EL ECTRONI C CI TATI ON: 14 FE D App. 0001P (6th Cir.) File Na me: 14b0001p.06

BA NK RU P TC Y A P P ELLA TE P AN EL OF THE SI XT H C IR CU IT
I n r e : DE AN R

. BR AD L E Y ; C YN T HIA E. BRADL EY,
De bto rs
.

______________________________________ KRAUS ANDERSON CAPI TAL , I NC. , Pla int if f- Ap pe lla nt,

v . DEAN R. B RADL EY ,

Def endant- Appellee

.

______________________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) No. 13-8010

Appea l from the United States B ankruptc y Court for the Norther

n District of Ohio at Akr on
. No. 10-55621; Adv. No. 11-5082

. Submit ted : November

5, 2013
Dec ided and F iled: March 26, 2014
Be fore : GEORGE W. EMERSON, J r., GUYR. HUMPHREY and C. KATHRYN PRESTON , B ank ru ptc y Ap pe llate Pane l Judg e s.

____________________ CO UN SEL
O N B RI E F: J oseph A. Wentz ell, WENTZ EL LL AW OFF I CE, PL L C, St . Anthony , Minnesota, for Appellant. Micha el J . Moran, GI BSON & L OWRY, Cuy ahog a F alls, Ohio, for Appe llee.- 2- ____________________ OP IN ION

____________________ GEORG E W. EMERSON, Jr. , Ba nkruptcy Appellate Pane l J udg e.
Kra us Anderson Capital, Inc. (“ L ender ”) appea ls the decision of the B ankruptc y Court deter mining that the de bt owed by Dea n R. Bra dley

(“D ebtor” ) is discharg eable . The ad v er s ary complaint asser

ted c auses of

action under 11 U.S.C. § 523(a)(2) (A), ( a)( 4) and ( a)( 6) based on L ender ’s claim that De btor’s fa ilure to remit the proc eeds of the sale of

collater al in brea ch of the terms of c erta in ag ree ments and his false repr esentations reg ardingthe status of the c ollatera l rende r the debt non-discha

rg eable

. L ender

also appe als the B ankruptc y Court’s decision deny

ing its motion to amend and make additional finding s of fa ct pursuant to F eder al Rul e o f Ba n k ruptcy Procedur e 7052. For

the re asons set for

th below, the Panel REVERSES the decision of the B ankruptc y Court holding the de bt owed to L ender d ischarg eable and REMANDS for a dete rminatio n reg ardingthe

a mou nt o f d a ma g e s.

I. ISSU ES ON AP P EAL
Appellant pre sents two issues in this appeal. The pr imary issue i s whether

the B ankruptc y C o u rte r r e d i nd e t e r m i n i n g t h a tt h e d e b to w e d t o L e n d e r s h o u l d

b e h e l d d i s c h ar g e a

b l e i nb an kr

u p t c y. The sec ond issue is whet h er t h e B ankruptc y Court erre d in denying L ender ’s motion to amend or make a dditional findings of f act pur suant to Fe dera l Rule of Ba nkruptcy Procedur e 7052.

II. JU RI SDI CT ION AND STANDARD OF RE VI EW

Th e B ank ru ptc y Ap pe llate Pane l of the Sixth Cir c uit (“ B AP” ) h a s ju

ri sd ic tio n to de c ide thi s
a pp e a l. T he Un ite d St ate s D istri c t Co ur t f or the No rt he rn Di str ic t of

Oh io h a s a

uth or ize d a

pp e a ls t o the B AP, and

no pa rt y ha s ti me ly

e le c te d to have thi s a

pp e a l he ard

by the dis tr ic t c ourt . 2 8 U .S. C. § 1 58 (b )( 6) , ( c )( 1) . A

“ fi na l” or de r o f a

ba nk ru ptc y c ourt may be a pp e a le d b y ri g ht und e r 28 U .S. C. § 158(a) (1). F or purpose s of appe al, an or der is final if it “ends the litigation on the merits and leave s- 3-

nothing f or the c ourt to do but ex ecute the judg ment.” Mi dla nd As ph alt Cor p. v . U nite d S tates, 4 8 9 U. S

. 7 9 4 , 797, 109 S. Ct . 1494, 1497 (1989) ( internal quotations and c itations omi tted). Deter minations of discharg eability are final order s for pur poses of a ppeal. Cash Am. Fin. Servs., Inc

. v. Fox ( In re Fox ), 3 7 0 B. R

. 1 0 4 , 1 0 9 (B

. A. P

. 6 t h C i r. 2 0 0 7 ) ( qu o t i n g He rtz e l v . E du c . Cr e dit

Mg mt

. Corp. ( In re He rtzel ), 329 B .R. 221, 224-25 (B .A.P. 6th Ci r. 2005))

.

Dischar g eability

deter minations present mix ed questions of law and fac t. Hogan v. Ge orge ( In re Ge orge ), 485 B .R. 478, 2013 WL 135274, at *1 (B .A.P. 6th Cir. 2013) (table)

. When a mix ed question of law a

nd fac t arises in t he bankr uptcy context, the reviewingcourt “ must break it down into its constituent parts and a pply t h e ap p ro p riate standa

rd of r eview f

or ea ch par

t.” Bank of Mo ntr e al v . O

ffi c ial Com m. of U

ns e c ur e d Cr e ditor

s ( In re Am. Homepatient, Inc

. ), 420 F.3d 559, 563 (6th Cir. 2005) (c itations omi tted). The appellate court re views conc lusions of law de novo and fac tual deter

minations are r eviewe d under a clea rly err oneous standar d. Van Ake n v. Van Aken ( In re Van Ak en ), 320 B.R. 620, 622 (B .A.P. 6th Cir. 2005)

. “Unde r a de novo standard of revie w, the appe llate cour

t must ‘review q u es t i o ns of law indepe ndent of the ba nkruptcy court’s deter mination.’ ” P h i l l i

p s v . W e iss e rt ( In re Phill ips ), 434 B .R. 475, 482 (B.A .P. 6th C ir. 2010) (c i t i n g Bailey v . Bailey (

In re Bailey ), 254 B .R. 901, 903 (B.A .P. 6th C ir. 2000)). “ A finding of fa ct is clear ly err oneous whe n althoug h there is evidence to support it, the reviewingcourt on the entire evidenc e is le ft with the definite and firm conviction that a mistake has bee n committed.” Riverv iew Trenton R.R. Co. v. DSC, Ltd. ( In re DSC, Ltd. ), 486 F .3d 9 4 0 , 9 4 4 (6t h Cir. 2007) (interna l quotation marks and c itation omit ted).

Co n tr a c t i n te r

p r e tati o n is a matt e r o f la w w h ic h is r e v iewed de novo

. Be nd e r v . Ne we ll W indow Furnishi ngs, Inc. , 681 F .3 d 2 53 , 2 59 (6 th C ir . 2 01 2) ; Rhone-P oulenc Basic Chems. Co. v. Am. Motorists Ins. Co. , 616 A. 2d 11 92 , 1 19 5 ( De l. 1 99 2) . T he de te rm inatio n o f whe the r a c on tr a c t, or a te rm there in, is clear or ambig uous is also a question of law r eviewe d de novo

. Official Comm. of U nsecure d Creditors v. Dow Corning Corp. ( In re Dow Cor ning Corp. ), 45 6 F .3 d 6 68 , 6 76 (6 th Cir. 2006).

The Pane l review s the denial of a motion to amend or m ak e ad d itional findings of f act pu rs u an t t o Fe dera l Rule of Ba nkruptcy Procedur e 7052 under

the abuse of discre tion standard.Al l r e fe re nc e s to do c ke t e ntr ie s are re fe re nc e s to th e Bank rupt c y Court ’s e le c tr on ic c a se 1 docket f or adversar

y proce eding no. 11-5082. All transc ript ref ere nces a re to the tria l conducted on Au g us t 10 , 2 01 2. Re fe re nc e s to e xhibi ts a re the e xhibi ts a dmi tte d at tr ia l.

- 4- Besser v . Sepanak, 478 Fe d. Appx. 1001 (6th C ir. 2012).

Ab us e of dis c re tio n e xists wh e n th e c ourt “ ‘r e lies upon

c le arl y err oneous finding s of fact or whe n it improperly applies the lawor uses an err oneous leg al standard.’ ” Corzin v. Fordu ( In re Fordu ), 209 B.R. 854, 858 (6th Cir. BA P 1997) (citation omitted). I f a trial court’s decision deter

mining discha

rg eability is based on the c orre ct l aw an d fa ct s , t h e c o u rt h a s n o t ab u s edi t s d i s cr et i o ni nd en yi n g a pa rt y ’s mot ion

to a me nd or make a dd iti on a l f

ind ing s o f f

a c t.
Lowr yv . Ni c od

e mu s ( In re Nicode mus ), 497 B .R. 852, 855 (B.A .P. 6th C ir. 2013).

