497 B.R. 525
Bankr. E.D. Tenn.2013Background
- PowerTenn Properties, LLC, owned by Mark and Anne Simerlein, signed a Note with First National Bank for $99,900 in 2007, renewed in 2009, with a Deed of Trust on the Skyview Drive Property securing the loan.
- PowerTenn must maintain insurance naming First National Bank as loss payee; fire destroyed the property on January 4, 2010; insurance proceeds were not paid to First National Bank.
- Defendant (as PowerTenn’s managing member) submitted a 2010 financial statement falsely valuing the property and failed to disclose the loan lien; insurance proceeds were later paid to PowerTenn and misapplied to other properties.
- First National Bank and Auto Owners Insurance Company filed adversary proceedings after the bankruptcy filing; a Chancery Court settlement with Auto Owners offset the First National Bank claim.
- Defendant and Anne Simerlein filed Chapter 7 bankruptcy on January 4, 2012; discharge granted April 16, 2012; plaintiffs seek nondischargeability under 523(a)(2), (4), and (6).
- Court consolidated the two adversary proceedings for trial; the court found Anne Simerlein dismissed and focused on Mark Simerlein’s actions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 523(a)(2)(A) nondischargeably protects debt from fraud | First National asserts misrepresentation by Simerlein induced loan and contributed to funds via insurance proceeds. | Simerlein contends no inducement or justifiable reliance; the misstatement did not induce the loan. | Not nondischargeable under § 523(a)(2)(A). |
| Whether § 523(a)(4) embezzlement/defalcation renders debt nondischargeable | Bank argues funds from Auto Owners were misappropriated by Simerlein in breach of fiduciary duty. | Simerlein contends no fiduciary misappropriation under the policy and loss-payee arrangement. | Auto Owners derivation: nondischargeable under § 523(a)(4). |
| Whether § 523(a)(6) willful and malicious injury applies | Auto Owners contends Simerlein intentionally harmed the lender by misusing insurance proceeds. | Simerlein argues lack of deliberate intent to injure; actions were not willful and malicious. | Nondischargeable under § 523(a)(6) as to Auto Owners. |
| What is the appropriate judgment against the Defendant on the First National Bank claim | First National seeks $26,705.19 under the Note and Guaranty, plus fees, with nondischargeability under 523(a). | Guaranty obligates him, but the debt was discharged; no nondischargeability for the First National debt. | Judgment entered for $26,705.19, but discharged on April 16, 2012; not nondischargeable. |
| What is the appropriate judgment against the Defendant on Auto Owners' claim | Auto Owners seeks $86,653.14 and nondischargeability under § 523(a)(2), (4), and (6). | Defense disputes liability for the full amount and its nondischargeability. | Judgment of $86,653.14, nondischargeable under § 523(a)(4) and (6). |
Key Cases Cited
- In re Copeland, 291 B.R. 740 (Bankr.E.D.Tenn.2003) (fraudulent intent may be inferred from totality of circumstances)
- In re Rembert, 141 F.3d 277 (6th Cir.1998) (subjective standard for fraudulent intent)
- Grogan v. Garner, 498 U.S. 279 (1991) (clarifies burden of proof for nondischargeability under 523(a))
- In re McCoy, 269 B.R. 193 (Bankr.W.D.Tenn.2001) (fraud elements and reliance considerations under 523(a)(2))
- In re Markowitz, 190 F.3d 455 (6th Cir.1999) (willful vs. malicious injury standards under 523(a)(6))
- In re Fox, 370 B.R. 104 (6th Cir. BAP 2007) (willful and malicious standard requires intent to injure)
- In re Lupo, 353 B.R. 534 (Bankr.N.D.Ohio 2006) (concurrence of willful and malicious requirements under 523(a)(6))
- Buckeye Retirement, LLC v. Heil, 289 B.R. 897 (Bankr.E.D.Tenn.2003) (summary of discharge goals for Chapter 7)
- Commercial Bank & Trust Co. v. McCoy (In re McCoy), 269 B.R. 193 (Bankr.W.D.Tenn.2001) (fraud and reliance under 523(a)(2) framework)