Becton, Dickinson & Co. v. Sterling (In re Sterling)

• Decision Date: 06 August 2012
• Docket Number: Bankruptcy No. 10–76253.,Adversary No. 11–04034.
• Citation: 479 B.R. 444
• Parties: In re Thomas A. STERLING, Debtor. Becton, Dickinson and Company, a New Jersey Corporation, Plaintiff, v. Thomas A. Sterling, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

479 B.R. 444

In re Thomas A. STERLING, Debtor.

Becton, Dickinson and Company, a New Jersey Corporation, Plaintiff,

v.Thomas A. Sterling, Defendant.

Bankruptcy No. 10–76253.

Adversary No. 11–04034.

United States Bankruptcy Court,

E.D. Michigan,

Southern Division.

Aug. 6, 2012.

Ronald S. Siegel, Bingham Farms, MI, for Plaintiff.

David I. Goldstein, Ann Arbor, MI, for Defendant.

OPINION DETERMINING DEBT IS DISCHARGEABLE

WALTER SHAPERO, Bankruptcy Judge.

Becton, Dickinson and Company (“Plaintiff”) brought this adversary proceeding against its former employee, Debtor Thomas A Sterling (“Defendant”), seeking a determination that a debt owed to it as a result of compensation overpayments is excepted from discharge under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). A trial was held and for the reasons set forth below, the debt is found to be dischargeable.

Facts

Defendant was employed by Plaintiff as a production supervisor from September 2008 until he was terminated in October 2010. By the terms of his employment, Defendant was to receive a beginning base salary of $60,000.00, plus time and a half of his regular hourly rate for any overtime hours. Due to a payroll error commencing at the beginning of his employment, Defendant instead continuously received three times his hourly rate for the overtimehours he worked, which he accepted—the erroneous overpayment totaling $54,540 until Plaintiff discovered the payroll error.

Upon this discovery, Danielle Wise, Plaintiff's human resource representative, confronted Defendant about the erroneous overpayments. During this confrontation, there is testimony that Defendant initially denied noticing anything wrong with his paychecks. He later, however, acknowledged that he knew that he was not entitled to the overpayments, but also stated he initially brought the issue to Plaintiff's attention when he noticed that something was wrong with his first paycheck and he reported this concern to Joan Wright, Plaintiff's benefit and payroll administrator. This was in October of 2008, about a month after Defendant began his employment. Ms. Wright testified that she noticed this error around the same time as well, as she was processing new hire information to make sure that correct information was entered in the system for Defendant. While Ms. Wright does not recall discussing the overpayment with Defendant, she did testify that if his paycheck was processed through the payroll before she caught the mistake, she certainly would have advised Defendant of the overpayment error.

After becoming aware of the mistake, Ms. Wright sought to correct it, by contacting the third party company that was retained by Plaintiff to manage its payroll and requesting it fix the incorrect overtime figure. Payroll service sent Ms. Wright a verification that the correction was made. She then confirmed the correct overtime figure on payroll service's verification. The correction, however, for some reason affected only that one payroll period. After this initial correction, Defendant continued to receive three times his hourly rate for overtime until Ms. Wright noticed the continuing mistake the following January of 2009, when annual increases were awarded. This time she notified Defendant of it. Despite again making another correction, the overtime figure was reversed yet again. As a result, Defendant continued to receive three times his hourly rate until Plaintiff's offsite accountant discovered the error and brought it to Ms. Wright's attention. This time Plaintiff went over its payroll record and calculated the total amount of overpayments made to Defendant, and decided to terminate Defendant's employment for his failure to report the overpayments during the course of his employment.

Defendant filed for relief under Chapter 7 of the Bankruptcy Code on December 1, 2010. Plaintiff seeks an exception to discharge of the overpayments pursuant to § 523(a)(2)(A) based on actual fraud, § 523(a)(4) for fraud while acting in a fiduciary capacity, and § 523(a)(6) for willful and malicious injury as a result of the conversion. Plaintiff contends that Defendant knew that he was not entitled to the overpayments and, despite this knowledge, remained silent about them until Plaintiff discovered the payroll error. Plaintiff argues that conduct constituted fraud. Furthermore, Plaintiff argues that Defendant, who at the time was going through a divorce, used the money primarily for child support and an apartment.

Jurisdiction

Bankruptcy courts have jurisdiction over all cases under title 11 and all core proceedings arising under title 11 or arising in a case under title 11. 28 U.S.C. §§ 1334, 157 (2012). Core proceedings include proceedings to determine dischargeability. Section 157(b)(2)(I).