III . F AC TS

On Novembe r 30, 2010, De btor and his wife Cy n t hia E. B radle y , filed a joint petition for relief under chapte r 7 of the Ba nkruptcy Code. Debtor owns Br adley Machine ry , L L C (“Bra dley Machine ry ”), w hich was in the business of selling a nd rentingconstruction equipment. B radle y Machine ry

did not file a bankr

uptcy petition.

On Marc h 21, 2011, L ender filed an ad v er s ary

p ro ce ed i n g a g a ins t D e bto r p ur su ant t o § 523(a) (4) a

nd (a) (6). L ender asser

ts Debtor caused Bra dley

Machine ry

to sell equipment “out of tr us t,” that is, wi tho ut re mittin g the pr oc e e ds of the sa le of c oll a te ra l to L e nd e r. L e nd e r a rgue s th is constituted embezzl ement under § 523(a) (4) a

nd was a

willful and malicious injury under § 523(a) (6). L e n d e r s u

b s e qu e n tl y a me n d e d it s c o mp la in t to a d d a c a u s e o f a c tion unde r § 523(a) (2)( A). The § 523(a) (2)( A) c ause of action is based on a settl ement agr eeme nt rea ched by the par ties after the sale of

some equipment “out of tr ust.” L ender

asser ts that Debtor obtained a

n extension of credit throug h false r epre sentations to L ender reg arding the status of cer tain piece s of its collateral. Kraus-Anderson Capital, Inc. v. Bradley ( In re Bradley ), Adv. Case No. 11- 05082 , ECF. Nos. 36, 43. 1- 5-

Prior to trial, L ender

and Debtor filed three separ ate stipulations of fac t. The fa cts stipulated by the pa rt ie s are a s f

oll ow s:

Def endant owns B radle y

Machine ry , L L C (“B radle y Machine ry ”).
Plaintiff and B radle y

Machine ry

enter ed into vario u s loan and secur ity ag ree ments . . . where by Plaintiff provided financ ing f or Br adley Machine ry ’s purc hase of equipment used in B radle y Machine ry ’s business. The e quipment purcha sed wit h the financ ing from Plaintiff was subjec t to security interests in favor

of Plaintiff.
Def endant pe rsonally

g uara nteed the pe rfor

man ce of

Br adley Machine ry ’s obli gations under the L oan Doc uments pursuant to a written g uara

nty dated January

27, 2005.
I n th e s p r in g o f 2 0 0 8 , B r a d le y M a c h in e r y ’ s b an k r e quired a mod if ic a tio n to the te rm s [of a loa n] and an inc re a se in the mon thl y pa y me nt a mou nt o f B ra dle y

Ma c hin e ry ’s loa

n, wh ic h c aused

c a sh flow problems for

Br adley Machine ry
. B y the summe r o f 2 00 8, B ra dle y Ma c hin e ry

wa s una ble to pay

its bil ls i n the o rd ina

ry c ours e of

bu sin e ss a

nd did no t r e ve a l th is information to Plaintiff.
Second Joi nt Sti pulations, ¶ 4-8, ECF N o. 35.

I n D e c e mbe r 2 00 8, De fe nd ant m e t w ithPla int if f’ s r e pr e senta tiv e s, Carl Carlson and J ames Stephen J arussi, in Def endant’ s office s, and at that meetingDef

end ant informed Plaintiff that he had ca used Br adley Machine ry

to sell certa in equipment subject to Plaintiff’s secur ity interest but did not pa

y the proce eds to Plainti ff. De fenda nt did not at that time disc lose that three other piece s o f e q u ipment subject to Plaintiff’s secur ity interests had be en sold.
Second Joi nt Sti pulations, ¶ 10, ECF No. 35.

Wit hin weeks a fter me eting with Plainti ff’ s repr ese n t at ives and signingthe Amendment to the L oan Do cu ments, Defe ndant ca used B ra dle y Ma c hin e ry to se ll e qu ipm e nt su bje c t to Pla int if

f’s securit

y interests without paying the proce eds to Plaintiff.
Second Joi nt Sti pulations, ¶ 13, ECF No. 35.

Br adley Machine ry

sold or cause d to be sold the following equipment su bje c t to Pla int if

f’ s se c ur ity

int e re st:- 6- 2007 Gehl Skid L oader , Model 6640E, S/N 606828
2007 Gehl Skid L oader , Model CTL 70, S/N 405302
Bobc at T190 L oader , S/N 527717582
Yanmar Vio45, S/N 50616
Yanmar Vio45, S/N 50712
Yanmar Vio35, S/N 51695
Y an m ar V i o 3 5

- 5 , K o m a c H a m m e r K B 3 0 0 S L Upon the sale of such e quipment, the obligations to Kra us Anderson se c ur e d b y

the e qu ipm e nt w e re no t pa id i n f ull

. Se c on d Join t Sti pu latio ns , ¶ 18 , E CF No . 3 5; Se e als o Ex. 2 9- 4, Eq uip . L ist

. De fe nd ant k

no ws the e qu ipm e nt w a s so ld b e c a us e he he lpe d s e ll i t. Second Joi nt Sti pulations, ¶ 19, ECF No. 35.

Def endant knew that Br adley

Machine ry

and De fenda

nt himself were e xpe ri e nc ingfi na

nc ia l pr ob le ms w he n h e so ld t he e qu ipm e nt. Second Joi nt Sti pulations, ¶ 22, ECF No. 35.

A Se ttl e me nt A g re e me nt ( “ Se ttl e me nt A g re e me nt” ) w a s a g re e d to i n Dec ember

2008 and entered into betwee n Plaintiff, Bra dley Machine ry , and De fenda

nt on March 27, 2009.
Second Joi nt Sti pulations, ¶ 15, ECF No. 35; Ex. 29.

As part of

the Settlement Ag reement, Br adley Machine ry

and Def endant e x ecute d a Confession of Judgment, whic h authorized Plaintiff to enter judg ment ag ainst Br adley Machine ry

and De fenda

nt in the amount of $308,828.12 or the por tion of that amount that rema ins unpaid if Br adley Machine ry

and De fe n dant def

ault in any pay ment [of the monthly installments] due under t h e S ett lement Ag re e me nt. Se c on d Join t Sti pu latio ns , ¶ 16 , E CF No . 3 5; E x. 29 -1 1, Con fe ssi on of Judg me nt.- 7- The Settlement Ag ree ment cover ed all outstanding amounts owed for all equipment for which Plain t i ff pr ovided financ ing f or B radle y Machine ry

to purcha se. Third J oint St ipulations, ¶ 3, ECF No. 50.

The total outstanding amounts owing for a ll equipment for which Plaintiff provided financ ing for Br adley Machine ry to purcha se as of J anuar y 23, 2009 was $232,512.99.
Third J oint St ipulations, ¶ 4, ECF No. 50.

I n 2010, Def

endant met with Plai n t i ff ’s auditors, Quiktrak, for the purpose of

verify ing the location of equipment subject to Plainti ff’ s secur ity interests. De fenda

nt lied to the auditors about the location of three piece s of equipment, and f ailed to tell them that the equipment had alr eady

been sold and was no long er in his possession or under his control. Def

endant in s tead told the auditors that the e quipment was lea s e d

an d a t c e rta in

jo b s it e s
. D e f

e n d an t k n e w th a t P la in ti ff wo uld re ly on the inf or matio n h e pr ov ide d to Pla int if f’ s a ud ito rs
. Second Joi nt Sti pulations, ¶ 17, Docke t No. 35.

