Pawnee Leasing Corp. v. Lauer (In re Lauer)

1

In re MICHAEL P. LAUER, SR. Debtors

PAWNEE LEASING CORPORATION Plaintiff v. MICHAEL P. LAUER, SR. Defendant

No. 19-17253 ELF

Adv. No. 20-204

United States Bankruptcy Court, E.D. Pennsylvania

January 19, 2022

Chapter 7

OPINION

ERIC L. FRANK, U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

Plaintiff Pawnee Leasing Corporation ("Pawnee") brought this adversary proceeding against the Debtor/Defendant, Michael P Lauer, Sr. ("the Debtor") to determine whether a $53, 251.74 debt is nondischargeable under 11 U.S.C §523(a)(2)(A) or §523(a)(6).

Pawnee's claim arises out of a financing transaction with the Debtor. Pawnee lent money to a company owned by the Debtor for the purchase of "roll-off" trash containers. The loan was secured by the containers. The Debtor personally guaranteed the loan.

The containers have gone missing and the parties offer differing explanations for the disappearance of Pawnee's collateral. Pawnee asserts that the Debtor's is responsible for the disappearance of the containers, rendering the $53, 251.74 balance due on the loan nondischargeable.

For the reasons explained below, I conclude that Pawnee has not satisfied its burden of proof under either 11 U.S.C. §523(a)(2) or (a)(6). Therefore, I will enter judgment in the Debtor's favor.

II. PROCEDURAL HISTORY

The Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code on November 19, 2019. On June 15, 2020, Pawnee timely filed a complaint to initiate the present adversary proceeding.

On February 11, 2021, I held a trial by videoconference.^[1] Pawnee presented two (2) witnesses: Kenny Fitzgerald, Pawnee's Vice President of Legal and Asset Management, and Norm Stein, Vice President of Targeted Lease Capital ("Targeted").^[2] The Debtor was the sole witness for his case-in-chief. The parties followed up with post-trial submissions.

III. APPLICABLE LEGAL PRINCIPLES

A. General Principles

One of the Bankruptcy Code's central purposes is to permit honest debtors to reorder their financial affairs with their creditors and obtain a "fresh start," unburdened by the weight of preexisting debt. See In re Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995); In re Marques, 358 B.R. 188, 193 (Bankr. E.D. Pa. 2006).

Exceptions to discharge are construed strictly against creditors and liberally in favor of debtors. Cohn, 54 F.3d at 1113 (3d Cir.1995); In re Glunk, 455 B.R. 399, 415 (Bankr. E.D. Pa.2011). A creditor objecting to the dischargeability of an indebtedness bears the burden of proof. Cohn, 54 F.3d at 1113; In re Stamou, 2009 WL 1025161, *3 (Bankr. D.N.J. Mar. 19, 2009); In re Marcet, 352 B.R. 462, 468 (Bankr. N.D.Ill. 2006). The burden of proof must be satisfied by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991); In re August, 448 B.R. 331, 357 (Bankr. E.D. Pa. 2011).

B. 11 U.S.C. §523(a)(2)

The standards for determining nondischargeability under 11 U.S.C. §523(a)(2) are well settled:

To prevail on a complaint brought under § 523(a)(2)(A), a creditor bears the burden of proving the following elements by a preponderance of the evidence:

1. the debtor made a material misrepresentation of fact that he or she knew at the time was false or contrary to his or her true intentions;

2. the debtor made the representation with the intention and purpose of deceiving the creditor;

3. the creditor justifiably relied on the representation; and

4. the creditor suffered a loss or damages as a proximate cause of the false representation or act.

Intent is a required element of § 523(a)(2)(A). . . . Determining whether a debtor had the requisite fraudulent intent is a subjective inquiry. In this Circuit, intent and knowledge may be inferred based on the totality of the circumstances.

In re Singh, 433 B.R. 139, 161 (Bankr. E.D. Pa. 2010) (quotations and citations omitted).

In addition, it is a matter of "well-entrenched jurisprudence that a contractor's failure to perform as promised, standing alone, gives rise to a case for breach of contract, not actionable fraud, misrepresentation or false pretenses under § 523(a)(2)(A)." In re Giquinto, 388 B.R. 152, 166 (Bankr. E.D. Pa. 2008). Instead, "to be actionable as fraud, the plaintiff must establish that the debtor entered into the contract with the intent of never complying with its terms." (Id.) (quoting In re Maurer, 112 B.R. 710, 713 (Bankr. E.D. Pa. 1990)).

