KSB

Judge Karlin

08-07076 Exchange State Bank/St Paul KS v. Murphy (Doc. # 37) - Document Text

SO ORDERED.
SIGNED this 29 day of September, 2009.

 

________________________________________
JANICE MILLER KARLIN
UNITED STATES BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re: )
JOSEPH DEAN MURPHY a/k/a )
JOE MURPHY and )
AMANDA SUE MURPHY, ) Case No. 08-41222

) Chapter 7

Debtors. )
____________________________________)
)
EXCHANGE STATE BANK, )
)
Plaintiff, )
)


v. ) Adversary No. 08-7076
)
JOSEPH DEAN MURPHY a/k/a )
JOE MURPHY, )

)
Defendant. )
____________________________________)


MEMORANDUM OPINION AND ORDER

Plaintiff, Exchange State Bank (“ESB”), seeks a judgment against Defendant, Joseph Dean

Murphy (“Murphy”), in the amount of $165,150, plus interest, costs and attorney’s fees. ESB also

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seeks a determination that any such judgment is excepted from discharge pursuant to 11 U.S.C. §
523(a)(2), (4) and (6).1 The Court conducted a short trial, reviewed all admitted exhibits, evaluated
the credibility of the witnesses, and is prepared to rule. This is a core proceeding over which this
Court has jurisdiction to enter a final order.2

I. FINDINGS OF FACT
Defendant, Murphy, began cattle ranching in southeastern Kansas in 1994. In 2002, Murphy
entered into a verbal agreement with his grandfather, James Mitchell, and his neighbor, Larry Pyle.

3

The agreement called for Mitchell and Pyle to each contribute $7,500 cash. Murphy did not invest
any cash into the business, but instead managed the day to day operations. The business venture was
named “2PM.” Murphy’s duties included selecting and purchasing the cattle for 2PM. He also
provided direct labor and care for the animals, which included feeding and transporting them on
pastures that he owned or leased. For a time, he also had the option of sending the animals to
feedlots for care.

The parties agreed to divide all profits equally but did not address the split if the investment
generated losses. No partnership documents or other contracts were ever drawn.

1This was filed after October 17, 2005, when most provisions of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 became effective. All future statutory
references are thus to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
11 U.S.C. §§ 101 - 1532 (2005), unless otherwise specifically noted.

2 28 U.S.C. § 157(b)(1)(jurisdiction to hear core proceedings) and § 157(b)(2)(I)) (action
to determine dischargeability of debt is core proceeding), 28 U.S.C. § 1334 and 11 U.S.C. §
523(c).

3Pyle testified at trial that he placed $15,000 into the business venture, which conflicted
with Murphy’s testimony that both Pyle and Mitchell infused $7,500. Because the actual amount
of Pyle’s investment is not critical to the outcome, the Court makes no finding of the amount
Mitchell or Pyle invested.

2

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On November 21, 2002, Murphy, Mitchell and Pyle, acting as principals of 2PM, engaged
in a series of loan transactions with ESB in order to raise additional capital. They signed, in their
individual names, two promissory notes. The first was for $75,018 and the second for $15,018.
These notes established revolving credit lines that would fund 2PM’s operations. In connection with
signing the promissory notes, Murphy, Mitchell and Pyle granted ESB a security interest in all cattle
purchased with the proceeds of the credit lines and signed an affidavit indicating that they
“intend[ed] to sell the Collateral to, by or through only the following buyers, commission merchants
or selling agents: Fort Scott Livestock Market, Inc.”

