VS. ADV. NO. 89-0148




This matter is before the Court on the Motion of the plaintiff Standard Federal Bank for Summary Judgment that the defendants willfully and maliciously converted the plaintiff's collateral and that the debt to the plaintiff is thereby rendered nondischargeable pursuant to 11 U.S.C. '523(a)(6). Plaintiff contends that there is no genuine issue as to any material fact, and that, based on the pleading, exhibits, and depositions of record, it is entitled to judgment as a matter of law. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334. It is a core proceeding pursuant to 28 U.S.C. '157.

The record in this case indicates that the defendants herein, Edward and Mary Saylor, purchased a certain motor home and granted the plaintiff's predecessor, Tower Federal Savings Bank, a security interest therein on December 19, 1986. The defendants have acknowledged that they granted such security interest. (Depo. of Edward M. Saylor, p. 6; depo. of Mary A. Saylor, p. 23). The contract for purchase of the motor home obligated them to make 144 payments of about $452.00 each. On October 3, 1988, having fallen behind in these payments, the defendants sold the motor home to an RV dealer in Tennessee for $20,000.00. They did not pay the money over to the plaintiff. (Depo. of Edward M. Saylor, pp. 5-10; depo. of Mary A. Saylor, pp. 24-27). When asked if he gave the bank any notice that he planned to sell the motor home, Edward Saylor testified as follows:

A I...they called me about my payment overdue and I told them I was selling the motor home.

Q And what did they say?

A They said I couldn't. I said, why can't I?

I've got a clear title.

Q So they did not agree to allow you to sell

the motor home?

A No, I knew they wouldn't agree. ... (At p. 11)

Mary Saylor also testified that she discussed selling the motor home with her husband, and that she agreed that they should sell it. (Depo. of Mary A. Saylor, pp. 26-27).

The record also indicates that when the Certificate of Title was issued for the subject motor home on January 24, 1987, notice of the lien did not appear on its face. After learning of the defendants' intention to sell, Tower Federal Savings Bank took steps to update the title, and on October 13, 1988, its security interest was perfected. The defendants filed their bankruptcy petition on March 16, 1989.

The plaintiff argues that a debtor's disposal of collateral before perfection of the security interest therein and before the filing of the bankruptcy petition is a "willful and malicious injury" within the meaning of 11 U.S.C. '523(a)(6), thereby rendering the underlying debt nondischargeable. The plaintiff cites several cases in support of its contention. In re Petsch, 82 B.R. 605 (Bkrtcy N.D. Fla. 1988), held that a security interest, even though unperfected, was "property" within the meaning of '523 (a)(6), and clarified that "the phrase `willful and malicious injury' covers a willful and malicious conversion". At 607. In re Cardillo, 39 B.R. 548, 550 (Bkrtcy D. Mass. 1984), held that

[when a] debtor has disposed of collateral without the permission or knowledge of the lienholder, and the debtor understands the effect of the security agreement, such unauthorized disposition constitutes a willful and malicious conversion so as to render the debt arising therefrom nondischargeable.

In In re Posta, 886 F.2d 364 (10th Cir. 1989), the court stated that the "malicious prong" of '523(a)(6) is satisfied by the debtor's "actual knowledge or the reasonable foreseeability that his conduct will result in injury to the creditor." Malicious intent may be shown "by evidence that the debtor had knowledge of the creditor's rights, and that, with that knowledge, proceeded to take action in violation of those rights." See also In re Imbody, 104 B.R. 830 (Bkrtcy N.D. Ohio 1989), wherein a debtor committed nondischargeable conversion by selling the bank's collateral and intentionally paying the IRS ahead of the bank to satisfy a personal tax obligation. The court opined that the element of maliciousness was satisfied by wrongful acts that lacked justification, even in the absence of personal hatred, spite, or ill-will.

The Petsch and Cardillo cases, as well as In re Sidic, 44 B.R. 167 (Bkrtcy E.D. Wisc. 1984), also stand for the proposition that while the failure to perfect a lien may render such lien subordinate to the rights of third parties, as between the debtor and the creditor, the security interest is valid and the debtor is estopped from denying its validity. The issue of whether a creditor is defeated by its failure to perfect its security interest until after the debtor's willful and malicious conversion is addressed by In re Duranti, 1 B.R. 54 (Bkrtcy W.D. Wisc. 1979). This case focuses on whether there was an "injury" to the creditor. Therein the court stated that "the bank's failure to perfect its lien prior to disposal of the collateral is irrelevant to the injury." At 56. All these cases support the plaintiff's position.

The initial burden of the movant for Summary Judgment is to show that there is no basis in the record for findings of facts that might determine a result of the case in favor of the non-movant. Such a showing would satisfy the movant's burden under Federal Rule of Civil Procedure 56(c) that there are no genuine issues as to any material fact. In re Calisoff, 92 B.R. 346 (Bkrtcy N.C. Ill. 1988), citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, at 251, 106 S.Ct. 2505, at 2510, 91 L.Ed. 202, at 214. This Court finds that the plaintiff has satisfied its burden. The record in this case establishes that the defendants granted the plaintiff a security interest in the subject collateral. In spite of the fact that they acknowledged the lien and understood its effect, they sold the subject collateral and did not pay the proceeds over to the plaintiff. The case law cited above supports the conclusion that such conduct amounts to a willful and malicious conversion which renders the underlying debt nondischargeable pursuant to 11 U.S.C. '523(a)(6).

The defendants, in their Response to Motion for Summary Judgment, do not set forth specific facts showing that there is a genuine issue for trial, as required by FRCP 56, in defense of the Motion for Summary Judgment. No genuine issue as to any material fact having been presented, therefore, and the Court having determined that there is no just reason for delay, the plaintiff is entitled to judgment as a matter of law.



By the Court -





Copies to:

Elizabeth Lee Thompson, Esq.

John Paul Jones, II, Esq.