This cause comes before the Court after a Trial on the Plaintiffs Complaint to Determine the Dischargeability of a Debt. At the Trial, the Parties were afforded the opportunity to present evidence and make any arguments that they wished the Court to consider in reaching its decision. This Court has now had the opportunity to review the arguments of counsel, the evidence presented at Trial, as well as the entire record in the case. Based upon that review, and for the following reasons, the Court finds that the obligation at issue herein is, for purposes of bankruptcy law, a nondisehargeable debt.
FACTS
The Plaintiff/Creditor, J & A Brelage, Inc. is a corporation created by John Bre-lage and his wife for the purpose of financing small businesses in the agricultural industry. As a part of its business operations, the Plaintiff/Creditor (hereinafter referred to as the “Plaintiff’) on various occasions undertook to finance the Defendant/Debtor who for many years operated a dairy farm in northwest Ohio. In return for this financing, which in all totaled One Hundred Twenty-three Thousand Two Hundred Thirty-three and 24/100 dollars ($123,233.24), the DefendanVDebtor (hereinafter referred to as the “Debtor”) agreed to pay the Plaintiff Three Thousand Eight Hundred Thirty-three and 90/100 dollars ($3,833.90) per month for a period of One Hundred Sixteen (116) months. As collateral for this transaction, the Debtor granted, through three separate instruments, the Plaintiff a security interest in all his livestock (specifically cattle) and equipment whether currently owned or thereafter acquired; the specific language of the Parties’ agreement which created this interest provided as follows:
Debtor also grants to Secured Party a present security interest in all other livestock owned including all increases thereto by birth, replacements, substitutions and additions and all machinery equipment owned or hereafter acquired.
(Plaintiffs Exhibit 3). In addition to the above stated security, the Debtor, as consideration for the Plaintiffs financing, granted the Plaintiff a third mortgage on his farm.
Sometime after obtaining his financing from the Plaintiff, the Debtor, on account of nonpayment, defaulted under the terms of the Parties’ agreement. During the course of this default, the facts of this case show that Debtor through various means, which mainly included the liquidation of a significant portion of the Debtor’s assets, was able to pay to the Plaintiff all but Eighteen Thousand Seven Hundred Ten and 08/100 dollars ($18,710.08) of the amount he had borrowed. The evidence presented in this case, however, also shows that at this time the Debtor continued to retain some of the Plaintiffs collateral, and that sometime thereafter, the Debtor sold this collateral without providing to the Plaintiff the proceeds therefrom. In this regard, it is undisputed that the Debtor received Ten Thousand Nine Hundred Three dollars ($10,903.00) for the sale of certain farm machinery against which the Plaintiff maintained a first priority security interest. In addition, the evidence put forth in this case also shows that the Defendant sold other farm equipment in which the Plaintiff maintained a subordinated security interest; the selling price of this collateral was approximately Twelve Thousand dollars ($12,000.00) which represented the outstanding amounts owed on this particular farm equipment. The Plaintiff also contends that the Debtor, in
On February 2, 2000, the Plaintiff obtained, in state court, a default judgment on a complaint for breach of contract; the amount of damages in this judgment was set at Eighteen Thousand Seven Hundred Ten dollars ($18,710.00) plus interest at 10% per annum. That same year, the Debtor petitioned this Court for relief under Chapter 7 of the United States Bankruptcy Code. Thereafter, the Plaintiff commenced a timely adversary complaint, pursuant to Bankruptcy Rule 7001, to have its state court judgment determined to be a nondischargeable debt. The legal grounds for the Plaintiffs complaint to determine dischargeability rested entirely upon the exception to discharge contained in 11 U.S.C. § 528(a)(6) which excludes from the scope of a bankruptcy discharge those debts incurred as a result of the debtor’s willful and malicious conduct.
In opposition to the Plaintiffs complaint, the Debtor argues that he was not aware that the Plaintiff maintained a first and best security interest in much of the farm equipment he had sold. In this regard, the Debtor testified to the fact that, at the time of the sale, he was under the understanding, albeit false, that his father had a first and best security interest in the farm equipment, which according to the Debtor had, unbeknownst to him, lapsed. Also, in opposition to the Plaintiffs complaint, the Debtor raises what is, in essence, an equitable argument; specifically the Debtor stated to the Court that:
Defendant Jones did sell some property which was secured by the Plaintiff; however, it is Defendant Jones’ position that any such sale or conversion was technical in nature and the Plaintiff did not suffer financial harm because of the extraordinary interest rate that Plaintiff had charged Defendant in prior dealings, and Plaintiffs gross return from this investment was more than commercially reasonable.