Over the next four to five years, as the notes came due, 2PM would pay off the accrued
interest and renew each of the credit lines. The names of the obligors on the notes changed
periodically from 2PM to the individual owners names. The parties agree that the notes were secured
by the prior security agreements entered into between the parties, as evidenced by the UCC
Financing Statements placed on file with the Kansas Secretary of State. In connection with the
renewal of each promissory note, Murphy, Pyle and Mitchell also signed new affidavits indicating
where they intended to sell the cattle that collateralized the loans.4

In October 2004, 2PM requested an increase in its line of credit to expand the operation and
take advantage of economies of scale. ESB agreed and extended another $75,000. On November

4 The places where cattle could be sold changed from time to time. In at least one
instance, the name “Tyson” was added to the Affidavit at some point after the Affidavit had been
typed (as shown by the use of different typeface and font). The consistent, and credible,
testimony on this issue was that the principals never understood that they could only sell cattle at
the designated places. They believed that the Bank only needed a general idea of where the
collateral would be sold. The Bank did not seem to take the execution or enforcement of these
Affidavits very seriously until it was evident that the enterprise may fail. ESB was aware that
Murphy was selling cattle at locations other than those stated in the Affidavit before it agreed to
renew at least some of the notes.

3

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2, 2006, the three notes were consolidated and renewed as one $165,000 note. Payment was due on
the earlier of demand by ESB, or May 1, 2007. On May 4, 2007, 2PM agreed to pay additional
interest of $7,284.77 and the bank granted a 90-day extension.

2PM did not make a payment prior to the extended deadline, so ESB sent a notice on August
14, 2007 demanding payment. Following this notice, Pyle and Mitchell collected and sold the
remaining cattle from both the 2PM operation and from Murphy’s “private” cattle inventory for
approximately $20,000. The cash proceeds were paid to ESB and applied against the balance on the
2PM note.

During the preceding years, Murphy had been commingling his cattle with 2PM’s and as a
result, it is unknown what proportion of the approximately 40 head sold belonged to 2PM and what
proportion belonged to Murphy. Murphy consented to the application of the proceeds to the 2PM
note, and did not ask for a portion to be applied to his personal loans. ESB was fully aware that
Murphy had commingled his cattle with 2PM’s.

Murphy’s accounting of the 2PM cattle operation was, at best, unsophisticated. In addition
to the 2PM cattle and his own personal stock, Murphy also managed cattle for his grandfather, his
in-laws, his brother, and for another individual named Kerry O’Brien. Only his in-laws and
O’Brien’s stock were kept separate, or at least identifiable, from the cattle owned by Murphy or his
other family members. Murphy testified that the cattle he purchased with his in-laws were kept in
a separate pen near his house. He would keep them there until he had sufficient numbers to take to
a feedlot to be fed.5 These cattle were never mixed with any of the other cattle kept by Murphy.

5His explanation for this arrangement was credible and logical. After the “mad cow”
disease in December 2003, ESB instructed Murphy not to take pledged cattle to a feedlot, but to
have Murphy pasture them to selling weight on his own or leased land. Ward feedlot had agreed

4

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In the transactions with O’Brien, Murphy testified that he went to sale barns and purchased
cattle. O’Brien would reimburse him by check after each purchase. Murphy then billed O’Brien for
the cost of feed, veterinary bills, etc. Murphy identified O’Brien’s cattle by ensuring that they were
properly branded. Murphy testified there were probably six to seven loads of cattle purchased and
sold in his dealings with O’Brien, with approximately 70 head of cattle per load.

Despite Murphy’s ability to keep the cattle purchased with his in-laws and O’Brien separate,
he was either unable or unwilling to manage cattle purchased by 2PM and his own cattle operation
in a similar fashion. Murphy testified that they developed a brand for 2PM, but that he stopped using
it when the operation ran into financial trouble and he realized he was short on sufficient cattle to
secure 2PM’s and his personal loans to ESB. Murphy also testified that he used ear tags for a while
to keep a proper accounting of the cattle, but that he abandoned that practice as well. Murphy
admitted that he intentionally stopped all attempts to identify and separate the 2PM cattle from his
own in order to save time and the costs associated with tagging and branding.

