- Category: Judge Somers
- Published on 21 January 2011
- Written by Judge Somers
- Hits: 2751
SIGNED this 19 day of January, 2011.
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE
Opinion designated for publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
JOHN WILLIAM KARR,
CHRISTOPHER J. REDMOND,
Trustee in Bankruptcy for Alexico
JOHN WILLIAM KARR,
CASE NO. 09-20008
ADV. NO. 09-6055
MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN PART THE
TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
Case 09-06055 Doc# 69 Filed 01/19/11 Page 1 of 33
This adversary proceeding is brought by Christopher J. Redmond, in his capacity
as the Trustee of the bankruptcy estate of Alexico Corporation (hereafter “Trustee”),
against Debtor John William Karr (hereafter “Karr” or “Debtor”), the sole director,
shareholder, and officer of Alexico Corporation (hereafter “Alexico”). The Trustee
objects to Karr’s discharge under two subsections of 11 U.S.C. § 727 and, in the
alternative, to the dischargeability of Karr’s debts to Alexico under two subsections of 11
U.S.C. § 523.1
The Trustee has moved for summary judgment as to discharge under § 727(a)(7)2
(which incorporates § 727(a)(2)(A)) and § 727(a)(5), and as to dischargeability under
§ 523(a)(4) and § 523(a)(6).3 The Debtor opposed the motion, and also filed a motion to
strike more than half of the Trustee’s statements of uncontroverted facts for alleged noncompliance
with Local Bankruptcy Rule 7056.1. By separate order, the Court has denied
the motion to strike. The Trustee filed a reply brief. The Debtor, without seeking the
Court’s approval, then filed a sur-reply brief, which the Trustee moved to strike. By
separate order, the Court has sustained the motion to strike. The Court will disregard the
1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District
of Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J). There is no objection
to venue or jurisdiction over the parties.
2 11 U.S.C. § 727(a)(7). Future references to title 11 in the text shall be to the section only.
3 The Trustee also asserts state law claims to avoid fraudulent transfers and for damages for
breach of fiduciary duty, but those claims are not involved in his summary judgment motion.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 2 of 33
Debtor’s sur-reply brief.
FINDINGS OF UNCONTROVERTED FACTS.
A. THE TRUSTEE’S MOTION IS BASED UPON THE FOLLOWING
From December 2, 2004, when a suit by a former stockholder of Alexico against
Karr and Alexico was settled, Karr was the sole director, shareholder and officer of
Alexico. Karr was the ultimate decision maker. On January 5, 2009, Karr filed a
voluntary petition for relief under Chapter 7. On February 16, 2009, Alexico filed a
voluntary petition under Chapter 7. Plaintiff Christopher J. Redmond was appointed
trustee in the Alexico case.
Alexico’s primary business was the sale of certain automotive-related insurance,
warranties, and service contract products to automobile purchasers, through auto
dealerships. As an administrative office for after-market warranties, Alexico issued
various policies, including an anti-theft policy known as Theft-Gard and Premium Care; a
paint, fabric, and vinyl protection package known as Signature Finish; GAP coverage,
which was Guaranteed Auto Protection; Travel-Gard, which was Tire and Wheel
Protection; and Lease Edge and Executive Edge.
On October 8, 2003, Robert B. Sparks (“Sparks”), a former minority shareholder
of the predecessor of Alexico, brought suit in Johnson County District Court against
Alexico and Karr. Sparks’s petition sought damages and equitable relief for breach of
fiduciary duty, fraud, breach of contract, an accounting, unpaid dividends, conversion,
Case 09-06055 Doc# 69 Filed 01/19/11 Page 3 of 33
promissory estoppel, and breach of the implied covenant of good faith and fair dealing,
and sought to impose liability on Karr personally through an alter-ego or pierce-thecorporate-
veil theory. The petition alleged that “Karr used Alexico as his personal piggy
bank, drawing large sums of money from the company for personal expenditures and
causing the company to purchase items and services intended only to benefit Karr and/or
members of his family.” Count II of Sparks’s petition asserted a claim of fraud against
Karr personally and alleged that in Alexico financial statements Karr presented to Sparks,
he: (a) omitted the use of Alexico’s assets to pay personal expenses of Karr; (b) omitted
the extension of interest-free personal loans or advances by Alexico to Karr from
corporate assets; (c) characterized and paid non-reimbursable personal expenses of Karr
as reimbursable business expenses; (d) acquired assets through Alexico for the principal
or sole purpose of benefitting Karr and his family personally, including but not limited to
motor vehicles and an airplane; and (e) engaged in self-dealing in the assets and income
of Alexico. Count II did not allege a claim against Alexico. On December 3, 2004, the
District Court of Johnson County, Kansas, entered a final judgment in favor of Sparks on
Count II of Sparks’s petition, in the amount of $2,400,000.
Pursuant to an agreement between the parties, the Sparks judgment was kept under
seal and was subject to the terms of a Mutual Release and Settlement Agreement
(“Settlement”) dated December 2, 2004. Among other things, the Settlement provided
that the judgment in the amount of $2,400,000 would be entered “against both John W.
Karr and Alexico Corporation . . . on Count II . . . [and] Sparks will voluntarily dismiss
Case 09-06055 Doc# 69 Filed 01/19/11 Page 4 of 33
with prejudice the other claims in his First Amended Complaint.” The agreement further
provided the Judgment could be satisfied by Karr, defined to mean John W. Karr and
Alexico Corporation, paying Sparks $1,650,000 in the form of a lump sum payment of
$950,000 on December 15, 2004, plus 48 monthly installments of $19,791.67 on the
fifteenth day of each month thereafter. If there was a material default and failure to cure,
Sparks would be entitled to immediately execute on the entire judgment amount of
$2,400,000. However, if all the payments required in the Settlement were made, the
judgment would be deemed fully satisfied. Karr testified that he agreed to have a
judgment against him for fraud to eliminate Sparks’s concern that Karr could file
bankruptcy after the settlement and thereby eliminate the debt. Karr’s Statement of
Financial Affairs states that nothing is still owing to Sparks.
Possibly as early as 2006, Alexico experienced apparent cash flow problems.4
Beginning in 2005 and continuing into 2006, there were instances when checks prepared
by Alexico’s in-house accountant on a weekly basis needed to be held rather than sent
immediately because there was not sufficient money in the Alexico operating account.