A trial was held in the adver sary proce eding on Aug ust 10, 2012. I n addition t o t h e three J oint St ipulations of Fac t filed by L ender and Debtor, the parties prese nted t he testi mony of De btor and James Stephen J arussi, the vice president and repr esentative of L ender . Duringthe trial, L ender and De btor also stipulated to the admis sion of thirty -three exhibi ts, including but not limit ed to the following : Guara

nty dated January

27, 2005 (Ex. 1) ; De al er Credit Ag ree ment (Ex. 2) and Promissory

Note date d J une 16, 2006 (Ex. 3); Promissory Notes and Sec urity Ag ree ments for Ge hl lo a d e r s ( E x. 4 ) an d

a B o b c a t l o a d e r

( E x. 1 0 ) ; S e tt le me n t A g r e e me n t d a te d M ar c h 2 7 , 2 0 0 9 ( E x. 29); L ist detailing status of e quipment a s of J anuar y 31, 2009 (Ex. 29A); Confession of J udg ment dated Ma r c h 2 7 , 2 0 0 9 ( E x. 2 9 C) ; Q u ik T r a k a u d it inv o ic e d a te d

N o v e mb e r

1 2 , 2 0 1 0 ( E x. 3 1 ); History of conta cts by

L ender with Br adley Machine ry

from De cembe r 13, 2005 throug h J anuar y 18, 2011 (Ex. 32); Email corresponde nce betwee n Debtor a nd L ender

dated Apr il 2010 (Ex . 33). At the conc lusion of trial, the parties w ere order ed to file written c losing a rg uments by

Aug ust 24, 2012. De bto r f ile d a po st- tr ia l br ie f a

nd L e nd e r f ile d it s c los ingargume nt a nd fi nd ing s o f f

a c t.There is no dispute that Debtor wa s the person w ho acte d on behalf of B radle y

Machine ry 2 and committed t he torts cr eatingthe nondischar g eable debt. A debtor actingon behalf

of a c o r p o r a ti o n , w h o a c ti v e ly c o n v e rts p r o p e rty o r c o mm it s an y o th e r to rt g iv in g r is e to a no nd isc ha

rg e a ble de bt u

nd e r § 52 3 is pe rs on a lly

res po ns ib le to the inj ur e d p art y and the de bt i s nondischarg eable under § 523. See Ford Motor Credit Co v. Owens , 807 F.2d 1556, 1559 ( 11th Cir. 19 87 ); Ea ton v . For

d Motor Cre dit Co. , LLC , 2012 WL 3579644, at *3 (M.D. Te nn. Aug . 16, 2012); Fi rst Am e ric an Titl e In s. Co. v . G as k ill ( In re Gaskil l) , 480 B.R. 291, 300 (B ankr. W.D. Mich. 2 0 1 2 ); and Bombardier Corp. v. Penning ( In re Pe nning) , 2 2 B

. R. 6 1 6 , 6 1 9 ( B an kr
. E .D. Mich. 1982). Thus, bec ause D ebtor wa s the person w ho made the r epre sentations to L ender and ca rried ou t th e a c ts g ivi ngri se to t he no n- dis c ha

rg e a ble de bt, f

or purp os e s o f t

he no nd isc ha

rg e a bil ity de te rm inatio ns , it

make s n o d if

fe re nc e a s to whe the r tho se a c ts ar e vie we d a s h a vin g be e n ta ke n in his ind ivi du a l c a

pa c ity or a s an o ff ic e r o f t he c or po ratio n. F or thi s re a so n, the de c isi on wi ll r e fe r t o De bto r a nd B ra dle y Ma c hin e ry

int e rc ha ng e a bly wi tho ut d if

fe re nti a tin g be tw e e n th e m.

- 8- On Fe bruar

y 5, 2013, the B ankruptc y

Court issued a memora

ndum opinion and order holding that L ender

had failed to show that the debt was nondischarg eable

. On Februa ry 19, 2013, L ender filed a motion to amend a nd make a dditional findings of f act a nd conclusions of lawand to alter , amend, or

vacate judg ment enter ed on F ebrua ry 6 , 2 0 1 3

. Debtor f

iled an objec tion. After consideration of L ender ’s motion and Debtor’ s objection, t he Bankruptc y Court denied the motion in a n o rd e r d a te d M arc h 6 , 2 01 3. L e nd e r t ime ly fi le d th is a

pp e a l.

IV . D ISC USS ION

Two of the c ounts of the complaint ar e ba s ed o n Debtor’ s actions prior to the Settlement 2 Ag ree ment. L ender

asser ts that under the ter

ms of the Dea ler Cre dit Agr eeme nt and Promis sory N o te , D e b to r w a s r e qu ir e d to r e mi t p r o c e e d s f r o m th e s a le s o f e qu ip me n t. L e n d e r asse rts that Debtor’ s action of selling equipment “out of trust” constitutes e mbezz lement an d i s n ondischarg eable under § 523(a)( 4) and is also a non-discha rg eable willful and malicious injury under § 5 23 (a )( 6) . D e bto r a dmi tte d th a t he so ld t he e qu ipm e nt “ ou t of

tr us t” bu t ass ert s th at the de bt i s discharg eable . Amended A ns. to Compl aint, ¶ 6, ECF N o. 10; Aug ust 10, 2012 Trial Tr. 225:7- 11, ECF No. 74.- 9-

A. 11 U.S.C. § 523(a)(4)

Un de r 11 U. S.C. § 523 (a )( 4) , a deb t is no t disc ha rg e a ble if it wa s inc ur

re d b y e mbe zzle me nt. L ender argues that “D ebtor’s sa le of the eq u i p m en t subject to [L ender ’s] security interest and

re te nti on and us e of the sa le pr oc e e ds c on sti tut e s e mbe zzle me nt. ” Pla int if f’ s Clo sin g Ar g . ¶

36 , E CF No. 60. “A cre ditor proves e mbezz lement by establishing tha

t (1) he e ntrusted his proper ty to the de bto r o r d e bto r l awf

ull y ob ta ine d th e pr op e rt

y , ( 2) the de bto r a

pp ro pr iate d th e pro pert y for a us e
o th e r th an th a t f

o r w h ic h it w a s in te n d e d , an d ( 3 ) th e c ir c u ms ta n c e s in d ic a te f

r a u d .” R o b i n s o n v. Robinson (

In re Robinson ), 2 0 1 2 W L4 7 1 5 0 9 3 , at * 4 (B an kr. N. D. Oh i o Oc t1 , 2 0 1 2 ) ( ci t i n g Brady v. Mc Allister , 101 F.3d 1165, 1173 (6th Cir. 1996)). See also Fox , 37 0 B .R. a t 11 5- 16 ; Peav ey E lec. Corp. v. Sinchak (

In re Sinchak

) , 109 B.R. 273, 276 (B ankr. N .D. Ohio 1990).

Th e fi rs t pr on g of

an “ e mbe zzle me nt c la im r e qu ir e s a sh ow ing that the pr op e rt y , a lle g e dly

e mb e zzl e d b y th e d e f

e n d an t, w a s th e p r o p e rty o f th e p la in ti f f .” F l a
. Ou t d o or Equip., Inc. v

. Tomlinson (

In re Tomlinson ), 22 0 B. R. 134 , 136 (B ank r. M. D. F la . 199 8)

. I n this c a se , th e pr op e rt y which L e n d e r

a c c u s e s D e b to r

o f e mb e zzl in g is th e p r o c e e d s ar is in g f r o m t h e s a le o f e quipment subject to L ender ’s sec urity interest.

Many c ourt s h a ve he ld “ a

me re lie n o r se c ur ity int e re st d oe s n ot r ise to t he le ve l of

ow ne rs hip sufficie nt to support a cla im under § 523(a )(4) ' s embezzl ement provision.” Hulsing Hotels Tenn., Inc. v . Steffner

( In re Steffner

), 479 B .R. 746, 766 (Ba

nkr. E.D. Te nn. 2012). S e e a ls o F ir s t N a t' l Ba nk of Fa

y e tte v ill e v . Phil lip s (

In re Phillips ), 88 2 F .2 d 3 02 , 3 04 –0 5 ( 8th Cir . 1 98 9) ; Mu tua l M

gm t. Ser vs
. , In c. v. Fairgrieve s ( In re Fairgriev es ), 426 B .R. 748, 756 (Ba nkr. N.D. I ll. 2010); Morganroth & Morganroth, PLLC v. Stollman (

In re Stollman ), 404 B.R. 244, 272-73 (B ankr. E.D

. Mic h. 20 09 ); Ba nk

of C as til e v . Kj oll e r (

In re Kjoller ), 395 B.R. 845, 851 (B ankr. W.D.N.Y. 2008); Ba nc o P op ula r, N. A m. , v . R od rigue z ( In re Rodriguez ) , 2 0 0 7 WL 5 4 3 7 5 0 , a t * 5

– 6 ( B an kr
. S. D

. T e x. F e b. 15 , 2 00 7) ; Calum e t v . W hite rs ( In re W hite rs ), 337 B .R. 326, 333 (B an k r. N.D. Ind. 2006); Bombardier Capital, Inc. v. Tinkler ( In re Tinkler), 311 B. R . 869, 877 (B ankr. D . Colo. 2004); Ev e rwe d Co . v . A

y e rs ( In re Ay e rs ), 25 B .R. 762, 774-75 (B ankr. M.D. T enn. 1982).The P anel acknowledg es a line of cases hol ding “that a debtor commit s an embe zz lement 3 un de r s e c tio n 5 23 (a )( 4) wh e n the de bto r se lls mor tg a g e d pro pe rt

y and fa ils to r e mit

the pr oc e e ds to a pro perl y perf

ect ed, secu red credi to r or

con si gnor. " J

on es v . H all ( In re Ha ll), 295 B .R. 877, 882 (B ankr. W.D. Ark. 2003)

. Howeve r, t hose cases t y pically involve a duty

to seg reg ate pr ocee ds of the sale of collater al s ubject to a sec urity interest. See Tomlinson , 220 B.R. at 136. The re is no evide nce of a duty to seg reg ate pr ocee ds in the prese nt case

.