In addition to commingling the 2PM cattle with his own stock, Murphy funneled the income
from the various operations through his personal checking account at ESB. Murphy used this
account to make deposits and write checks for both his business activities and his personal affairs,
even though 2PM had an account at ESB. The 2PM account was apparently used initially, but was
closed in 2005.

to finance the purchase of some cattle, but ESB refused because this arrangement would have
required that it take a second lien on the cattle. Accordingly, Murphy established a separate
arrangement with his in-laws. Murphy did not take advantage of this opportunity to harm the
bank and complied with ESB’s request that he not handle “its” collateral in this fashion. Murphy
believed that he could make some extra income by having a small cattle operation with his in-
laws, who allowed him to take advantage of the Ward financing option.

5

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The commingling of his personal and the 2PM cattle was not as troublesome as his handling
and disposition of the pledged cattle. After the mad cow disease started in December 2003, and a
sharp increase in the price of feed corn from $1.50/bushel to $7-$8/bushel, Murphy and 2PM
struggled to remain solvent. Eventually, Murphy was forced to sell cattle to pay operating expenses,
resulting in fewer cattle to secure the ESB loans. Murphy testified that because of the commingling,
by 2005 or 2006, he was no longer able to differentiate between his and 2PM’s stock.

The evidence at trial established that prior to the renewal of each note, which occurred
approximately every 6 months, ESB’s Executive Vice President Dean Davied personally
accompanied Murphy to inspect the cattle. ESB wanted to insure that sufficient cattle existed to
fully secure its loans to 2PM and Murphy. Murphy and Davied never executed a physical count of
the cattle nor did they actually weigh them; instead they relied on estimates made by visual
inspection of quantity and weight in each pasture.

ESB had knowledge that Murphy was commingling his cattle with 2PM’s. The evidence at
trial established that Murphy and Davied, after making the quantity and weight estimates, would
apportion the entire inventory between Murphy’s personal stock (also security on Murphy’s personal
loans with ESB) and 2PM’s stock. As long as the total number of cattle appeared to be sufficient
to keep the bank fully secured on both Murphy and 2PM’s notes, ESB did not require Murphy to
change his methods of accounting for the cattle. 6 Despite the deficient accounting and the informal
apportionment methods, ESB routinely renewed the notes upon receipt of the interest payments.

6It also appeared that ESB may have been more relaxed about the adequacy of the
collateral because both Mitchell and Pyle had unencumbered assets that appeared to be sufficient
to further secure repayment of the note.

6

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Murphy testified that he understood that cattle purchased with proceeds from the 2PM loans
served as collateral to ESB. Despite this knowledge, Murphy sold 2PM cattle and used at least a
portion of the funds for his personal use and to pay expenses related to his personal cattle operation.
Although it is unclear exactly when the 2PM cattle were sold and the cash proceeds misapplied, it
is clear that by October 2006, the number of cattle collateralizing the $165,000 note to ESB had
dwindled significantly.

On October 23, 2006, Davied and Murphy conducted an inspection of the cattle
collateralizing both Murphy’s personal and 2PM’s loans. Murphy testified at trial that he knew at
that time that there was not enough cattle to fully secure the loans. In an effort to hide that fact, he
told Davied that he was in possession of one hundred cows when he admits there were only sixty
present. Pyle corroborated this testimony by testifying that at some point between May and
September 2007, he had a meeting with Murphy where Murphy admitted that he had misrepresented
the cattle quantities to Davied during the October 23rd inspection. He further admitted that the
number of cattle had dwindled even below what he had told Davied. Murphy knew from prior
inspections how many cattle were necessary for ESB to renew the notes.

Davied testified that if he had known the truth, he would not have agreed to renew 2PM’s
note on November 2, 2006. The report created by Davied following the inspection shows that based
on Murphy’s statements and his own inspection, Davied believed there were nearly300 head of 2PM
cattle, with a total value of just over $166,000, enough to fully secure its $165,000 loan. When the
cattle were rounded up and sold on September 1, 2007, there were only 40 head of cattle, which
included both 2PM cattle and Murphy’s personal stock. Part of the reason for the deficiency is
Murphy continued to sell cattle even after the last extension, and after the note was finally called.

7

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None of the cash proceeds from those sales were applied to the past due note, and it appeared that
he had no alternate plan for payment.

