In re Brady, Bankruptcy No. 91-40194
| Decision Date | 19 March 1993 |
| Docket Number | Adv. No. 91-4070.,Bankruptcy No. 91-40194 |
| Citation | 154 BR 82 |
| Parties | In re Geraldine Marie BRADY, Debtor. Patricia McBEE, Plaintiff, v. Geraldine M. BRADY, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
John K. Allinder, Jack Grate, White, Allinder, Grate & Graham, Independence, MO, for plaintiff.
Kenneth Bigus, DeWitt, Zeldin & Bigus, Kansas City, MO, for defendant.
This matter concerns the dischargeability of a state court judgment for punitive damages. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a), and 157(b)(1). For the reasons set forth below, I find the debt to be nondischargeable.
Debtor-defendant Geraldine Brady was the President of W.L. Brady Investments, Inc., a Missouri corporation ("Brady Investments"). In that capacity, she allowed two mortgages to be placed of record against plaintiff's home, when plaintiff believed one of the mortgages had been paid off. Here's how that happened. Ralph McBee, the deceased husband of the plaintiff,1 purchased a lot in Kansas City, Jackson County, Missouri on or about February 12, 1988, from Brady Investments. On that date Mr. McBee also executed a promissory note for $86,400 in favor of Brady Investments, secured by a Deed of Trust on the real property. Defendant then negotiated with Boatmen's First National Bank of Raytown, Missouri ("Boatmen's") to finance construction of a home for Mr. McBee and plaintiff. On or about February 26, 1988, Brady Investments executed a promissory note and assigned its interest in the McBee loan to Boatmen's. Mr. McBee, and later plaintiff, at all times dealt with Brady Investments.
The McBees completed construction of their home and obtained an "end loan" from Brady Investments on or about July 6, 1988, in the sum of $96,000. That loan was secured by a new Deed of Trust on the improved real estate. That Deed of Trust was on the same date assigned to the Merchants Bank ("Merchants"), which had advanced to Brady Investments the funds for the "end loan." Defendant represented to the McBees that this "end loan" paid off the Boatmen's construction loan. Defendant also represented to Merchants that its loan had been used to pay off Boatmen's. As proof, defendant on July 8, 1988, supplied Merchants with a copy of a check purportedly written on the trust account of Brady Investments, payable to the order of "Boatman's sic Raytown Bank," and signed by the defendant. Such check was in the amount of $78,589.57 (Pl.Ex. 37). Defendant's representations to the plaintiff and her husband were false. Defendant never used the "end loan" proceeds from Merchants to pay off the construction loan from Boatmen's. Instead, while defendant showed a copy of the check to Merchants supposedly proving payment, the original of such check was never, in fact, tendered to Boatmen's. Brady Investments continued to make payments on the mortgage obligations, without telling Boatmen's that an "end loan" closing had taken place. Meanwhile, the plaintiff and her husband made timely monthly payments first to Brady Investments, and later to a mortgage servicing center to whom the Merchants' mortgage was assigned.
After the loan to Boatmen's had been supposedly paid off, at least as far as plaintiff and Merchants knew, defendant, on behalf of Brady Investments, executed three different renewal and/or extension agreements with Boatmen's, which allowed the loan to remain current if Brady Investments made monthly payments. The loan came due in full on August 23, 1989, and was not extended again.
On or about March 14, 1990, Ralph McBee received a letter from Edward Herman, Jr., Vice President of Boatmen's, informing him that the Promissory Note and Deed of Trust executed by Mr. McBee on February 12, 1988, and assigned to Boatmen's on February 26, 1988, was in default. Plaintiff and her husband then received a notice of foreclosure sale on their home for default in payment on the Boatmen's construction loan. A foreclosure sale was noticed and scheduled for May 9, 1990.
In response to the foreclosure notice, Plaintiff and Mr. McBee obtained a temporary injunction to halt the foreclosure, and filed a petition in the Circuit Court of Jackson County, Missouri on or about August 1, 1990, alleging false pretenses, false representation, fraud, and willful and malicious injury.
