Court Opinion

ID: 998117
Source: CourtListenerOpinion
Date Created: 2013-07-04 17:06:42.583831+00
Date Added: 2024-06-11T15:38:13.520509
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: JAMES W. HARRELL; In Re:
GLORIA E. HARRELL,
Debtors.

JAMES W. HARRELL; GLORIA E.
HARRELL,                                                            No. 98-1728
Plaintiffs-Appellees,

v.

MERCHANT'S EXPRESS MONEY ORDER
COMPANY,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Henry C. Morgan, Jr., District Judge.
(CA-97-971-2, BK-96-26022-S, AP-97-2001-S)

Submitted: February 19, 1999

Decided: March 19, 1999

Before ERVIN, LUTTIG, and WILLIAMS, Circuit Judges.

_________________________________________________________________

Affirmed by unpublished per curiam opinion.

_________________________________________________________________

COUNSEL

Steven L. Brown, TOLERTON & BROWN, P.C., Norfolk, Virginia,
for Appellant. Jonathan L. Hauser, CHRISTIAN & BARTON, L.L.P.,
Norfolk, Virginia, for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Merchant's Express Money Order Co. (MEMO) appeals from the
district court's order affirming in part and reversing in part the bank-
ruptcy court's order determining the dischargeability of a debt owed
by the Harrells to MEMO. For the reasons that follow, we affirm.

James and Gloria Harrell were officers and directors of K.R.B.,
Inc., a Virginia corporation that owned and operated several grocery
and convenience stores in the Hampton Roads, Virginia, area. The
Harrells were also K.R.B.'s sole shareholders until just prior to filing
bankruptcy. In October 1995, K.R.B. and MEMO entered into a con-
tract in which K.R.B. agreed to sell, for a fee, MEMO's money orders
in its stores, and MEMO agreed to provide all the necessary supplies.
The agreement required K.R.B. to maintain a separate account for the
money collected from money orders sold and to turn over the funds
each week to MEMO. It is undisputed that K.R.B. never maintained
a separate account for the money order proceeds.

In March and April 1996, K.R.B. failed to turn over approximately
$120,000 in money collected from sold money orders. 1 The Harrells
personally guaranteed K.R.B.'s obligations to MEMO. 2 K.R.B. filed
a petition under Chapter 11 of the bankruptcy code in July 1996; the
Harrells filed under Chapter 7 in September.
_________________________________________________________________
1 The exact amount that K.R.B. failed to pay is less than clear from the
record. In June 1996, K.R.B. confessed judgment in Virginia state court
in the amount of $123,319.73 plus costs of $12,331.97. On their bank-
ruptcy petition, the Harrells listed an unsecured nonpriority claim of
$117,000 owed to MEMO.
2 In May 1996, Mr. Harrell, on behalf of K.R.B. and individually, exe-
cuted an acknowledgment in which he agreed that a balance of
$134,729.73 was owed to MEMO. Further complicating matters, the
amount claimed in MEMO's complaint was $132,231.23.

                     2
MEMO filed a three-count complaint against the Harrells to deter-
mine the dischargeability of the debt. Count I asserted that the debt
was nondischargeable under 11 U.S.C. § 523(a)(2)(A) (1994),
because the Harrells had obtained the funds by false pretenses. Count
II alleged that the debt was nondischargeable under 11 U.S.C.
§ 523(a)(4) (1994), due to the Harrells' fraud and defalcation while
acting in a fiduciary capacity. Count III alleged that the debt was non-
dischargeable under 11 U.S.C. § 523(a)(6) (1994), as a result of the
Harrells' willful and malicious injury to MEMO.

The bankruptcy court dismissed Count I. After a hearing, the court
then found that MEMO failed to show by a preponderance of the evi-
dence that either debtor committed willful and malicious injury
(Count III). As to Count II, the bankruptcy court found that (1) a fidu-
ciary relationship was created notwithstanding the commingling of
funds, and (2) the debtors committed a defalcation. However, the
bankruptcy court held only Mr. Harrell liable for the corporation's
indebtedness to MEMO and not Mrs. Harrell. Both parties appealed
to the district court which affirmed the bankruptcy court's decision as
to Counts I and II but reversed its ruling on Count III as to Mr. Harrell
only. MEMO appeals.

We review the judgment of the district court sitting in review of a
bankruptcy court de novo, applying the same standards of review that
were applied in the district court. See Cook Group v. C.R. Bard, Inc.
(In re Wilson), 149 F.3d 249, 251-52 (4th Cir. 1998). The bankruptcy
court's findings of fact will not be set aside unless clearly erroneous.
See In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992); Bankr. R. 8013.
Our review of the bankruptcy court's application of the law is de
novo. See Johnson, 960 F.2d at 399.