Additional facts will be discussed below, when necessary.

II.
ANALYSIS
Plaintiff alleges that its debt should not be discharged pursuant to 11 U.S.C. § 523(a)(2)(A),
§ 523(a)(4), and § 523(a)(6). The Court will address each of these claims separately. Before doing
so, it is important to note that the purpose of bankruptcy is to allow a debtor to have a financial
“fresh start.” However, the Bankruptcy Code does not provide a blanket fresh start for all debtors
under all circumstances. In fact, § 523 provides an express list of debts that are nondischargeable
in a Chapter 7 bankruptcy. Section 523 balances the competing policies of allowing a fresh start
while preventing a debtor from prospering from his own bad acts.7

A.
Standard of Review
The burden of proof rests with the party opposing the discharge. Accordingly, ESB has the
burden of proof, and must meet that burden by a preponderance of the evidence.8 Discharge
provisions are strictly construed against the creditor and, because of the fresh start objectives of
bankruptcy, doubt is to be resolved in the favor of debtors.9

B.
ESB met its burden of showing that the debt is non-dischargeable pursuant to
§ 523(a)(2)(A).
7Field v. Mans, 157 F.3d 35, 44 (1st Cir. 1998).

8See Grogan v. Garner, 498 U.S. 279, 291 (1991) (holding that preponderance of the
evidence standard, not clear and convincing standard, applies to all exceptions to discharge). See
also In re Busch, 369 B.R. 614, 623 (10th Cir. BAP 2007).

9In re Sweeney, 341 B.R. 35, 40 (10th Cir. BAP 2006) (citing In re Kaspar, 125 F.3d
1358, 1361 (10th Cir. 1997)).

8

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Section 523(a)(2)(A) of the Bankruptcy Code provides an exception to discharge “for money,
property, services, or an extension, renewal, or refinancing of credit” if a debt was obtained by “false
pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an
insider’s financial condition.” ESB must prove, by a preponderance of the evidence, (1) that Debtor
made a false representation; (2) that the representation was made with intent to deceive ESB; (3) that
ESB justifiably relied on this representation, and (4) that ESB sustained a loss as a result of the false
representation.10 A debtor’s intent to deceive a creditor in making false representations, within the
meaning of the fraud discharge exception, may be inferred from the totality of circumstances, or
from a knowingly made false statement.11

Intent to deceive may also be demonstrated by a defendant’s reckless disregard for the truth
or accuracy of his representations.12 “The Court is mindful, however, that reckless disregard for the
truth or accuracy of the representations as a basis for satisfying the intent requirement under 11

U.S.C. § 523(a)(2)(A) should be construed narrowly.”13 There must be some indication as a whole
that “‘presents a picture of deceptive conduct by the debtor which indicates an intent to deceive the
10Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996).

11Id. at 1375.

12In re Daviscourt, 353 B.R. 674, 685 (10th Cir. BAP 2006) (“Intent to deceive under this
subsection [§ 523(a)(2)(A) ] may be inferred from the totality of the circumstances, and includes
reckless disregard of the truth.”); In re McGuire, 284 B.R. 481, 493 (Bankr. D. Colo. 2002)
(noting that “the Tenth Circuit has held that a finding of reckless disregard may satisfy the
scienter element” under § 523(a)(2)).

13FTC v. Abeyta (In re Abeyta), 387 B.R. 846 (Bankr. D.N.M. 2008) (citing In re
McGuire, 284 B.R. 481, 854, 493 (Bankr. D. Colo. 2002)).

