Communitywide Fed. Credit Union v. Laughlin (In re Laughlin)
| Decision Date | 25 February 2014 |
| Docket Number | NO. 3:13-CV-353 PS,3:13-CV-353 PS |
| Parties | IN RE: LANCE W. LAUGHLIN, Debtor COMMUNITYWIDE FEDERAL CREDIT UNION, Appellant, v. LANCE W. LAUGHLIN, Appellee. |
| Court | U.S. District Court — Northern District of Indiana |
Appeal from the U.S. Bankruptcy Court
Northern District of Indiana
Lance Laughlin sold his car without paying off the note held by CommunityWide Federal Credit Union that was secured by the car. Laughlin claims his ex-wife, who had been granted the car in their divorce, returned the car to him with the windows smashed in and other damage to the car, representing that she had paid the car off but didn't want it anymore. Since the car's title jibed with his ex-wife's story, Laughlin sold the car and pocketed the money. CommunityWide is dubious of the story Laughlin tells; they claim Laughlin knew the car hadn't been paid off and that he forged a signature on the title in order to stiff the bank out of what they were owed. CommunityWide filed suit against Laughlin for conversion and won a default judgment in state court after Laughlin failed to appear to defend himself, although Laughlin said he never received notice of the lawsuit.
Laughlin declared bankruptcy after CommunityWide began garnishing his wages to enforce their judgment. CommunityWide then began this adversary proceeding, arguing thatLaughlin's debt to them was non-dischargeable under 11 U.S.C. § 523(a)(6) because Laughlin acted willfully and maliciously to deprive them of their property. After a full trial on the merits, Bankruptcy Judge Dees disagreed, finding Laughlin's testimony credible and thus ruling that the debt was dischargeable. CommunityWide now appeals that determination. Because Judge Dees' factual findings are not clearly erroneous, the opinion of the Bankruptcy court is AFFIRMED.
Background
In October 2006 Lance Laughlin borrowed $18,330.50 from CommunityWide Federal Credit Union in order to buy a 2003 Lexus RX300 [DE 11-1 at 44-47]. The loan was secured by the car, and CommunityWide appeared on the car's certificate of title as the first lien holder. Id.
Laughlin testified that he and his wife legally separated in December 2006. [Tr. at 29]1. Although their divorce wasn't finalized until April 2008, the two entered into a court-ordered property settlement at the outset of the separation. Id. at 23, 29. Most likely, this was a provisional order which is often entered in divorce proceedings while the divorce is pending. In any event, as part of that agreement, Laughlin's wife was granted possession of the car Id. at 23. Along with possession came responsibility for paying for the vehicle, though Laughlin never actually transferred the title to his wife, apparently believing the court's approval of the settlement took care of it for him. Id. at 14-15, 23-24.
As Laughlin tells it, in early 2007, he found the Lexus parked in his driveway with all the windows smashed out and the interior destroyed [Tr. at 16]. He got a message from his wifestating she was fed-up with the car, had spent all her money paying it off, and couldn't afford to get it fixed. Id. Laughlin testified that he wasn't surprised to find a clean title inside the car since his wife said she had paid it off. Id. at 26. Laughlin says he spent some money getting the car fixed up and sold it to a dealership for $14,000. Id. at 30-31.
The problem with all of this is that Laughlin's ex-wife had not, in fact, paid off the car loan. [Tr. at 60]. Further, someone forged a signature on the car's title releasing CommunityWide's lien. Id. at 55-56. On April 6, 2008, CommunityWide filed suit against Laughlin in St. Joseph County Court. CommunityWide alleged Laughlin was liable for conversion, forgery and deception in selling the Lexus. (An earlier criminal case of forgery brought against Laughlin had been dismissed). Laughlin never received notice of the suit so he failed to appear in court to defend himself. Id. at 35. As a result, the court entered a default judgment in favor of CommunityWide for $25,969.48 plus the costs of the action [DE 11-1 at 49].
After CommunityWide started collecting on its judgment through a wage garnishment, Laughlin filed for Chapter 7 bankruptcy relief. CommunityWide was named as a creditor in Laughlin's petition because of the state court judgment it had obtained against him. CommunityWide responded by filing an Adversary Proceeding against Laughlin to determine if CommunityWide's judgment was excepted from discharge pursuant to 11 U.S.C. § 523(a)(6).