Alexico’s in-house balance sheets for June 30, 2005, September 30, 2005, and December
4 The Court rejects Karr’s objection to this statement of fact and others about Alexico’s financial
condition, which are supported by the testimony of Alexico’s in-house accountant, on the basis that the
“financial condition of Alexico is opinion testimony for which an expert witness is required.” Doc. 53.
Fed. Rule of Evid. 701 permits a witness who is not testifying as an expert to express opinions and
inferences which are “(1) rationally based on the perception of the witness, (b) helpful to a clear
understanding of the witness’ testimony or the determination of a fact in issue, and (c) not based on
scientific, technical or other specialized knowledge within the scope of Rule 702.” The Court finds that
to the extent an opinion about Alexico’s financial condition is involved, such statements are admissible.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 5 of 33
31, 2005, show negative cash balances in the operating account. This condition was also
present in 2006 and 2007; for example, the negative balance in the operating account as
of February 28, 2007, was $228,827.75. Alexico’s 2005 tax return showed a negative
equity position of $1,201,006, which increased to a negative $2,529,245 by year end 2006
and a negative $2,629,704 by year end 2007. Alexico’s audited financial statement as of
December 31, 2006, prepared by outside accountants, identified the total stockholder’s
deficit to be $5,199,274.5 The notes to the audited financial statement include the
As of the report date the Company continues its business
operations despite difficulties with cash flow and a general
downward movement in the automotive market. . . . The
viability of continuing business operations is contingent upon
the Company’s ability to mange its relationships with
reinsurers and agents under payment terms that will allow the
Company to extend obligations until such time as cash flow
Karr admits that Alexico had cash flow problems and that he became aware of a serious
cash flow problem by the summer of 2007. When insufficient cash was available to pay
all creditors, Karr directed the in-house accountant which creditors to pay and when.
One of the reinsurers of Alexico’s warranty products, Allstate, performed an
5 The Court rejects Karr’s objections to the Trustee’s statements of fact based upon the audited
financial statement as inadmissible opinion testimony for the reasons stated in note 4 above. The Court
also rejects the objection that it is inadmissible hearsay. The Court finds the financial statement
admissible under the business records exception of Fed. R. Evid. 803(6). As stated in the Trustee’s
affidavit, the audited financial statement was included in Alexico’s business records. Contrary to Karr’s
position, the fact that the statement was not created internally does not place it outside the business
records exception to the hearsay rule. See Fernandez v. Chios Shipping Co., Ltd., 542 F. 2d 145, 154
n.16 (2nd Cir. 1976); In re Vaniman Int’l, Inc., 22 B.R. 166, 192 (Bankr. E.D.N.Y. 1982).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 6 of 33
internal audit of Alexico in September 2007. The report described Alexico’s financial
condition as “seriously impaired” and questioned whether Alexico could “continue as a
going concern.” The report stated that Alexico was delinquent on two invoices to Allstate
amounting to over $600,000, and new invoices were about to be billed.6 In March 2008,
Allstate required that commissions paid to Alexico for the sale of products that Allstate
insured be sent to a lockbox. This had a big adverse effect on Alexico’s cash flow
problems. At this time, another large reinsurer creditor was communicating with Karr
about substantial outstanding obligations owed to it by Alexico. During 2008, Alexico’s
accountant would have to hold back automatically-generated checks for so long that, by
the time cash was available, the dates on the checks became an issue, and new checks
were created before payment was sent.
Karr admits that he did not distinguish between himself and Alexico.7 From 2001
forward, Alexico’s accountant paid Karr’s personal expenses and the expenses of some of
Karr’s family members. Initially, the accountant had signatory authority for Karr's
personal account at First National Bank, to which his salary was deposited and from
6 Karr objects to the Trustee’s reliance on the Allstate audit as inadmissible hearsay and as
opinion evidence for which an expert is required. The Court rejects the objection based upon the hearsay
rule because the Allstate audit report is within the business records exception of Fed. R. Evid. 803(6).
See note 5 above. As stated in the Trustee’s affidavit, the Allstate audit was included in Alexico’s
financial records when it filed for bankruptcy relief. Further, Karr testified that Allstate, because it was
one of Alexico’s insurers, could at any time do an audit. Karr also testified about the portions of the audit
that are included in the Trustee’s statement of facts and did not assert they were erroneous. Pl. Ex 13,
109:3-113:17. In addition, Karr relies upon the Allstate audit in the additional statements of fact he
presented to the Court. Doc. 53. The Court also rejects the objection based upon opinion evidence for
the reasons stated in note 4 above.
7 Doc. 53, p. 26.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 7 of 33
which his bills were paid. An Advance to Officer Account was established in Alexico’s
books to show advances made to Karr in excess of his salary when Karr directed the
cutting of a check for deposit to his personal account because its balance was not
sufficient to cover his expenses. After Karr’s personal checking account was garnished
by the State of Kansas prior to December 2005, Karr directed the accountant to make his
salary deposits as credits to the Advance to Officer Account and to pay his expenses
through the Alexico bank account, with appropriate debits to the Advance to Officer
Account. At Karr’s direction, Alexico also made some deposits to the bank accounts and
savings accounts of some of Karr’s family members. The deposits were considered to be
advances to Karr and were recorded in the Advance to Officer Account. For the period
from July 2007 to June 2008, disbursements from the Advance to Officer Account
exceeded credits for salary and capital distributions by an amount in excess of $450,000.8
Karr was married at least three times to three different women, Sherry, Dawn, and
Crystal Karr, and divorced from each of them. Maintenance payments to Sherry Karr of
$7,500 per month were paid by Alexico through 2008. Maintenance payments to Crystal
Karr of $5,000 per month for 20 months commenced April 1, 2008, and some payments
were made. Karr has two children, Austin and Alexis. In 2008, Karr continued to have
Alexico make payments for his daughter’s BMW, auto insurance, and cable service, and
8 The Court’s own review of the statements for the Advance to Officer Account, submitted by the
Trustee as Exhibit 17 in support of his motion for summary judgment, shows payments to Karr in excess
of his salary each month from March 2008 through June 2008 as follows: March $25,640.69; April
$44,601.55; May $37,122.21; and June $28,299.58.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 8 of 33
deposits to her savings account. In 2008, Karr also continued to have Alexico make
payments on his own country club membership and for maintenance of his swimming
Over the years of Alexico’s operation, Alexico acquired vehicles for Karr’s
personal use, including a Ferrari F430, a Ferrari Stradali, a Mercedes CLK63, an Aston
Martin, and a Porsche, among others. Karr continued the purchase of luxury automobiles
through August 2007. In 2008, Karr conveyed a corporate automobile to his latest ex-
wife in their divorce settlement. The Mercedes SUV was worth $103,738.76 as shown on
Alexico’s July 2008 balance sheet, but was “awarded” to Karr’s ex-wife sometime
between that date and the September 30, 2008, balance sheet.