9

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creditor.’”14 A debtor’s silence regarding a material fact can constitute a false representation under
§ 523(a)(2)(A).15

Courts typically look for specific indicia of fraud, often referred to as “badges of fraud,”
when analyzing a case under § 523(a)(2)(A).16 However, when a court analyzes a case by evaluating
the badges of fraud, the Court must be mindful that the cases are peculiarly fact specific, and the
conduct in each case must be viewed individually, which this Court has done.17

ESB claims several acts by Murphy constitute fraud sufficient to have his debt to the bank
found nondischargeable. First, ESB claims that Murphy acted fraudulently by commingling his
personal cattle with those belonging to 2PM. The Court finds that because Murphy did this with the
implied, if not express, permission of ESB, that this allegation does not provide a basis for a finding
of non-dischargeability. To prevail on a fraud claim, ESB must show that it justifiably relied upon
Murphy’s actions to its own detriment. That element is lacking here; the record clearly reflects that
ESB had knowledge of this practice, as shown by the unrebutted evidence that Davied and Murphy

14Groetken v. Davis (In re Davis), 246 B.R. 646, 652 (10th Cir. BAP 2000) aff'd in part
and vacated in part by 35 Fed. Appx. 826 (10th Cir. 2002) (quoting 3 William L. Norton, Jr.
Norton Bankruptcy Law and Practice 2d § 47:16, n.62 (1999) (citations omitted)).

154 Collier on Bankruptcy ¶ 523.08[1][d] (15th ed. rev. 2008).

16Actions from which fraudulent intent has been inferred include situations in which a
debtor conceals pre-bankruptcy conversions, converts assets immediately before the filing of the
bankruptcy petition, gratuitously transfers property, continues to use transferred property, and
transfers property to family members. Courts also consider the monetary value of the assets
converted, whether the debtor obtained credit in order to purchase exempt property, whether the
conversion occurred after entry of a large judgment against the debtor, whether the debtor had
engaged in a pattern of sharp dealing prior to bankruptcy, and whether the conversion rendered
the debtor insolvent. Cadle Company v. Stewart (In re Stewart, 263 B.R. 608, 611 (10th Cir.
BAP 2001)).

17Id.

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performed numerous cattle inspections on these commingled cattle, and would then sit down and
apportion those cattle between Murphy’s personal loans and those of the 2PM operation.

Second, ESB claims that Murphy committed fraud by selling 2PM cattle at sale barns that
were not authorized by the affidavits signed in conjunction with the renewal of the 2PM notes. As
noted above, in order to constitute fraud, Murphy’s actions must have been done with the intent to
deceive the bank. Both Murphy and Pyle testified they did not read those affidavits closely, that it
was never their understanding that the businesses listed on those forms were the only places where
2PM cattle could be sold, and Murphy testified that regardless where the cattle were sold, he put the
sale proceeds into the general account. It was clear from the evidence at trial that the intent to
defraud is missing as to this claim. In addition, it was clear that ESB knew or should have known
that Murphy was selling cattle at places other than those listed on the Affidavits, but chose to renew
the notes several times after it had this information.

However, the Court does find that Murphy’s actions at the October 23, 2006 cattle inspection
provide sufficient grounds to sustain a fraud claim under § 523(a)(2)(A). Debtor essentially admitted
at trial that he intentionally misled ESB about the number of cattle present at the time of that
inspection. Murphy testified that he did so because he knew that the number of 2PM cattle to secure
the note was substantially short, and he was afraid ESB would call the note if they knew the true
status of their collateral. He was confident he could turn things around, so he did not think this
misrepresentation was serious. Murphy’s testimony was corroborated by Pyle, who testified that
Murphy admitted the misrepresentation he made to Davied at a private meeting they had after the
inspection.

11

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Furthermore, the bank officer in charge of handling the 2PM loans testified that he would not
have agreed to renew the notes had he known that there were significantly fewer cattle than were
represented by Murphy. The Court was initially troubled by the fact that the Bank officer
accompanying Murphy at the October 2006 inspection apparently decided to rely on the numbers
provided by Murphy instead of performing his own physical count. In other words, the Court had
some concern about whether ESB’s reliance on Murphy’s admitted misrepresentation was justified.
But testimony indicated the cattle grazed on up to 300 acres in approximately four pastures, and that
cattle “hide” in trees and “move.” Murphy was feeding and caring for the animals on a daily basis,
as well as purchasing and selling them. The bank had a right to rely on the numbers that Murphy
represented, and the Court finds it did so.