- 10- This Panel ag ree s with this l ine of case s. “As owner of the collateral, t he debtor remaine d the

owner of it s p ro c e e ds , e ve n th ou g h b oth the c oll a te ra l and

its pr oc e e ds we re su

bje c t to a se c ur ity interest. No pe rson ca

n embezzle from himself.” De e re & Co. v . Co nte lla ( In re Con te lla ), 16 6 B .R. 26, 30 (B ankr. W.D.N.Y. 1994)

. 3

Neither the B ankruptc y Court nor either party addre ssed the issue of whe ther the pr ocee ds of the sale of collate ral we re “ proper ty ” of L ender for purposes of § 523(a )(4) . Howeve r, “the bankruptc y

cour t 's decision . . . may be af firmed on a

ny g rounds supported by

the re cord.” Mo n t ed o n i co v. B ec kh a m (I

n r e B ec kh a m), 421 B.R. 602, 2009 WL 1726526, at *7 (B .A.P. 6th Cir. 2009) (table). S

ee a l s o B es i n g v. Ha w th o rn e (I

n r e B es i n g

), 981 F.2d 1488, 1494 (5th Cir. 1993); Phillips , 434 B.R. at 488 ( Rh o d e s , J. , c oncurr ing) . Acc ording ly , the Panel AF FI RMS t he B ankruptc y Court ’s c on c lus ion

that th e e le me nts of

§ 5 23 (a )( 4) are no t me t.

B. 11 U.S.C. § 523(a)(6)

Under 11 U.S.C. § 523(a)(6) , a debt is not disc harg eable if it is due to a willful and malicious inj ur y . L e nd e r a

rgue s th a t “ [De bto r’ s] sa le of the e qu ipm e nt s ub

je c t to [L e nd e r’ s] se c ur ity int e re st and re tention and use of the sales procee ds wer e will ful and malicious.” Plaintiff’s Closing Arg. ¶41, ECF No. 60. The Supreme Court has e x plained that for a debt to be non-d i s ch ar gea b l e under § 523(a) (6), the “ ‘ac tor [mus t] intend ‘the c onsequenc es o f an act,’ not simply ‘the a ct itself.’ ” Kawaauhau v. Geiger , 523 U.S. 57, 61-62, 118 S. Ct. 974, 977 (1998) (quoting Restatement (Second) of Torts § 8A, Comment a, p. 15 (1964)). The Sixt h Circuit Court of Appea ls has further qualified that a

willful and malicious injury occ u rs o n ly

if the debtor ( 1) desire s “to ca use the conseque nces of

his act, or” (2) “believe s those conseque nces a re substantially

cer tain to result from it.” Ma rk owi tz v . Ca mp be ll (

In re Ma rk

owi tz) , 190 F.3d 455, 464 ( 6th Cir. 1999).- 11-

I n revie wing the B ankruptc y Court's de termination whethe r L ender suffe red a

n injury and whether the injury to L ender was willful and malicious for purposes of § 523(a) (6), the Panel applies the clea rly err oneous standar d.

“ Th e c le arl y

e rr on e ou s st and ard

do e s n ot p e rm it this P anel to su bs tit ute its asses sme nts of

c re dib ili ty

in p la c e of

the e xplic it fi n dings ma de by

the bankr

uptcy court.” In re Forbe

s , 372 B.R. at 334. As long as the ba

nkruptcy court' s findings are “re asonable and supported by

the evidenc e,” the Panel may not overturn them. Id

. (q u o t i n g DuVoisin v. Foster ( In re S. Indus. Banking Corp. ), 809 F .2d 329, 331 (6th Cir.1987)). Phillips , 434 B.R. at 484.

1. Wil lful

I n th e c on te xt w he re a de bto r h a s c on ve rt e d a c re dit or ' s c oll a te ra l, i t has bee n held . .

. that the ‘willful’ re quirement of 523( a)( 6) may be indirectly established by the cr editor demonstrating the e x istence of two fac ts: (1) the debtor kne w of the cre ditor' s lien rig hts; a nd (2) the de bto r k ne w that hi s c on du c t w ou ld c a us e inj ur y to t ho se ri g hts

. Takacs v. Rude rson (

In re Rude rson ), 2007 WL4570581, at *6 (Bankr . N.D. Ohio De c. 20, 2007) (quoting J

& A B re lage, I

nc . v . J on es ( In re J ones ), 276 B .R. 797, 802 (Ba n k r. N. D. Oh i o 2001), ci t i n g Mitsubishi Motors Credit of Am., Inc. v. Longley (

In re Longley

), 23 5 B .R. 65 1, 65 7 ( B .A .P. 10th Cir.1999)).

Th e B ank ru ptc y Court did no t a dd

re ss D e bto r’ s k

no wl e dg e of

L e nd e r’ s li e n r ig hts be c a us e it f ound that D e bto r w a s n ot req

uir e d to tur

n o ve r t he pr oc e e ds of

the sa le of

the c oll a te ra l. T his leg al conc lusion requires a n analy sis of the contra ct. I t is a question of law re viewed de novo .

I n footnotes, t he Bankruptc y Court dismiss ed the role of the Dea ler Cre dit Agr eeme nt and the Pr omi sso ry

No te date d Jun e 16 , 2 00 6, e a c h o f whic h c on ta in c la us e s r e qu ir ing De bto r t o r e mit the proc eeds of

sales of c ollatera l to L en d er. The Ba nkruptcy Court stated that “the c ourt is not

c on vin c e d that the De a le r Cre dit or Ag re e me nt ha s any sig nif ic ant re latio n to the ind ivi du a l se c ur ity- 12-

ag ree ments and notes. Kr aus Ande rson re prese ntative Mr. Jarussi’s testim o ny sug g ested that he himself was unsure about the re lationship.” Fe b. 5, 2013, Op. at 9, n.1, ECF N o. 61.

A re view of the trial transc ript reve als that M r. J arussi wa s not at all unsure a bout the

re la tio ns hip . “ Th e re is n o confl ict in my min d. Th e ov e rr idi ngdo c ume nt i s th e de a le r c re dit ag ree ment.” August 10, 2012, Trial Tr. 119:1-2, ECF No. 74. Mr. J arussi explained that the P r o m i s s o r

y N o t e a t t a c h e d

t o t h e D e a l e r C r e d i t A g r e e m e n t i n c l u d e s e v e r y t h i n g D e b t o r f

i n an c e d

. It repr esente d a re volving line of cre dit o n wh i ch the borrower , Br adley Machine ry , could (a

nd did) dr aw t o pur c ha se pie c e s of eq uip me nt. Ea c h in div idu a l pu rc ha se of a pie c e of e qu ipm e nt w a s a lso repr esente d by

individual schedules, sec urity agr ee ments, and notes under the line of c redit. Tr. 133:10-22. Severa l times M r. Jarussi ex plained that the Promissory Note attac hed to the De aler Credit Ag ree ment was a fluid or floatingline of cr edit, with collatera l coming in a nd g oing out. Tr

. 139:21-24; 141:20-25. He e x plained that the other notes wer e all part of the l ine of cre dit under the De a le r C re dit

Ag re e me nt. Tr . 1 42 :6- 12 ; 14 5:6 -1 1. He c on sis te ntl y te sti fi e d th a t th e De a le r C re dit Ag re e me nt w a s “ umb re lla fi na nc ing ” (T r: 13 2:4 -6 ) an d that th e Pr omi sso ry No te (E x. 3) wa s a

c re dit line limit and it spelled out the rules of the relationship. Tr. 150:15-19. Finally , he explained that if he ne e de d to e nf

or c e the tr ans a c tio ns wi th B ra dle y Ma c hin e ry he wo uld us e the De a ler Cre dit Ag ree ment, Promissory

Note, subseque nt notes and sec urity ag ree ment(s).