Karr received salary compensation from Alexico that was in excess of $1 million
each year from 2005 through 2007. He continued to take a salary until February 2008.
Karr received capital distributions from Alexico in the amounts of $2,700,000 in 2005
and $1,500,000 in 2006.9
The Allstate internal audit report from September 2007 included the following as a
Critical Audit Finding: “Alexico also pays the owner[’s] personal expenses. It was
determined that insurance company funds are utilized to pay approximately $150,000
each month of the owner[’s] personal expenses. The company only generates
9 Karr attempts to controvert this statement, which is support by copies of Alexico’s federal
income tax returns, by stating that the contributions were credited to his Advance to Officer Account.
The Court finds this fact, assuming it is true, does not controvert the Trustee’s statement, as there was a
distribution whether it was in cash or a credit to his account.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 9 of 33
approximately $50,000 in operating profit from the business. Consequently, the advances
paid to the stockholder approximate $76,000 per month plus a $20,000 per month legal
settlement with an ex-employee causing the negative cash flow situation.”10
Starting in the fall of 2007, a portion of the premiums due to Old United, a
reinsurer, were held back and those funds were used to pay other expenses, including
Karr’s divorce payments, the Sparks Settlement, and the IRS. Alexico continued to sell
Travel-Gard warranties until it filed for bankruptcy on October 31, 2008. At that time, it
was holding back checks for payments of Travel-Gard claims because it had insufficient
Karr provided a personal financial statement to an individual and corporate
creditor, Great Western Bank, as of July 12, 2007. The financial statement reported that
Alexico was worth $5,000,000, and that Karr had personal property valued at $500,000
and artwork valued at $70,000.
B. DEFENDANT KARR’S STATEMENT OF FACTS SUBMITTED IN
RESPONSE TO THE TRUSTEE’S MOTION.
Karr, when opposing the Trustee’s motion, sets forth 30 paragraphs of statements
of fact. The majority of these statements are nearly identical to those submitted in
attempting to controvert the facts submitted by the Trustee in support of his motion for
summary judgment. The Trustee controverts all but a few of Karr’s statements.
10 Karr attempts to controvert this statement on the basis that it is inadmissible hearsay and
opinion testimony for which an expert is required. The Court rejects these arguments for the reasons
stated in notes 4 and 5 above. Although Karr did not testify about this portion of the report in his
deposition, he provides no evidence that the quoted statement is not accurate.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 10 of 33
Karr begins his statement of uncontroverted facts with several statements about the
December 2, 2004, settlement of the Sparks litigation, which the Court finds are not
proper for inclusion in the statement of facts portion of a memorandum in opposition to a
motion for summary judgment because they are in essence legal conclusions. The
uncontroverted facts about the settlement are stated above. Karr’s statement of facts
includes the following: “Alexico and Karr were both responsible for making payments
under the Settlement Agreement. . . . Because Alexico was liable under the Settlement
Agreement, Sparks could have enforced the Settlement Agreement against Alexico if
there was a default under the Settlement Agreement. . . . The lawsuit with Robert Sparks
was a shareholder lawsuit.” The Trustee controverts these statements, asserting that the
Settlement Agreement and the payments are examples of Karr’s use of corporate assets to
satisfy his personal obligations, since the corporation was not a defendant in Count II, the
count allegedly settled with Sparks. The Trustee also asserts that the complaint, although
brought by a shareholder, involved more than a “shareholder suit.” As to the additional
“facts” provided by Karr, the Court finds that they evidence a legal dispute as to the legal
impact of the Settlement, not additional uncontroverted facts.
Karr states as uncontroverted that he “does not recall when Alexico began
experiencing cash flow issues; however, he believes that he first became aware of
Alexico’s cash flow issues in late 2007.” This statement is controverted. As previously
found, it is uncontroverted that Karr became aware of Alexico’s cash flow problems by
the summer of 2007. Karr further states that when he “became aware of Alexico’s cash
Case 09-06055 Doc# 69 Filed 01/19/11 Page 11 of 33
flow issues, he reduced his monthly salary from $80,000 to $33,000,” and that he did not
take a salary in May 2008. This statement is controverted. The Trustee, relying on the
Advance to Officer Account transaction records, responds that Karr’s salary was not
reduced until February 2008, several months after he states he became aware of the cash
flow issues, and that he took his salary as scheduled on May 15, 2008, and May 31, 2008.
Karr’s statements about his attempt to sell the company are controverted. Karr
states as follows:
After he was unable to secure the loan, Defendant Karr attempted to sell
Alexico. In fact, Defendant Karr reached an agreement in principle with a
company to purchase Alexico. However, the agreement fell through and
Defendant Karr was unable to sell the business to the prospective purchaser.
Mr. Karr believed that he could sell the business for between $8,000,000.00
and $10,000,000.00. Based upon this evaluation, Defendant Karr remained
confident that he could sell Alexico and pay off its liabilities, including the
Advance to Officer Account.11
The Trustee asserts that these statements are controverted because they are supported only
by self-serving, conclusory statements provided by Karr’s affidavit, without any
supporting details. The Trustee specifically controverts Karr’s statement of the value of
the business. As to the value of the business, Karr cites the Allstate audit, which in a box
on the right margin of the document labeled “deleted” states: “The company is in dire
need of a potential equity partner to secure additional funding, since it is estimated that
the market value of Alexico’s business is anywhere from $8 million to $10 million.” As
the Trustee points out, in the body of the audit, as opposed to the box labeled “deleted,”
11 Doc. 53, p. 28, ¶¶ 10-14 (citations to record omitted).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 12 of 33
the report states: “Currently, Alexico’s financial condition is seriously impaired and there
is a question as to whether [it] can continue as a going concern.” The body of the report
also states: “The most significant asset on Alexico’s books is a $2.6 million Advance to
Stockholder. It is not known if the owner of this Subchapter S-Corporation has any other
assets to contribute as a capital infusion. The company requires an infusion of cash and is
presently in a negative equity position of $2.8 million as per [its] June 30, 2007 balance
sheet.” The Court finds, as urged by the Trustee, that the Allstate audit does not provide a
basis for a reasonable belief that Alexico could be sold for $8,000,000 to $10,000,000.
