*

Honorable Floyd R. Gibson, Senior U.S. Circuit Judge for

the Eighth Circuit, sitting by designation. 

 1Wolfson entered into each of the loan transactions as

general partner of the Farm, and as an individual co-maker. 

United States Court of Appeals,

Eleventh Circuit.

No. 94-2814.

In re Stephen P. WOLFSON, Debtor.

Stephen P. WOLFSON, Plaintiff-Appellant,

v.

EQUINE CAPITAL CORPORATION, a Delaware Corporation, DefendantAppellee.

June 27, 1995.

Appeal from the United States District Court for the Middle

District of Florida. (No. 93-944-Civ-Orl-06(22), George C. Young,

Judge.

Before CARNES and BARKETT, Circuit Judges, and GIBSON*

, Senior

Circuit Judge.

BARKETT, Circuit Judge:

Appellant Stephen P. Wolfson ("Wolfson") appeals from a

district court judgment affirming a bankruptcy court's decision

excepting $1,815,805 of Wolfson's debt from discharge. Because we

conclude that the debt was excepted in error, we reverse.

From 1971 to 1990, Wolfson and his brother, Gary, were

partners in a horse farm known as the Happy Valley Farm (the

"Farm"). In 1987, Equine Capital Corporation ("ECC") replaced

Citibank, N.A., as the Farm's primary lender, making ten loans to

the Farm between 1987 and 1989. For most of these loans, the Farm

pledged various interests in horses as collateral. Subsequently,

five of the loans went into foreclosure.1

 During this period, the
Farm routinely deposited its income, including proceeds from the

sale of collateralized horses, into its general business account;

it paid to ECC whatever it could of amounts due on a monthly basis,

while adding amounts it could not pay to its total indebtedness.

The bankruptcy court found that ECC knew of and at no time objected

to these practices. Indeed, even though it was well aware of the

practices, ECC continued to renew and extend additional credit to

the Farm, hoping that such cash infusions would eventually return

it to profitability. Ultimately, however, ECC declared the Farm

loans to be in default due to nonpayment of interest and principal,

and the Farm terminated its business operations surrendering its

remaining horses and other collateral to ECC. While nine months

earlier ECC had valued these assets at $7,810,000, it received only

$1,300,000 when it eventually sold them.

 Subsequently, Wolfson filed a voluntary petition under

Chapter Seven of the Bankruptcy Code in the U.S. Bankruptcy Court

in Jacksonville, Florida. In hopes of avoiding discharge of

Wolfson's $5,120,058 debt, ECC commenced an adversary proceeding in

the bankruptcy court filing a twelve-count complaint under 11

U.S.C. § 523, based upon various allegations of misconduct by

Wolfson. According to 11 U.S.C. § 523(a)(6):

(a) A discharge under ... this title does not discharge an

individual debtor from any debt—

....

(6) for willful and malicious injury by the debtor to

another entity or to the property of another

entity.

Willful and malicious injury includes willful and malicious

conversion, which is the unauthorized exercise of ownership over
goods belonging to another to the exclusion of the owner's rights.

In count VI, ECC specifically alleged that Wolfson had "converted

to his own use or the use of Happy Valley Farm" various horses "or

the proceeds thereof" which he had pledged as collateral in

security agreements with ECC, and that "his transfer of collateral

previously pledged to ECC, or the diversion of proceeds of said

collateral was willful, malicious, and done with intent to harm

ECC." The bankruptcy court entered a final judgment favoring ECC

on count VI, finding that Wolfson's "retention of proceeds which

should have been remitted to Plaintiff was done deliberately and

without justification" and that "[a]ccordingly, the Defendant

committed a willful and malicious act that caused injury to

Plaintiff." As a result, the court excepted $1,815,805 of

Wolfson's debt from discharge. Wolfson appealed from the judgment

on count VI to the district court, but the district court affirmed

the bankruptcy court.

 We conclude that the district court erred in finding that

Wolfson's retention of proceeds and failure to make payments of

debt entitled ECC to an exception to discharge. While under 11

U.S.C. § 523(a)(6), discharge is not permitted where there has been

"willful and malicious injury by the debtor to another entity or to

the property of another entity," the U.S. Supreme Court has

observed that such an injury "does not follow as of course from

every act of conversion, without reference to the circumstances,"

Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151,

153, 79 L.Ed. 393 (1934). In some circumstances, found the Court,

"[t]here may be an honest, but mistaken belief, engendered by a
 2

. For linguists, we note that English lexicographers regard

"wilful" and "willful" as acceptable variants. THE AMERICAN

HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 1465-1466 (1976). 

The Supreme Court used "wilful" in Davis.

course of dealing, that powers have been enlarged or incapacities

removed. In these and like cases, what is done is a tort, but not

a wilful and malicious one." Id. (emphasis added);2

 see also In

re Billy F. McGinnis, 586 F.2d 162, 163 (10th Cir.1978).

Here, the course of dealing clearly indicates that Wolfson had

a reasonable belief that his business practices were known to his

secured creditor. More importantly, it indicates that the secured

creditor knowingly acquiesced in Wolfson's business practices, and

took no steps to protect its collateral. The Farm kept standard

business records, accounting for all of the income received from

operations and sales, including purse money earned at horse races

and proceeds from the sale of horses. The Farm's bookkeeper

provided ECC with all of the financial information ECC requested,

including an accounting of all sale proceeds, on a monthly basis.

In fact, at the end of each month, the bookkeeper would meet with

an ECC representative and determine the amounts due ECC. On this

basis, ECC knew that the Farm placed its proceeds into a general

account out of which it paid ordinary business expenses, and knew

also which of the loan collateral the Farm had sold during the

month. Wolfson's belief, engendered by a course of dealing, was

thus reasonable, and under Davis could support the conclusion that

if Wolfson committed the tort of conversion, it was not a willful

or malicious one.

However, it is not necessary to reach the question of whether
Wolfson's actions were willful and malicious, nor the question of

whether Wolfson's sale of collateral and failure to remit the

proceeds amounted to conversion. As the bankruptcy court

recognized, ECC not only knew of and failed to object to the Farm's

sales of collateral and its business practice of depositing all

proceeds into a general business account, but ECC also continued to

renew and extend additional credit to the Farm. For example, ECC

loaned the Farm $600,000 on June 29, 1988; $2,400,000 on February

21, 1989; $1,800,000 on February 21, 1989; $900,000 on February

21, 1989; $500,000 on February 21, 1989; and $150,000 on October

6, 1989. We find that since ECC failed to enforce whatever rights

it may have had regarding the disposition of its collateral, it

waived its right to assert under 11 U.S.C. § 523(a)(6) that its

claim is non-dischargeable and that it suffered "willful and

malicious" injury by Wolfson. If ECC "acquired knowledge" of

Wolfson's alleged conversion and did so when "it could have

asserted its security interest in the property and failed to take

reasonable steps to protect its security, the indebtedness should

be discharged." Bennett v. W.T. Grant, Co., 481 F.2d 664, 666 (4th

Cir.1973). Put another way, ECC's "failure to take reasonable

steps to protect its collateral ... prevented application of the

exception." McGinnis, 586 F.2d at 163.

Therefore, under the facts of this case, we conclude that the

district court erred in finding that ECC was entitled to an

exception to discharge, and, accordingly, we REVERSE the district

court's judgment as to count VI and REMAND for further proceedings

consistent with this opinion.
REVERSED and REMANDED.