St. Paul Fire & Marine Ins. Co. v. Vaughn

• Decision Date: 26 December 1985
• Docket Number: Nos. 84-1583,85-1207 and 85-1208,s. 84-1583
• Parties: 14 Collier Bankr.Cas.2d 133, 14 Bankr.Ct.Dec. 127, Bankr. L. Rep. P 70,893 ST. PAUL FIRE & MARINE INSURANCE COMPANY, Appellee, v. Roland C. VAUGHN, Appellant, and Gladys G. Vaughn, Defendant. In re Roland C. VAUGHN and Gladys G. Vaughn a/k/a Gladys Murray, Debtors. Gladys G. VAUGHN, a/k/a Gladys Murray; Anigroeg Services, Inc.; Nucleus Construction, Plaintiffs, and Roland C. Vaughn, Appellant, v. W. Alan SMITH, Jr., Trustee, Appellee. Gladys C. VAUGHN, a/k/a Gladys Murray, Plaintiff, and Roland C. Vaughn, Appellant, v. W. Alan SMITH, Jr., Trustee; Sherwood S. Day, Trustee; St. Paul Fire & Marine Insurance Company, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1003

779 F.2d 1003

14 Collier Bankr.Cas.2d 133, 14 Bankr.Ct.Dec. 127,

Bankr. L. Rep. P 70,893

ST. PAUL FIRE & MARINE INSURANCE COMPANY, Appellee, v. Roland C. VAUGHN, Appellant, and Gladys G. Vaughn, Defendant.

In re Roland C. VAUGHN and Gladys G. Vaughn a/k/a Gladys

Murray, Debtors.

Gladys G. VAUGHN, a/k/a Gladys Murray; Anigroeg Services, Inc.; Nucleus Construction, Plaintiffs, and Roland C. Vaughn, Appellant, v. W. Alan SMITH, Jr., Trustee, Appellee.

Gladys C. VAUGHN, a/k/a Gladys Murray, Plaintiff, and Roland C. Vaughn, Appellant, v. W. Alan SMITH, Jr., Trustee; Sherwood S. Day, Trustee; St.

Paul Fire & Marine Insurance Company, Appellees.

Nos. 84-1583, 85-1207 and 85-1208.

United States Court of Appeals,

Fourth Circuit.

Argued Oct. 8, 1985.

Decided Dec. 26, 1985.

Sidney H. Kirstein (McRorie, Kirstein & McMahon, Lynchburg, Va., on brief), for appellant.

Seth E. Twery (Bell, Morrison & Spies, Lynchburg, Va., on brief) and Sherwood S. Day (Bevin R. Alexander, Jr., Edmunds & Williams, W. Alan Smith, Jr., Lynchburg, Va., on brief), for appellees.

Before WIDENER and MURNAGHAN, Circuit Judges, and HAYNSWORTH, Senior Circuit Judge.

MURNAGHAN, Circuit Judge:

The appeal questions the correctness of a grant of a motion for judgment notwithstanding the verdict in favor of St. Paul Fire & Marine Insurance Co. ("St. Paul") and the Trustees in Bankruptcy ("the Trustees") in a case involving the nondischargeability of a debt under the Bankruptcy Code, 11 U.S.C. Sec. 523(a)(6). ¹ Roland C. Vaughn ("Vaughn" or "the debtor"), appeals the decision of the district court on four grounds: (1) that the grant of jnov was improper because there was sufficient evidence, viewed in the light most favorable to Vaughn to support the jury's verdict that Vaughn had not willfully and maliciously injured the property of St. Paul; (2) that, in the event the verdict is reinstated, the bankruptcy court's initial decision to reject a settlement by the Trustees of claims against Vaughn's estate was correct, and should be ordered reinstated; (3) that, if the jnov is affirmed, the settlement subsequently entered by the Trustees is barred by the doctrine of "election of remedies"; and (4) that award of attorneys' fees to the debtor's counsel should bear interest from the date of the judgment award.

I.

Vaughn and his wife were the owners of two construction companies, Anigroeg Services, Inc. ("Anigroeg") and Nucleus Construction ("Nucleus"). Anigroeg, formed in the late 1970s, was primarily engaged in the painting business. In March 1979, Anigroeg received a $700,000 contract to paint a large Navy facility at the Norfolk, Virginia shipyard. As required by the Miller Act (40 U.S.C. Sec. 270a), Anigroeg had previously obtained a surety payment and performance bond from St. Paul. The Small Business Administration ("SBA") guaranteed eighty percent of St. Paul's bond under its surety bond guarantee program. (13 C.F.R. Sec. 115.1-115.4 (1985)).

In 1980, difficulties arose in performing the Navy contract. The Navy insisted on using a type of paint Vaughn asserted would not adhere to the walls. Vaughn complied with the Navy's request, but was forced to repaint the facility when the original paint would not adhere. The Navy refused to reimburse Vaughn and he pursued a claim against the Navy for his expenses. Meanwhile, he was forced to turn to St. Paul for financial assistance in connection with the repainting.

St. Paul and Vaughn entered into an agreement on July 18, 1980, whereby St. Paul agreed to make payments on "all outstanding subcontract or material bills" for completion of the Navy contract by Anigroeg in fulfillment of its bonding arrangement. In return, the parties agreed that "until the contract has been completed, all bond claims have been paid and the Surety has been reimbursed for all payments made hereunder, all payments made under the contract shall be sent to the Surety to be applied by it in accordance with the understandings expressed above." Vaughn, as agreed, informed the Navy that any further payments on the Anigroeg contract should be sent to Anigroeg care of St. Paul's Fairfax, Virginia office.