As to Karr’s July 2002 financial statement presented to Great Western Bank, Karr
submits the following as uncontroverted facts. “The $500,000 figure listed on the July,
2007 financial statement he provided to Great West[ern] Bank was an estimation of the
value of [his] personal property.” The Trustee does not controvert this statement. Karr
further states: “In the above referenced financial statement, Defendant Karr did not list
any specific items of personal property.” The Trustee responds, correctly, that the
financial statement identified several items of personal property, including two
automobiles, a 401k balance of $125,000, and artwork valued at $70,000. Karr further
states: (1) “Any items of artwork listed on the financial statement were included in his
bankruptcy schedules,” (2) “Defendant Karr still has the artwork which he valued at
$70,000.00 on the Great West[ern] Bank statement, except for two pieces which were
sold,” and (3) “The value of the artwork is currently significantly less than $70,000.00.”
As the Trustee points out, the foregoing are supported only by Karr’s affidavit, with no
Case 09-06055 Doc# 69 Filed 01/19/11 Page 13 of 33
specifics concerning valuations or past sales.
Karr’s statement of uncontroverted facts includes the following regarding the
Advance to Officer Account:
When Alexico did not have sufficient cash flow to pay all its
creditors, Alexico had to decide which creditors to pay. Defendant Karr,
rather than Alexico[,] paid his personal expenses. Defendant Karr
directed Ms. Heermann to pay his personal expenses out of his Advance to
Officer Account. Any salary owed Defendant Karr was credited to his
[A]dvance to [O]fficer [A]ccount, and any personal expenses paid out of
Defendant Karr’s Advance to Officer Account in excess of his salary would
remain in the Advance to Officer Account. Any dividend distributions
listed on Alexico’s Federal Income Tax Returns were not paid to Defendant
Karr. Rather, they were used to pay down [his] Advance to Officer
Account. Moreover, every single penny that entered into and exited the
Advance to Officer Account was accounted for and its whereabouts
These statements, when viewed simply as facts about Alexico’s accounting procedures
relating to the payment of Karr’s personal expenses by the corporation, are the same as
the uncontroverted facts found in the preceding section. As stated by Karr and not
disputed by the Trustee, the Advance to Officer Account properly identifies and
documents the transactions that flowed through the account. To the extent Karr’s
statements of fact vary from the uncontroverted facts found above, they are arguments as
to the legal implications of the procedures and are not proper for inclusion in statements
of fact submitted in response to a motion for summary judgment.
Karr’s statement of uncontroverted facts includes several statements of his belief
12 Doc. 53, p. 29-30, ¶¶ 25, 27, 28, 23, & 31 (citations to record omitted).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 14 of 33
and intent. Karr states:
All actions in deciding which creditors to pay were made with the
intent of continuing the business of Alexico with the ultimate goal of selling
Alexico. I never took an action that I believed would harm Alexico or its
value. Because I was the sole shareholder of Alexico, any harm to Alexico
would have diminished the value of my stock in Alexico and directly
The Trustee responds that these statements, which are supported only by Karr’s affidavit,
are contrary to the manner in which Karr operated Alexico, which in the Trustee’s view
harmed Alexico to the benefit of Karr personally. Whether they are sufficient to create a
material fact in controversy will be discussed in the analysis section of this opinion.
ANALYSIS AND CONCLUSIONS OF LAW.
A. SUMMARY JUDGMENT AND BURDEN OF PROOF.
Rule 56 of the Federal Rules of Civil Procedure applies in adversary proceedings.
Pursuant to that rule, a judgment sought by a properly filed and supported motion for
summary judgment “should be rendered if the pleadings, the discovery and disclosure
materials on file and any affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of law.” The provisions for
denial of discharge of all debts under § 727 are “generally construed in favor of the debtor
and strictly against the creditor.”14 The same rule applies to determining whether a
13 Doc. 53, p. 29-30, ¶¶ 26, 29, & 30 (citations to record omitted).
14 6 Collier on Bankruptcy ¶ 727. 01 (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th
Case 09-06055 Doc# 69 Filed 01/19/11 Page 15 of 33
particular debt falls within one of the exceptions to discharge of § 523.15 As to both
objections to the discharge of all debts and the excepting of specific debts from discharge,
the objecting party has the burden of proving the objection16 by a preponderance of the
B. DENIAL OF DISCHARGE UNDER § 727(a)(7) AND § 727(a)(2)(A).
“Section 727(a)(7) extends the basis for denial of discharge [from misconduct in
the debtor’s own case] to the debtor’s misconduct in a substantially contemporaneous
related bankruptcy case.”18 It provides:
(a) The court shall grant a debtor a discharge, unless —
. . .
(7) the debtor has committed any act specified in
paragraph (2), (3), (4), (5), or (6) of this subsection, on
or within one year before the date of the filing of the
petition, or during the case, in connection with another
case, under this title or under the Bankruptcy Act,
concerning an insider.
A commentator explains the operation of the exception as follows, “Thus, if the debtor
engages in objectionable conduct in a case involving . . . a corporation of which the
debtor is an officer, director or controlling person, the debtor may be denied a discharge
15 Id. at ¶ 523.05.
16 Fed. R. Bankr. P. 4005.
17 In re Serafini, 938 F.2d 1156 (10th Cir. 1991) (proceedings objecting to discharge of all debts
under § 727); Grogan v. Garner, 498 U.S. 279 (1991) (proceedings to except specific debts from
discharge under § 523).
18 6 Collier on Bankruptcy ¶ 727.10.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 16 of 33
in the debtor’s own case.”19
Two requirements must be satisfied. The debtor must be an insider of the debtor in
another case, and the debtor must have engaged in an act proscribed by § 727(a)(2), (3),
(4), (5), or (6). For purposes of § 727(a)(7) , “insider” is defined by § 101(31). Since
Karr was the president, sole director, and sole stockholder of Alexico and controlled its
business, this element is satisfied. To satisfy the second requirement for denial of
discharge under § 727(a)(7), the Trustee alleges that Karr’s conduct was objectionable
under § 727(a)(2)(A), which provides:
(a) The court shall grant the debtor a discharge, unless —
. . .
(2) the debtor, with intent to hinder, delay, or defraud a
creditor or an officer of the estate charged with custody
of property under this title, has transferred, removed,
destroyed, mutilated, or concealed, or has permitted to
be transferred, removed, destroyed, mutilated, or
(A) property of the debtor, within one year
before the date of the filing of the petition.
