Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-alnb-2_04-ap-00125/USCOURTS-alnb-2_04-ap-00125-1/pdf.json

Parties Involved:
Acceptance Loan Company
Plaintiff
Jeanne Merea Bowers
Defendant

Document Text:

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF ALABAMA

SOUTHERN DIVISION

In re: )

)

David Allen Bowers and )

Jeanne Merea Bowers, ) Case No.: 04-03413-BGC-7

)

Debtors. )

Acceptance Loan Company, )

)

Plaintiff, )

)

vs. ) A. P. No.: 04-00125

)

Jeanne Merea Bowers, )

)

Defendant. )

MEMORANDUM OPINION

The matters before the Court are the plaintiff’s Complaint, as amended, seeking

permission to prosecute a claim for fraud against the debtor and a Motion for Relief

from the Automatic Stay filed by Acceptance Loan Company on May 19, 2004, seeking

permission to continue prosecution of the state court complaint filed against the

defendant.

After notice, a hearing was held on October 27, 2004. Appearing were William

Barnes for the plaintiff, and Heath Johnson for the defendant. The matter was

submitted on the arguments of counsel and the pleadings.

I. Background

On May 19, 2004, Acceptance Loan filed its Motion for Relief from the Automatic

Stay. After notice, a hearing was scheduled for June 15, 2004, and continued to July 7,

2004. Appearing at the July 7 hearing were the debtors; their attorney Mr. Jimmy

Calvert; and Mr. Barnes.

The Court entered an Order on July 15, 2004, on the Motion for Relief from the

Automatic Stay. That order reads in part:

The motion before the Court seeks relief from the automatic stay for

Acceptance: (1) to take possession of and sell the vehicle; and, (2) to continue

with its pending state court litigation.

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2

Possession of the Vehicle

At the July 7 hearing on this matter, the debtors agreed to deliver the

vehicle to Acceptance and agreed to relief from the stay for the purpose of

Acceptance liquidating the collateral. The parties disagreed as to whether the

state court proceeding should go forward.

Based on the pleadings and the representations of counsel at the

hearing, the Court finds that the portion of the Motion for Relief from the

Automatic Stay relating to Acceptance’s request to take possession of and sell

the vehicle is due to be granted.

Complaint

Based on the pleadings and the representations of counsel at the

hearing, the Court finds that portion of the Motion for Relief from the Automatic

Stay relating to the state court action is premature. In its motion Acceptance

stated that it, “objects to discharge of this debt, or any portion thereof, pursuant

to 11 U.S.C. § 523. Exceptions to discharge (a)(2)”. However, no complaint to

determine the dischargeability of any debt Acceptance contends is owed by the

debtor has been filed. And unless such a complaint is filed within the deadline

set in this case, any debt alleged to be nondischargeable pursuant to section

523(a)(2), will be dischargeable after the deadline established by section 523(c)

expires. That deadline in this case is July 19, 2004. Because no complaint has

been filed, the issue of dischargeability has not been joined and is not before the

Court. Consequently, the pending motion does not raise an issue for this Court

to decide.

Based on the above, the Court finds that the Motion for Relief from the

Automatic Stay is due to be denied, without prejudice to the movant to file

another motion if a complaint to determine the dischargeability of the alleged

debt is filed.

It is therefore ORDERED:

1. That portion of the Motion for Relief from the Automatic Stay

relating to Acceptance’s request to take possession of and sell the

vehicle is GRANTED;

2. That portion of the Motion for Relief from the Automatic Stay

relating to Acceptance’s request to prosecute its state court action

is DENIED without prejudice to Acceptance to ask that the motion

be returned to the Court’s calendar if the alleged debt is not

discharged by operation of law.

Order, July 15, 2004, Proceeding No. 24 (footnote omitted).

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3

The plaintiff filed its nondischargeability Complaint in this Court on July 16, 2004. 

 On August 17, 2004, the defendant filed an answer to the Complaint and a Motion to

Dismiss the adversary proceeding. After notice, a hearing was held on September 1,

2004, on the Complaint and the Motion to Dismiss. Appearing were Mr. Barnes and Mr.

Robert Keller for the defendant. The Motion to Dismiss was submitted on the

arguments of counsel and the pleadings.

The Court entered its opinion and order on September 14, 2004, denying the

Motion to Dismiss and giving the plaintiff additional time to file an amended complaint. 

The Court scheduled a status conference for October 27, 2004, on the plaintiff’s

amended complaint, if filed, and on the Motion for Relief from the Automatic Stay filed

in the main case.