In early 1982, the Navy project was finally completed. In the year and a half after the July 18, 1980 agreement, St. Paul paid out over $544,000 as Anigroeg's surety.

A short time after Anigroeg completed the project, Vaughn's Washington, D.C. attorney settled the dispute with the Navy. The Navy agreed to pay Anigroeg $664,000 and to give the company future Navy work. Around this time, in March 1982, Vaughn formed a new construction company in Virginia, Nucleus Construction, Inc.

The financial pressures of completing the Navy contract meant that Vaughn was hard pressed for funds and he applied to St. Paul for relief from the July 1980 agreement. St. Paul agreed to allow Vaughn to receive the first Navy payment directly, so that Vaughn could satisfy his creditors, if Vaughn would nevertheless deposit that check directly into his Virginia attorneys' trust account, from which creditors other than St. Paul would be paid. The second check was to be sent directly to St. Paul by the Navy. St. Paul also agreed that it would settle for a partial payment of the money it had expended on Anigroeg's behalf and that consequently St. Paul would keep $250,000 from that second check and pay the balance to Vaughn or at Vaughn's direction.

Vaughn's financial difficulties continued to grow worse and the arrangement with St. Paul was again modified. On April 19, 1982, St. Paul agreed that the second Navy check might also be sent directly to Vaughn, if Vaughn would deposit the check into his attorneys' trust account and immediately send St. Paul a check for $250,000. Vaughn clearly was not confused as to the meaning of the agreement. He was asked at trial,

Q. [St. Paul's attorney] Well, again, you promised that upon receipt of those funds that [sic] you would pay over to St. Paul the sum of $250,000.

A. [Vaughn] That is correct.

As it turned out, the Navy divided its payment to Anigroeg into two additional checks. The first--a check for $66,000--was sent directly to Vaughn, who deposited it in his attorneys' trust account. A check for $66,000 from that account was issued to Nucleus. The second Navy check, also made out and sent to Vaughn, was, however, in breach of his agreement with St. Paul, not deposited in the trust account.

On May 14, 1982, a Friday, the Navy sent Vaughn the second check made out to Anigroeg for $479,000. Vaughn and one of his attorneys attempted to deposit the check in the attorneys' Virginia trust account, but were unsuccessful because Vaughn's signature was not guaranteed for Anigroeg at that bank. Vaughn then deposited the check into his Nucleus account at the same bank.

On the following Monday, the bank told Vaughn that it refused to accept the check because his signature was not guaranteed with respect to the Nucleus account either. Vaughn went to his Maryland bank, had his signature guaranteed, and deposited the check in his Nucleus account at the Virginia bank. It does not appear, once the guarantee of the signature had taken place, why deposit could not have been, in compliance with Vaughn's agreement, to the attorney's trust account.

St. Paul was not informed by either Vaughn or Vaughn's Virginia counsel that Vaughn had received the $479,000 check until three weeks later, when St. Paul discovered that fact from Vaughn's counsel. ² Vaughn made no effort at any time to send St. Paul the $250,000, as he admitted at trial:

Q. Well, there's no--There was nothing that prevented you from writing a check for $450,000 to Ruttenberg, Phelps and Slocum [Vaughn's Virginia attorneys] was there?

A. Oh, I could have transferred the money into the checking account and wrote a check to anybody

I wanted to after the--but it wouldn't have been approved until the following week, the middle of the following week.

Q. Now, of the $479,000, none of that went to St. Paul either, did it?

A. No, none of it went to St. Paul.

Instead of paying St. Paul, Vaughn purchased a number of expensive items and property in the Lynchburg area starting in May, 1982. Vaughn bought a DeLorean automobile, an office building, an historic residence, a restaurant, antiques and a new mobile home. Vaughn also paid $90,000 to improve those properties and paid himself over $200,000 in back salary. At trial, Vaughn admitted that he had spent the money which he had received from the Navy to make the expenditures for his own benefit instead of paying St. Paul:

Q. Okay. Now, Mr. Vaughn, we've been through a list of the various things you purchased with your money. Is that correct?

A. That's correct.

Q. Bought the house, bought a restaurant, bought an office building, a DeLorean, a motor home, antiques. Did you ever pay one penny of it to St. Paul?

A. No, but I paid other creditors.

St. Paul eventually located Vaughn and, after investigation, determined that he had spent most of the money he had been paid by the Navy. On November 3, 1982, St. Paul filed a pre-judgment attachment on Vaughn's property. Vaughn filed a Chapter 11 petition in bankruptcy in the Bankruptcy Court for the Western District of Virginia, as a debtor in possession, for reorganization of the estate of himself and his wife, as well as of Nucleus and Anigroeg. After Trustees in Bankruptcy were appointed, Vaughn's debtor in possession status was ended.

Vaughn then filed an adversary suit against St. Paul in the bankruptcy court, alleging St. Paul's lien was a preferential transfer under the Bankruptcy Code ("the Code"). St. Paul counterclaimed and also filed a separate adversary proceeding alleging that Vaughn's debt to it was not dischargeable because Vaughn had willfully and maliciously converted St. Paul's money. Subsequently, St. Paul and the trustees successfully had Vaughn's Chapter 11 case converted into a liquidation proceeding under Chapter 7 of the Code.

Before trial began...