Judge Berger

09-06108 Country Club Bank v. Polese (Doc. # 45) - Document Text

The relief described hereinbelow is SO ORDERED.

Signed March 31, 2011.

United States Bankruptcy Judge


In re:

Debtor. Chapter 7


v. Adv. No. 09-6108


The parties have filed cross-motions for summary judgment.1 Plaintiff Country Club
Bank seeks to except $47,000 from discharge under 11 U.S.C. §523(a)(2)(B) and (6). The Bank
claims Debtor obtained a loan with false financial statements and further injured the Bank by

1 Defendant’s Motion for Summary Judgment, Doc. No. 25, and Plaintiff’s Cross-Motion for Summary
Judgment, Doc. No. 33.

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selling its collateral without the Bank’s knowledge or consent.

Findings of Fact

Debtor filed for bankruptcy on March 26, 2009. The Bank had a commercial banking
relationship with Debtor since 2005 when Debtor was an employee of Xelocity, Inc. Debtor was
the primary point of contact for Xelocity. In 2007, Debtor purchased Xelocity from Value Chain
Consulting Holdings Limited (“VCCHL”) for $200,000. Debtor paid $50,000 in cash and
executed a promissory note in favor of VCCHL dated September 10, 2007, in the amount of

Debtor, as president of Xelocity, executed a promissory note dated September 20, 2007,
in favor of the Bank in the amount of $50,000. The purpose of the loan was to provide Xelocity
with a line of credit. Xelocity pledged all its assets to the Bank to secure the note, and the Bank
filed a UCC financing statement to perfect its security interest. Debtor personally guaranteed
Xelocity’s note to the Bank and submitted a personal financial statement dated August 17 and
signed by Debtor on August 28, 2007. The personal financial statement purported to show
Debtor’s financial condition as of July 31, 2007. However, on August 27, the day before he
signed the statement, Debtor had withdrawn $87,000 he had listed as an asset from a 401(k)
account. Debtor used the 401(k) funds, in part, to pay VCCHL for Xelocity. The personal
financial statement also did not include the September 10, 2007, VCCHL note. Thus, when the
Bank funded the Xelocity loan on September 20, 2007, it did not have a written statement from
the Debtor showing his assets had decreased by $87,000 and his liabilities had increased by
$150,000 between July 31 and September 20, 2007.

On September 20, 2008, Xelocity renewed the note to the Bank, and Debtor confirmed


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his personal guaranty. Debtor resubmitted his personal financial statement dated September 26,
2008. The note matured on March 20, 2009.

On December 31, 2008, Debtor sold Xelocity back to VCCHL in exchange for debt
forgiveness in the amount of $168,955.65 related to the VCCHL note. The Xelocity sale
included the transfer of accounts receivable in the approximate amount of $40,000, one laptop,
and general intangibles including the company name and good will. Debtor describes the
transaction as a setoff.

On March 31, 2009, Debtor advised the Bank he had sold Xelocity and would seek to
discharge his personal debt to the Bank in bankruptcy.

The Bank presents uncontroverted testimony stating it did not know about the sale until
after it was closed and did not consent to the sale of its collateral.

Conclusions of Law

A. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates there is no genuine
issue as to any material fact, and he is entitled to judgment as a matter of law.2 All inferences are
to be construed in favor of the non-moving party.3 Only when reasonable minds could not differ
as to the import of the proffered evidence is summary judgment proper.4 In determining whether
any genuine issues of material fact exist, the court must construe the record liberally in favor of
the party opposing the summary judgment.5 An issue is “genuine” if sufficient evidence exists
on each side “so that a rational trier of fact could resolve the issue either way” and “[a]n issue is


Fed. R. Bankr. P. 7056.
3 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).
4 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-51 (1986).
5 McKibben v. Chubb, 840 F.2d 1525, 1528 (10th Cir. 1988) (citation omitted).


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‘material’ if under the substantive law it is essential to the proper disposition of the claim.”6 The
moving party has the burden of establishing that he or she is entitled to summary judgment.7
This Court’s function is not to weigh the evidence, but merely to determine whether there is
sufficient evidence favoring the nonmovant for a finder of fact to return a verdict in that party’s
favor.8 Essentially, this Court performs the threshold inquiry of determining whether a trial is

Cross-motions for summary judgment allow the court to assume the only evidence to be
considered has been submitted with the pleadings. However, cross-motions are to be considered
independently, and summary judgment is not appropriate if disputes remain as to any material
fact.10 When the matter would be tried before the court as opposed to a jury, the court resolves
any conflicting inferences drawn from undisputed evidentiary facts.

