Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almb-1_04-ap-01320/USCOURTS-almb-1_04-ap-01320-0/pdf.json

Parties Involved:
Banktrust of Alabama
Plaintiff
Rachel Turner Smith
Defendant

Document Text:

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF ALABAMA

In re Case No. 04-12654-DHW

 Chapter 7

RACHEL TURNER SMITH,

 Debtor.

_____________________________

BANKTRUST OF ALABAMA,

Plaintiff,

v. Adv. Proc. No. 04-01320-DHW

RACHEL TURNER SMITH,

Defendant.

MEMORANDUM OPINION

On December 28, 2004, Banktrust of Alabama (hereinafter “Banktrust”)

filed this adversary proceeding seeking a determination that its claim against

Rachel Turner Smith (hereinafter “Smith”) is not dischargeable under 11 U.S.C.

§ 523(a)(2) and (a)(6). Trial was held on June 22, 2005, in Dothan, Alabama.

At trial the plaintiff was represented by Jimmy S. Calton, and the defendant was

represented by Donald J. McKinnon. 

Jurisdiction

The court’s jurisdiction in this adversary proceeding is derived from 28

U.S.C. § 1334 and from the United States District Court for this district’s

general order of reference referring title 11 matters to this court. Further,

because a complaint to determine the dischargeability of a particular debt is a

core proceeding under 28 U.S.C. § 157(b)(2)(I), the court’s jurisdiction is

extended to the entry of a final order or judgment. 

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1 Eufaula Bank & Trust Co. is the predecessor of Banktrust.

2

Findings of Fact

On November 4, 2002, Smith opened a checking account at Banktrust.

See Plaintiff’s Ex. 4. Smith’s sole purpose in establishing the account was to

permit the direct deposit of her monthly Social Security disability benefit, which

had been awarded to her a few months earlier. 

On October 20, 2003, Banktrust received a wire transfer from Southtrust

Bank totaling $10,729.83. See Plaintiff’s Ex. 3.1

 These funds were intended for

deposit into the account of one of Banktrust’s commercial customers. Instead,

on October 22, 2003, Banktrust deposited the money erroneously into Smith’s

checking account. 

Banktrust mailed Smith a copy of a deposit slip evidencing the

$10,729.83 deposit. See Plaintiff’s Ex. 6. Upon receipt of the deposit slip,

Smith called the bank to inquire as to the source of the deposited funds. A

person in the bank’s bookkeeping department told Smith that the source of the

money could not be determined from the information at hand but that it appeared

that the money was legitimately in Smith’s account and belonged to her. 

On October 24, 2003, two days after the erroneous deposit was made,

Smith wrote two checks totaling $10,000. See Plaintiff’s Ex. 2. One of the

checks was payable to cash in the amount of $6,000. A few days after

negotiating the $6,000 check, Smith went to a gaming casino in Biloxi,

Mississippi.

The other check for $4,000 was made payable to Smith’s sister, Verdell

Grubbs. Smith wrote the word “loan” on the face of the check. Despite the

implication, there was no loan to Grubbs. Rather, Smith’s daughter needed

money to repay one of her (the daughter’s) loans. Smith gave the $4,000 check

to Grubbs because Grubbs was able to cash the check locally and deliver the

money to Smith’s daughter who lived out of state.

About three months later, Banktrust was notified by its commercial

customer that its account had never been credited with the $10,729.83 deposit.

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Upon investigation, Banktrust learned of its mistake. It restored the money to

the account of the rightful customer and notified Smith of the error. 

Over the next several months, Banktrust made contact with Smith

endeavoring to recover all or a portion of the funds. See Plaintiff’s Ex. 7 and 8.

By the time Smith filed her bankruptcy petition on November 19, 2004, she had

not repaid any of the funds erroneously deposited into her account. 

Smith testified that she believed that the $10,729.83 deposited into her

account by the bank could have been an additional payment by the Social

Security Administration on her disability claim. 

Smith had filed the disability application on January 27, 2001. On July

9, 2002, the Social Security Administration found, inter alia, that Smith was

entitled to benefits and further that she had become disabled effective March

1994. See Plaintiff’s Ex. 1. 

Thereafter, Smith received a monthly social security benefit of about

$818. As stated supra, she established the Banktrust account to receive this

monthly payment via direct deposit. 

