Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-01477/USCOURTS-ca10-87-01477-0/pdf.json

Nature of Suit Code: 442
Nature of Suit: Civil Rights Employment
Cause of Action: 

---

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

In r e: GREGORY ALYAN POSTA and ) 

MARY JONES POSTA, ) 

) 

) 

) 

C. I . •r. FINANCIAL SERVICES, INC . , ) 

) 

Plaintiff- Appellant, ) 

) 

v. ) 

) 

GREGORY ALYAN POSTA ; MARY J ONES POSTA, ) 

) 

Defendants-Appellees. ) 

FILED 

United States Court of Appeals 

Tenth Circuit 

JAN 2 .61989 

ROBERT L. HOECKER 

Clerk 

No. 87-1477 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C . No. 86-K-1552) 

Submitted on the briefs: 

Robert M. Duitch of Duitch & Johnson, PcC., Colorado Springs, 

Colorado, for Plaintiff-Appell ant. 

Andrew J. Slee of Overholser & Slee, P.C., Montrose, Colorado, for 

Defendants-Appellees. 

Before LOGAN, LEAVY,* and BRORBY, Circuit Judges. 

*The Honorable Edward Leavy, Circuit Judge, United States Court of 

Appeals for the Ninth Circuit, sitting by designation . 

PER CURIAM. 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 1 
After examining the briefs and appellate record, this panel 

has determineq unanimously that oral argument would not materially 

assist the determination of ·this appeal. See Fed . R. App. P. 

34( a); lOth Cir. R. 34.1.8. The cause is therefore ordered 

submitted without oral argument. 

C.I.T. Financial Servi ces, Inc. appeals the dismissal of its 

complaint objecting to the discharge in bankruptcy of a debt of 

Gr egory Alyan Posta and Mary Jones Posta. CI T argues that the 

Pastas' debt to CIT, secured by a mobile travel trailer, is 

nondischargeable under § 523(a)(6) of the Bankruptcy Code, because 

the Pastas sold the trailer in violation of the terms of CIT's 

security agreement. In dismissing CIT's complaint, the bankruptcy 

court found that the Pastas had not willfully disregarded CIT's 

rights by selling the trailer and tha t their debt to CIT was 

properly dischargeable. On appeal, the district court affirmed. 

We likewise affirm. 

In 1983, the Pastas purchased a mobile travel trailer from 

Washburn Enterprises in Lakewood, Colorado, financing $23,631 of 

t he purchase price through CIT. The Pastas executed a security 

agreement with CIT , granting CIT a security interest in the 

trailer. The agreement p r ovided that the Pastas could not sell, 

ren t, or transfer the trailer, or move it from their home address 

unless CIT ag reed in writing. The bankruptcy court found that 

nei t her Mr. nor Mrs. Posta read the security agreement before 

signing it. 

2 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 2 
Within a year after this purchase, payments on the trailer 

began to strain tha Pastas' finances. The couple determined tha t 

they would be unable to meet the ir other financial obligations and 

continue to make the payments on the trailer. Cons equently, they 

moved the trailer from their home in Ridgeway, Colorado, to a 

dealership in Denver, a~tempting to lease it through the dealer. 

They also advertised the trailer for sale in Denver newspapers. 

On October 7, 1984, t he Pastas were contacted_ by Mr. Ronald 

Swartz, who indicated t hat he was interested in buying the 

trailer. Mr . Swa r tz met with the Postas that day and, after some 

nego tiation , ag reed to purchase the tra iler. That evening, the 

parties signed a sales agreement prepared by Mr. Swartz. As 

prov i ded in the agreement, Mr. swartz delivered $962.65 in cash to 

the Pastas (representing their equity in the trailer plus the next 

monthly paymen t) and a pr omissory note for $22,245.00 (the 

remaining balance on their loan from CIT). To secure the note, 

Mr. Swartz executed a second deed o f trust on certain condominium 

property l ocate d in Grand County, Colorado. He also purchased an 

i nsurance policy on the trailer, naming the Pastas as additi onal 

insureds . 

Mr. Swartz left tha t evening with the t railer . He returned 

the following morn i ng to deliver a copy of the sal es agreement and 

two football ticke ts which he had p romised to Mr. Pos ta. After 

that morning , however, neither he nor the t railer we r e ever s een 

agai n. Mr. Swartz defaulted on his payments on the promissory 

note , and the Pastas discovered that Mr. Swartz did not hold 

record inte re st in the property subject to the deed of trust 

3 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 3 
securing the note. Despite their efforts, the couple was unable 

to locate Mr. Swartz at any of the addresses he had given them. 