On September 27, 2004, the plaintiff filed its Amended Complaint and a Brief

and Memorandum of Law in Support of Creditor’s Complaint. The defendant filed an

Answer on October 4, 2004. The hearing was held on October 27, 2004. Appearing

were Mr. Barnes and Mr. Johnson. The Court gave the parties until December 14,

2004, to file briefs and the matter was submitted on the argument of counsel and the

pleadings.

The Court explained that it would address the initial issue of whether relief from

stay should be granted to allow the state court complaint to go forward.

On December 14, 2004, the defendant filed a Brief in Support of Motion to

Dismiss, and the plaintiff filed a Brief and Memorandum of Law.

II. Limited Findings of Fact and Contentions

The plaintiff filed a complaint against the defendant in state court on March 2,

2004, for fraud and breach of contract. The plaintiff demanded a jury trial in the state

court. Its state court complaint contains essentially the same fraud allegations as the

nondischargeability complaint filed here.

The debtors filed the pending case on April 15, 2004. The Chapter 7 trustee

filed a report of no assets on May 25, 2004.

In its bankruptcy complaint, the plaintiff alleges that the debtor contracted with

the plaintiff to purchase a vehicle but did not have the ability to pay for the vehicle. The

complaint alleges that subsequently the debtor failed to pay for the vehicle and that the

plaintiff has been harmed. The plaintiff contends that the liability and damages portion

of this matter should be tried in state court through its Motion for Relief from the

Automatic Stay and asks for permission to do so. The plaintiff argues that this Court

should find that the debt the defendant owes for the purchase of the vehicle should not

be discharged for fraud pursuant to section 523(a)(2) of the Bankruptcy Code.

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Wood v. Fielder (In re Wood), 548 F.2d 216 (8th Cir. 1977); Goya Foods, Inc. v. 1

Unanue-Casal (In re Unanue-Casal), 159 B.R. 90 (D.P.R. 1993), aff’d, 23 F.3d 395 (1 Cir. st

1994); Universal Life Church, Inc. v. United States (In re Universal Life Church, Inc.), 127 B.R.

453 (E.D. Cal. 1991), aff'd, 965 F.2d 777 (9th Cir. 1992); Murray v. On-Line Business Systems,

Inc. (In re Revco D.S., Inc.), 99 B.R. 768 (N.D. Ohio 1989); Broadhurst v. Steamtronics Corp.,

48 B.R. 801 (D. Conn. 1985); Harris v. Fidelity and Deposit Co. of Maryland (In re Harris), 7

B.R. 284 (S.D. Fla. 1980); Edmondson v. America West Airlines, Inc. (In re America West

Airlines), 148 B.R. 920 (Bankr. D. Ariz. 1993); In re Anton, 145 B.R. 767 (Bankr. E.D.N.Y.

1992); Murray Indus., Inc. v. Aristech Chemical Corp. (In re Murray Indus., Inc.), 121 B.R. 635

(Bankr. M.D. Fla. 1990); In re Saunders, 103 B.R. 298 (Bankr. N.D. Fla. 1989); In re Parkinson,

102 B.R. 141 (Bankr. C.D. Ill. 1988); In re Todd Shipyards Corp., 92 B.R. 600 (Bankr. D.N.J.

1988); Covert v. McGuirt (In re McGuirt), 61 B.R. 974 (Bankr. S.D. Tex. 1986); In re Newport

Offshore, Ltd., 60 B.R. 348 (Bankr. D.R.I. 1986); In re Yaffe, 58 B.R. 26 (Bankr. D.C. 1986);

Wilson v. Unioil (In re Unioil), 54 B.R. 192 (Bankr. D. Col. 1985); In re Westwood Broadcasting,

Inc., 35 B.R. 47 (Bankr. D. Haw. 1983); Metro Mill & Casework v. Fielder (In re Fielder), 34 B.R.

602 (Bankr. D. Col. 1983); Hoenig v. Hoffman (In re Hoffman), 33 B.R. 937 (Bankr. W.D. Okl.

1983). Congress intended that the stay be lifted to allow proceedings to continue in forums

other than the bankruptcy court under appropriate circumstances. "[I]t will often be more

appropriate to permit proceedings to continue in their place of origin, when no great prejudice to

the bankruptcy estate would result, in order to leave the parties to their chosen forum and to

4

The defendant contends that this Court should hear all matters and that the

pending complaint should be dismissed.

The parties represent that no appreciable work has been completed in the state

court matter and the pleadings confirm that agreement.