In addition to the monthly benefit, Smith was awarded and paid a $25,000

lump sum benefit for the two-year period preceding her January 2001

application. Although Smith’s disability dated back to 1994, under Social

Security Administration regulations, she could only receive compensation for

the two-year period immediately preceding her application for benefits. 

Smith testified that she made her original application for Social Security

benefits in 1994 when she first became disabled. Under this scenario, she

would have been entitled to back payment of benefits to that date. The Social

Security Administration, however, found no record of Smith’s alleged earlier

application. Smith admitted that she never received any notification from the

Social Security Administration that she would receive an additional lump sum

benefit.

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Conclusions of Law

Banktrust contends that Smith, by negotiating the two checkswithdrawing

the erroneously deposited funds, committed fraud and that its claim against her

is nondischargeable under § 523(a)(2)(A). Further, Banktrust contends that

Smith willfully and maliciously caused injury to its property and that its claim

is non-dischargeable under § 523(a)(6). 

Banktrust has the burden of proving the nondischargeability of its claim

by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S. Ct.

654, 112 L. Ed. 2d 755 (1991). Further, exceptions to discharge are to be strictly

construed to give effect to the fresh start policy of the Bankruptcy Code. Hope

v. Walker (In re Walker), 48 F.3d 1161, 1164-65 (11th Cir. 1995). 

11 U.S.C. § 523(a)(2)(A) Fraud

A debt is not discharged to the extent obtained by fraud. The exact text

of the statute provides:

(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—

(2) for money, property, services, or an extension, renewal, or

refinancing of credit, to the extent obtained, by__

(A) false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s or an insider’s

financial condition;

11 U.S.C. § 523(a)(2)(A).

In order to establish fraud under § 523(a)(2)(A) the plaintiff must prove

each of four elements by a preponderance of the evidence. Plaintiff must prove

(1) that the debtor made a false representation to deceive the creditor; (2) that the

creditor relied on the misrepresentation; (3) that the reliance was justified; and

(4) that the creditor sustained a loss as a result of the misrepresentation. SEC v.

Bilzerian (In re Bilzerian), 153 F.3d 1278, 1281 (11th Cir. 1998); Fuller v.

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Johannessen (In re Johannessen), 76 F.3d 347, 350 (11th Cir. 1996). Further, it

is justifiable reliance, rather than the more stringent reasonable reliance or the

more lenient actual reliance, that is the standard in § 523(a)(2)(A) litigation.

Field v. Mans, 516 U.S. 59, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995); City Bank

& Trust Co. v. Vann (In re Vann), 67 F.3d 277, 281 (11th Cir. 1995). 

In this case, by drawing the two checks on her account at the bank, Smith

made no representation to Banktrust – much less one with the intent to deceive.

 The Supreme Court has held, in interpreting a criminal statute, that a false

statement is not made by the giving of a check. Justice Blackmon explained that

“. . . a check is not a factual assertion at all, and therefore cannot be

characterized as ‘true’ or ‘false.’ . . . [A] check is simply ‘a draft drawn on a

bank and payable on demand.’” Williams v. United States, 458 U.S. 279, 284-

85, 102 S. Ct. 3088, 3091-92, 73 L. Ed. 2d 767 (1982). However, even if the

drawing of a check constituted a representation, that representation would run

to the payee – not to the bank on which the check is drawn.

Instead of factual representations, as drawer of these two checks, Smith

made certain implied warranties to her transferees, her sister on one check and

herself on the other made payable to cash. See Ala. Code § 7-3-416 (1975).

None of these warranties, however, run to the bank. But even if they did, they

were extinguished when the checks were honored by Banktrust. 

But as the presenter of the check made payable to cash, Smith did make

implied warranties to the bank. See Ala. Code § 7-3-417 (1975). A presenter

warrants to the drawee that 1) there are no missing endorsements, 2) there is no

alteration of the instrument, and 3) there is no forgery of the drawer’s signature.

None of these warranties were breached by Smith. 

Hence, by writing the two checks, which effectively withdrew the

mistakenly deposited funds, Smith did not make a false representation to

Banktrust with the intent to deceive. Failing to prove this element of fraud,

Banktrust cannot prevail on its claim under § 523(a)(2). 

