creditor has a claim against the director of an insolvent corporation for causing the corporation to pay first those corporate debts upon which he is personally liable, the evidence here does not support a finding that Mr. You was the moving force in deciding which of APF's debts were to be paid. Accordingly, even if directors of insolvent corporations were embraced within the definition of "fiduciary" in the narrow sense that term is used in § 523(a)(4), the factual predicate for the court to determine that there was a defalcation is simply not present.
C. Embezzlement
The third basis upon which Jin Hai seeks to exclude the debt from discharge is that the debtor, by taking the funds destined for APP, and diverting them instead to APF's debts, embezzled those funds. Embezzlement is the misappropriation of property by a person who comes into possession of it lawfully or with the consent of true owner. Clark v. Taylor (In re Clark), 58 B.R. 849 (Bankr. E.D. Va. 1986) (co-owner who sold horse and kept other co-owner's share was guilty of embezzlement); Weigend v. Chwat (In re Chwat), 203 B.R. 242, 248 (Bankr.E.D.Va. 1996); see also Hall v. Blanton (In re Blanton), 149 B.R. 393, 394 (Bankr.E.D.Va. 1992); Allman Wholesale Corp. v. Allman (In re Allman), 147 B.R. 122, 125 (Bankr.E.D.Va. 1992); Clark v. Taylor (In re Taylor), 58 B.R. 849, 854 (Bankr.E.D.Va. 1986); Commonwealth of Va. Comm. of Game and Inland Fisheries v. Myers (In re Myers), 52 B.R. 901, 905 (Bankr.E.D.Va. 1985); 4 Collier on Bankruptcy § 523.10[2], at p. 523-76 (Lawrence P. King, ed., 15th ed. rev. 2000). The elements of embezzlement are: "(1) debtor's appropriation of property for debtor's benefit, and (2) appropriation with fraudulent intent or by deceit." Chwat, 203 B.R. at 248; 4 Collier on Bankruptcy § 523.10[2], at p. 523-76.
The fundamental problem with Jin Hai's embezzlement theory is that any cause of action for embezzlement in this case belongs to APP, not to Jin Hai as a creditor of APP. Jin Hai, having made the loan, was no longer the owner of the funds and merely held a claim against APP and Mr. You. See Marshall v. McCaffrey (In re McCaffrey), 216 B.R. 196, 200 (Bankr.E.D.Mich. 1997) (nondischargeability claim arising from corporate officer's use of loan proceeds for gambling belonged to corporation and could not be asserted by creditor that loaned the money). Accordingly, the evidence cannot sustain a finding that the debtor embezzled funds belonging to Jin Hai.
D. Willful and Malicious Injury to Property
The final basis upon which Jin Hai seeks to have its claim against debtor held nondischargeable is on the theory that Mr. You's actions in using the money loaned to APP to pay APF debts constituted a conversion of the loan funds. As noted, § 523(a)(6), Bankruptcy Code, makes debts "for willful and malicious injury by the debtor to another entity or to the property of another entity" nondischargeable. "Willful," as used in § 523(a)(6), requires an intentional injury, not merely an intentional act that results in injury. Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). The requirement that the conduct be "malicious," however, does not require that a debtor bear subjective ill will toward his or her creditor; it is sufficient that a debtor's injurious act is done "deliberately and intentionally in knowing disregard of the rights of another." First Nat'l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 667 (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., 293 U.S. 328, 331-332, 55 S.Ct. 151, 153, 79 L.Ed 393 (1934) (dicta) (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] 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); see also Branch Banking Tr. Co. v. Powers (In re Powers), 227 B.R. 73 (Bankr.E.D.Va. 1998) (post-Geiger decision holding that debtor's conversion of bank's collateral by delivering it to another creditor was not a willful and malicious injury where debtor did not intend to injure the bank and intended to pay the debt in full).
In the present case, it is doubtful that the facts could support a finding of a willful and intentional injury. There is no suggestion that Mr. You, at the time he caused the loan funds to be applied to APF's operating expenses, intend to injure Jin Hai. Although APF closed the Blackstone factory a scant three months later, the evidence shows that in September 1996 the debtor and Mr. Scully still had hopes for APF's survival and expected that APP would be able to repay the loan. More fundamentally, however, any cause of action for conversion, just as for embezzlement, belongs to APP, not to Jin Hai. McCaffrey, 216 B.R. at 200. Accordingly, a claim for nondischargeability based on willful and malicious injury to property has not been established.
Conclusion
Although the debtor was undoubtedly less than candid with Mr. Chan concerning the financial straits of his business, a misrepresentation as to financial condition is not actionable as a basis for nondischargeability unless the misrepresentation is in writing. The evidence is far from clear that the debtor expressly misrepresented the purpose of the loan, but in any event the evidence is clear that Mr. Chan did not rely on a specific intended use of the loan funds but rather on the fact that Mr. You came to him well recommended and was willing to provide a personal guarantee. Mr. You was not, by virtue of his position as a director of APF, a fiduciary for Jin Hai in the restricted sense in which the term "fiduciary" is used in § 523(a)(4). Finally, Jin Hai does not have standing to assert that Mr. You's use of the loan funds, following their receipt by APP, to pay the operating expenses of APF, constituted embezzlement of Jin Hai's property or a willful and malicious injury to Jin Hai's property. Accordingly, final judgment will be entered for the debtor determining that his liability to Jin Hai is dischargeable and has been discharged.