Discussion

I. Section § 523(a)(2)(A)—Actual Fraud

Plaintiff argues that the overpayment debt owed to it should be excepted from discharge under § 523(a)(2)(A) based on actual fraud. Section 523(a)(2)(A) provides:

(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—

* * *

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

This section is phrased in the disjunctive, meaning that false pretenses, false representation and actual fraud are three separate grounds for nondischargeability. Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (6th Cir. BAP 2001); JGR Assocs., LLC v. Brown (In re Brown), 442 B.R. 585, 600 (Bankr.E.D.Mich.2011); Morganroth & Morganroth, PLLC v. Stollman (In re Stollman), 404 B.R. 244, 257 (Bankr.E.D.Mich.2009).

A Bankruptcy Appellate Panel for the Sixth Circuit adopted the Seventh Circuit Court of Appeal's position in McClellan v. Cantrell, 217 F.3d 890 (7th Cir.2000), “that [§ ] 523(a)(2)(A) is not limited to misrepresentations and misleading omissions.” Vitanovich, 259 B.R. at 877 (quoting McClellan, 217 F.3d at 893).¹ The Bankruptcy Appellate Panel held, “When a debtor intentionally engages in a scheme to deprive or cheat another of property or a legal right, that debtor has engaged in actual fraud and is not entitled to the fresh start provided by the Bankruptcy Code.” Vitanovich, 259 B.R. at 877. To establish actual fraud, Plaintiff must show (1) a course of conduct intended to deceive; (2) justifiable reliance; and (3) proximate causation. Brown, 442 B.R. at 600 (citing Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995)). Plaintiff has the burden of proving actual fraud by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “[E]xceptions to discharge are to be strictly construed against the creditor.” Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir.1998).

As noted, Plaintiff argues that Defendant's conduct in cashing the checks and keeping silent about the overpayments constitutes actual fraud or at least the required course of conduct evidencing an intent to deceive.

Plaintiff's evidence of any possible intent to deceive is Defendant's silence, which can establish the requisite intent, but only if Defendant had an affirmative duty to disclose. See M&D, Inc. v. McConkey, 231 Mich.App. 22, 585 N.W.2d 33, 39 (1998). Under the so-called “silent fraud” doctrine, a plaintiff must prove “that the defendant intended to induce him to rely on its nondisclosure and that defendant had an affirmative duty to disclose.” Clement–Rowe v. Mich. Health Care Corp., 212 Mich.App. 503, 538 N.W.2d 20, 23 (1995); Hord v. Envtl. Research Inst. of Mich., 463 Mich. 399, 617 N.W.2d 543, 550 (2000); Bergen v. Baker, 264 Mich.App. 376, 691 N.W.2d 770, 775 (2004).

First, there is credible evidence that Defendant did in fact notify Plaintiff of the error after he received his first paycheck. Ms. Wright admitted that she remembers meeting with Defendant around that time, but does not remember what was then discussed. That corrections were promptly attempted supports the fact of such notification. Second, even if Defendant did remain silent, under the cited authorities, mere silence does not rise to a level of deceptive conduct unless circumstances exist that give rise to a duty of disclosure. Query—–Did Defendant have an affirmative legal or equitable duty to disclose?

Plaintiff argues that Defendant had a contractual duty to report any conflict of interest, which arose from a required online course, “Annual BD Business Conduct and Compliance Guide 2009 (Doing What Is Right),” that had to be completed by all of Plaintiff's employees. But the only evidence that Plaintiff produced on this point was a confirmation sheet showing that Defendant completed the course. Plaintiff did not produce the actual course guide into evidence and, as a result, the Court has no evidence of the content of the course and, therefore, no evidence that the course instructs employees in such a duty.

A duty to disclose may also arise in equity. Most cases that provide for an equitable duty to disclose under the silent fraud doctrine address circumstances where one party has superior knowledge that is not easily accessible to the other party by the exercise of due diligence. See U.S. Fid. & Guar. Co. v. Black, 412 Mich. 99, 313 N.W.2d 77, 88 (1981); Hand v. Dayton–Hudson, 775 F.2d 757, 759 (6th Cir.1985) (holding that “[t]here is an equitable duty of disclosure in a business transaction when ‘circumstances surrounding a particular transaction are such as to require the giving of information’ ”) (citations omitted). The present case does not present any circumstances that would give rise to such an equitable duty. To the contrary, Plaintiff was in a position of control and had at least equal if not superior knowledge, gained from repeated, but unavailing attempts...