In this case, it is uncontroverted that Karr was an insider of Alexico. Thus, if,
within one year before the date of the filing of the Alexico petition, Karr transferred
property of Alexico in violation of § 727(a)(2)(A), Karr may be denied a discharge in his
own Chapter 7 case. The elements of a § 727(a)(2)(A) claim are: (1) The debtor or his
duly authorized agent transferred, removed, destroyed, mutilated, or concealed
Case 09-06055 Doc# 69 Filed 01/19/11 Page 17 of 33
(2) property of the debtor, (3) within one year prior to the bankruptcy filing, (4) with the
intent to hinder, delay, or defraud a creditor.20 To deny a discharge under this subsection,
the court must find “‘actual intent to defraud creditors.’”21 “Fraudulent intent of course
may be established by circumstantial evidence, or by inferences drawn from a course of
conduct.”22 “The initial burden is upon the objecting creditor to establish reasonable
grounds for believing the bankrupt has committed acts which will prevent his
discharge. . . . [T]he bankrupt must then assume the burden of showing that the transfer
was justified under all the circumstances.”23
Since Karr was an insider of Alexico, the elements required for denial of Karr’s
discharge under § 727(a)(7) are: (1) that Karr transferred substantial assets of Alexico to
himself or to others for his benefit; (2) that such transfers occurred at Karr’s direction;
(3) that such transfers occurred within one year of Alexico’s bankruptcy filing on
February 16, 2009, and (4) that such transfers were made with intent to hinder, delay, or
defraud creditors of Alexico.
Here, the uncontroverted facts clearly establish that within one year prior to
Alexico’s filing, under Karr’s direction, substantial funds from Alexico’s operating
account in excess of Karr’s salary were transferred for Karr’s benefit. During this time
20 Mathai v. Warren ( In re Warren), 512 F3d 1241, 1249 (10th Cir. 2008).
21 Id. (quoting Marine Midland Bus. Loans, Inc., v. Carey (In re Carey), 938 F.2d 1073, 1077
(10th Cir. 1991)).
22 Farmers Co-op. Ass’n v. Strunk, 671 F.2d 391, 395 (10th Cir. 1982).
23 McMullin v. Todd, 228 F.2d 139, 142 (10th Cir. 1955).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 18 of 33
period, as previously found, Karr admits that he did not distinguish between himself and
Alexico, and all of his personal expenses were paid from Alexico’s operating account,
with appropriate entries to Alexico’s Advance to Officer Account. The charges to the
Advance to Officer Account exceeded the credits by more than $450,000 from July 2007
to June 2008. Karr’s personal obligations paid by the corporation during 2008 included
maintenance payments to two ex-wives, his country club membership and pool
maintenance expenses, payments for Karr’s daughter’s BMW, auto insurance, and cable
service, and deposits to her savings account. In 2008, Karr conveyed a corporate
Mercedes SUV, valued at $103,738.76, to his latest ex-wife in their divorce settlement.
The Court does not include payments on the Sparks Settlement in the transfers for
Karr’s benefit which satisfy the elements of § 727(a)(2)(A). The Court finds that there
are controverted issues of fact concerning Alexico’s liability under the Settlement. It is
true that Alexico was not a defendant in Count II of the Sparks complaint under which the
Settlement states liability was agreed to, but Alexico was a defendant in other counts
which were dismissed. These additional counts may have had value which for
convenience was wrapped into the settlement of Count II against Karr. Without further
evidence concerning the merits of Sparks’s lawsuit and the intent of the Settlement, the
Court can not determine whether Alexico’s alleged liability to Sparks was based upon
corporate wrongdoing, or whether the inclusion of Alexico as a liable party under the
Settlement is further evidence of Karr’s fraudulent conduct. There are disputed issues of
material fact as to whether payments on the Sparks Settlement were payments to a
Case 09-06055 Doc# 69 Filed 01/19/11 Page 19 of 33
creditor of Alexico rather than fraudulent transfers for the benefit of Karr.
The circumstantial evidence establishes that the transfers for the benefit of Karr
were made with intent to hinder, delay, or defraud Alexico’s creditors. From at least late
2005 forward, Alexico, at Karr’s direction, paid all of Karr’s personal expenses. Alexico
began experiencing cash flow problems as early as 2006, yet Karr was credited with a
salary in excess of $1,000,000 each year from 2005 to 2007. The practice of Alexico
paying all of Karr’s expenses continued after the summer of 2007, when Karr admits that
he was aware of Alexico’s cash flow problems. In September 2007, when Alexico was
delinquent on two invoices to Allstate amounting to over $600,000, Allstate, a reinsurer
of Alexico, conducted an audit of Alexico. The audit described Alexico’s financial
situation as “seriously impaired.” It noted that the payment of Karr’s personal expenses
using insurance company funds was occurring, and that the excess of these expenses over
the company’s operating profit was causing a negative cash flow situation. After the
audit, in March 2008, Allstate required that commissions paid to Alexico be forwarded to
Allstate through a lockbox arrangement. This change made the cash flow situation worse.
During 2008, Alexico’s accountant would have to hold back automatically-generated
checks for so long that by the time cash was available to pay them, the dates on the
checks became an issue and new checks were created before payment was sent. Another
large insurer, in addition to Allstate, began communicating with Alexico regarding a
substantial outstanding obligation. However, despite all of these events indicating that
Alexico had insufficient funds to pay both its creditors and Karr’s personal expenses,
Case 09-06055 Doc# 69 Filed 01/19/11 Page 20 of 33
Karr did not stop the practice of having Alexico pay his personal expenses.
For the foregoing reasons, the Court concludes that the Trustee has made out a
prima facie case that Karr should be denied a discharge under § 727(a)(7) because as an
insider of Alexico, within the year preceding Alexico’s bankruptcy, Karr, with the intent
to delay payment of Alexico’s creditors, directed the transfer of Alexico’s assets for his
own benefit and the benefit of his family, within the meaning of § 727(a)(2)(A).
Karr has not satisfied his burden to justify the transfers. Karr does not contest the
fact that he was an insider or that substantial transfers from the Alexico operating account
were made for his benefit when Alexico had cash flow issues and was not paying all of its
creditors. His first defense is a legal one, the argument that there is no § 727(a)(2)(A)
violation since the property in issue was not his own property. The Court rejects this
position since it totally ignores the fact that the Trustee is proceeding under § 727(a)(7),
which provides that if a debtor engages in objectionable conduct in a case concerning a
corporation of which the debtor is an insider, the debtor may be denied a discharge in the
debtor’s own case. Under this theory, the relevant transfers are transfers of Debtor
Alexico’s property, not Debtor Karr’s property.