Ex amination of the doc uments support Mr. J arussi’s e x planation of the f inancing

arr ang e me nt. Para g ra

ph3 o f t he De a le r C re dit

Ag re e me nt p ro vid e s in

pa rt :
As long as Bor

rowe r is not in def

ault, Bor rowe r may

sell any item of Collateral in the ordinary course of Bor rowe r’s business for a p ri ce no t le ss t ha n th e Adv ance made f

or su c h it e m of

Col late ra l, u

nle ss o t h e r w i s e a g r e e d

t o i nw r i t i n g b y

Le n d e r , p r o v i d e d

B o r r o w e r p ays L ender any amounts due under

the Note a s a re sult of such sale.
Dea ler Cre dit Agr eeme nt, ¶ 3, Ex

. 2. Parag raph 3 also clea rly convey s that, to secure pay ment on all curr ent and future debts, Br adley Machine ry g rante d L ender a security interest on all prese nt and future e quipment purcha sed with adva nces ma de by

L ender from the line of cre dit a

nd all proce eds of that pr op e rt

y . Pa ra g ra ph3 f ur ther ex pl ain s tha t B ra dle y Ma c hin e ry

wa s r e qu ir e d to e xec ute additional secur ity

docume ntation as additional equipment wa s purcha sed. More over, the Dea ler- 13-

Cr e dit Ag re e me nt a llo we d B ra dle y Ma c hin e ry

to s e ll e qu ipm e nt in the or din ary c ours e of bu sin e ss so long a s Br adley

Machine ry

paid the amounts due unde r the Promissory Note as a result of the sale

.

Th e Am e ndme nt o f L oa

n Doc ume nts e xec ute d b y the pa rt ie s a ft e r t

he br e a c h f

ur the r r e fl e c ts the pa rt ie s’ un de rs tand ingof

the ir pr ior a g re e me nt. Th e Am e ndme nt o f L oa n D oc ume nts re fe rs to the individual not es and sec urity ag ree ments as “sc hedules” and make s ref ere nces to the D eale r Cr e dit Ag re e me nt, “ Th e Pr omi sso ry No te ,” Se curity

Ag re e me nt a

nd I nd ivi du a l G ua

ra nty . T his langua g e su

pp or ts M r. Jar

us si’ s te sti mony

that th e De a le r C re dit

Ag re e me nt w as the umb re lla document that explained the rule s of the re lationship.

L ikewise, the Confe ssion of J udg ment executed by the par ties also ref

lects t hat Debtor

owes L ender $308,828.12 under the Dea ler Credit Ag ree ment and the re lated sche dules. Fina lly , Debtor himse lf r e f

e r r e d to th e ar

r an g e me n t a s “ a r e v o lv in g li n e o f c r e d it

. ” T r
. 2 0 5 :1 4

- 1 5

. The a dmitted exhibi ts included sever al of the a mendments to the J une 16, 200 6 P ro m i s sory Note that re flec t incre ases in the maximum amount of the l ine of cre dit, extension of t ime for the maturity date, a nd chang es i n terms of interest. Perhaps most telling is Debtor’ s admission that he sold equipment “out of trust.” Ame nded Ans. to Complaint, ¶ 6, ECF No. 10, Tr . 225:7-11. I n the automot i v e sale s industry , a dea ler' s sale of a u t o m obile inventory without paying the secur ed lende r is known as selling “ out of trust.” Ea ton v . F or d M oto r Cr e dit

Co. , LLC , 201 2 W L 3 5 7 9644, at *3-4 (M.D

. T en n
. Au g. 1 7 , 2 0 1 2 ) ( ci t i n g F o rd M o to r Cr e dit Co

. v
. M o o dy ( In r e M oody ), 277 B .R. 865, 868 (B ankr. S.D. Ga . 2001)).

Th e c on tr a c t doc ume nts , exhib its and te sti mony

sh owthat th e De a le r C re dit Ag re e me nt d id control and pla

y a key role in t h e financ ing a

rra ng ement. The individual security ag ree ments and promissory

notes laid out pay

ment plans that supplemented the Dea ler Credit Ag ree ment and we re
us e d to pa

y do wn the de bt w hil e e qu ipm e nt re ma ine d un so ld. Th e ind ivi du a l se c ur ity a g re e me nts and promissory

notes, as well as the Deale r Credit Ag ree ment and Promissory Note, allowe d collater al to be sold in the ordinar y course of business. The Dea ler Credit Ag ree ment provided that collater al could be sold a s long a s the proce eds we re pa id to L ender . The Promissory Note conta ined a spec ific provision for this pay ment to occur

five da y s after the sale.- 14-

A c c o r d in g ly , th e Pa

n e l h o ld s th a t b a s e d

o nth e D e a le r

Cr e d it A g r e e me n t, an d

o th er documents, L ender

had a se curity

interest in the proc eeds of the sale of collater al and De btor had a duty to use the proc eeds of

sales of c ollatera l to pay

L ender

.

Th e record firmly

establishes that De btor knew a bout L ender ’s lien rig hts and knew that failure to remit the proce eds would be substantially cer tain to harm L ender . The pa rties intended the proce eds of sa le of c ollatera l to be used to pay down the debt owe d to L ender and De btor did not do so . H e re ta ine d the m f or a dif fe re nt u se . T he fa c t th a t it wa s f or a bu sin e ss u se do e s n ot a lte r t his fi n d i n g.

Under

§ 523(a) (6), the busine ss pe rson is he ld to a highe r standar d as a business per son who is more knowledg eable of the natural conseque nces of

his acts. Tru st C

o. Ba nk v . R ic k e tts ( In re Ri c k e tts ), 16 B.R. 833, 834–35 (B ankr. N .D. Ga. 1982)

. . . . A wi l l fu l and malicious conver sion oc curs wher e an individual in b ankruptc y obtains vehicles, a s an officer of a de aler ship, with money advanc ed by a sec ured c redi t o r, and then disposes of those vehicles without remi t t i n g the sale pr ocee ds to the secur ed cr editor. Such ac ts are contra ry to the parties' floor pl an agr eeme nt's ex press provisions. A debtor' s sales out of trust cr eate s a debt that is nondischa rg eable under § 523(a) (6). Ford Motor Credit Co. v. Owens , 807 F.2d 1556, 1559 (11th Cir. 1987).
Eaton , 2012 WL 3579644, at *3-4.

Debtor a dmitted he knew a bout L ender ’s lien rig hts in the collatera l. D ebtor de scribed the relationship between the Debtor and L ender as “floor plan” financing

. Tr. 205:15; 215:10-12. He signe d the financ ing documents that g ave L ender a security interest in t he collate ral. In the answe r to the complaint and at tria l, Debtor ad m i t t ed t h at h e sold equipment “out of tr ust.” Tr.225:7-11. Moreove r, De btor’s ac tion of selling the c ollatera l and lying about it so that he did not have to turn
ov e r t he pr oc e e ds of

the c oll a te ra l sh ow s th a t De bto r kn e w that his c on du c t wo uld c a us e inj ur y to L e nd e r’ s r ig ht t o r e c e ive the pr oc e e ds

.