On or about January 23, 1991, defendant filed a Chapter 7 bankruptcy petition. Plaintiff then filed this adversary proceeding on March 20, 1991, to determine the dischargeability of debt, and also filed a Motion to Lift Stay. Such motion asked that plaintiff be allowed to proceed to trial in the pending state court case and, if successful, to return to this Court and request that any damages awarded be held nondischargeable. On June 12, 1991, this Court granted such motion. On May 21, 1992, following a jury trial, judgment was entered in favor of the plaintiff for $86,400 in compensatory damages and $500,000 in punitive damages.2 Damages were awarded by the jury based on a finding of fraudulent misrepresentation. Only the punitive damages are at issue here, however, because Boatmen's, which had also been a defendant in the state court case, settled by paying the amount awarded as actual damages.3 Plaintiff then returned to this Court on June 29, 1992, and asked for summary judgment on the Complaint to Determine Dischargeability of Debt based upon the state court judgment. That motion was denied on November 16, 1992.4
On May 31, 1991, in response to plaintiffs Request for Admissions in this Court, defendant invoked her fifth amendment privilege and refused to answer all requests. Similarly, plaintiff asserted this privilege in the state court proceeding. On May 16, 1992, plaintiff again propounded to defendant First Interrogatories and Request for Admissions in the bankruptcy proceeding. There was no response to either the interrogatories or the Request for Admissions. Plaintiff correctly interpreted this lack of response as a continuation of the privilege originally asserted on May 31, 1991. At the hearing on this matter defendant attempted to testify on her own behalf. Plaintiff's attorney objected to this testimony on the grounds that defendant could not invoke her fifth amendment privilege during the discovery phase and then offer testimony about the same matters that were the subject of such discovery.5 The Court sustained the objection and offered to suspend the proceedings until such time as plaintiff's attorney could depose defendant. Defendant refused this accommodation and, through counsel, stated that she no longer wished to testify.
The dischargeability of debt is a matter of federal law governed by the terms of the Bankruptcy Code ("Code"). Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991); Brown v. Felsen, 442 U.S. 127, 120-30, 99 S.Ct. 2205, 2208-09, 2211, 60 L.Ed.2d 767 (1979).
Section 523(a)(2) provides for the nondischargeability of debts incurred through false pretenses, a false representation, or actual fraud.6 However, that section by its terms only blocks dischargeability "to the extent" that money or other property was so obtained. Therefore, courts have held that Section 523(a)(2) is not applicable to punitive damages awards.7 Those must instead be considered under Section 523(a)(6).
Section 523(a)(6) of the Code provides as follows:
11 U.S.C. § 523(a)(6). The Eighth Circuit has held that section 523(a)(6) is directed "at the nature of the conduct which gives rise to the debt, rather than the nature of the debt." In re Miera, 926 F.2d 741, 745 (8th Cir.1991); See 3 Lawrence P. King et al., Collier on Bankruptcy ¶ 523.163, at XXX-XXX-XX (15th ed. 1993). Therefore, the punitive damages portion of a judgment is not dischargeable if such damages arise from willful and malicious conduct. Id.8
Willful and malicious conduct under section 523(a)(6) "turns on whether the conduct is (1) headstrong and knowing (`willful') and, (2) targeted at the creditor (`malicious'), at least in the sense that the conduct is certain or almost certain to cause financial harm." Barclays American Business Credit, Inc. v. Long (In re Long), 774 F.2d 875, 881 (8th Cir.1985). The Eighth Circuit goes on to indicate that a debtor acts with malice if he or she intends or fully expects that the conduct will harm the economic interests of the creditor. Id. at 882.
I find that the defendant acted both willfully and maliciously toward plaintiff and that, therefore, the punitive damages awarded by the state court jury are nondischargeable. The evidence is uncontradicted that defendant allowed two mortgages to be placed on plaintiff's residence and took steps to hide that fact from the McBees, as well as the holders of the two mortgages. Certainly the defendant's actions in advising the McBees that the Boatmen's obligation would be paid off from the "end loan" proceeds, in submitting to Merchants a copy of a phony check as proof that Boatmen's had been paid off, and in continuing to make monthly payments to Boatmen's after advising the McBees and Merchants that Boatmen's had been paid off, all constitute headstrong and knowing acts. Therefore, willful conduct has been shown.
Defendant's acts were also malicious since they were targeted at the McBees, at least in the sense that such acts were certain or almost certain to cause financial harm to them. Allowing an additional mortgage to be placed on a person's home, so that the funds generated by such additional mortgage can be used for other purposes, is certain or almost certain to...
To continue reading
Request your trial