Karr’s second defense is also legal. Karr argues that he “was not using Alexico
funds for these personal expenses,”24 since they were charged to the Alexico Advance to
Officer Account. The Court denies this defense. It is uncontroverted that the personal
24 Doc. 53, p. 34.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 21 of 33
expenses were paid from the Alexico operating account; there was a transfer of Alexico’s
property. The fact that the payments were fully accounted for by entries to Alexico’s
Advance to Officer Account does not change their nature.
As to Karr’s third defense, the Court finds no issues of material fact exist
concerning Karr’s intent to hinder, delay, or defraud Alexico’s creditors. The evidence of
substantial payments from Alexico’s assets for Karr’s benefit is uncontroverted. The only
evidence offered by Karr of actions, taken after he became aware of the cash flow issues
in the summer of 2007, that allegedly negate an intent to hinder, delay, or defraud
Alexico’s creditors is that Karr reduced his salary in March 2008 and allegedly received
no salary in May 2008.25 However, Karr has admitted that he knew of the cash flow
problems since at least the summer of 2007, so that response was significantly delayed.
Further, assuming that his salary was reduced in response to Karr’s learning of the cash
flow problems, since there is no evidence that the reduction was accompanied by a
termination of Alexico’s practice of paying all of Karr’s expenses, even in excess of his
salary, the reduction of the salary had no impact on the availability of funds to pay
Alexico’s creditors. Karr offers no evidence that payments to creditors of Alexico were
ever favored over payment of his personal expenses. Therefore, to the extent there are
controverted facts about Karr’s salary, those controversies are not material to the finding
of a violation of § 727(a)(2)(A).
25 Karr’s statement that he received no salary in May 2008 is refuted by the details of the Advance
to Officer Account included as Plaintiff’s Exhibit 17.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 22 of 33
As to Karr’s fourth defense, the Court finds no issue of material fact arising from
Karr’s argument that he was obligated to and fully intended to repay the advances.
Although legally Karr was obligated to repay the advances, Karr offers no evidence that
he ever repaid any of the advances made by the corporation, even in part, or that he
acknowledged his obligation to do so before Alexico filed for bankruptcy relief. There
are no contemporaneous promissory notes or minutes of corporate meetings evidencing
that the advances were considered loans. The only evidence which Karr offers to show
his acknowledgement of his duty to repay the corporation are statements in his affidavit
that he attempted unsuccessfully to get a loan and that even though one sale of Alexico
fell through, he “fully anticipated that he could sell Alexico and pay off its existing
liabilities, including the Advance to Officer Account.” This defense is unsuccessful. It
does not address the prima facie case that the advances were fraudulent when taken; at
most it indicates after-the-fact acknowledgment of an obligation to restore the corporation
for his wrongful prior acts. Any controversies concerning the alleged intent to obtain a
loan and then to sell the company are not material to finding a violation of
For the foregoing reasons, the Court finds that the Trustee is entitled to summary
judgment on his objection to Karr’s discharge under § 727(a)(7) because of the fraudulent
transfers of Alexico’s property, made at Karr’s direction, within one year of Alexico’s
petition date with intent to hinder and delay Alexico’s creditors, within the meaning of
§ 727(a)(2)(A). Karr has failed to justify the transfers.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 23 of 33
C. DENIAL OF DISCHARGE UNDER § 727(a)(5).
Subsection 727(a)(5) provides that a debtor shall be granted a discharge unless
“the debtor has failed to explain satisfactorily, before determination of denial of discharge
under this paragraph, any loss of assets or deficiency of assets to meet the debtor's
liabilities.” “[N]oticeably lacking from § 727(a)(5) is any element of wrongful intent, or,
for that matter, any affirmative defenses — § 727(a)(5) simply imposes strict liability.”26
“A party objecting to a debtor's discharge under § 727(a)(5) has the burden of proving
facts establishing that a loss or shrinkage of assets actually occurred. However, once the
objecting party meets its initial burden of proof, the burden then shifts to the debtor to
explain the loss or deficiency of assets in a satisfactory manner.”27 The explanation must
be more than a “vague explanation” unsupported by “documentation or some other
corroboration.”28 The explanation should be “sufficient to enable either the trustee or a
creditor to properly investigate the circumstances surrounding the loss or deficiency.”29
In this case, the Trustee asserts that Debtor should be denied a discharge under
§ 727(a)(5) because he has failed to satisfactorily explain the discrepancy between the
report of his ownership of personal property valued at $500,000, plus artwork valued at
$70,000, in his financial statement as of July 12, 2007, and the disclosure of personal
26 Baker v. Reed (In re Reed), 310 B.R. 363, 368 (Bankr. N.D. Ohio 2004).
27 Cadle Co. v. Stewart (In re Stewart), 263 B.R. 608, 618 (10th Cir. BAP 2001).
28 Gray v. Gray (In re Gray), 295 B.R. 338, 346 (Bankr. W.D. Mo. 2003).
29 Reed, 310 B.R. at 370.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 24 of 33
property totaling only $132,925.42 on his bankruptcy schedules filed on January 5, 2009,
including “CD’s; Art; Collectibles” valued at $500.
Karr responds that the Trustee has not made an essential element of his case since
he has not identified “a specific fund or an identifiable piece of property” as the basis for
his objection.30 The Court disagrees. First, the Trustee’s objection is based in part on a
very specific asset, artwork, which was valued at $70,000 on the financial statement and
at less than $500 on Debtor’s schedules. Second, the financial statement sufficiently
identifies specific assets, since it included $500,000 of personal property in addition to
other assets of $25,000 in cash, $5,000,000 in securities, a $1,4000,000 homestead,
$100,000 worth of other real estate, and two specific automobiles. The $500,000 value
was therefore attributable to personal property other than cash, securities, artwork, and
automobiles. The Court finds this description sufficiently specific.