Judge Dees held a trial on CommunityWide's complaint, and after hearing the evidence, Judge Dees found in favor of Laughlin, finding Laughlin's debt to CommunityWide to be dischargeable. Judge Dees found Laughlin's unrebutted testimony to be "probative, . . . reliable and trustworthy . . ." [Tr. at 75]. In crediting Laughlin's story, Judge Dees found that the carwas essentially dumped on Laughlin by his ex-wife and that it was in a state of disrepair. [Tr. at 75] Judge Dees believed Laughlin when he said that since his ex-wife got the car in the divorce, he assumed that she had paid the car off. Id. The voice mail she left with Laughlin confirmed this fact as did the title to the car which was found inside of it with no lien it. Id. Laughlin then fixed the car at his own expense and sold it. According to Judge Dees, when Laughlin did that he "[b]elieved that, since there was no lien on the title, that was his money." In short, Judge Dees found that "Lance Laughlin told the truth." Id. at 72. He did not act willfully or maliciously and so the debt to CommunityWide was ordered discharged. Id.
Discussion
In reviewing a bankruptcy court's decision pursuant to 28 U.S.C. § 158(a), the district court functions as an appellate court and is authorized to affirm, reverse, modify, or remand the bankruptcy court's ruling. Fed. R. Bankr. P. 8013. The standard for review of bankruptcy court decisions depends upon the issue being reviewed. Findings of fact are upheld unless clearly erroneous, but legal conclusions are reviewed de novo. In re Marrs-Winn, 103 F.3d 584, 589 (7th Cir. 1996); Hess v. Hartford Life & Accident Ins. Co., 274 F.3d 456, 461 (7th Cir. 2001).
In the adversary proceedings, Judge Dees held that Section 523 of the Bankruptcy Code did not apply and Laughlin's debts were therefore dischargeable. Section 523 provides for certain exceptions for the dischargeability of debts. The one at issue here is § 523(a)(6) which provides that a debt is not dischargeable if the creditor can prove the debtor's actions 1) caused an injury to the property interest of the creditor; 2) the action causing the injury was willful; and 3) the action was done in a malicious manner. 11 U.S.C. § 523(a)(6); In re Whiters, 337 B.R. 326, 339 (Bankr. N.D. Ind. 2006).
CommunityWide alleges the bankruptcy court made a number of errors - both factual and legal - but they all boil down to the issue of whether Laughlin acted willfully and maliciously. Judge Dees believed Laughlin's story and therefore found that he didn't act willfully and maliciously. CommunityWide challenges that finding on three main fronts. First, they argue Judge Dees applied the incorrect legal standard in assessing whether CommunityWide had met their burden of proof. Next, they argue that Judge Dees ignored a F.R.C.P. Rule 36 admission that conclusively established Laughlin had acted willfully and maliciously and, in the face of the admission, Judge Dees' finding of fact to the contrary was clearly erroneous. Finally, they argue that the court should have given preclusive effect to the state court judgment against Laughlin. I'll tackle each argument in turn.
CommunityWide's first argument is that Judge Dees did not apply the correct burden of proof. As I noted above, in order to prevail in the adversary proceeding, CommunityWide had to show by a preponderance of the evidence that Laughlin's actions in selling the car were willful and malicious 11 U.S.C. § 523(a)(6). To satisfy the willfulness standard, CommunityWide had to show that Laughlin either intended to injure the bank's property interest or acted with substantial certainty that his act would injure it. In re Whiters, 337 B.R. at 343. Maliciousness is proven by showing a conscious disregard for a duty owed without just cause or excuse. In re Thrityacre, 36 F.3d 697, 700 (7th Cir. 1994). There's no need to show ill will or specific intent to do harm. Id.
Judge Dees ruled from the bench in Laughlin's favor, making findings after the conclusion of the adversary proceeding [DE 11-1 at 17-20]. According to CommunityWide,Judge Dees required that they prove Laughlin harbored ill will towards the bank and that Laughlin intended to injure the bank's interest, as opposed to acting with substantial certainty that he would injure it. They seize on a couple of Judge Dees' remarks as evidence of this too-onerous standard. At one point, Judge Dees stated that CommunityWide "had to prove that Mr. Laughlin intended to and caused an injury . . . and that [the actions] were willful and that they were malicious" [DE 11-1 at 18]. He then elaborated: Id.
If this were the extent of the court's findings, then I might agree with CommunityWide. However, Judge Dees made further findings of fact that clearly demonstrate he understood and applied the correct burden of proof. First, with respect to Laughlin's intent, Judge Dees found Laughlin's story credible: "in this Court's judgment, Lance Laughlin told the truth." Id. He consequently found that Laughlin could not have acted with either the intent to, or substantial certainty of, injuring CommunityWide's interest because he was unaware that CommunityWide still had an interest in the car. As Judge Dees noted, Laughlin "didn't think he had to pay anything to the Credit Union because there was no lien on the title and his...
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