In Re: Carol Platt Cagan
| Decision Date | 28 September 2010 |
| Docket Number | No. 09-1202 J,No. 7-08-11193 JS,7-08-11193 JS,09-1202 J |
| Parties | In re: CAROL PLATT CAGAN, Debtor. OMER MAY, Plaintiff, v. CAROL PLATT CAGAN, Defendant. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico |
ROBERT H. JACOBVITZ
THIS MATTER is before the Court following a trial on the merits of this adversary proceeding to determine the dischargeability of certain debt under 11 U. S. C. § 523(a)(4) and 11 U. S. C. § 523(a)(6). At issue is whether Defendant Carol Cagan's disposition of certain proceeds from the sale of certain real property in connection with the Lobo Land, LLC ("Lobo Land") bankruptcy case constitutes a willful and malicious injury within the meaning of 11 U. S. C. § 523(a)(6) or constitutes a breach of fiduciary duty, embezzlement or larceny sufficient to render the debt non-dischargeable under 11 U. S. C. § 523(a)(4). The sale proceeds were designated under Lobo Land's confirmed plan to be disbursed to Plaintiff Omer May. After consideration of the evidence in light of the applicable statutes and relevant case law, the Court finds that the debt at issue is non-dischargeable under 11 U. S. C. § 523(a)(6). Because the Court finds that the debt is non-dischargeable under 11 U. S. C. § 523(a)(6) it is not necessary to consider whether the debt is non-dischargeable under 11 U. S. C. § 523(a)(4).
FINDINGS OF FACT
1. Defendant Carol Cagan was the managing member and 97% owner of Lobo Land. Her partner, Dee Cross, owned the remaining 3%. Ms. Cagan was in charge of the affairs of Lobo Land.
2. Carol Cagan is a lawyer, and practiced in California in the field of entertainment law prior to moving to New Mexico. Her area of expertise included the negotiation and drafting of contracts.
3. Prior to the filing of Lobo Land's bankruptcy case, Plaintiff Omer May sold Lobo Land certain real property located in Angel Fire, New Mexico and made a non-recourse loan to the buyer to finance the purchase. See Exhibit 11, Stipulated In Rem Judgment for Foreclosure of Mortgage Against the Bankruptcy Estate of Lobo Land Limited Liability Company, entered in the Eighth Judicial District Court, County of Colfax, State of New Mexico Case No. D-809-CV200300181.
4. Lobo Land filed a voluntary petition under Chapter 11 of the Bankruptcy Code on January 14, 2005 as Case No. 11-05-10262 SA.
5. Mr. May is a creditor of Lobo Land.
6. Among the assets of Lobo Land were three residential lots located in the Angel Fire Resort (the "residential lots"), including Lot 460 and Lot 782 (Lot 460 and Lot 782 hereafter are called, "Lots 460 and 782").
7. Angel Fire Resort Operations asserted certain claims against Lobo Land representing unpaid membership dues and services.
8. Lobo Land's plan of reorganization, as modified by Debtor's First Modification to Plan Dated October 11, 2005 ("First Modification"), was confirmed on March 8, 2006. See Case No. 11-05-10262 SA, Docket No. 75 (First Modification) and Docket No. 85 (Order Confirming Plan).
9. The confirmed plan included the following provision:
Debtor shall pay to May one or more lump sum payments totaling $40,000. 00 from the proceeds of sales of the residential lots as such funds become unrestricted by order of the Court if such funds are not available prior to the Effective Date. Lobo Land shall promptly file such adversary proceedings as may be necessary to determine the validity of any adverse lien, claim or interest against the proceeds of the residential lost sales or against the residential lots in order to make such proceeds available to May.
Plan, ¶6. 3. 1. 3, See Case No. 11-05-10262 SA, Docket No. 73.
10. The term "unrestricted" contained in the plan provision is a reference to the funds becoming free of a claim of lien of a person other than Mr. May.
11. At the time Lobo Land sold Lots 460 and 782, the other residential lot remained unsold.
12. Proceeds from the sales of Lots 460 and 782 were placed in escrow at C. U. Title, Inc. pending an order from the Court to release the funds.
13. On July 9, 2007 an Order to Release Monies in Escrow ("Release Order") was entered in the Lobo Land Bankruptcy Case. See Case No. 11-05-10262, Docket No. 116.
14. The Release Order was approved by counsel for Lobo Land and counsel for Angel Fire Resort Operations and directed that "[a]ll monies held in escrow by CU Title shall be released immediately and payable to Lobo Land, LLC." Id.
15. Counsel for Mr. May did not approve the Release Order and did not receive notice of the entry of the Release Order.
16. As a result of the Release Order, funds in the amount of $32,369. 96 were released from the escrow account at C. U. Title, Inc., consisting of $13,559. 21 from the sale of Lot 460 and $18,810. 75 from the sale of Lot 782.