III. Issue

The issue is does cause exist for granting relief from the stay to allow the plaintiff

to continue with its state court complaint.

IV. Conclusions of Law

The filing of the debtors’ bankruptcy petition under Chapter 7 of the Bankruptcy

Code on April 15, 2004, stayed the continued prosecution of the plaintiff’s state court

complaint against the debtor. The debtor now requests relief from that stay for the

purpose of continuing its prosecution against the debtor.

Section 362(d) of the Bankruptcy Code provides that the bankruptcy court may

grant relief from the automatic stay for "cause." 11 U.S.C. § 362(d). "Cause" for

granting relief from the stay may exist if the equities in a particular case dictate that a

lawsuit, or some other similar pending action, should proceed in a forum other than the

bankruptcy court for the purpose of liquidating the claim on which the lawsuit is

premised. The issue in this proceeding then is whether "cause" to lift the stay exists 1

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relieve the bankruptcy court from any duties that may be handled elsewhere." H.R. Rep. No.

595, 95th Cong., 1st Sess. 341 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 50 (1978),

reprinted in 1978 U.S.C.C.A.N. 5787, 5836, 6297. Congress's concept of "cause" is further

explained as follows:

A desire to permit an action to proceed to completion in another tribunal may

provide another cause. Other causes might include the lack of any connection

with or interference with the pending bankruptcy case. For example, a divorce or

child custody proceeding involving the debtor may bear no relation to the

bankruptcy case. In that case, it should not be stayed. A probate proceeding in

which the debtor is the executor or administrator of another's estate usually will

not be related to the bankruptcy case, and should not be stayed. Generally

proceedings in which the debtor is a fiduciary, or involving postpetition activities

of the debtor, need not be stayed because they bear no relationship to the

purpose of the automatic stay, which is debtor protection from his creditors. The

facts of each request will determine whether relief is appropriate under the

circumstances.

H.R. Rep. No. 595, at 340-344.

5

under Section 362(d).

In prior cases this Court has applied a ten-part test to determine whether actions

may be, or should be, litigated in state court. That test is appropriate here.

A. Ten-part Test

The practical questions before this Court are, should the state court lawsuit

continue in the forum in which it originated or should the plaintiff be required to proceed

solely in the bankruptcy court. To answer these questions, this Court must balance the

hardship to the plaintiff, if it is not allowed to continue the lawsuit, against the potential

prejudice to the debtor, the bankruptcy estate, and to other creditors, if the plaintiff is

allowed. 

To aid in balancing these equities, this Court has considered certain factors. 

Those include: (1) trial readiness of the proceeding in the non-bankruptcy forum; (2)

judicial economy; (3) the resolution of preliminary bankruptcy issues; (4) costs of

defense or other potential burden to the debtor or the bankruptcy estate; (5) the

creditor's chances of success on the merits; (6) specialized expertise of the

non-bankruptcy forum; (7) whether the damages or claim that may result from the nonbankruptcy proceeding may be subject to equitable subordination under Section 510(c);

(8) the extent to which trial of the case in the non-bankruptcy forum will interfere with

the progress of the bankruptcy case; (9) the anticipated impact on the movant, or other

non-debtors, if the stay is not lifted; and, (10) the presence of third parties over which

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See this Court’s opinion in In re Tricare Rehabilitation Sys., Inc., 181 B.R. 569, 575 2

(Bankr. N.D. Ala. 1994). See also Goya Foods, Inc. v. Unanue-Casal (In re Unanue-Casal),

159 B.R. at 100; Edmondson v. America West Airlines, Inc. (In re America West Airlines), 148

B.R. at 923; In re Anton, 145 B.R. at 770; Murray Indus., Inc. v. Aristech Chemical Corp. (In re

Murray Indus., Inc.),121 B.R. at 637; In re Parkinson, 102 B.R. at 142; In re Todd Shipyards

Corp., 92 B.R. at 602; Wilson v. Unioil (In re Unioil), 54 B.R. at 195; In re Westwood

Broadcasting, Inc., 35 B.R. at 48; Hoenig v. Hoffman (In re Hoffman), 33 B.R. at 941.