Ac c or din g ly , th e Pane l f

ind s th a t th e inj ur

y to L e nd e r w a s w ill fu l.Whil e the Panel does not ha ve cause to r eview the Ba nkruptcy Cour t ’s d et er m ination 4 reg ardingDebtor’ s subjective intent to repa y , the Panel notes that some of the fa cts relied upon by the Ba n k ru p tcy

Court in reac hing this conc lusion are c lear ly err oneous. F or example, the Ba nkruptcy Co u rt h el d that Debtor pa id $100,000 - “a siz eable amount” towar d the Settlement Ag ree ment. Fe b. 5, 2013, Op. at 9,11, ECF N o. 61. Howeve r, th i s fac t is not supported by the rec ord. Mr. Jarussi testified that of t he $100,000 that L ender rec ouped, $84,000 wa s on acc ount of e qu ipm e nt that wa s r e tur

ne d to Ya nma r. Th e c re dit

fr om Y anma

r w a s a lr e a dy

pe nd inga t th e tim e B ra dle y Ma c hin e ry , D e bto r a

nd L e nd e r en te re d into the Se ttl e me nt A g re e me nt a nd wa s n ot a re su lt of any post-settlement eff

orts by Debtor to re pay the debt. August 10, 2012, Trial Tr. 149:6- 14;Tr. 15 7:1 7- 15 8:9 , E CF No . 7 4. Mr . Jar us si a lso te sti fi e d th a t B ra dle y Mach ine ry ma de “ so me pay ments” towar d the settlement ag ree ment. Tr. 158:1-5. De btor admitted that Mr. J arussi wa s c or re c t, a nd he on ly ma de pa

y me nts tot a lin g a

pp ro xima te ly

$1 8, 00 0 to wa

rd the de bt o ve r t

he c ours e of almost two y ear s. Tr. 208:11-14. The ba nkruptcy court plac ed empha sis on Debtor’ s desire to save his business. Howe ver, 5 a debtor’s desire to sa

ve his business is not dispositi ve of w hether he intended to ha

rm the cr editor, part i cu l ar l y

within the Six th Circuit. Ea ton v . F or d M oto r Cr e dit

Co. , LLC , 2012 WL 3579644 (M

. D. T en n
. Au g, 1 7 , 2 0 1 2 ) ( ci t i n g Gene ral Motors Acce ptance Corp. v. Cline , 431 B.R. 407, 2010 WL 22334 (B .A.P. 6th Ci r. 2010) ( table))

.

- 15- 2. Malicious

The B ankruptc y

Court made the f

actua l finding that Debtor did not intend to har m L ender when it kept the pr oce ed s of the sale s of L ender ’s collater al. The B ankruptc y Court noted that

“ [De bto r] t e sti fi e d b a se d on his tor y he be lie ve d his bu sin e ss wo uld re c ov e r and he wo uld be a ble to pay his deb ts

. F e b

. 5 , 2 0 1 3 , O p
. a t 6 , E CF N o
. 6 1

. H o w e v e r , th e te s t f o r ma li c io u s n e s s in the

c o n t e x to f § 5 2 3 ( a ) ( 6 ) d o e s n o tf

o c u s o nD e b t o r ’ s s u

b j e c t i v e i n t e n tt o r e p ay. 4

[M] ali ci o u s “mea

ns in conscious disreg ard of one' s duties or without just cause or excuse; it does not require ill-will or specific i ntent to do harm.” W heele r v. Laudani , 783 F.2d 610, 615 ( 6th Cir.1986). Stated differ en t ly , “[t] here must also be a consciousness of

wrong doing. . . . It is thi s k n o wl edg e of w rong doing, not the wrong fulness of the debtor' s actions, t hat i s the key to malicious under § 523( a)( 6).” AB F, In c . v . R us se ll (

In re Ru sse ll), 262 B .R. 4 4 9 , 455 (B ankr. N .D. Ind. 2001) (citations omitted). Auto. Fin. Corp. v. Leonard ( In re Le on ar

d ), 2012 WL 1565120, at *11 (B ankr. E.D. Tenn. May 2, 2012).. While a debtor’ s “subjective mind set is centr al t o the i nquiry ,” the focus is not on whether a debtor intended to re p ay t h e debt eve ntually

. Rather, the f ocus is on “whe ther de btor ac ted 5 d e li b e r a te ly in kn o w in g d is r e g ar d o f a c r e d it o r s ’ r ig h ts in p r o p e rty

. ” Oc ea n E q u i t y Grp., Inc . v.When L ender attempted to asser t proof of da

mag es at trial, the B ankruptc y Court stated that 6 it normally

does not liquidate claims, but just det er m i n es n on-dischar g eability . Aug ust 10, 2012, Trial Tr. 101:19- 104:24, E C F No

. 7 4

. The Pane l notes that the bankruptc y court ha s concur

rent jur isd ic tio n w iththe state c ourt to d e te rm ine the a mou nt o f d a ma g e s. 28 U. S.C. § 1 33 4( b) ; Longo v. Mc Laren ( In re M cLaren) , 3 F.3d 958, 965-66 (6th Cir. 1993)

. The mea sure of damag es may

not be equiva lent to the full amount of the debt owed by Debtor to L ender : only the damag es ca

used by De bto r’ s c on du c t in

c on ve rt ingthe pr oc e e ds are no nd isc ha rg e a ble purs ua

nt to § 52 3( a )( 6) . T ho se damag es ar e comprised of t he amount of t he sale proce eds and possibly other damag es. I n this case, there w a s n o c o n c u r

r e n t s tate c o u rt a c ti o n , s o th e Pa n e l f in d s it is p arti c u la

r ly a p p r o p r iate f

o r the ba nk ru ptc y c ourt to d e te rm ine dama g e s g ive n it s f a mil iari ty wi th t he un de rl yingfa c ts.

- 16- W ooten ( In re W ooten ) , 4 2 3 B

. R

. 1 0 8 (B an kr. E

. D. Va

. 2 0 1 0 ) ( qu o t i n g J oh ns on v . D av is (

In re Da v is ), 262 B .R. 663, 670-71 (B ankr. E.D . Va. 2001) ). Unde r § 523(a )(6) , malice is inferr ed whe n
a ca r dea ler knows the harm for his failure to remit the proc eeds obta ined from ve hicles sold out of trust. Le on ar

d , 2012 WL 1565120, at *11

. See also Longley , 23 5 B.R . at 6 56 –5 8; HOC, Inc. v

. McAllister

( In re M cAllister ), 211 B .R. 976, 982–83 (Ba nkr. N.D. A la. 1997).

The P an el holds that Debtor ac ted maliciously as def ined by § 523(a) (6). The rec ord establishes that Debtor acte d in “ knowing disreg ard” of L ender ’s secur ity interest i n t h e p ro ceeds of the c ollatera l. Debtor’s e x tensive ef forts to kee p information re gardingthe sales hidden f rom L ender , indicates that Debtor knew that his action of ke eping the proc eeds of the sales wa s wrong ful

un de r t he te rm s o f t

he c on tr a c ts. De bto r k

ne w that hi s use of th e pro cee ds fo r o the r b us ine ss purposes would injure L ender ’s rig ht to rece ive the proc eeds. The fac t th at De b t or may have ha d a subjec tive intent to eventua lly repa y the debt owed to L ender does not e x cuse the injury to L ender ’s

secur ity interest. The rec ord i s devoid of any fac ts which could support the notion that Debtor a cted with just cause or e x cuse.

Debtor c onverte d the proc eeds of the s al es o f collater al which we re subjec t to L ender ’s

s e c u r i t y i n t e r e s t

. L e n d e r ’ s d a m a g e s ar e a d e b tt h a ti s t h e r e s u l t o f

a w i l l f u l an d m a l i c i o u s i n

j u r y. Acc ording ly , it is non-discharg eable pursuant to § 523(a) (6). The recor d befor e the Pane l does not reflect the a mou

nt o f p ro c e e ds tha

t w e re re ta ine d b y

De bto r u po n th e sa le of

L e nd e r’ s c oll a te ra l. Ac c or din g ly , th e matte r i s REMAN DED fo r a de te rm inatio n r e g ard ingthe a mou nt o f d a ma g e s. 6- 17-

C. 11 U.S.C. § 523(a)(2) (A)
Section 523(a) (2)( A) e x cepts fr om discharg e “a ny debt . . . for mone y , proper ty , service s, or

. . .a n e xten sio n, re ne wa l, o r re fi na nc e of c re dit , to the e xten t ob ta ine d b y . . . f a lse pr e te ns e s, a

fa lse repr esentation, or actua l fraud.” 11 U.S.C. § 523(a) (2)( A). Unde r § 523(a )(2) (A), the cre ditor bear s the burd e n o f p ro vin g by

a pr e po nd e ra

nc e of the e vid e nc e , th a t:
(1) the debtor obtained money [or a n extension, re newa l, or ref inancingof existi ng cre dit] throug h a mater ial misrep re s entation that, at th e tim e , th e de bto r kne w w a s f a lse or ma de wi th g ro ss re c kle ssn e ss a s to its tr

uth ; (2 ) t he de bto r i nte nd e d to de c e ive the c re dit or ; (3) the c reditor justifiably relied on the false r epre sentation; and (4 ) i ts r e lia

nc e wa s th e pr oximate c a us e of the los s. See O ld Republic Title Co. of T enn. v. Looney (

In re Looney ), 453 B.R. 252, 259 (B .A.P. 6 t h Cir. 20 11 ); Rembe rt v. AT & T Universal Card Servs., Inc

. ( In re Re mb e rt), 14 1 F .3 d 27 7, 28 0- 81 (6 th Cir. 1998).