They reported the incident to the appropriate authorities and to 

CIT, and unsuccessfully attempted to recover on the insurance 

policy covering the trailer. The Postas were then forced to 

default on their loan payments to CIT, and shortly thereafter they 

filed for bankruptcy. 

CIT instituted the instant action in bankruptcy court on 

November 20, 1985, objecting to the discharge of the Postas• debt 

secured by the trailer. CIT alleged that, under § 523(a)(6) of 

the Bankruptcy Code, 11 U.S.C. § 523(a)(6)(1982), the debt was not 

dischargeable because the Postas had willfully and maliciously 

converted the travel trailer. The Postas responded by moving to 

dismiss the complaint, on the grounds that CIT had failed to 

allege that they had the requisite malicious intent. CIT then 

amended its complaint, and the Postas again moved for dismissal. 

After a hearing on the matter, the bankruptcy court ruled that the 

Postas' sale of the trailer was merely a technical conversion. It 

f ou nd no e vidence that the Postas• actions were taken in conscious 

disregard of the rights of CIT and held that the conversion was 

not malicious. The district court affirmed on appeal, relying on 

this court 's decision in In re Compos, 768 F.2d 1155 (lOth Cir. 

1985}. 

In reviewing an order of the bankruptcy court, we apply the 

same standard of review as the district court. Findings of fact 

by the bankruptcy court are not set aside unless clearly 

erroneous; conclusions of law are subject to de ~ review. In 

4 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 4 
re Mullet, 817 F.2d 677, 678-79 {lOth Cir. l987) . In this case, 

the .facts are relati~ely undisputed. The only issue before us is 

whether t he bankruptcy court properly construed the t erm 

"malicious" under § 523( a){ 6} of the Bankruptcy Code. CIT argues 

that the Pastas' intentional sale of the trailer in violation of 

the terms of the secu rity ag reeme nt was, by its nature, malicious. 

We disagree . 

We begin by examining the re levant provision of the 

Bankruptcy Code. Section 523(a)(6) of the Code e xcepts from 

discharge any debt "for willful and malicious injury by the debtor 

to ano ther entity or the property of another entity." Such injury 

includes the conversion of property subject to a creditor's 

security interest. In re Pommerer , 10 Bankr. 935, 940 (Bankr. D. 

Mi nn. 1981). For a debt to be nondischargeable under this 

section, however, the debtor's conve rsion of property must be both 

"willful" and ttmalicious. '' The creditor objecting to the 

discharge has the burden of proving both of these elements, In re 

McGi nn is, 586 F.2d 162, 163 (lOth Cir. 1978), by clear and 

convincing evidence , In re Auto Outlet, Inc ., 71 Bankr. 674, 677 

(Bankr . D. Utah 1987) . 

The "willful" element is straightforward. It simply 

addresses whether the debtor intentionally performed the basic act 

complained of. In re Egan, 52 Bankr. 501, 506 (Bank r . D. Minn. 

1985 } . 11Willful" conduct is conduct that is volitional a nd 

del ibe rate and over whi ch the debtor exercises mean ingful con trol, 

as . opposed to unintentional or accidental condu.ct . In re 

Clayburn, 67 Bankr. 52 2, 52 5 (Bankr. N.D . Ohio 1986); In re 

5 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 5 
Nelson, 67 Bankr. 491, 497 (Bankr. D. Minn. 1985). Thus, acts 

caused by the debtor's negligence or recklessness are not 

encompassed by this exception. In re Compos, 768 F.2d at 1158; 

In re Egan, 52 Bankr. at 506. 

In this case, there seems to be little question but that the 

Postas vol untarily and intentionally sold the trailer; so their 

conduct wa s ''willful." The issue is, instead, whether in doing 

so, they acted maliciously. CIT asserts that when a debtor 

intends to do an act which results in harm to his creditor, such 

conduct is "ma licious ... 

intentionally sold the 

Consequently, because 

trailer, and because the 

the Postas 

sale was in 

viol ation o f the security agreement and ultimately harmed CIT, CIT 

cont e nds that the "ma licious" element is satisfied. We disagree. 

Were we to accept CIT's argument, nearly any intentional 

conduct would fall within this exception to discharge, and the 

word "malicious'' in this section would be rendered meaningless. 

Statutes should be construed to give effect to every word Congress 

has used. Reiter v. Sonotone Corp., 442 u.s. 330, 339 (1979). 

Although we agree that conduct which violates the rights of a 

creditor is wrongful, we refuse to inf.er that it is, by its very 

nature, 11malicious. 11 Instead, the focus of the "malicious" 

inquiry is on the debtor's 

foreseeability that his conduct 

actual knowledge or the reasonable 

will result in injury to the 

creditor, "not on abstract and perhaps moralistic notions of the 

'wrongfulness' of the debtor 's act." In re Egan, 52 Bankr. at 507 

n. 4. · Thus, the Postas' sale of the trailer was not "malicious" 

simply because it violated the terms of the security agreement. 