Numerous considerations have influenced the balancing operation described in the

many published bankruptcy opinions on this subject. Those considerations have been stated

and restated in many forms and fashions, but are readily listed, and consistently and routinely

followed. This Court previously attempted to catalogue and discuss those considerations in In

re Tricare Rehabilitation Sys., Inc., 181 B.R. 569, 573-574 (Bankr. N.D. Ala. 1994). The factors

listed have been gleaned from the often cited cases of In re Johnson, 115 B.R. 634, 636

(Bankr. D. Minn. 1989), and In re Curtis, 40 B.R. 795 (Bankr. D. Utah 1984). In Tricare, the

Court combined and reconciled the list of factors contained in Johnson with the factors listed in

Curtis, and discussed those factors within the context of the facts presented in that particular

case. To that discussion, the Court would make an additional observation. The factor listed in

Curtis as number 12 relating to the anticipated impact on the movant, or other nondebtors, of

the bankruptcy court's decision to lift the stay, or not, although it has no corresponding Johnson

factor per se, is implicit in any "weighing of the equities" exercise and therefore an important

consideration in every case. In re Curtis, 40 B.R. at 799-800.

In re Tricare Rehabilitation Sys., Inc., 181 B.R. at 575. See also Goya Foods, Inc. v. 3

Unanue-Casal (In re Unanue-Casal), 159 B.R. at 94; In re Anton, 145 B.R. at 769; In re Todd

Shipyards Corp., 92 B.R. at 602 n. 2; Wilson v. Unioil (In re Unioil), 54 B.R. at 193.

In re Tricare Rehabilitation Sys., Inc., 181 B.R. at 575. See also Goya Foods, Inc. v. 4

Unanue-Casal (In re Unanue-Casal), 159 B.R. at 95; In re Anton, 145 B.R. at 769; In re Todd

Shipyards Corp., 92 B.R. at 602; Wilson v. Unioil (In re Unioil), 54 B.R. at 194; Hoenig v.

Hoffman (In re Hoffman), 33 B.R. at 941.

6

the bankruptcy court lacks jurisdiction.2

The party requesting relief from the automatic stay must first, of course, present

at least a prima facie showing of "cause." The burden is then on the party opposing 3

the motion for relief to show that if a movant is allowed to proceed against a debtor in

state court, that there would be prejudice to the debtor, to the bankruptcy estate, or to

other creditors.4

The following ten factors assist in resolving the pending matters.

1. Trial Readiness

The plaintiff filed its state court complaint on March 2, 2004. The debtors filed

their bankruptcy petition on April 15, 2004. The plaintiff filed the pending proceeding on

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In re Tricare Rehabilitation Sys., Inc., 181 B.R. at 575. See also Goya Foods, Inc. v.

5

Unanue-Casal (In re Unanue-Casal), 159 B.R. at 97-98; Universal Life Church, Inc. v. United States (In re

Universal Life Church, Inc.), 127 B.R. at 455; Harris v. Fidelity and Deposit Co. of Maryland (In re Harris),

7 B.R. at 286; In re Anton, 145 B.R. at 770; Edmondson v. America West Airlines, Inc. (In re America

W est Airlines), 148 B.R. at 925; Murray Indus., Inc. v. Aristech Chemical Corp. (In re Murray Indus., Inc.),

121 B.R. at 637; In re Saunders, 103 B.R. at 299; Mattingly v. Newport Offshore, Ltd. (In re Newport

Offshore, Ltd.), 59 B.R. at 285; In re Yaffe, 58 B.R. at 28; W ilson v. Unioil (In re Unioil), 54 B.R. at 195; In

re Westwood Broadcasting, Inc., 35 B.R. at 49.

The Court emphasizes, may be necessary. See the discussion in item number 6

6

below.

7

July 16, 2004. It is clear that no appreciable work has been completed by either the

state court or this Court and that neither complaint is ready for trial. The state court is

therefore in no better procedural posture to try this case more expeditiously or

expediently than this Court.

This factor weighs against granting the relief from the stay.

2. Judicial Economy

Principles of judicial economy require that, without good reason, judicial

resources should not be spent by duplicitous litigation and that a lawsuit should be tried

only once, if one forum with jurisdiction over all parties is available to dispose of all

issues relating to the lawsuit. Often, a state court is in the best posture to provide a 5

complete consideration of the issues of liability and damages, among all the parties to a

case, and to do so while guaranteeing to each the constitutional rights of due process

and a trial by jury. This Court of course must decide whether any debt owed is

discharged in bankruptcy. If this Court does not try all matters, two trials may be

necessary.6

This factor weighs against granting the relief from the stay.

3. Resolution of Preliminary Bankruptcy Issues

Since the resolution of the litigation will have no impact on the administration of

the bankruptcy estate or any other party to this bankruptcy proceeding, other than those

directly involved in the state court litigation, there are no preliminary bankruptcy issues

to be resolved before the stay may be lifted.

This factor is in favor of granting the relief from stay. 