Accordingly, the Court finds that Murphy’s misrepresentation caused harm to ESB by
effectively persuading it not to call the note or notes when they came due on October 31, 2006.
Instead, ESB renewed the line of credit for an additional six months, during which time the number
of 2PM cattle continued to dwindle to the point where the loan was substantially under secured.

Having met all of the elements of a cause of action under § 523(a)(2)(A), the Court finds that
judgment should be granted in favor of ESB on its claim against Murphy. Based upon Murphy’s
false representation at the collateral inspection on October 23, 2006, which induced ESB to renew
the loan, the debt owed by Murphy to ESB is found to be nondischargeable.

B. ESB failed to show that the debt is non-dischargeable under § 523(a)(4).
Section 523(a)(4) provides an exception to discharge from any debt for “fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny.” To prevail under this provision of

12

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§ 523(a)(4), ESB must first prove that a fiduciary relationship existed between itself and Murphy.18

It must then prove that Debtor committed fraud or defalcation within the course of that fiduciary

19 20

relationship. In Fowler Brothers v. Young (In re Young), the Tenth Circuit discussed breach of

fiduciary duty as it relates to § 523(a)(4), as follows:

The existence of a fiduciary relationship under § 523(a)(4) is determined under
federal law. However, state law is relevant to this inquiry. Under this circuit’s
federal bankruptcy case law, to find that a fiduciary relationship existed under §
523(a)(4), the court must find that the money or property on which the debt at issue
was based was entrusted to the Debtor. Thus, an express or technical trust must be
present for a fiduciary relationship to exist under § 523(a)(4). Neither a general
fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality between
the parties’ knowledge or bargaining power, is sufficient to establish a fiduciary
relationship for purposes of dischargeability. Further, the fiduciary relationship must
be shown to exist prior to the creation of the debt in controversy.21

ESB contends that the structure of the 2PM cattle operation is that of a partnership under

Kansas law, and that the Kansas Uniform Partnership Act22 creates a fiduciary duty between Murphy

and his alleged partners, Pyle and Mitchell. ESB then argues that § 523(a)(4) “does not seem to

require that the fiduciary relationship exist between [Murphy] and [ESB] in this case, but only that

it exists and that the defalcation occurred while [Murphy] was acting in a fiduciary capacity.”

18Antlers Roof-Truss & Builders Supply v. Storie (In re Storie), 216 B.R. 283, 286 (10th
Cir. BAP 1997) (citing Fowler Bros. v. Young, 91 F.3d at 1371).

19Id.

2091 F.3d at 1371-72.
21Id.
22K.S.A. 56-101.


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The Court generally agrees with ESB’s contention that 2PM was likely acting as a partnership
and that Murphy may well have owed a fiduciary duty to Mitchell and Pyle.23 However, the duty
owed to his “partners” does not pass through to ESB. Although § 523(a)(4) does not specifically
state that the fiduciary duty must exist between a debtor and the objecting creditor, binding caselaw
in this Circuit clearly does.24

There was no evidence presented, or argument made, that Murphy owed a fiduciary duty to
ESB. At most, ESB could argue that borrowing funds from ESB created a fiduciary duty for Murphy
to account for the collateral to his partners. However, as explained in In re Young, “the fiduciary
relationship must be shown to exist prior to the creation of the debt in controversy.” 25 Because ESB
wholly failed to establish that a fiduciary relationship existed between itself and Murphy prior to the
creation of the debt, ESB’s claim under § 523(a)(4) is denied.

C. ESB failed to show that the debt was dischargeable under § 523(a)(6).
Plaintiff’s final claim is that Debtor caused a willful and malicious injury to it, and as a result,
the debt he owes ESB should not be dischargeable pursuant to § 523(a)(6). Section 523(a)(6)
provides an exception to discharge “for willful and malicious injury by the debtor to another entity
or to the property of another entity.”

