In re Gagle, Bankruptcy No. 97B-28583

• Decision Date: 08 February 1999
• Docket Number: Adversary No. 97PB-2386.,Bankruptcy No. 97B-28583
• Citation: In re Gagle, 230 B.R. 174 (Bankr. N.D. 1999)
• Parties: In re Matthew Scott GAGLE and Lisa Ann Gagle, aka Lisa Ann Ternay, aka Lisa Kotsiris, Debtors. America First Credit Union, a Corporation, Plaintiff, v. Matthew Scott Gagle and Lisa Ann Gagle, aka Lisa Ternay, aka Lisa Kotsiris, Defendants.
• Court: U.S. Bankruptcy Court — District of North Dakota

230 B.R. 174 (1999)

In re Matthew Scott GAGLE and Lisa Ann Gagle, aka Lisa Ann Ternay, aka Lisa Kotsiris, Debtors America First Credit Union, a Corporation, Plaintiff, v. Matthew Scott Gagle and Lisa Ann Gagle, aka Lisa Ternay, aka Lisa Kotsiris, Defendants.

Bankruptcy No. 97B-28583, Adversary No. 97PB-2386.

United States Bankruptcy Court, D. Utah, Northern Division.

February 8, 1999.

COPYRIGHT MATERIAL OMITTED

Timothy W. Blackburn, Van Cott, Bagley, Cornwall & McCarthy, Ogden, Utah, for plaintiff.

Brent E. Johns, Ogden, Utah, for defendants.

MEMORANDUM DECISION

JUDITH A. BOULDEN, Bankruptcy Judge.

A $30,000 customized truck was intentionally destroyed by the debtor when, in need of cash, he sold off the truck's parts until nothing of the truck remained. Yet the debtor always intended to, and in fact did, make loan payments to the creditor that had a perfected security interest in the truck, despite the fact the truck had been destroyed. Under these circumstances, did the debtor wilfully and maliciously injure the creditor or its property so that the amount owed to the creditor is nondischargeable under 11 U.S.C. § 523(a)(6)? The answer is yes. The analysis used to reach this conclusion, but also to conclude that the debtor did not defraud the creditor so as to render the debt nondischargeable under 11 U.S.C. § 523(a)(2)(A), follows.

FACTS

In May of 1996, Matthew Scott Gagle (Matthew Gagle) and Lisa Ann Gagle (Lisa Gagle), the debtors in this case (collectively the Debtors), applied for a $10,000 unsecured debt consolidation loan from America First Credit Union (America First). America First disapproved the loan application, but advised the Debtors that the loan would be granted if, among other things, the loan was collateralized. The only property the Debtors could provide as collateral was a customized 1969 Chevrolet shortbed sidestep pickup truck (Truck) they owned free and clear. The Debtors purchased the Truck in 1991 for approximately $1,500. Matthew Gagle, who is a mechanic by trade, spent approximately $17,000 for parts and contract labor to customize the Truck during the following five years. He believed the Truck was worth more than $10,000, and the Debtors listed the Truck on the loan application as having an appraised value of $25,000.

The Debtors agreed to pledge the Truck as collateral. America First conditionally agreed to extend the loan, but required that the Debtors first have the Truck appraised. Matthew Gagle then arranged to have Benn Framer (Framer), who specialized in valuing custom vehicles, appraise the Truck. Lisa Gagle took various photographs of the Truck to Framer's office to obtain the appraisal. Although there is contradictory testimony, the Court finds that Framer reviewed the photographs and authorized an appraisal that valued the Truck at $30,000. The valuation of the Truck contained in the Framer appraisal was generally accurate at the time it was made.

The Debtors gave the $30,000 Framer appraisal to America First. In so doing, the Debtors did not believe the Framer appraisal was false or inflated, and did not intend to obtain the Loan proceeds through fraud, false pretenses or false representation. America First relied upon the Framer appraisal in making the $10,000 collateralized loan (Loan) to the Debtors. America First's reliance on the Framer appraisal was justified in light of the specialized nature of the Truck, and the Framer appraisal was material to the Loan transaction.

The Loan was funded on approximately June 1, 1996, and America First properly perfected a security interest in the Truck. The Debtors made sporadic payments on the Loan that totaled approximately $2,926, or the equivalent of almost eleven $270 payments during the fifteen months between when the first payment was due and when the Debtors filed this Chapter 7 case. The last payment of $540 was made to America First on June 16, 1997. It is unclear from the evidence during what period of time the Loan may have been in default. The remaining balance on the Loan is $10,143.61. America First has incurred attorney fees of $1,790.50, $1,560 of which are reasonable, and costs of $329.50 in relation to this adversary proceeding. It is this amount representing the contract balance, plus attorney fees and court costs (Debt), that America First seeks to have declared nondischargeable.