Since the Trustee has identified specific assets which were present approximately
18 months before filing and are not included in Debtor’s schedules, the burden shifts to
Debtor to adequately explain the loss. This Debtor has failed to do. As to the artwork,
Debtor states by affidavit that “[a]ny items of artwork listed on the financial statement
were included in his bankruptcy schedules,” “Defendant Karr still has the artwork which
he valued at $70,000.00 on the Great West[ern] Bank statement, except for two pieces
which were sold,” and “[t]he value of the artwork is currently significantly less than
30 Karr cites Urological Group, Ltd., v. Petersen (In re Peterson), 296 B.R. 766, 792 (Bankr. C.D.
Ill. 2003) in support.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 25 of 33
$70,000.00.” He provides no other details, such as what artwork was included in the
$70,000 valuation and what artwork has been sold, to whom, and for what amount. Karr
provides no details as to the artwork remaining, or any evidence other than his general
statement as to its value. Further, Karr makes no attempt whatsoever to explain the
apparent loss of almost $500,000 of other personal property. Debtor’s response does not
satisfy the minimum requirements to avoid denial of discharge under § 727(a)(5).
D. EXCEPTION TO DISCHARGEABILITY FOR DEBTOR’S DEBT TO
ALEXICO UNDER § 523(a)(4).
The Trustee also moves for summary judgment under § 523(a)(4), which provides
that a Chapter 7 discharge does not discharge any debt “for fraud or defalcation while
acting in a fiduciary capacity.” “Although the question of fiduciary status under this
provision is one of federal law, state law is an important factor in determining when a
trust relationship exists.”31 Alexico is a Nevada corporation. Under Nevada common
law, an officer or director serves as a fiduciary to the corporation.32 The Nevada Supreme
Court has recognized that “‘A director is a fiduciary. . . . So is a dominant or controlling
stockholder or group of stockholders. . . . Their powers are powers in trust.’”33
Commentators agree that for purposes of § 523(a)(4), the relationship of a
31 Driggs v. Black (In re Black), 787 F.2d 503, 506 (10th Cir. 1986), overruled on other grounds,
Grogan v. Garner, 498 U.S. 279 (1991).
32 Leavitt v. Leisure Sports, Inc., 103 Nev. 81, 86, 734 P.2d 1221, 1224 (1987).
33 Foster v. Arata, 74 Nev. 143, 155, 325 P.2d 759, 765 (1958) (quoting Pepper v. Litton, 308
U.S. 295, 306 (1939)).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 26 of 33
corporate officer to the corporation commonly imposes a fiduciary relationship.34
Officers of corporations “are fiduciaries as to corporate stockholders as well as to the
corporation itself with respect to funds controlled by them.”35 “Corporate officers and
directors are widely viewed as acting as fiduciaries with respect to their corporation,”36
and the “[n]ondischargeable liability of corporate officers to the corporation, or its trustee
in bankruptcy, ... is well established.”37
As stated by a former judge of this Court in 1983, “it has long been settled that a
corporate officer is a ‘fiduciary’ of the corporation, within the meaning of § 523(a)(4) and
§ 17(a)(4), its predecessor section under the Bankruptcy Act of 1898.”38 Application of
this rule to facts similar to this case is illustrated by In re Decker.39 Debtor Decker was
the president and principal manager, as well as a shareholder and director, of Black’s, Inc.
Despite Black’s poor financial condition, Decker withdrew substantial funds from
Black’s for his personal use and for his purchase of Black’s stock. Although the debts
34 Leah A. Kahl and Peter C. Ismay, Exceptions to Discharge for Fiduciary Fraud, Larceny, and
Embezzlement, 7 J. Bankr. L. & Prac. 119, 122 (1998).
35 3 Norton Bankr. L. & Prac. ¶ 57:27 at p. 57-79 (3d ed., Thomson Reuters 2010).
36 Kahl and Ismay, Exceptions to Discharge for Fiduciary Fraud, Larceny, and Embezzlement, 7
J. Bankr. L. & Prac. at 129.
37 3 Norton Bankr. L. & Prac. ¶ 57:27 at p. 57-80 (citing In re Hammond, 98 F.2d 703 (2nd Cir.
1938) and Pepper v. Litton, 308 U.S. 295 (1939)).
38 American Metals Corp. v. Cowley (In re Cowley), 35 B.R. 526, 528-29 (Bankr. D. Kan. 1983)
(Franklin, J.). Although Cowley was decided with reference to Kansas corporate law, it cited Pepper v.
Litton, the United States Supreme Court case quoted by the Nevada Supreme Court in Foster v. Arata, 74
Nev. at 155, 325 P.2d at 765.
39 Black’s Inc. v. Decker (In re Decker), 36 B.R. 452 (D.N.D. 1983).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 27 of 33
were fully and accurately reflected upon the books, records, and accounts of Black’s,
which were available for inspection by interested persons, Decker did not specifically
disclose the transfers to the other directors or sign promissory notes for the money. In
Decker’s subsequent bankruptcy, Black’s objected to discharge of Decker’s debt to it.
The court held that Decker was a fiduciary as to the corporation and incurred the debt to
the corporation through fraud or defalcation while acting in a fiduciary capacity,40 saying
he failed “to act in the best interests of Black’s or with full disclosure and assent.”41
The Court therefore concludes that Karr stood in a fiduciary relationship to
Alexico. The debt of Karr to the Alexico bankruptcy estate for property of Alexico which
Karr diverted for his personal use is a fiduciary debt for purposes of § 523(a)(4).
The Court rejects Karr’s defense that “fiduciary” for purposes of § 523(a)(4) is so
narrowly construed as to exclude Karr’s relationship to Alexico. The primary case Karr
relies upon is In re Cantrell,42 a Ninth Circuit case where judgment creditors objected to
the discharge of a debtor-corporate-officer’s debt arising from misappropriation of
corporate assets. The court found no fiduciary relationship for purposes of § 523(a)(4)
because under California law, while corporate officers “possess the fiduciary duties of an
agent, they are not trustees with respect to corporate assets.”43 Of course, this case is not
40 Id. at 456-59.
41 Id. at 459.
42 Cal-Micro, Inc., v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003).
43 Id. at 1127.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 28 of 33
controlled by California law.
The Court also rejects Karr’s further argument that a § 523(a)(4) fiduciary
relationship exists only when there is an express or technical trust, an argument derived
from the Supreme Court’s decision in Davis.44 This requirement has been applied by the
Tenth Circuit to find that there was no fiduciary relationship between a corporate officer
of a construction company and the owner of four-plexes with whom the corporation
contracted.45 The Tenth Circuit has also found no fiduciary duty between a corporate
officer and a minority stockholder.46 But this rule requiring an express or technical trust
does not apply when a corporation, rather than a corporate creditor or individual
shareholder, objects to the discharge of a corporate officer’s debt to it.47 “[W]hen the
[Supreme] Court interpreted the meaning of the term ‘fiduciary capacity’ to require a
technical or express trust, . . . the Court did not mean to say that an officer of a
corporation was not a fiduciary.”48 Such an interpretation would be contrary to the settled
rule that a corporate officer is a fiduciary of the corporation, within the meaning of
§ 523(a)(4) and its predecessor under the Bankruptcy Act of 1898.49
44 Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934).