To prove that a debt is nondischargeable, the creditor bears the bur-
den of proof by a preponderance of the evidence. See Grogan v.
Garner, 498 U.S. 279, 287 (1991). Section 523(a)(2)(A) states, in
part, that a bankruptcy discharge does not discharge an individual
debtor from "any debt . . . for money, property, services, or an exten-
sion, renewal, or refinancing of credit, to the extent obtained by . . .
false pretenses, a false representation, or actual fraud." To sustain a
claim under § 523(a)(2)(A), the creditor must show, by a preponder-
ance of the evidence, that the debtor made misrepresentations, with

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the intention and purpose of deceiving or defrauding the creditor, that
the creditor relied on the misrepresentations, and that it sustained a
loss as a proximate result of the misrepresentations or fraud. See In
re Eashai, 87 F.3d 1082, 1086 (9th Cir. 1996). Both the bankruptcy
court and the district court concluded that MEMO failed to prove the
elements necessary to sustain its claim in Count I. We agree. MEMO
failed to show either that the Harrells knew at the time they promised
to pay MEMO the money order proceeds (i.e., at the time the agree-
ment was executed) that the promise was false or that they made that
representation with the intent to deceive MEMO. Accordingly, we
affirm the dismissal of Count I.

Section 523(a)(6) excepts from discharge any debt for "willful and
malicious injury by the debtor to another entity or to the property of
another entity." In the context of § 523(a)(6), "willful" means "delib-
erate or intentional." Kawaauhau v. Geiger , 118 S.Ct. 974, 977 n.3
(1998); see also St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d
1003, 1009 (4th Cir. 1985). "Malice" does not require a showing of
ill will; rather, "a debtor's injurious act done`deliberately and inten-
tionally in knowing disregard of the rights of another,' i.e., a creditor,
is sufficiently willful and malicious, and prevents discharge of the
debt." In re Stanley, 66 F.3d 664, 667 (4th Cir. 1995). Further, malice
may be implied from the debtor's conduct. See id. Finally, the "proper
focus . . . is not on [debtor's] good intentions, but simply on his exer-
cise of dominion and control over funds that he knew belonged to
another." Id. at 668.

The bankruptcy court found that MEMO failed to prove that the
debt arose from the Harrells' willful and malicious injury. Specifi-
cally, the court found that MEMO failed to prove that the Harrells
intended to harm MEMO and that "there is no evidence before the
Court that the debtors' conduct rose to the level in which they inten-
tionally disregarded the rights of MEMO." With respect to Mrs. Har-
rell, the district court agreed with the bankruptcy court's finding that
she did not commit willful and malicious injury. We agree. The evi-
dence established that, although Mrs. Harrell worked full-time in the
family business and drew a $300 weekly salary, it was Mr. Harrell
who made the key business decisions--including the decision not to

                     4
pay MEMO--and that Mrs. Harrell acted under her husband's
direction.3

Section 523(a)(4) provides that any debt "for fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny" is not
discharged in bankruptcy. This section "`was intended to reach those
debts incurred through abuses of fiduciary positions.'" Miller v. J.D.
Abrams, Inc. (In re Miller), 156 F.3d 598, 602 (5th Cir. 1998) (quot-
ing In re Boyle, 819 F.2d 583, 588 (5th Cir. 1987)). The definition of
"fiduciary" for purposes of § 523(a)(4) is controlled by federal com-
mon law and is narrower than under general common law. See id.
Under this section, a fiduciary is limited to instances involving
express or technical trusts. See id. The trustee's obligations must have
been imposed prior to, rather than by virtue of, any claimed misappro-
priation of funds; "[c]onstructive trusts or trusts ex malificio thus . . .
fall short of the requirements of § 523(a)(4)." Tran v. Texas Lottery
Commission (In re Tran), 151 F.3d 339, 342 (5th Cir. 1998). Again,
MEMO bore the burden of proof on this claim. See Grogan v.
Garner, 498 U.S. at 286-90.

Both the bankruptcy court and the district court concluded that
Mrs. Harrell was not acting in a fiduciary capacity with respect to
MEMO. We agree. The evidence presented by MEMO failed to estab-
lish that Mrs. Harrell's relationship with MEMO rose to the level of
a trustee. Because we find that no fiduciary relationship existed
between Mrs. Harrell and MEMO, we need not reach the issue of
whether failure to turn over the funds to MEMO constituted a defalca-
tion.

Accordingly, we affirm the district court's order affirming in part
and reversing in part the bankruptcy court's decision regarding the
dischargeability of the debt at issue.4

AFFIRMED
_________________________________________________________________

3 The Harrells have not appealed from the district court's finding that
Mr. Harrell caused willful and malicious injury. Accordingly, we need
not address the application of § 523(a)(6) to Mr. Harrell.
4 On October 8, 1998, this court granted the joint motion of the parties
to submit this case for decision on the briefs without oral argument.

                     5