Summary judgment generally is not favored when an element of the case is the
defendant’s alleged fraudulent intent.11 However, actual intent may be proven by circumstantial
evidence or on inferences drawn from a course of conduct because a defendant is unlikely to
testify that his or her intent was fraudulent. Thus, a court may look to all the surrounding facts
and circumstances and grant summary judgment if appropriate.12

B. No Amendment to the Complaint
The Bank submitted uncontroverted statements of fact which were not alleged in the

6 Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998).
7 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
8 Anderson, 477 U.S. at 249.


Id. at 250.
10 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).
11 In re Davison, 296 B.R. 841, 847 (Bankr. D. Kan. 2003).




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complaint. In its complaint, the Bank alleged Debtor fraudulently obtained his debt pursuant to
the 2008 renewal note and financial statement. However, in its summary judgment motion, the
Bank raises factual allegations regarding the original note and financial statement made in 2007.
Debtor objects to, although he did not controvert, the additional factual allegations.

Rule 15(b) allows amendments to the complaint to conform with the evidence. However,
a summary judgment motion, alone, cannot amend a complaint over the objection of the
opposing party.13 The party seeking to amend must expressly move for the amendment under
Rule 15(b).14 The objecting party must be allowed the opportunity to satisfy the court the
evidence would prejudice that party’s defense on the merits.15 Thus, the Tenth Circuit requires a
formal request to amend a complaint. Although leave to amend shall be freely given, procedure
can not be ignored in favor of perceived efficiency.

The Bank has not moved to amend its complaint. Debtor objects to the evidence
presented which includes the 2007 note and financial statement. These facts support claims
raised outside the scope of the pleadings. The complaint can not be amended by the summary
judgment motion, and judgment can not be granted based on these facts. The 2007 factual
allegations must be disregarded for purposes of the Bank’s summary judgment motion.

C. Count I Under 11 U.S.C. §523(a)(2)(B)
Section 523(a)(2)(B) involves a written statement regarding the debtor’s financial
condition which is materially false.16 The essential elements are debtor’s intent to deceive and

13 Green Country Food Market, Inc. v. Bottling Group, LLC, 371 F.3d 1275, 1280-81 (10th Cir. 2004).

14 Moncrief v. Williston Basin Interstate Pipeline Co., 174 F.3d 1150, 1163 n.7 (10th Cir. 1999).

15 Id.; Fed. R. Bankr. P. 7015 incorporating Fed. R. Civ. P. 15(b)(1).

16 The Tenth Circuit limits the phrase “respecting the debtor’s ... financial condition” to statements
showing debtor’s overall net worth and financial position. In re Joelson, 427 F.3d 700, 707 (10th Cir. 2005).


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the creditor’s actual and reasonable reliance. The creditor must prove each element by the
preponderance of the evidence.17 Intent may be inferred from the totality of the circumstances.18
The creditor must show reliance in fact and that such reliance was reasonable.19

With respect to the 2008 financial statement, genuine issues as to Debtor’s intent to
deceive the Bank and the Bank’s actual and reasonable reliance exist. The Bank has not met its
burden to show it is entitled to judgment as a matter of law. Debtor, likewise, has failed to show
the Bank cannot sustain its burden at trial. Summary judgment on Count I of the Complaint is
denied as to both parties.

D. Count III Under §523(a)(6) and the Bank’s Claim of Converted Collateral
A discharge in bankruptcy does not discharge an individual debtor from any debt for
willful and malicious injury by the debtor to another entity or to the property of another entity.20
Thus, a person who commits an intentional tort will not be absolved of liability through a
discharge in bankruptcy.21 The plaintiff must prove by the preponderance of the evidence the
debtor intended to cause the injury through his actions.22 Section 523(a)(6) exceptions to
discharge are construed in favor of the debtor.23 The willful and malicious standard is stringent,
and debts arising from recklessness or negligence do not qualify.24 Prior to Geiger, the Tenth

17 Grogan v. Garner, 498 U.S. 279, 291 (1991).
18 Central Nat’l Bank and Trust Co. of Enid, Oklahoma v. Liming (In re Liming), 797 F.2d 895, (10th Cir.


