United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 02-6049 WA

 

In re: *

*

Loy Claudie Logue and *

Bettina Dian Logue, *

*

Debtors. *

*

Jerome Johnson, * Appeal from the United States

* Bankruptcy Court for the 

Plaintiff-Appellant, * Western District of Arkansas 

*

v. *

*

Loy Claudie Logue and *

Bettina Dian Logue, *

*

Defendants-Appellees. *

 

Submitted: April 29, 2003 

Filed: June 16, 2003

 

Before KRESSEL, Chief Judge, SCHERMER and FEDERMAN, Bankruptcy

Judges

SCHERMER, Bankruptcy Judge
1

The Honorable Robert F. Fussell, United States Bankruptcy Judge for the

Eastern and Western Districts of Arkansas.

2

Jerome Johnson (“Johnson”) appeals from the bankruptcy court1 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 McIlroy

Bank and Trust (“Bank”) in the amount of $38,085.51 with a maturity date of

May 21, 2001. Johnson co-signed the promissory note. The indebtedness was

secured by 100 head of cattle and two cattle trailers. The security agreement

contained a sales restriction which required the Debtor to use the Washington County

Livestock Auction (the “Designated Auction”) if he desired to sell any of the secured

cattle.

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
2

Johnson filed the complaint against the Debtor and his co-debtor wife. The

bankruptcy court dismissed the wife at trial.

3

not turn over any cattle at that time. The Bank then made demand on Johnson who

paid off the note in the amount of $38,865.05 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 petition

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 Johnson

obtained possession of the remaining cattle on December 28, 2001, pursuant to order

of the Bankruptcy Court.

Johnson filed a complaint seeking a determination that 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 determined 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 of 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), 95 F.3d 706, 710 (8th Cir. 1996); Johnson v. Fors (In re Fors), 259 B.R.

131, 135 (B.A.P. 8th Cir. 2001). Questions of fact are reviewed under the clearly
4

erroneous standard and are not to be reversed unless after reviewing the record the

appellate court is left with the definite and firm conviction that a mistake has been

committed. Waugh, 95 F.3d at 711; Barclays Am./Bus. Credit, Inc. v. Long (In re

Long), 774 F.2d 875, 877 (8th Cir. 1985); Fors, 259 B.R. at 135. Due deference shall

be given to the opportunity of the trier of fact to judge the credibility of the witnesses.

Fors, 259 B.R. at 136; Tri-County Credit Union v. Leuang (In re Leuang), 211 B.R.

908, 909 (B.A.P. 8th Cir. 1997). Where the evidence is susceptible to two permissible

views, the trial court’s choice between the two cannot be clearly erroneous. Fors, 259

B.R. at 135-36. If the trial court’s account of the evidence is plausible in light of the

entire record, an appellate court cannot substitute its judgment for that of the trier of

fact. Id. at 136.

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, 523 U.S. 57, 61, 118 S.Ct. 974, 977

(1998); Hobson Mould Works, Inc. v. Madsen (In re Madsen), 195 F.3d 988, 989 (8th

Cir. 1999); Fischer v. Scarborough (In re Scarborough), 171 F.3d 638, 641 (8th Cir.

1999), cert. denied, 528 U.S. 931, 120 S.Ct. 330 (1999); Johnson v. Fors (In re Fors),

259 B.R. 131, 136 (B.A.P. 8th Cir. 2001). The injury, and not merely the act leading

to the injury, must be deliberate or intentional. Geiger, 523 U.S. at 61-62, 118 S.Ct.

977. Malice requires conduct which is targeted at the creditor, at least in the sense

that the conduct is certain or almost certain to cause financial harm. Madsen, 195

F.3d at 989; Scarborough, 171 F.3d at 641; Waugh v. Eldridge (In re Waugh), 95

F.3d 706, 711 (8th Cir. 1996); Barclays AM./Bus. Credit, Inc. v. Long (In re Long),

774 F.2d 875, 881 (8th Cir. 1985); Fors, 259 B.R. at 136. 

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
5

an injury which is both willful and malicious. Grogan v. Garner, 489 U.S. 279, 111

S.Ct. 654 (1991); Scarborough, 171 F.3d at 641; Fors, 259 B.R. at 136. Here, the

Bankruptcy Court determined that Johnson established that the debt was for a willful

injury but failed to establish that it was for a malicious injury. The issue of

willfulness was not appealed. Consequently, the sole issue on appeal is whether the

debt was for a malicious injury.

Malice requires conduct more culpable than that which is in reckless disregard

of the creditor’s economic interests and expectancies. Long, 774 F.2d at 881. The

debtor’s knowledge that he or she is violating the creditor’s legal rights is insufficient

to establish malice absent some additional aggravated circumstances. Conduct which

is certain or almost certain to cause financial harm to the creditor is required. While

intentional harm may be difficult to establish, the likelihood of harm in an objective

sense may be considered in evaluating intent. Id.

In the context of the breach of a security agreement, a willful breach is not

enough to establish malice. Phillips, 882 F.2d at 305; Long, 774 F.2d at 882. As the

Eighth Circuit Court of Appeals stated:

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 one, to keep a

business afloat, malice may not necessarily be inferred from the debtor’s conduct.

Phillips, 882 F.2d at 305; Long, 774 F.2d at 882.
6

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 rather 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 context. The Debtor produced cancelled checks and

receipts accounting for most but not all of the sales proceeds. Johnson did not present

any evidence that the Debtor used the sales proceeds other than in conjunction with

his business. The Bankruptcy Court found that the amount for which the Debtor

could not account was de minimis.

The 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 render the

actions malicious. Phillips, 882 F.2d at 305; Long, 774 F.2d at 882. Furthermore, a

debtor’s inability to account for every penny of the proceeds does not necessarily

equate to malice. Here the Debtor explained the use of the proceeds and accounted

for most of the money with documentary evidence. Additionally, the Debtor’s pattern

of selling the cattle in batches bolsters the Debtor’s assertions that he was attempting

to maximize proceeds and was using the proceeds as needed to maintain the

remaining herd.

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 evidence of lack of malice, the converse is not necessarily true. A

lack of diligent efforts to obtain alternate financing is not necessarily evidence of

malice 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
7

on September 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 be evidence of an intent, albeit unfulfilled, to benefit the

creditor. Long, 774 F.2d at 882. 

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

concluded 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 discharge pursuant to 11 U.S.C. § 523(a)(6). Accordingly, we

AFFIRM.

A true copy.

Attest:

CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE

EIGHTH CIRCUIT