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In re Tricare Rehabilitation Sys., Inc., 181 B.R. at 574 n. 10. See also Goya Foods, 7

Inc. v. Unanue-Casal (In re Unanue-Casal), 159 B.R. at 98; Murray v. On-Line Business

Systems, Inc. (In re Revco D.S., Inc.), 99 B.R. at 777; Broadhurst v. Steamtronics Corp., 48

B.R. at 802-03; Edmondson v. America West Airlines, Inc. (In re America West Airlines), 148

B.R. at 925; In re Parkinson, 102 B.R. at 142; Mattingly v. Newport Offshore, Ltd. (In re

Newport Offshore, Ltd.), 59 B.R. 283, 286 (Bankr. D.R.I. 1986); cf. Universal Life Church, Inc.

v. United States (In re Universal Life Church, Inc.), 127 B.R. at 455 (relief from stay granted to

allow liquidation of tax claim in state tax court).

8

4. Costs of Defense or Other

Potential Burden to the Debtor or to the Estate

There is no evidence that the costs to the debtors of defending the state court

action will be substantially more if the stay is lifted, than if the stay is not lifted. The

preparation and trial time and expenses of both would be about equal under either

situation.

This factor is in favor of granting the relief from stay.

5. The Creditor's Chances 

of Success on the Merits

No evidence was presented or representations were made by the movant

regarding the chances of success on the merits in the state court action. Without

knowing the evidence the state court will hear, it is not possible for this Court to predict

an outcome.

This factor is neutral.

6. Specialized Expertise of

the Non-Bankruptcy Forum

All of the issues regarding liability and damages in this matter strictly involve

Alabama state law. The state court judge is most familiar with the law that forms the

framework for the resolution of those issues. The law regarding dischargeability is 7

however, federal law. The relationship of one to the other demonstrates why this factor

weighs in favor of the relief requested.

a. Bankruptcy Fraud Law and State Fraud Law

(1) Section 523(a)(2)(A)

Section 523(a)(2)(A) of the Bankruptcy Code makes nondischargeable debts for

money, property, services or credit obtained by a debtor by "false pretenses, a false

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9

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). To have a debt declared

nondischargeable pursuant to 523(a)(2)(A), a creditor must prove that “the debtor made

a false statement with the purpose and intention of deceiving the creditor; the creditor

relied on such false statement; the creditor's reliance on the false statement was

justifiably founded; and the creditor sustained damage as a result of the false

statement.” Fuller v. Johannessen (In re Johannessen), 76 F.3d 347, 350 (11 Cir.

th

1996). A false statement made without knowledge of its truth or falsity, in reckless

disregard of the truth, is treated the same under 523(a)(2)(A) as a false statement

made with knowledge of its falsity, and will suffice equally to render the resulting debt

nondischargeable. “[R]eckless disregard for the truth or falsity of a statement

constitutes a "false representation" under § 523(a)(2)(A) of the Bankruptcy Code.” 

Birmingham Trust Nat’l Bank v. Case, 755 F.2d 1474, 1476 (11 Cir. 1985). th

(2) Section 523(a)(2)(B)

Pursuant to section 523(a)(2)(B) of the Bankruptcy Code, debts are

nondischargeable for:

money, property, services or an extension, renewal, or refinancing of

credit, to the extent obtained by use of a statement in writing that is

materially false; respecting the debtor's or an insider's financial condition;

on which the creditor to whom the debtor is liable for such money,

property, services, or credit reasonably relied; and that the debtor caused

to be made or published with intent to deceive ....

11 U.S.C. § 523(a)(2)(B)(emphasis added). 

(3) Interplay between Sections 523(a)(2)(A) and 523(a)(2)(B)

Section 523(a)(2)(A) makes nondischargeable a debt for money, property,

services, or an extension, renewal or refinancing of credit, to the extent obtained by

"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)

(emphasis added). Section 523(a)(2)(B) makes nondischargeable a debt for money,

property, services, or an extension, renewal or refinancing of credit, to the extent

obtained by, “use of a statement in writing (I) that is materially false; (ii) respecting the

debtor's or an insider's financial condition; (iii) on which the creditor to whom the debtor

is liable for such money, property, services, or credit reasonably relied; and (iv) that the

debtor caused to made or published with the intent to deceive.” 11 U.S.C.

§ 523(a)(2)(B) (emphasis added).