19 Leadership Bank, N.A. v. Watson (In re Watson), 958 F.2d 977, 978 (10th Cir. 1992).

20 11 U.S.C. §523(a)(6).

21 Panalis v. Moore (In re Moore), 357 F.3d 1125, 1128 (10th Cir. 2004).

22 Fed. R. Bankr. P. 4005; Grogan v. Garner, 498 U.S. 279 (1991); In re Graham, 973 F.2d 1089, 10981102
(3d Cir. 1992).

23 Bellco First Federal Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir. 1997).

24 Kawaauhau v. Geiger, 523 U.S. 57, 64 (1998).


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Circuit had adopted a reasonably foreseeable injury standard.25 Geiger rejected this standard and
held “willful” in §523(a)(6) required a deliberate or intentional injury, not merely a deliberate or
intentional act which leads to injury.26 To prevail after Geiger, the creditor must prove the
debtor intended the resulting injury or that he was at least substantially certain to cause injury.27
In order to except a debt from discharge for converting collateral, the creditor must show (1)
debtor committed a wrongful and intentional act; (2) the act necessarily caused injury to the
creditor; (3) the act was without just cause or excuse; and (4) debtor acted with the specific
intent to cause injury to the creditor or knew or believed injury to the creditor was substantially
certain to occur as a result of his actions.28 Selling collateral without remitting proceeds to the
secured lender can be shown to be a willful and malicious injury, provided the creditor can show
the debtor acted with knowledge of the creditor’s security interest and converted the proceeds
from the sale of the collateral to debtor’s own use, knowing the creditor would suffer as a
result.29 The measure of damages when collateral is converted is the value of the collateral at the
time of conversion.30

When Debtor resold the business in exchange for personal debt forgiveness without

25 In re Posta, 866 F.2d 364 (10th Cir. 1989); In re Grey, 902 F.2d 1479 (10th Cir. 1990); and In re

Cantrell, 208 B.R. 498 (B.A.P. 10th Cir. 1997).

26 Kawaauhau v. Geiger, 523 U.S. at 61.

27 Via Christi Reg’l Med. Ctr. v. Budig (In re Budig), 240 B.R. 397, 401 (Bankr. D. Kan. 1999).

28 Exchange Bank v. Burd (In re Burd), 2007 WL 2401836 (Bankr. N.D. Okla. 2007), citing Geiger, 523

U.S. at 61-64; Budig, 240 B.R. at 401; Mabank Bank v. Grisham (In re Grisham), 245 B.R. 65, 71-72 (Bankr. N.D.
Tex. 2000).
29 Bancfirst v. Padgett (In re Padgett), 105 B.R. 665, 667 (Bankr. E.D. Okla. 1989).
30 Friendly Fin. Serv. Mid-City, Inc. v. Modicue (In re Modicue), 926 F.2d 452, 453 (5th Cir. 1991) (the
appropriate measure for nondischargeability under §523(a)(6) is an amount equal to the injury caused rather than the
amount contractually owed); Fidelity Fin. Servs. v. Cox (In re Cox), 243 B.R. 713, 720 (Bankr. N.D. Ill. 2000).

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notice and without any prospect for the Bank to realize the value of its collateral, there was an
objective, substantial certainty the Bank would be injured. Debtor served his self-interest and
thereby knowingly caused harm to the Bank. Debtor’s intent is further shown by his failure to
notify the Bank about the sale for three months. The claim arising from conversion of collateral
is not dischargeable. However, a genuine issue of material fact exists with respect to the
collateral’s value at the time of conversion. Accordingly, the parties will have to proceed to trial
regarding the amount of the nondischargeable claim under §523(a)(6).


IT IS THEREFORE ORDERED Plaintiff’s Motion for Summary Judgment under 11

U.S.C. §523(6) is GRANTED with the amount of the nondischargeable claim under Count III to
be determined at a later trial date. Both parties’ motions are DENIED as to 11 U.S.C. §523(2).
The parties shall proceed to trial on Count I.

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