C. 11 U.S.C. §523(a)(6)

In 2020, I summarized the legal principles applicable in a determination of nondischargeability under §523(a)(6) as follows:

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." 11 U.S.C. § 523(a)(6).

"Willful" and "malicious" are distinct elements. E.g., In re Coley, 433 B.R. 476, 497 (Bankr. E.D. Pa. 2010).

A "willful" injury is an injury that is done deliberately or intentionally. Id. (citing Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)). In Geiger, the Supreme Court clarified that in § 523(a)(6):

[t]he word "willful" in (a)(6) modifies the word "injury," indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury... [T]he (a)(6) formulation triggers in the lawyer's mind the category "intentional torts," as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend "the consequences of an act," not simply "the act itself."

523 U.S. at 61-62, 118 S.Ct. 974 (quoting Restatement (Second) of Torts § 8A, Comment a, p. 15 (1964)).

In the Third Circuit, "actions taken for the specific purpose of causing an injury as well as actions that have a substantial certainty of producing injury are 'willful' within the meaning of § 523(a)(6)." Coley, 433 B.R. at 497 (citing In re Conte, 33 F.3d 303, 307-09 (3d Cir. 1994)).

"Malice refers to actions that are wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will." In re Kates, 485 B.R. 86, 101 (Bankr. E.D. Pa. 2012) (internal quotations omitted). The "wrongfulness" which characterizes malice involves conduct more culpable than that which is in reckless disregard of creditors' economic interests and expectancies, as distinguished from mere legal rights. Moreover, knowledge that legal rights are being violated is insufficient to establish malice, absent some additional "aggravated circumstances." In re Jacobs, 381 B.R. 128, 139 (E.D. Pa. Bankr. 2008) (quoting In re Long, 774 F.2d 875, 881 (8th Cir.1985)).

Thus, to prevail, the plaintiff must establish three (3) elements demonstrating that the debt arose from an injury that was:

(1) willful (i.e., involving deliberate and intentional conduct);

(2) intended or substantially certain to cause injury; and

(3) malicious (i.e., wrongful).

In In re Tzabari, 622 B.R. 332, 341-42 (Bankr. E.D. Pa. 2020),

In addition to these principles, other considerations come into play when a §523(a)(6) claim is related to a breach of a contractual relationship.

As I observed in Coley, the expression of "malice" in terms of wrongful behavior that is without just cause or excuse is extremely broad, with the potential for an overbroad application of the §523(a)(6) discharge exception. Courts have narrowed the term's potentially overly expansive scope by suggesting that "malice" under §523(a)(6) must arise from tortious activity, as opposed to a mere breach of contract - but also, that the existence of a tort as the source of liability is not, by itself, sufficient to render the debt nondischargeable. The tort must be an intentional tort, not one based on mere negligence or recklessness. Coley, 433 B.R. at 499.

One line of cases under §523(a)(6) involves a debtor's violation of his or her obligations under the loan and security documents that diminishes, impairs or extinguishes the creditor's collateral. Again, this is a subject that I have previously examined:

Because conduct that impairs a creditor's collateral is rooted in the parties' contractual arrangement that created the creditor's property interest in the collateral, analyzing § 523(a)(6) cases of this nature "can be a perplexing exercise," In re Trantham, 286 B.R. 650, 663 (Bankr. W.D. Tenn. 2002), rev'd, 304 B.R. 298 (6th Cir. B.A.P. 2004), presenting "unique conceptual difficult[ies]." [In re] Whiters, [337 B.R. 326, 345 (Bankr. N.D. Ind. 2006)]

The seminal case on the subject . . . is Davis v. Aetna Acceptance Co., [293 U.S. 328, (1934)], decided under § 17a of the former Bankruptcy Act, in which the Supreme Court stated:

There is no doubt that an act of conversion, if willful and malicious, is an injury to property within the scope of this exception.... But a willful and malicious injury does not follow as of course from every act of conversion, without reference to the circumstances. There may be a conversion which is innocent or technical, an unauthorized assumption of dominion without willfulness or malice. There may be an honest but mistaken belief, engendered by a 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 willful and malicious one.

293 U.S. at 332, 55 S.Ct. 151 (citations omitted).

In light of Davis, there appear to be two propositions on which there is some judicial consensus in § 523(a)(6) nondischargeability cases involving impairment of a secured creditor's collateral. First most courts do not categorically rule out the possibility that a purposeful breach of a contract, in some circumstances, can cause a willful and malicious injury, particularly if the breach is accompanied by a tortious act, such as conversion. Second, "[s]imply because the sale [of the

...