I n the prese nt c ase, there is no dispute that the first and se cond prong s of § 523(a )(2) (A) a re met. I n the stipulated fac ts and at trial, De btor testified that he lied to L ender reg ardingwhich piec es of equipment ha d been sold prior to enteringinto the S ettlement Agre ement. Aug ust 10, 2012, Trial Tr. 225:23-2 5; 240:4-12, ECF No. 74. More over, D ebtor a dmitted at trial that he knewhe wa s dece iving L ender

and that he did so to get L ender to ag ree to an ex tension of credit. Tr. 226:5-6. Debtor te stified that he made a consc ious c hoice to disc lose some, but not all of the sale s of L ender ’s collater al bec ause he did not want to “make it look any worse.” Tr. 226:8. He a dmitted that when he ente red the Settlement Ag ree ment i n M ar ch, there wa s an equipment list attache d that aff irmatively

stated that he ha d possession of the B obcat loade r and two G ehl loader s that he did not have posse ssion of beca

use they had alre ady been sold. Tr. 244:10-13; 247:5-6. He a dmitted that he continued to lie to L ender for over eig hteen months be cause he was try ing to g ive himself more time to pay

off the de bt. T r. 2 2 6 : 1 8 -24. See also Ex . 33-1 (e mail from Debtor to L ender ’s repr esentative containing false inf ormation reg arding hours on a B obcat loade r that had a lrea dy been- 18-

sold.) Additionally , he lied to L en d er ’s audit ors and supplied them with fa lse documents so that L ender would not know that its c o l l at er al h ad been sold. He also stipulated that he knew L ender would rely

on these misrepr esentations. S econd Joint S tipulations, ¶ 17, ECF No. 35.

The Ba n k ruptcy

Court, however , found that L ender did not just ifiably

rely on the mis re pr e s e n t a t i o n s
. T h e B an kr u p t c y C o u rt f

o u n d t h a t L e n d e r “ d i d l i t t l e t o k e e p t a b s o n it s collater al.” Fe b. 5, 2013, Op. at 7, ECF No. 61. The Ba nkruptcy Court noted that L ender

did send auditors to investigate the status of e quipment, however , once told by Def endant that the equipment

was at another job site, the a uditors ended the inqu i ry
. The B ankruptc y Court found that since L ender knew that De btor had pre viously sold equipment without turning over the proc eeds ( having “lied”) it was not rea sonable to enter into a Settlement Ag ree ment without conducting a more th o ro u gh i n vestig ation. The B ankruptc y Court held that § 523 actions “a re not mea

nt to be substitut es for

appropr iate due diligenc e. [And L ender ] could have done more to monitor the status of the eq u i p m en t.” Ther efor e, the B ankruptc y Court found that L ender ’s re liance on D ebtor’s omissions and misrepr esentations reg ardingthe status of the collater al was not justifiable. Fe b. 5, 2013, Op. at 7, ECF N o. 61.

Th e B ank ru ptc y Court ’s fi nd ing is c le arl y e rr on e ou s. Th e B ank ru ptc y Court imp os e d a

du ty upon the L ender

to investi gat e the truthfulness of D ebtor’s r epre sentations that is not required by law.

I n Field v. Mans , 516 U.S

. 5 9 , 7 2

– 75, 116 S. Ct . 437, 444-46 (1995) , the Supreme Court specific ally

reje cted the notion that cre ditors must conduct an investigation to dis cover fra ud. See als o Foley &Lardner v. Biondo ( In re Biondo ), 1 8 0 F. 3 d

1 2 6 , 1 3 5 (4 t h C i r. 1 9 9 9 ) ( ci t i n g Fi e ld for the pr op os iti on

tha t a c re dit or ha s no duty

to i nv e sti g a te a

de bto r' s f a c tua l r e pr e se ntatio ns , e ve n if the fa lsity easily could be discove red)

.
[T] he plaintiff is e ntitled to rely upon repr esentations of fac t of such a cha rac ter a s to require some kind of investigation or examination on his pa rt to d isc ov e r t

he ir fa lsi ty , a nd a de fe nd ant wh o h a s b e e n guil ty o f c o n s ci o u s m i s re p re s en t at i o nca n n o to ff er as a de fense the p l ai n t i ff

's failure to make the investig ation or examination to verify the same.- 19-

Fi e ld , 516 U.S. at 72 (quoting 1 F. Ha rper & F . J ames, Law of To rts 7.12, pp., 581–83 (1956))

. See als o Le ntz

v . S pa do ni ( In re Spadoni ), 3 1 6 F. 3 d

5 6 , 5 9 (1 s tC i r. 2 0 0 3 ) ( ci t i n g Fi e ld for the r ule that “the c ircumstance s of the re liance c laim must be taken into acc ount and that the i n d i v i dual is not oblige d to investigate statements made to him (although he ca n n ot shut his ey es to an obvious fa lse ho od ). ” ); EugeneParks L a w C orp. Defined Be nefit Pension Plan v. Kirsh ( In re Kirsh) , 973 F.2d 1454, 1459 ( 9th Cir.1992) (noting that under the justifiable r el i ance standar d, “althoug h a pe rs on or din ari ly

ha s n o d uty to inv e sti g a te the tr

uth of a re pr e se ntatio n, a

pe rs on c ann ot p ur

po rt to rely on prepo s t er o u s representations or close his ey es to avoid discover y of the truth”) (citation omi tte d) ; Holmes v . Nat’l Ci ty Bank ( In re Holme

s ), 414 B .R. 115, 122-23 (E.D. Mich. 2009)

.

I f D e bto r h a d c on fe sse d th e sa le s, L e nd e r w ou ld n ot h a ve e nte re d the Se ttl e me nt A g re e me nt. Aug ust 10, 2012, Trial Tr. 184:23-185:4, ECF N o. 74 (testimony of Mr. J arr usi that if L ender

had known the collate ral ha d been sold “ there would have be en nothi ng to work out.”). L ender relied

on o r a l s tate me n ts an d

w r itte nd o c u me n tati o n

p r o v id e d b y D e b to r ( w h o m t h e B an kr u p tc y Court found “quite c redible” ) that t he equipment had not been sold and was still held as c ollatera l subject to a sec urity

interest for

the extens i o n o f credit provided by the Settlement Ag ree ment and Am e ndme nt t o L oa

n D oc ume nts . L e nd er rel ie d o n D e bto r’ s c on tin ue d f a lse re pr e se ntatio ns a s to the status of

the c oll a te ra l in

its de c isi on

to a g re e to a fo rb e ara

nc e un de r the Se ttl e me nt A g re e me nt. L ender did attempt to determine the loc ation and status of its collateral fo llowing the Settlement Ag ree ment throug h sever al audits and re quests for infor mation from Debtor. The re asons g iven for the e qu ipm e nt t o be un a va ila ble to v ie w ( be c a

us e it w a s o n le a se to t

hir d p art ie s) a

pp e are d le g iti mate in light of the supporting documentation provided by Debtor indicating that this was an authorized

us e of the e qu ipm e nt u

nd e r the te rm s of the pa

rt ie s’ a g re e me nts

. L e nd e r d id n ot “ shut [i ts] e y e s to an obvious false hood.” Ac cording ly , L ender ’s re liance on Debtor’s misre prese ntation of the

e qu ipm e nt’ s st a tus wa s, in f a c t, j us tif ia ble

. Th e B ank

ru ptc y Cou rt ’s fi nd ingto t

he op po sit e is c le arl y
e rr on e ou s.

Th e last element L ender

is require d to prove for

a findingof non-discha

rg eability under § 523 (a )( 2) (A ) is that re lia nc e on the mate ri a l misr e pr e se ntatio n is the pr oximate c a us e of its los s. The B ankrupt cy C o u rt d i d not conduct a se parate ana ly sis of this prong but simply stated that L ender ’s “a ctions at the time it entere d into the Settlement Agr eeme nt and there afte r do not supportDebtor did c ontradict this a dmission at trial, asser ting that he had not sold any equipment 7 afte r the date of the Settlement Ag ree ment. Aug ust 10, 2012, Trial Tr. 225:23-25, ECF No. 74.