45 Allen v. Romero (In re Romero), 535 F.2d 618 (10th Cir. 1976).
46 Black, 787 F.2d at 506.
47 Cowley, 35 B.R. at 529, n.1 (stating “[a] corporate officer may not be a fiduciary of the
corporation’s creditors absent a statutory, technical, or express trust” and citing Davis and Romero.)
48 Decker, 36 B.R. at 457-58.
49 See Cowley, 35 B.R. at 528-29.
Case 09-06055 Doc# 69 Filed 01/19/11 Page 29 of 33
The second element of the Trustee’s objection to the discharge of Karr’s debt to
Alexico is whether there was a defalcation. The Tenth Circuit BAP has held that
“‘defalcation’ under section 523(a)(4) is a fiduciary-debtor’s failure to account for funds
which have been entrusted to it [sic] due to any breach of fiduciary duty, whether
intentional, wil[l]ful, reckless, or negligent.”50 This standard requires no “mental
culpability on the part of the debtor-fiduciary.”51 “Any failure to maintain the standard of
care attributable to a fiduciary is a bad act that is nondischargeable under section
There is no question that the actions of Karr creating his liability to Alexico were
defalcations. Karr converted corporate assets to his own and his family’s use while
corporate creditors went unpaid, thereby breaching his duty of care, loyalty and good
faith to Alexico. He continued this conduct while he knew that his personal expenditures
were causing a severe financial burden. The fact that the corporation kept records of the
funds advanced in breach of Karr’s fiduciary duty does not mean that there was no
defalcation. Even assuming, as contended by Karr, that the excess payments were loans,
there is no evidence of notes or an agreement as to the terms of repayment. As a
fiduciary, Karr had a duty not to loan corporate assets on a less than arm’s-length basis.53
50 Antlers Roof-Truss & Builders Supply v. Storie (In re Storie), 216 B.R. 283, 288 (10th Cir.
51 Id. at 289.
53 Moreno v. Ashworth (In re Moreno), 892 F.2d 417, 421 (5th Cir. 1990).
Case 09-06055 Doc# 69 Filed 01/19/11 Page 30 of 33
The Trustee is entitled to summary judgment on his claim of exception to
discharge under § 523(a)(4). The uncontroverted facts establish that Karr’s debts to the
Alexico estate were incurred by defalcations committed when Karr was acting as a
fiduciary to Alexico.
E. DISCHARGEABILITY OF KARR’S DEBTS TO ALEXICO PURSUANT
TO § 523(a)(6).
The Trustee also contends that Karr’s debts to Alexico are excepted from
discharge by § 523(a)(6). It provides, “A discharge under section 727 . . . does not
discharge an individual debtor from any debt — . . . (6) for willful and malicious injury
by the debtor to another entity or to the property of another entity.” This Court has
explained the requirements for an exception to discharge under § 523(a)(6) as follows:
[W]ithout proof of both a willful act and malicious injury the
objection to discharge under this subsection fails. The
exception covers “only acts done with the actual intent to
cause injury.” In order to constitute a willful act, the debtor
must intend to cause the consequences of his act or believe
that the consequences are substantially certain to follow. The
malicious element requires proof that “the debtor either intend
the resulting injury or intentionally take action that is
substantially certain to cause the injury.” “[N]ondischargeability
takes a deliberate or intentional injury, not
merely a deliberate or intentional act that leads to injury.”
The exception generally applies to tort damages resulting
from intentional torts, such as assault and battery or
intentional infliction of emotional distress.54
The Trustee asserts he is entitled to summary judgment since Karr, knowing from
54 Guinn v. Anderson (In re Anderson), 403 B.R. 871, 881 (Bankr. D. Kan. 2009) (citations
Case 09-06055 Doc# 69 Filed 01/19/11 Page 31 of 33
the summer of 2007 forward that Alexico was having severe cash flow issues, continued
to pay his personal expenses, including payments to family members, a vacation to
Mexico, pool cleaning, and country club dues. These acts are alleged to have caused
willful injury because Karr “believed they were substantially certain to cause injury to
Alexico and . . . were malicious because they were substantially certain to cause injury to
Alexico.” Karr responds that the record does not support a finding that he acted with the
specific intent to injure Alexico, and that when he realized Alexico was having cash flow
issues, he reduced his salary, attempted to get a loan, located a buyer for Alexico, and
attempted to sell the business. Karr states by affidavit that he did not intend to harm
Alexico and points out that any harm to Alexico was against his self-interest since he was
the sole shareholder of Alexico.
The Court finds that controversies concerning material facts preclude summary
judgment on the claim of denial of discharge under § 523(a)(6). There is no controversy
that Karr harmed Alexico and, when he became aware of Alexico’s financial problems,
did not cease his diversion of corporate assets. However, the uncontroverted facts are not
sufficient for the Court to conclude that Karr acted willfully and maliciously, rather than
simply out of self-interest with a false belief that the company could be salvaged.
For the foregoing reasons, the Court grants the Trustee’s motion for summary
judgment as to his objection to discharge under § 727(a)(7), based on Debtor Karr’s
misconduct in connection with the related Alexico bankruptcy case, and § 727(a)(5),
Case 09-06055 Doc# 69 Filed 01/19/11 Page 32 of 33
based on Karr’s failure to satisfactorily explain his loss of assets. The Court also grants
the Trustee’s motion for summary judgment as to his objection to discharge of Karr’s
debts to Alexico, under § 523(a)(4), for fraud or defalcation while acting in a fiduciary
capacity. The Court denies the Trustee’s motion for summary judgment as to his
objection to discharge of Karr’s debts to Alexico under § 523(a)(6), based on allegedly
willful and malicious injury to the property of another.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the
Federal Rules of Civil Procedure applicable to this matter. A judgment based upon this
ruling will be entered on a separate document as required by Federal Rule of Bankruptcy
Procedure 7058 and Federal Rule of Civil Procedure 58.
IT IS SO ORDERED.
# # #
Case 09-06055 Doc# 69 Filed 01/19/11 Page 33 of 33
- << Prev