Merritt v. Layne (In re Layne), 517 B.R. 778

Defendant (debtor) borrowed $18,900 (April 2012) from Plaintiff to buy and upgrade a 2008 Ford F-250, promising repayment in 45 days and to partner in an excavation business; debt went unpaid.
Plaintiff sued in state court for fraud and breach of contract; Defendant filed Chapter 7 before judgment and listed the debt as disputed.
Plaintiff commenced an adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6) and revocation of discharge under § 727 (later abandoned at hearing).
Defendant did not file an answer and was in default; Court nevertheless required Plaintiff to present evidence at an evidentiary hearing before entering default judgment.
At the hearing Plaintiff offered an affidavit and exhibits; Defendant appeared pro se and offered no testimony. Plaintiff sought nondischargeability but presented no additional proof beyond his affidavit and pleadings.
Court denied default judgment and entered judgment for Defendant, concluding Plaintiff failed to meet his burden on each § 523 theory and denying a reopening for additional discovery.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether default alone permits nondischargeability relief	Merritt argued defaults admit allegations so debt is nondischargeable	Debtor offered no defense but was in default; Court required proof despite default	Default does not automatically entitle Plaintiff; plaintiff must prove elements by evidence; hearing required and Plaintiff failed to carry burden
§ 523(a)(2)(A) — fraud (false representation, intent, reliance, causation)	Defendant misrepresented ability/intention to repay in 45 days; Plaintiff relied and suffered $18,900 plus fees	Debtor’s inability to pay shown on schedules does not prove intent to deceive; no direct evidence of fraudulent intent	Plaintiff failed to prove fraudulent intent or other elements by preponderance; judgment for Defendant
§ 523(a)(4) — fiduciary/defalcation, embezzlement, larceny	Loan was made for a specific purpose (truck/business) and thus allegedly implicates fiduciary/defalcation or embezzlement	No trust relationship, no evidence of embezzlement or larceny (Plaintiff voluntarily gave money)	Plaintiff did not prove existence of an express/technical trust, fraudulent intent, or larceny; claim fails
§ 523(a)(6) — willful and malicious injury	Failure to repay was intentional and caused Plaintiff’s loss	No evidence Debtor intended harm or acted with substantial certainty of harm; mere nonpayment insufficient	Plaintiff failed to show willful and malicious conduct; claim fails

Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (creditor must prove nondischargeability elements by preponderance)
Rembert v. AT & T Univ's Card. Serv.'s, Inc. (In re Rembert), 141 F.3d 277 (6th Cir. 1998) (elements for fraud under § 523(a)(2)(A))
Brady v. McAllister (In re Brady), 101 F.3d 1165 (6th Cir. 1996) (embezzlement requires fraudulent intent)
Markowitz v. Campbell (In re Markowitz), 190 F.3d 455 (6th Cir. 1999) (willful requirement under § 523(a)(6): substantial certainty standard)
In re Roberts, 193 B.R. 828 (Bankr. W.D. Mich. 1996) (debtor's inability to pay on schedules insufficient alone to infer fraudulent intent)
In re Talbert, 268 B.R. 811 (Bankr. W.D. Mich. 2001) (court will not grant relief unsupported by proof merely because defendant defaulted)
In re Stollman, 404 B.R. 244 (Bankr. E.D. Mich. 2009) (defalcation applies only to express or technical trusts)
In re Grim, 293 B.R. 156 (Bankr. N.D. Ohio 2003) (larceny requires wrongful taking without owner consent)