First Commercial Bank v. Mizerany, IV, 07-00148

Background

Debtor Joseph S. Mizerany IV obtained a $544,000 closed-end construction line to renovate 1810 Mayfair; nine draws totaling $454,851.29 were made between May 30 and Aug 30, 2006.
The Construction Loan Agreement required bank approval for each advance and that proceeds be used to complete the Mayfair improvements.
Three draws ($289,451.81; $8,748.43; $6,651.05) were uncontested and either paid off prior loan amounts or were applied by the bank to other loan payments with the bank’s approval.
The bank challenged six draws totaling $150,000 as fraudulently obtained because debtor allegedly used them for other projects and loan payments rather than Mayfair renovations.
Bank officer Joe Fountain approved the draws; his testimony admitted he may have authorized or acquiesced in use of proceeds for recouping equity, paying interest, and other projects, and that his approval contributed to employment termination.
Court found the bank failed to prove debtor made false representations or acted with fraudulent, willful, malicious intent or embezzling intent; the debt was held dischargeable.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether debt is nondischargeable under 11 U.S.C. §523(a)(2)(A) (fraud)	Debtor promised proceeds would be used for Mayfair renovations but instead used them elsewhere — so debt obtained by false pretenses/representations	Debtor told bank (via Fountain) how proceeds would be used; bank approved each draw; no intent to deceive	Denied — bank failed to prove false representation, intent to deceive, reliance, and damages required for §523(a)(2)(A)
Whether debt is nondischargeable under 11 U.S.C. §523(a)(6) (willful & malicious injury)	Debtor intentionally used proceeds contrary to agreement, causing bank injury	Bank knowingly approved draws; any injury resulted from bank’s deliberate acquiescence, not debtor’s intent to injure	Denied — no evidence debtor intended to cause injury or acted maliciously; bank waived claim by approving draws
Whether debt is nondischargeable under 11 U.S.C. §523(a)(4) (embezzlement)	Use of proceeds contrary to paragraph 2 constituted embezzlement of bank funds	Funds were entrusted but bank expanded permitted uses by approving draws after being informed; no fraudulent intent shown	Denied — bank did not prove fraudulent appropriation or that debtor was not lawfully entitled to use funds as he did
Effect of bank agent’s conduct on creditor’s claims	Agent’s approval is irrelevant; contractual restriction controls	Agent (Fountain) approved/was informed of alternative uses; course of dealing permitted commingling/other uses	Held for debtor — agent’s approvals and course of dealing defeated bank’s nondischargeability theories

Key Cases Cited

Fuller v. Johannessen, 76 F.3d 347 (11th Cir. 1996) (elements for §523(a)(2)(A) fraud claim)
Kawaauhau v. Geiger, 523 U.S. 57 (U.S. 1998) (§523(a)(6) requires intent to cause injury)
In re Walker, 48 F.3d 1161 (11th Cir. 1995) (willfulness and maliciousness standards under §523(a)(6))
In re Ikner, 883 F.2d 986 (11th Cir. 1989) (malice definition and §523(a)(6) analysis)
In re Wolfson, 56 F.3d 52 (11th Cir. 1995) (creditor may waive §523(a)(6) claim by allowing challenged conduct)