23Because the form of this venture is not dispositive to the issues before the Court, it does
not decide whether there was, in fact, a partnership under Kansas law.
24See Storie, 216 B.R. at 286.
25In re Young, 91 F.3d at 1372.
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In 1998, the Supreme Court clarified, in Kawaauhau v. Geiger,26 that § 523(a)(6) only applies
to a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. In
other words, debts arising from injuries that are recklessly or negligently inflicted are not within the
exception of § 523(a)(6). The Supreme Court explained that a debtor must have intended the
consequences of his act, not simply the act itself.27

That said, if a debtor actually knows, or should reasonably foresee, that his voluntaryconduct
will result in injury, the conduct is deemed willful and malicious. 28 And as noted by the Court of
Appeals for the Tenth Circuit, without proof of both a willful act and a malicious injury, an objection
to discharge under § 523(a)(6) must fail.29 A wrongful act done intentionally, which necessarily
produces harm or that has a substantial certainty of causing harm, and is without just cause or
excuse, is “willful and malicious” within the meaning of § 523(a)(6).30

26523 U.S. 57, 60-64 (1998).

27Id. at 61-62. See also Horn v. Hazard (In re Hazard), 166 B.R. 145, 147 (Bankr. E.D.
Mo. 1994) (citing W. Prosser, Law of Torts 32 (4th ed. 1971) (stating “a person should be
deemed to have intended a result when ‘a reasonable person in ... [his] position would believe ...
[such a] result was substantially certain to follow.’”)

28Davis v. Williams (In re Williams), 173 B.R. 912 (Bankr. W.D. Ark. 1994); 4 Collier on
Bankruptcy ¶ 523.12[2], p. 523-94 (15th ed. rev. 2009).

29Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004) (emphasis in
original).

304 Collier at ¶ 523.12[2] (noting that liability arising from assault or battery is generally
considered as founded upon a willful and malicious injury and is therefore within the exception);
Hixson v. Hixson (In re Hixson), 252 B.R. 195, 198 (Bankr. E.D. Okla. 2000) (noting that debts
arising from assault and battery, absent legal justification or excuse, are considered willful
injuries under § 523(a)(6)).

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Generally, causes of action for breach of contract do not give rise to a nondischargeability
claim under § 523(a)(6). However, transfers in breach of a security agreement may render a debt
nondischargeable when the debtor’s conduct is knowing and certain to cause financial harm.31
“Unless the creditor can prove not only that the debtor knew of the security interest, but also that the
debtor knew the transfer of the property was wrongful and certain to cause financial harm to the
creditor, the debt should not be found nondischargeable.”32

Applying the settled legal standard to this case, the Court finds that ESB failed to show that
Murphy acted willfully and maliciously in causing damage to ESB’s property. The evidence clearly
established that Murphy was commingling the cattle that secured ESB’s loan to 2PM with cattle that
secured ESB’s loan to Murphy, as well as commingling the proceeds from the sale of both
categories of cattle. The evidence also established that Murphy sold cattle that secured ESB’s loan
without applying the cash proceeds to the 2PM note and misled ESB’s bank officer into believing
that sufficient cattle existed to collateralize the notes. These acts were clearly willful, as there is no
evidence that Murphy’s actions were inadvertent or accidental. Murphy clearly knew what he was
doing in operating the cattle operation in this manner.

However, the Court finds that there was insufficient evidence to show that Murphy acted in
a malicious manner toward ESB. It is clear that Murphy operated under a sense of eternal optimism
that things would soon turn around—a rather common occurrence with farmers and ranchers. The
Court was impressed with Murphy’s work ethic, and came away with little doubt that Murphy
intended to continue working hard to turn things around, make a profit, and repay the loan. It was

314 Colliers on Bankruptcy § 523.12[1] (15th ed. rev. 2001).

32Id (emphasis added).

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never his intent to defraud ESB or maliciously cause any injury to the bank. He always thought that,
given more time, and a more favorable cattle market, that he would be able to pay back the loan.