17. Some time before the entry of the Release Order, Ms. Cagan had been diagnosed with cancer.
18. At the time that the escrowed funds were released, Ms. Cagan was headed to California to undergo cancer surgery.
19. Ms. Cagan had a bank account at the same bank that C. U. Title, Inc. had an account. Lobo Land did not have an account at that bank.
20. To facilitate the release of the escrowed funds before Ms. Cagan returned from California, Ms. Cagan directed C. U. Title, Inc. to deposit the monies released from escrow into her personal account at International Bank in Raton.
21. Depositing the funds into Ms. Cagan's personal bank account is contrary to the terms of the Release Order, which directed C. U. Title, Inc. to release the funds to Lobo Land.
22. Ms. Cagan did not transfer the funds released from escrow to Lobo Land or disburse the funds to Mr. May.
23. Ms. Cagan spent the funds in question that were deposited in her personal account.
24. Mr. May filed an adversary proceeding against Lobo Land and Carol Cagan in connection with the Lobo Land bankruptcy case seeking, among other things, judgment against Lobo Land and Carol Cagan jointly and severally in the amount of $32,369. 96, plus attorneys fees and costs based on claims for conversion and breach of fiduciary duty.
See Adversary Proceeding No. 07-1125S, Complaint for Conversion, Breach of Fiduciary Duty, and Prejudgment Attachment ("Lobo Land Complaint"), Docket No. 1. The Lobo Land Complaint included a claim for punitive damages. Id.
25. The Lobo Land bankruptcy case converted to Chapter 7 on January 3, 2008. See Case No. 7-05-10262, Docket No. 144. Ms. Cagan did not attend the hearing on conversion of the Lobo Land bankruptcy case.
26. Following a trial on the merits, Mr. May obtained a judgment against Lobo Land in Adversary No. 11-1125S based on Lobo Land's breach of its contractual obligations under the confirmed plan. See Findings of Fact and Conclusions of Law after Trial on the Merits ("Lobo Land FFCL"), Adversary No. 11-1125 S, p. 8, ¶3-Docket No. 32. The judgment included punitive damages in the amount of $16,000. 00. Id. at p. 13.
27. Carol Cagan did not participate in the trial, and the judgment did not asses any liability as to Ms. Cagan. See Lobo Land FFCL, Adversary No. 11-1125 S, Docket No. 33, Judgment entered against Lobo Land only.
28. Carol Cagan filed a voluntary petition under Chapter 13 of the Bankruptcy Code on April 18, 2008 as Case No. 13-08-11193. Her case converted to Chapter 7 on August 26, 2009. See Case No. 7-08-11193JS, Docket No. 107.
29. Mr. May filed this adversary proceeding on December 7, 2009.
CONCULSIONS OF LAW
Pursuant to 11 U. S. C. § 523(a)(6), debts resulting from the "willful and malicious injury by the debtor to another entity or to property of another entity" are not dischargeable. 11 U. S. C. § 523(a)(6). The "willful" element under this section requires both a willful act and an intendedharm; an intentional act that leads to an injury is not sufficient. 1 Whether the debtor had the requisite intent to harm is evaluated under a subjective standard that focuses on the debtor's state of mind; the debtor must have desired the consequences of his or her act or have intentionally acted believing that the consequences of the act were substantially certain to result from it. 2Evidence of the debtor's state of mind may be inferred from the circumstances. 3 An intentional breach of contract, without more, is insufficient to sustain a non-dischargeable claim under 11 U. S. C. § 523(a)(6). 4 The "malicious" component of 11 U. S. C. § 523(a)(6) requires a showing ofthe following: "1) the act is wrongful; 2) the act is intentional; and 3) the act is without just cause or excuse"5
Conversion of a creditor's property interest can support a non-dischargeability claim under 11 U. S. C. § 523(a)(6). 6 As explained by the Supreme Court in Davis v. Aetna Acceptance Co., 293 U. S. 328, 55 S. Ct. 151, 79 L. Ed. 393 (1934), decided under subsection (6) of § 17(a) of the Bankruptcy Act of 1898, the precursor to 11 U. S. C. § 523(a)(6),
There is no doubt that an act of conversion, if willful and malicious, is an injury to property within the scope of this exception.... But a willful and malicious injury does not follow as a matter of course from every act of conversion, without reference to the circumstances. There may be a conversion which is innocent or technical, an unauthorized assumption of dominion without willfulness or malice.
293 U. S. at 332 (citations omitted).
Defendant raises two main arguments in defense of Mr. May's claim: 1) that the funds released pursuant to the Release Order did not constitute Mr. May's property; and 2) that there is no evidence of any wrongful intent on the part of Ms. Cagan. The Court will address each argument in turn.
Whether Mr. May held an interest in the proceeds of sale of Lots 460 and 782 is a necessary pre-requisite to his establishing his claim against Ms. Cagan is nondischargeable under 11 U. S. C §523(a)(6), which requires willful and malicious injury "to another entity or to property of another entity"(emphasis added). It is also required for Mr. May to...
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