The Co-Maker and Security Agreement that was read, signed and understood by the Debtors provided as follows:

OWNERSHIP OF COLLATERAL: . . . You agree not to sell . . . the collateral . . . until the advance has been paid.

USE OF COLLATERAL: While any part of this advance is unpaid, you promise: . . . (2) To obtain written permission from the credit union before making major alterations. . . .

DEFAULT: . . . You will be in default if you break any promise you made under this Security Agreement.

COLLECTION COSTS: . . . If the Credit Union takes legal action against you . . . you agree to pay reasonable attorney fees and court costs.

Despite receiving the Loan proceeds, the Debtors' financial condition worsened and they fell further behind in meeting their financial obligations. Matthew Gagle's income from his commission-only occupation declined and, even though he took a second job and asked relatives for money, the Debtors needed additional funds to cover their family's living expenses.

To cover the shortfall, in September of 1996, Matthew Gagle began to remove and sell parts from the Truck in exchange for cash. In the beginning he sold only a few parts with the intent that when his financial condition improved, he would replace the parts. However, by January of 1997, all the parts from the Truck had been sold and nothing of the Truck remained to which America First's security interest could attach. The Debtors did not try to sell the entire Truck in September of 1996 while it was in show condition because they did not have the time or resources to do so. Lisa Gagle knew Matthew Gagle was selling the Truck's parts but did not participate in parting-out the Truck. The sale of the parts from the Truck was of no consequence to Lisa Gagle because the Debtors intended to continue making payments on the Loan, and in fact did so, well after all of the Truck's parts had been sold.

The sale of the Truck's parts generated approximately $9,600. The funds were placed in a checking account used by the Debtors to pay household bills, including but not limited to those owed to America First.

The Debtors filed a Chapter 7 petition on September 24, 1997. America First timely filed this adversary proceeding, in which it seeks judgment that the Debt is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(6).¹ The matter was tried to the Court and taken under advisement to review the impact of three Supreme Court rulings upon the applicable law of the Tenth Circuit as applied to the facts of this case.

DISCUSSION

A. Jurisdiction

The Court has jurisdiction over this adversary proceeding by virtue of 28 U.S.C. §§ 1334, 157(a) and DUCivR 83-7.1. Venue is proper in this jurisdiction under 28 U.S.C. §§ 1408(1) and 1409(a). This proceeding to determine the dischargeability of a debt is a core proceeding pursuant to 28 U.S.C. § 157(b)(1)(I), and this Court has jurisdiction to enter a final order.

B. Section 523(a)(2)(A)

America First's complaint pleads a claim for relief under 11 U.S.C. § 523(a)(2)(A).² In order to prevail in its claim, America First must prove, by a preponderance of the evidence, that the Debtors obtained the Loan by false pretenses, a false representation, or actual fraud, other than a statement respecting the Debtors' financial condition. § 523(a)(2)(A); Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). As clarified in Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), we look to the elements set forth in the RESTATEMENT (SECOND) OF TORTS (1976) (Restatement (1976)) to determine what constitutes actual fraud for the purposes of § 523(a)(2)(A). Id. at 69-70, 116 S.Ct. 437 (specifically referencing §§ 537, 540 and 541 of the Restatement (1976)); see also, Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225 B.R. 778, 783-84 & n. 5 (10th Cir. BAP 1998). The Restatement (1976) sets forth the elements of actual fraud under § 525, Liability for Fraudulent Misrepresentation, as follows:

One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation.

Restatement (1976) at § 525.

America First has failed to prove, even by a preponderance of the evidence, that it suffered a loss as a result of the Debtors' misrepresentation of fact or opinion made for the purpose of inducing America First to act thereon. The evidence fully supports the $30,000 valuation the Framer appraisal placed upon the Truck. No fraudulent misrepresentation of any kind was made by the Debtors, whether by false pretenses, false representation or actual fraud.³ America First has failed to prove that either of the Debtors intended to deceive America First.

C. Section 523(a)(6)

America First's remaining claim for relief is plead pursuant to § 523(a)(6). Section 523(a)(6) provides that a debtor may not discharge any debt that is "for willful and malicious injury by the debtor to another entity or to the property of another entity." § 523(a)(6). Federal Rule of Bankruptcy Procedure 4005 places the burden of proof upon America First to prove that the obligation owed to it by the Debtors is nondischargeable; and, America First must prove its claim by a preponderance of the evidence. Grogan, 498 U.S. at 291, 111 S.Ct. 654; Dorr, Bentley & Pecha, CPA's, P.C. v. Pasek (In re Pasek), 983 F.2d 1524, 1526 (10th Cir.1993).

1. Willful and Malicious Injury

Because they are...