- 20- a finding

. . . of justifiable relianc e or that Debtor’s de ceit wa s the proxim ate c ause of its loss .” F eb. 5, 2013, Op. at 5, ECF N o. 61. I n his post-tria l br ief, Debtor a rg ues that the misrepr esentation of the status of the equipment wa s not the proxi mate ca use o f L en d er ’s loss because if L ender had not enter ed into the Settlement Ag ree ment, an d instead had pur sued a judg ment ag ainst Debtor unde r the g uara nty , it would not ha

ve re cover ed any

more money

beca use De btor did not have a ny more assets in 2009 than he had at the time the petition wa s filed. Def

. Post-Tr. Br

. at 3 , E C F N o
. 5 9. On appe al, Debtor argues t hat even if this Panel reverse s the B ankruptc y Court, only

a portion of the total debt would be non-discha rg eable beca

use not all of the loss is a direc t r esult of the lies about the status of

the e qu ipm e nt.

After the Settlement A g ree ment, Debtor c ontinued in business for appr ox imately eig hteen months. Dur ing that time, D ebtor continued to pr ovide fa lse repor ts to L ender

reg ardingthe status of its c oll a te ra l. D e bto r s tip ulate d th a t he so ld at lea st o ne pie c e of e qu ipm e nt t

hat w a s su

bje c t to L ender ’s Secur ity

interest af

ter the Settlement Ag ree ment without turning ove r proc eeds. Second 7 Joint Stip ulatio ns ¶ 13, ECF No . 35. L e nd e r may be a ble to e sta

bli shtha t it wo uld have be e n a

ble to rec over more collater al, or c ollatera l w ith less depre ciation, or that it may have been able to pursue other re medies with mor e likelihood of succe ss, if it had not entere d into the Settlement Agr eeme nt with Bra dley

Machine ry

and De btor and ha d begun pursuing its remedies a lmost t wo y ear s ear lier. Additionally , Debtor te stified that he took a “ draw ” fr om Bra dley Machine ry

of $15,900 in 2009 and $23,000 in 2010. Aug ust 10, 2012, Trial Tr. 243:8-10, ECF No. 74. There fore , it does appea r that the business had e noug h assets to pa y Debtor $38,900 w hile L ender continued to extend cre dit based

on Debtor’ s materia l misre prese ntations r eg arding L ender ’s collater al. Additionall y , ce asi ng business almost two y ear s ear lier mig ht have pr ovided eve n m o re as s et s if all overhe ad wa s eliminated rather than just re duced. ( See De btor’s testimony that he re duced ove rhea d by $2,000 per month by

firing all other e mploy ees a nd moving to a ne w location. August 10, 2012, Trial Tr. 249:19-22, ECF No. 74.) Finally , during 2009 and 2010, L ender expended funds attempting to, as the B ank ru ptc y Court pu t i t , “ k e e p ta

bs on ” its c oll a te ra l du e to D e bto r’ s mate ri a l mi sr e pr e se ntatio ns
.Se e fo otn ote 5. Da ma g e s f or the § 52 3( a )( 2) (A ) c a

us e of a c tio n wo uld be wh a te ve r l os s 8 is attr ibuta

ble to L e nd e r’ s f

or be ara nc e un de r t

he S ett lem ent A g re e me nt a nd the re a ft e r, du e to De bto r’ s r e pe a te d mi sr e pr e se ntatio ns re g ard ingthe status of the c oll a te ra l.

- 21- I f L ender had known the collateral had been sold, L ender may not have neede d to pay for some or

a ll o f a n a ud ito r’ s se rv ic e s.

Acc ording ly , the Panel holds that the B ankruptcy Court’s fac tual finding that relianc e on Debtor’ s misrepre sentation(s) reg arding the status of the collater al was not the proxi mate ca use of loss is clearly

err o n eo u s . L ender

suffe red a

loss due to Debtor’s misre prese ntations and lies

re g ard in g t he status of

the c oll a te ra l. T he Pane l mu st r e ma nd fo r f ur the r f a c tua l f ind ing s to deter mine the amount of damag es attributable to L ender ’s forbe ara nce f rom collec tion that resulted fr om e nte ri ngint o th e Se ttl e me nt A g re e me nt. 8

The B ankruptc y

Court relied heavily on its deter mination that at t he ti me of the Settl ement Ag ree ment, Debtor ha d a subjec tive intent to repay the debt. Howe ver, D ebtor’s subjec tive intent to r epay is not a fac tor under the § 523(a) (2)( A) Re mb e rt te st wh e n the re is a se pa rate sp e c if

ic fa lse material m i s re p rese ntation. Debtor’s r epre sentation that Br adley Machine ry

still possessed thre e piece s of valuable equipment that wer e collate ral for the loans in question was a m aterial misrepre sentation. Debtor stipulated that he intended to dec eive the c reditor. F urther, D ebtor kne w that L ender

would rely

on these misrepre sentations when deter mining whether to c ontinue to ext end

cre dit to him . Acc ording ly , the B ankruptc y Court’s deter

mination that L ender

did not prove the elements o f § 5 2 3 (a )(2)(A) is REVERSED and the c ase is REMANDED for a deter mination of dama g e s.

D. L e nd e r’ s Mo tio n to Am e nd or Make Ad dit ion a l F ind ing s o f F a c t

F e de ra l Ru le of

B ank ru ptc y Pr oc e dure 70 52 a

pp lie s Ru le 52 of th e Federa l Ru le s o f C ivi l Procedur e to bankr

uptcy adver sary

proce eding s. Fe d. R. B ankr. P. 7052. Rule 52(a) (1) state s that

“ [i]n an a c tio n tr ie d o n th e fa c ts w ith ou t a jur y . . . th e c ourt

mus t f ind the fa c ts s pe c ia lly

and state its conclusions of law sepa rate ly .” Id . “F indings [of fac t] are to be libera lly co n s trued in support- 22-

of a judg ment, even if

the findings ar e not as e x plicit or detailed a s might be de sired.” Fordu , 201 F.3d at 710 (citation omitted).

I t is no t ne c e ssa

ry fo r t he [B ank ru ptc y ] Judg e to p re pa

re e la bo ra te fi nd ing s o n e ve ry po ssi ble iss ue ra ise d a t tr ia l. Ho we ve r, the re mus t be fi nd ing s, in s uc h d e ta il a nd e xac tne ss a s th e nat ure of the c a se permits, of subsidiary

fac ts o n wh i ch an ultimate c onclusion can rationally be predicate d. The findings should be explicit so as to give the appe llate cour

t a clea r under standing of the ba sis of the trial court’s de cision, and to ena ble it to determine the g rounds on which the trial cour

t rea ched its dec ision. Orlett v. Cincinnati Microwave, Inc

. , 9 5 4 F. 2 d 4 1 4 , 4 1 8 (6 t h C i r. 1 9 9 2 ) ( ci t i n g Gr ov e r H ill Grain Co. v. Baughman-O

ster, Inc ., 728 F.2d 784, 792- 93 (6th Cir. 1984)).

I n th e pr e se nt c a se , the re we re mor e sti pu late d f a c ts tha n th e B ank

ru ptc y Court inc lud e d in the written opinion. Ther e we re a lso additional facts in the a dmitted exhibi ts and provided by the te sti mony of bo th wi tne sse s. Th os e a dd iti on a l f a c ts d ic tate a

dif fe re nt r e su lt o n th e me ri ts. There fore , the B ankruptc y Court erre d in not gr anting the Rule 7052 motion.

V. CO NC LU SION

Th e B ank ru ptc y Court ’s ho ldi ngthat L e nd e r d id no t prov e the e le me nts of § 5 23 (a )( 4) is AFF I RMED on alternative g rounds.

Howeve r, t he debt is non-discha rg eable pursuant to § 523(a )(2) (A) a nd § 523(a) (6). De btor obtained an e x tension of cr edit, via the Settlement Ag ree ment, due to L ender ’s re liance on D ebtor’s fa lse state me nt s. Debto r’ s a c tio ns sh owthat he kn e w that he ha d a du ty to r e mit the pr oc e e ds to L ender and that his failure to r emit the proce eds would har m L ender . Additionally , the B ankruptc y Court abused its discr etion in de ny ing L ender ’s motion to amend the finding s of fa ct and c onclusions of law. The Ba

nkruptcy Court’s ruling that the debt owed to L ender is discharg eable is REVERS ED. The c ase is REMANDED for a deter mination of the amount of dama g es that L ender suffe red due to D e bto r’ s c on ve rs ion

purs ua nt t o § 52 3( a )( 6) and

fr a ud ule nt m isr e pr e se ntatio ns purs ua nt t o § 5 2 3 ( a ) ( 2 ) ( A ) an d

f o r ane n t r y o f j u d g m e n ti nf

a v o r o f L e n d e r a c c o r d i n g l y.