Johnson v. Logue (In Re Logue)Johnson v. Logue (In Re Logue)
Jеrome Johnson (“Johnson”) appeals from the bankruptcy court 1 order declining to except from discharge the indebtedness of Debtor Loy Logue (“Debtor”) to Johnson. We have jurisdiction over this appeal from the final order and judgment of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.
ISSUE
The issue on appeal is whether the bankruptcy court properly determined that the Debtor’s indebtedness to Johnson is not malicious within the ambit of 11 U.S.C. § 523(a)(6) which excludes from discharge debts for willful and malicious injury. We conclude that the bankruptcy court properly determined that the indebtedness should not be excepted from discharge as a debt for willful and malicious injury. •
BACKGROUND
On March 21, 2001, the Debtor executed a promissory note in- favor of Mcllroy Bank and Trust (“Bank”) in the amount of
On May 21, 2001, the note and security agreement were renewed for an additional two months. On July 21, 2001, the Debtor .defaulted on the note. The Bank made demand on the Debtor to turn over the remaining cattle. The Debtor did not turn over any cattle at that time. The Bank then made demand on Johnson who paid off the note in the amount of $88,865.05 on July 28, 2001. The Bank assigned the note and security agreement to Johnson.
On September 20, 2001, the Debtor and his wife, Bettina Logue filed a petitiоn for relief under Chapter 13 of the Bankruptcy Code. Their case was subsequently converted to Chapter 7.
Nine days after execution of the promissory note in favor of the Bank, the Debtor began selling secured cattle at livestock auctions other than the Designated Auction. The Debtor continued this practice after filing bankruptcy until Jоhnson obtained possession of the remaining cattle on December 28, 2001, pursuant to order of the Bankruptcy Court.
Johnson filed a complaint seeking a determination thаt the Debtor’s indebtedness to him as assignee of the Bank constitutes a debt for willful and malicious injury which should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(6). 2 The Bankruptcy Court detеrmined that Johnson satisfied the willful prong of the test but failed to establish malice. Johnson appeals the conclusion that the debt is not for a malicious injury.
STANDARD OF REVIEW
The determination оf whether a party acted maliciously inherently involves inquiry into and finding of intent, which is a question of fact.
Waugh v. Eldridge (In re Waugh),
DISCUSSION
Pursuant to 11 U.S.C. § 523(a)(6), a discharge does not discharge an individual from a debt for willful and malicious injury. In this context, the term willful means deliberate or intentional.
Kawaauhau v. Geiger,
In order to except a debt from discharge under 11 U.S.C. § 523(a)(6), the plaintiff must establish by a preponderance of the evidence that the debt arises from an injury which is both willful and malicious.
Grogan v. Garner,
Malice requires conduct more culpable than that which is in reckless disregard of the creditor’s economic interests and expectancies.
Long,
In the context of the breach of a security agreement, a willful breach is not enough to establish malice.
Phillips,
Debtors who willfully break security agreements are testing the outer bounds of their right to a fresh start, but unless they act with malice by intending or fully expecting to harm the economic interests of the creditor, such a breach of contract does not, in and of itself, preclude a discharge.
Long, 774
F.2d at 882. A debtor’s retention of proceeds of sales of collateral, while clearly a breach of a security agreement, is not enough to establish malice. Where a debtor has used the proceeds in an attempt, albeit unsuccessful onе, to keep a business afloat, malice may not necessarily be inferred from the debtor’s conduct.
Phillips,
Here, the Bankruptcy Court acknowledged that the Debtor sold collateral other than in' accordance with the security agreement. The Debtor sold cattle at auctions other than the Designated Auction. The Debtor testified that he sold the cattle at different auctions to maximize price.
The Debtor also testified that he used the sales proceeds to feed and maintain the remaining herd rathеr than delivering the proceeds to the Bank. Johnson asserts that the Debtor did not use all proceeds to maintain the herd and that such use is evidence of malice in this cоntext. The Debtor produced cancelled checks and receipts accounting for most but not all of
Thе use of some proceeds of another’s collateral to directly benefit oneself while also benefitting the business as a whole is not necessarily enough to rendеr the actions malicious.
Phillips,
Johnson also argues that the Debtor failed to diligently pursue other financing options. While efforts to maintain a business, including efforts to obtain alternate financing, may be evidеnce of lack of malice, the converse is not necessarily true. A lack of diligent efforts to obtain alternate financing is not necessarily evidence of maliсe nor was that the situation here. The Debtor testified that he sought refinancing as late as September 11, 2001, and received the Bank’s response denying his request on Septembеr 14, 2001. Shortly thereafter the Debtor filed bankruptcy. An ill-fated reorganization effort which quickly collapses is not necessarily a “sham or hopeless from the beginning” and can bе evidence of an intent, albeit unfulfilled, to benefit the creditor.
Long,
Taken as a whole, we cannot say that the evidence does not support the Bankruptcy Court’s finding that the Debtor did not act with malice. Accordingly, the Bankruptcy Court’s order and judgment should be affirmed.
CONCLUSION
The Bankruptcy Court properly weighed the evidence as a whole and cоncluded that Johnson failed to meet his burden of establishing malice on the part of the Debtor. Accordingly, the Debtor’s indebtedness to Johnson should not be excepted from disсharge pursuant to 11 U.S.C. § 523(a)(6). Accordingly, we AFFIRM.