(Debtor’s Pretrial Brief, at pg. 1).
LAW
Section 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity[.]
DISCUSSION
Under 28 U.S.C. § 157(b)(2)(I), a determination as to the dischargeability of a particular debt is a core proceeding. Thus, this matter is a core proceeding.
The Bankruptcy Code excepts from discharge those debts which arise from a “willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). The Plaintiffs argument to have its claim against the Debtor held nondischargeable under this section centers around the Debtor’s alleged conversion of its collateral. (Plaintiffs Pretrial Statement, at pg. 1). In addressing this argument as it relates to the Plaintiffs cause of action under § 523(a)(6), the Court begins by noting that the Debtor’s failure to satisfactorily account for the Plaintiffs collateral almost certainly amounts to an act of conversion under Ohio law. However, dischargeability proceedings brought under § 523(a)(6) are determined by reference to federal
For purposes of the § 523(a)(6) exception to discharge, it is clear that, by Congress inserting the conjunctive word “and” in between the words “willful” and “malicious,” a debt will only be excepted from discharge if both these standards, as defined by federal law, are met.
Markowitz v. Campbell (In re Markowitz),
The word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondis-chargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead ‘willful acts that cause injury.’ Or, Congress might have selected an additional word or words, i.e., ‘reckless’ or ‘negligent,’ to modify ‘injury.’ Moreover, as the Eighth Circuit observed, the (a)(6) formulation triggers in the lawyer’s mind the category ‘intentional torts,’ as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend ‘the consequences of an act,’ not simply ‘the act itself.’
we now hold that unless ‘the actor desires to cause consequences of his act, or ... believes that the consequences are substantially certain to result from it,’ he has not committed a ‘willful and malicious injury’ as defined under § 523(a)(6).
In any action brought under § 528(a)(6), federal law places the burden of proof upon the creditor to establish that the debtor acted with the intent to cause injury or was substantially certain the injury would occur, with the quantum of proof therefor being the preponderance of the evidence standard.
Grogan v. Garner,
Under Ohio law, a security interest affords a creditor a legal interest in the subject property. O.R.C. § 1301.01(KK)(1). More importantly, however, for purposes of this case, a debt- or is also under a duty to take reasonable precautions to protect a creditor’s interest in the property subject to the security interest. Ohio JuR.3d., Secured Transactions § 125 (Risk of Loss in Nonpurchase Money Security Interest is with the debt- or). It therefore follows that, for purposes of determining whether a debtor knew his actions would injure the creditor’s lien rights, a rebuttable presumption will arise when the debtor, despite having knowledge as to the implications of the security agreement, took no action to protect the creditor’s interest therein. In this regard, two considerations present in this case show that this presumption is applicable. First, the security agreement entered into between the Debtor and the Plaintiff clearly spelled out that the Plaintiffs security interest extended to all equipment and machinery owned by the Debtor regardless of when it was acquired. Second, the facts presented in this case show that the debt- or, having been in the farming business for a number of years, was undoubtably familiar with the implications of a security agreement. In fact, this latter point is clearly exemplified by the fact that the Defendant, upon experiencing financial dif-' ficulties, voluntarily applied a significant portion of the Plaintiffs collateral to his outstanding debt.
In response to these considerations, the Debtor offered, as a justification for his actions, the assertion that he thought that his father maintained a first and best secu
Thus, for the foregoing reasons, it is the conclusion of this Court that the Debtor had to be aware that his actions vis-a-vis the farm equipment would potentially injure the Plaintiffs lien rights therein. Accordingly, the Court hereby holds that, for purposes of § 523(a)(6), the Debtor acted “willfully” with respect to the farm equipment the Plaintiff held as collateral. Additionally, for these same reasons, the Court finds that the Debtor acted maliciously with respect to the Plaintiffs collateral, with a malicious injury being defined under § 523(a)(6) as occurring when a person acts in conscious disregard of their duties or without just cause or excuse.
Gonzalez v. Moffitt (In re Moffitt),
In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
Accordingly, it is
ORDERED that the debt of the Debt- or/Defendant, Gregory G. Jones, to the Plaintiff, J & A Brelage, Inc., be, and is hereby, determined to be a NONDIS-CHARGEABLE DEBT.
Notes
.
See, e.g., Call Federal Credit Union v. Sweeney (In re Sweeney),
. McIntyre v. Kavanaugh,