6 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 6 
Under § 523 (a)(6), the debtor's malicious intent can be shown 

in two ways. In the rare instances in which ther ~ is direct 

evidence that the debtor's conduct was taken with the specific 

intent to harm the creditor, the malice requi rement is easily 

e stablished . See, ~, In r e Boren, 47 Bankr. 293 (Bankr. W.O . 

Ky. 1985)~ In re Majo r, 44 Bankr. 636 {Bankr . W.O. Mo. 1984}. 

More commonly, however , malicious intent must be demonstra ted by 

evide nce t hat the debtor had knowledge of the creditor's rights 

and that, with that knowledge, proceeded to take action in 

violation o f those rights. In re Nelson , 67 Bank r. at 497; In re 

Dever, 49 Bankr. 329, 332 (Bankr . W.O. Ky. 1 984). Such knowledge 

can be inferred from the debtor ' s experience in the business, his 

concea lment of t he sal e, or by h is admission that he has read and 

understood the security agr eement . In re Cullen, 71 Bankr . 274, 

282 (Bankr. W.o. Wis. 1987); In re Gantt, 56 Bankr . 852, 857 

(Bankr. E.D . Va. 1985); United Bank of Southgate v. Nelson , 35 

Bankr . 766, 776 (N.D. Ill. 1983} . 

We a re not persuaded by CIT's argument that the bankruptcy 

court misconstrued the term "malicious" as to require actual 

mal ice , or a specific intent to harm the creditor. Rather, the 

court c orrectly looked to whether the Pastas had willfully 

disregarded the rights of CIT in making the sale. The court noted 

that the Pastas were re latively inexperienced in business ma tters, 

that they had difficul ty in unde rstanding business c oncepts, and 

tha t they had not read the security agreement. See, ~, In re 

Walk er, 44 Ba nkr. 1, 3 (Bankr. S.D. Oh~o 1983); In re Scarbaci, 34 

Ban kr. 344 (Bankr. S.D. Fla. 1983); In re Casselli, 4 Bankr. 531, 

7 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 7 
53 5 (Bankr. C.D. Cal. 1980). The evidence shows that, at all 

times, the Pastas intended to fulfill their loan obligatio ns to 

CIT by applying the proceeds of Mr. Swartz' note to the loan. 

See , ~, In re Camp, 11 Bankr. 85, 89 (Bankr . N.D. · Ga. 1 981); In 

~e Harris, 8 Bankr. 88, 93-94 (Bankr. M.D. Tenn. 1980). They did 

not conceal the sale from CIT and, in fact, requested CIT' s 

assistance when it appeared their arrangement with Mr. Swartz had 

gone sour. Compare In re Fields, 44 Bankr. 322, 330 (Bankr·. S.D. 

Fla . 1984). We agree with the bankruptcy court that, in light of 

these facts, at most , all that occurred was a "technical 

conversion." Technical conversions do not fall within the 

§ 523(a}(6) exception to discharge. Davis v. Aetna Acceptance 

Co., 293 U.S. 328, 331- 32 (1934); In re McGinnis, 586 F.2d at 163 . 

CIT attempts to distinguish t his case fr om other cases 

involving technical conve rsions by arguing that, beca use it did 

not acquiesce in any way in the Posta's sale of the trai ler, the 

c ou rt may not excuse the Pastas' disregard of the terms of the 

securi ty agreemen t. This a ttempted distinction is illusory. The 

issue of a creditor's acqui escence comes into play only in those 

cases in whi ch the deb tor ha s knowledge of the credi tor's 

limitations on the sale of i ts collateral but, because of some 

conduct by the creditor, is led to believe the sale would 

nevertheless be permissible . See, ~, Davis v . Aetna 

Acc ept a nce Co., 239 u.s. 3 28: Ford Motor Credit Co. v. Owens, 80 7 

F.2d 1556 (11th Cir. 1987); In re McGinnis , 586 F.2d 162. In this 

case , however, the threshold question, as noted above , is whether 

the Postas had any knowledge that the sale would violate the terms 

8 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 8 
of the security agreement. The district court found that the 

Pastas had no knowledge of such terms bf the security agreement. 

It properly conc l uded that, because they did not knowingly violate 

CIT's rights by selling the traile~ , the Pastas' conversion of 

CIT's property was not "malicious." That CIT did not acquiesce in 

the sale was therefore irrelevan t. 

The order of the United States District Cour t for the 

District of Colorado is AFF IRMED . 

9 

Appellate Case: 87-1477 Document: 01019724739 Date Filed: 01/26/1989 Page: 9