Expressly excluded from the operation of Section 523(a)(2)(A) are statements

respecting a debtor's financial condition. And section 523(a)(2)(B) expressly relates

only to written statements respecting a debtor's financial condition. Consequently, a

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The Supreme Court of Alabama stated long ago: 8

One who is negotiating a trade must not recklessly or even innocently assert that

as a fact which is untrue if such asserted fact be to any extent an inducement to

the other party to enter into the contract. Honest belief in the truth of the

statement of such fact, while it exculpates from moral fault, does not relieve from

the legal liability to make it good. It is as much a fraud to affirm as true that which

is untrue, though not known to be so, as it is to assert what is untrue and known

to be so. 

Prestwood v. Carlton, 162 Ala. 327, 50 So. 254, 257 (1909).

10

false oral statement made by a debtor about his financial condition cannot create or

result in a debt which is not dischargeable under either section. And a false written

statement not respecting the debtor’s or an insider’s financial condition cannot create or

result in a debt which is nondischargeable under section 523(a)(2)(B).

(4) Alabama “fraud” law

Section 6-5-101 of the Code of Alabama 1975 provides, “Misrepresentations of a

material fact made willfully to deceive, or recklessly without knowledge, and acted on by

the opposite party, or if made by mistake and innocently and acted on by the opposite

party, constitute legal fraud.” Under section 6-5-101, a false representation, even if

made by mistake or innocently, is actionable and entitles a plaintiff to compensatory

damages. Hall Motor Co. v. Furman, 285 Ala. 499, 504, 234 So. 2d 37, 41 (1970). 

Fraudulent intent, or an intent to deceive, is not essential to a recovery under that

section. Standard Oil Co. v. Johnson, 276 Ala. 578, 581, 165 So. 2d 361, 364 (1964). 

Neither is knowledge by the defendant of the falsity of his or her representations. First

Nat'l Bank of Auburn v. Dowdell, 275 Ala. 622, 626, 157 So. 2d 221, 225 (1963); Barrett

v. Hanks, 275 Ala. 383, 385, 155 So. 2d 339, 342 (1963). The good faith of a party in

making what proves to be a misrepresentation is immaterial as to the question of

whether there was an actionable fraud if the other party acted on the misrepresentation

to his detriment. Smith v. Reynolds Metals Co., 497 So. 2d 93, 95 (Ala. 1986).

Consequently, the mere assertion of that to be true which is not true, although believed

to be true, when made to be relied on and which is relied on to the injury of a party

misled thereby, may result in the imposition of liability for compensatory damages.

Hudson v. Moore, 239 Ala. 130, 133, 194 So. 147, 149 (1940); Hartselle Real Estate &

Ins. Co. v. Atkins, 426 So. 2d 451, 453 (Ala. Civ. App. 1983).8

Intentional fraud, which, unlike innocent or mistaken fraud, may entitle the party

deceived to receive punitive damages, is elaborated upon further in Code of Ala. 1975,

§§ 6-5-103 and 6-5-104. Section 6-5-103 provides:

Willful misrepresentation of a material fact made to induce another

to act, and upon which he does act to his injury, will give a right of action. 

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11

Mere concealment of such a fact, unless done in such a manner as to

deceive and mislead, will not support an action. In all cases of deceit,

knowledge of a falsehood constitutes an essential element. A fraudulent

or reckless representation of facts as true, which the party may not know

to be false, if intended to deceive, is equivalent to a knowledge of the

falsehood.

Code of Ala. 1975, § 6-5-103. And section 6-5-104 provides:

(a) One who willfully deceives another with intent to induce him to

alter his position to his injury or risk is liable for any damage which he

thereby suffers.

(b) A deceit within the meaning of this section is either:

(1) The suggestion as a fact of that which is not true by one who

does not believe it to be true;

(2) The assertion as a fact of that which is not true by one who has

no reasonable ground for believing it to be true;

(3) The suppression of a fact by one who is bound to disclose it or

who gives information of other facts which are likely to mislead for want of

communication of that fact; or 

(4) A promise made without any intention of performing it.

Code of Ala. 1975, § 6-5-104.

Sections 6-5-103 and 6-5-104 cumulatively define the mens rea and delineate

the conduct necessary to a cause of action for a willful or intentional deception. To

satisfy the mens rea requirement of the two statutes, a defendant must have (1)

purposely deceived the plaintiff with (2) the intent to induce the plaintiff to act or alter

position. The conduct made actionable by the statutes includes (1) intentional

misrepresentations (a false statement made by someone who knows the statement to

be false); (2) reckless misrepresentations (a false statement made recklessly by

someone who may not know the statement to be false or someone who has no

reasonable grounds for believing it to be true); (3) fraudulent concealment (nondisclosure by someone who has a duty to disclose); and (4) promissory fraud (a

promise made by someone who has no intention of performing the promise).