11 U.S.C. 523(a)(6)Willful and Malicious Injury

A debt for the willful and malicious injury to the property of another

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 It is not sufficient that the debtor intentionally committed an act which resulted

in injury if the injury itself was neither intended nor substantially certain to result from

the act. Hope v. Walker (In re Walker), 48 F.3d 1161 (11th Cir. 1995). 

6

entity is not dischargeable. The statute provides:

(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[.]

11 U.S.C. § 523(a)(6).

Under the willful and malicious exception, the injury must be both willful

and malicious: both terms modify injury. “Willful” means deliberate or

intentional. Kawaauhau v. Geiger, 523 U.S. 57, 61 n.3, 118 S. Ct. 974, 977

(1998). To be nondischargeable, the debtor must intend to injure another entity

or his property.2

 Id. at 61. Willful does not encompass a recklessly or

negligently inflicted injury. Id. at 64. 

“Malicious” means “‘wrongful and without just cause or excessive even

in the absence of personal hatred, spite or ill-will.’” Hope v. Walker (In re

Walker), 48 F.3d 1161, 1164 (11th Cir. 1995) (quoting Lee v. Ikner (In re Ikner),

883 F.2d 986, 991 (11th Cir. 1989)). 

“Willful and malicious injury includes willful and malicious conversion,

which is the unauthorized exercise of ownership over goods belonging to

another to the exclusion of the owner’s rights.” Wolfson v. Equine Capital

Corp. (In re Wolfson), 56 F.3d 52, 54 (11th Cir. 1995). But not every tort of

conversion falls within the purview of 11 U.S.C. § 523(a)(6). “[I]nnocent or

technical” conversion of a person’s property does not lend itself to a finding of

a willful and malicious injury for dischargeability purposes. Davis v. Aetna

Acceptance Co., 293 U.S. 328, 332, 55 S. Ct. 151, 153, 79 L. Ed. 393 (1934).

To be nondischargeable, the resulting injury must have been deliberate and

intentional. A negligent or reckless conversion would not fall within the

statutory exception. “[A] willful and malicious injury does not follow as of

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course from every act of conversion, without reference to the circumstances.”

Davis, 293 U.S. at 332.

One federal appellate court has opined that when conversion is at issue

under § 523(a)(6), “nondischargeability turns on whether the conduct is (1)

headstrong and knowing (“willful”) and, (2) targeted at the creditor

(“malicious”), at least in the sense that the conduct is certain or almost certain

to cause financial harm.” Barclays American/Business Credit, Inc v. Long (In

re Long), 774 F.2d 875, 881 (8th Cir. 1985).

In the instant case, two circumstances militate in the debtor’s favor.

When Smith received the deposit slip in the mail, she immediately called the

bank and inquired as to the source of the deposited funds. Secondly, Smith

entertained a hope, however unfounded, that the Social Security Administration

would pay her an additional lump sum benefit.

On the other hand Smith’s telephoning the bank regarding the source of

the deposit shows that she had doubt as to her ownership of this money. Further,

no one at the bank definitively told her the source of the funds. To the contrary,

Smith was told by the bank’s bookkeeping employee that the source of the

deposit could not be ascertained from the records immediately available. 

In addition, the day after learning that the funds had been placed into her

account, Smith withdrew the money by writing the two checks which are in

evidence here. The timing of the withdrawals gives the appearance that Smith

snapped the money up before the mistake could be found and corrected. 

Finally, Smith never received any notice from the Social Security

Administration that she had been awarded an additional lump-sum benefit.

Neither did she attempt to contact the Social Security Administration after

learning that her account had been credited with these funds. Her failure to

verify the deposit with the Social Security Administration casts doubt on the

integrity of her belief.

Weighing all of these circumstances, the court concludes that Smith knew

that these funds were deposited into her account in error and that they did not

belong to her. It follows, that by drawing these funds in the form of personal

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checks, Smith deliberately and intentionally converted the property of the bank.

Conclusion

For the foregoing reasons Banktrust of Alabama’s claim against Rachel

Turner Smith is nondischargeable pursuant to 11 U.S.C. § 523(a)(6). Pursuant

to Fed. R. Bankr. Pro. 9021 a separate judgement will enter consonant with this

opinion. 

Done this the 29th day of July, 2005.

/s/ Dwight H. Williams, Jr. 

United States Bankruptcy Judge

c: Jimmy S. Calton, Attorney for Plaintiff

 Donald J. McKinnon, Attorney for Defendant

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