Furthermore, there was absolutely no evidence that Murphy was selling ESB’s cattle to fund
an extravagant lifestyle or make frivolous or extravagant purchases. He commingled cattle money,
but all of the money went right back into the only account he kept—at ESB—and he was not trying
to hide anything from anyone about how he was conducting this business. ESB was fully aware that
Murphy was conducting business in this fashion—and had been doing so since at least 2005. ESB
never suggested to him that his business practices were improper. In fact, with substantial
knowledge of his business practices, it continued to renew the loan many times.

The Court finds that because of the economic climate, including the financial set back to the
beef industry precipitated by the mad cow disease from which 2PM never recovered, coupled with
increasing feed prices, Murphy got behind on cattle early on and just kept plugging away, trying to
find ways to make this venture profitable. He tried different ways of conducting the cattle operation,
including a venture he ultimately conducted with his in-laws using the financing available through
a specific feed yard that ESB refused to let him use for its collateral. He worked a second job, in the
evening, while trying to hold on and earn a profit. His grandfather was jointly responsible for this
debt, and it was clear that he tried everything he could to spare his grandfather from losing his
money. At trial, it was clear that Murphy did everything he knew how (including the
misrepresentation noted above) to try and keep this cattle venture afloat.

Obviously his efforts failed, but there was no evidence of a malicious intent behind any of
his actions. There was no evidence presented to show that Murphy acted in a manner that he knew

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was certain to cause financial harm to ESB. Having failed to establish that Murphy acted with a
malicious intent to cause injury to ESB, the claim under § 523(a)(6) fails.

D.
ESB is entitled to judgment on its claim, but not in the amount prayed for in the
Pretrial Order.
ESB has shown that Murphy owes a debt to it because Murphy failed to fulfill his obligations
under the promissory note and the Commercial Extension Agreement, and that the debt is
nondischargeable. In the Pretrial Order, ESB requested judgment against Murphy in the amount of
“$165,150 plus interest, costs, and attorney’s fees . . . .” Murphy does not appear to contest his
liability on this note, only its dischargeability.

The only evidence received demonstrates that the balance due on the note as of January 6,
2008 was $154,295.56.33 This amount allows for the accrual of interest through that date, and also
credits the $20,889.61 payment made on the note following the sale of the remaining cattle by Pyle
and Mitchell.

The Court finds that judgment should be granted in the amount of $154,295.56, plus interest
at the contract rate of 9.25% from January 6, 2008 through the date of this judgment. ESB is also
entitled to post-judgment interest at the statutory rate set forth in 28 U.S.C. § 1961, from the date of
judgment until the debt is paid in full. Further, as the prevailing party, ESB is entitled to its costs
in connection with this action.

Neither party addressed the issue of attorney fees at trial, or in the post-trial briefing.
Accordingly, the Court will not rule on the issue of attorney fees at this time. Instead, the Court will
schedule a telephone conference with counsel to determine the parties’ respective positions on this

33Exhibit 51.
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remaining issue prior to entry of final judgment. Counsel are expected to be prepared to discuss the
authority on the issue of whether ESB is entitled to its reasonable attorney fees.

III. CONCLUSION
The Court finds that ESB is entitled to judgment in the amount of $154,295.56, plus interest
based upon Murphy’s failure to repay the note. The Court further finds that the debt was procured
by fraud based upon Murphy’s misrepesentation of the number of cows in his possession during the
inspection conducted October 23, 2006. Because this misrepresentation induced ESB to renew the
note, it is nondischargeable pursuant to § 523(a)(2)(A). The Court denies relief under § 523(a)(4)
and § 523(a)(6).

IT IS, THEREFORE, BY THE COURT ORDERED that a nondischargeable judgment
will be entered in favor of Plaintiff, Exchange State Bank, and against Defendant, Joseph Dean
Murphy, in the amount of $154,295.56, plus interest at the contract rate of 9.25% from January 6,
2008 through the date of judgment, and post-judgment interest at the statutory rate from the date of
judgment until the debt is paid in full. The Court will reserve ruling on Plaintiff’s request for
attorney fees pending further hearing.

IT IS SO ORDERED.
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