Regardless of whether a representation was made willfully, recklessly, or

mistakenly, in order to obtain a judgment based on fraud, a plaintiff must prove that the

defendant made a false representation; that the false representation concerned a

material existing fact; that the plaintiff relied upon the false representation; and that the

plaintiff was damaged as a proximate result of his or her reliance upon the false

representation. George v. Associated Doctors Health & Life Ins. Co., 675 So. 2d 860,

862 (Ala. 1996). Where promissory fraud is involved, the plaintiff must prove two

additional elements: (1) that the false promise was made with a present intent to

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Torres was overruled in Hickox v. Stover, 551 So.2d 259 (Ala. 1989), but was 9

reinstated in Foremost Ins. Co. v. Parham, 693 So.2d 409 (Ala. 1997).

The Supreme Court of Alabama explained in that case:

10

where statements are made of facts, especially where they concern matters

which may be assumed to be within the knowledge of the party making them, the

party to whom they are made has a right to rely upon them. In the absence of

knowledge of his own which would arose suspicion, he is not bound to make

inquiries or examine for himself. A party asserting facts cannot complain that the

other took him at his word. “Positive representation of a fact cannot be

counteracted by the implication that the party might have ascertained to the

contrary; under such circumstances he need not institute an independent

investigation.” McDonald v. Pearson, 114 Ala. 638, 21 South. 534.

12

deceive and (2) that, at the time the false promise was made, the defendant intended

not to perform. Valley Properties, Inc. v. Strahan, 565 So. 2d 571, 576 (Ala. 1990).

A misrepresentation, to be actionable, must be one of a material fact. Lawson v.

Cagle, 504 So. 2d 226, 227 (Ala. 1987). A fact is considered “material” if it is one that

is likely to induce the party to whom the representation is made to take action. Havens

v. Trawick, 564 So. 2d 917, 920 (Ala. 1990). But the misrepresentation need not have

been the sole motivation for the plaintiff’s entering into a contract. It is sufficient if the

misrepresentation materially contributed to the plaintiff’s making the contract and was of

such a character that the plaintiff would not have consummated the contract, had he or

she known the falsity of the statement. Bank of Red Bay v. King, 482 So. 2d 274, 282

(Ala. 1985).

A plaintiff must show that reliance on the misrepresentation was reasonable

under the circumstances. Foremost Ins. Co. v. Parham, 693 So.2d 409, 421 (Ala.

1997). Where a party has reason to doubt the truth of a representation or is informed

of the truth before acting, there is no right to act thereon. M.J.M., Inc. v. Casualty

Indem. Exch., 481 So. 2d 1136, 1141 (Ala. 1985). "If the purchaser blindly trusts,

where he should not, and closes his eyes where ordinary diligence requires him to see,

he is willingly deceived, and the maxim applies, 'volunti non fit injuria '." Torres v. State

Farm Fire & Cas. Co., 438 So.2d 757, 759 (Ala. 1983) quoting Munroe v. Pritchett, 16

Ala. 785, 789 (1849). If the circumstances surrounding the pronouncement of the 9

representation would have aroused suspicion as to its validity in the mind of a

reasonable person, a plaintiff cannot be said to have reasonably relied upon the

misrepresentation. Holman v. Joe Steele Realty, Inc., 485 So.2d 1142, 1144 (Ala.

1986); Cook v. Brown, 393 So. 2d 1016, 1019 (Ala. Civ. App. 1981). But absent

suspicious circumstances, or patent falsity, a plaintiff has no duty to affirmatively

investigate and determine for himself whether or not the defendant is telling the truth. 

Shahan v. Brown, 167 Ala. 534, 52 So. 737 (1910).10

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52 So. at 738.

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Punitive damages may not be awarded if liability is imposed based upon

innocent or mistaken fraud. Therefore, while the good faith of a party in making a

misrepresentation is immaterial to the determination of whether or not a fraud has been

committed if another party has acted on the misrepresentation to his or her injury, it is

material to the question of damages. Hall Motor Co. v. Furman, 285 Ala. 499, 503, 234

So. 2d 37, 40 (1970). 

Punitive damages, by statute, may be awarded only “where it is proven by clear

and convincing evidence that the defendant consciously or deliberately engaged in

oppression, fraud, wantonness, or malice with regard to the plaintiff.” Code of Ala.

1975, § 6-11-20(a). “Fraud” is defined particularly in the statute as, “An intentional

misrepresentation, deceit, or concealment of a material fact the concealing party had a

duty to disclose, which was gross, oppressive, or malicious and committed with the

intention on the part of the defendant of thereby depriving a person or entity of property

or legal rights or otherwise causing injury.” Code of Ala. 1975, § 6-11-20(b)(1).

Absent from the statutory list of types of actions that will support an award of

punitive damages is an action for “breach of contract.” “A claim for breach of contract

will not support an award of punitive damages.” Nolin v. Dismukes, 554 So.2d 1019,

1020 (Ala. 1989). And the statute was not designed to create a right to punitive

damages which did not otherwise exist, or to expand the right to punitive damages to

actions which would not have supported such a claim, prior to the statutes’ enactment.

“Nothing contained in this article is to be construed as creating any claim for punitive

damages which is not now present under the law of the State of Alabama.” Code of

Ala. 1975, § 6-11-20(a).

As the above demonstrates, a judgment can be awarded in state court for fraud

where the fraud committed does not rise to the level of nondischargeability as required

under the stricter bankruptcy law standard. However, if the facts support a judgment

that would qualify for the stricter nondischargeability standard, this Court would be

required to apply that judgment in a nondischargeability decision in this Court.

(5) Collateral Estoppel

Collateral estoppel would preclude the retrial of factual issues actually tried and

determined in the state court. See this Court’s opinion in Angus v. Wald (In re Wald),

208 B.R. 516 (Bankr. N.D. Ala. 1997). The state court record must, however, be clear

as to what issues were actually tried and determined. The dischargeability issue of

fraud is governed by federal law and this Court is reluctant to relinquish the

determination of that issue since there is a chance that the state court record will be

unclear or that the jury will return a general verdict for compensatory damages and not

punitive damages. If that occurs, then additional testimony and evidence may be

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The defendant contends that the plaintiff waived its right to a jury trial. This order does

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not address that issue.

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required to clarify the state court record. If testimony and evidence is required to clarify

the state court record then any judicial economy that may be realized by sending the

case to state court may be eviscerated.

This factor weighs in favor of granting the relief from the stay.

7. Whether the Damages or Claim that may

Result from the Non-Bankruptcy Proceeding

may be Subject to Equitable Subordination

under 11 U.S.C. § 510(c)

The case is a “no-asset” Chapter 7 case.

This factor is neutral.

8. The Extent to Which Trial of the

Case in the Non-Bankruptcy Forum Will

Interfere With the Progress of the Bankruptcy Case

The bankruptcy case cannot be closed until the instant adversary proceeding is

resolved. If relief from the stay is granted, the section 523 portion of the adversary

proceeding will not be resolved until after the trial of the state court lawsuit. Since the

case in this Court is a “no asset” case, delay that will result from awaiting the outcome

of the state court suit will have no impact on the administration of the bankruptcy estate.

Awaiting the outcome of the state court suit will, however, delay the closing of the

bankruptcy case, but because there is no issue in the proceeding relating to the

debtor’s general discharge under section 727 of the Bankruptcy Code, it will not delay

entry of that discharge. Because this case may not be closed is of no legal or practical 

consequence. 

This factor weighs in favor of granting the relief from stay.

9. The Anticipated Impact on the Movant

and other Parties if the Stay is Not Lifted

If the relief from the stay is denied, the plaintiff may not be afforded its jury trial. 

This factor weighs in favor of granting the relief from stay.11

10. The Presence of Third Parties Over Which

 the Bankruptcy Court Lacks Jurisdiction

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15

There are no third parties.

This factor is neutral.

B. Conclusion

Other than the factors that are not neutral, five favor the relief requested and two

are against. But as is almost always true, some factors are more important than others. 

Here those factors are number 6, the expertise of the non-bankruptcy forum in the area

of fraud, and number 9, the impact on the movant’s right to a jury trial if the stay is not

lifted. Both of those factors weigh heavily in favor of the relief requested.

Based on the above-factors, the Court finds that there is cause to grant relief

from stay. The liability and damages portion of this proceeding should be resolved in

the state court. If the state court finds that the debtor is liable for damages in favor of

the plaintiff, the parties must return to this Court for a determination of whether that

debt is discharged in this case.

V. Order

It is ORDERED, ADJUDGED and DECREED that:

1. The Motion for Relief from the Automatic Stay is GRANTED. The matter

before the State Court may proceed

2. The Complaint to determine dischargeability is continued until the State

Court has ruled.

Dated: February 3, 2005 /s/Benjamin Cohen 

BENJAMIN COHEN

United States Bankruptcy Judge

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