In re Little

• Decision Date: 22 December 2005
• Docket Number: Bankruptcy No. 04-21457.,Adversary No. 05-01107.
• Citation: 335 B.R. 376
• Parties: In re Sheldon M. LITTLE, Debtor. CMEA Title Agency, Inc., Plaintiff, v. Sheldon Little, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

335 B.R. 376

In re Sheldon M. LITTLE, Debtor CMEA Title Agency, Inc., Plaintiff, v. Sheldon Little, Defendant.

Bankruptcy No. 04-21457.

Adversary No. 05-01107.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

December 22, 2005.

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Harvey A. Snider, Solon, OH, for Debtor.

MEMORANDUM OF OPINION AND ORDER

RANDOLPH BAXTER, Chief Judge.

The matter before the Court is CMEA Title Agency, Inc.'s ("CMEA") Complaint to Determine Dischargeability of Debt of Sheldon Little ("Little"). The Court acquires core matter jurisdiction over this proceeding under 28 U.S.C. § 157(b)(2)(J) and General Order No. 84 of this District. Upon an examination of the parties' respective briefs and supporting documentation, and after conducting a trial on the matter, the following findings of fact and conclusions of law are hereby rendered:

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On or about February 2, 1994, Little purchased certain real estate (the "Real Estate") located at 18700 Invermere in Cleveland, Ohio for approximately $58,000. Chase Manhattan Mortgage Corporation took a mortgage on the Real Estate in exchange for providing Little with the financing to acquire the Real Estate.

In 2001, Little allegedly sold the Real Estate to Albert Reynolds ("Reynolds"), for the purpose of allowing a friend, Ivey ("Ivey"), to live in the house. CMEA alleges that in order to assist Reynolds in obtaining a loan from Conseco, Little prepared and submitted false financial information on behalf of Reynolds, including counterfeit checks and a fraudulent land installment contract. Reynolds defaulted on the loan, and is currently in arrears by more than $95,000.

After closing the sale of the Real Estate to Reynolds, CMEA, as title agent, failed to record the mortgage granting a lien to Conseco (predecessor to Citifinancial). As a result, Little continued to receive certain tax and utility bills.

CMEA alleges that Little had a sophisticated understanding of the mortgage lending and real estate industries, and initiated a transaction with Ivey's mother, Akilah Ashraf ("Ashraf), whereby Little would transfer the Real Estate to Ashraf through a quitclaim deed on or about June 30, 2003. CMEA alleges that Little persuaded Ashraf to take out a loan for $65,000 from Washington Mutual Bank ("Washington Mutual"), with Ashraf retaining a portion of the loan proceeds, and directing $30,000 to be directed to a friend of Little, LaDonna Hatcher ("Hatcher"). CMEA also alleges that Little coordinated the preparation of the paperwork for the loan and received payment for serving as the loan officer for the transaction.

Washington Mutual recorded its mortgage, thereby obtaining a superior lien position to Conseco's unrecorded mortgage. Conseco later assigned the note and mortgage to Citifinancial Mortgage Co. ("Citifinancial").

Because an agent of CMEA was responsible for failing to record the mortgage, CMEA paid Citifinancial for its loss. In exchange, CMEA received an assignment of rights against Little from Citifinancial. Paragraph 2 of the Assignment of Claims assigns to CMEA all rights against Little all rights, claims, and causes of action relating to the Real Estate.¹ Pursuant to this assignment, CMEA brings this action as successor in interest to Citifinancial.

CMEA also maintains a foreclosure action regarding the subject property in the Cuyahoga County Court of Common Pleas, captioned Citifinancial Mortgage Co., Inc. v. Albert Reynolds, et al. (Case No. 03 510802) ("State Court Proceeding"). Little is a named co-defendant in the action. The Court is not aware of any other pending proceedings against Little, or in relation to the Real Estate.

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On September 7, 2004, Little filed a voluntary petition for relief under Chapter 7. Little's Schedule F ("Creditors Holding Unsecured Nonpriority Claims") includes Citifinancial (denoted as "Successor in Interest to Conseco Bank Inc.") for an amount of $10.00, and notes that the claim was entered "For Precautionary Purposes only." On February 24, 2005, the Chapter 7 Trustee filed a No-Asset Report. Accordingly, no proofs of claims were filed by any creditors, including CMEA.

CMEA commenced the above captioned adversary proceeding on March 4, 2005, seeking to determine the dischargeability of debt pursuant to 11 U.S.C. § 523(a)(6).² CMEA alleges that Little owes debts to CMEA arising from a willful and malicious injury resulting from a scheme of misconduct. Specifically, CMEA asserts that pursuant to § 523(a)(6), Little's debts are nondischargeable because they were obtained by 1) the willful and malicious conversion of the Real Estate in the sale from Little to Ashraf; and 2) the willful and malicious fraud in connection with Conseco's loan to Reynolds.

Little denies CMEA's allegations, and asserts that CMEA's injury is the result of the malfeasance, misconduct, and willful failure of its own employees to record the mortgage following the sale to Reynolds.

* * *

"A dischargeability action under 11 U.S.C. § 523(a)(6) encompasses `two distinct claims: (1) whether the debtor owes a debt to the plaintiff and (2) whether the debt owed by the debtor to the plaintiff is nondischargeable.'" In re Lombardo, 326 B.R. 901 (6th Cir. BAP 2005) (quoting In re Sweeney, 276 B.R. 186, 195 (6th Cir. BAP 2002)). Section 523(a) provides, in relevant part,

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b)of this title does not discharge an individual debtor from any debt —

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

11 U.S.C. § 523(a). The standard of proof for all of the dischargeability exceptions in 11 U.S.C. § 523(a) is a preponderance of the evidence standard. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (holding that the preponderance of the evidence standard applied to all of the § 523 dischargeability exceptions, including the fraud discharge exception): In re Stern, 345 F.3d 1036, 1043 (9th Cir. 2003).

1. Existence of Debt

Initially, it must be determined whether the debtor owes a debt to the plaintiff. The term "debt" is defined by the Bankruptcy Code as a "liability on a claim." 11 U.S.C. § 101(12). "Based upon this definition, the Supreme Court of the United States has held that the terms `debt' and `claim' are essentially synonymous with one another." In re Indian River Estates, Inc., 293 B.R. 429, 433 (Bankr.N.D.Ohio 2003) (citing Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. 552, 557, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990)). The term "claim" is defined by the Code as a

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

11 U.S.C. § 101(5). Where specific performance is sought in lieu of a monetary award, "a right to an equitable remedy for breach of performance is a `claim' if the same breach also gives rise to a right to a payment `with respect to' the equitable remedy.... The right to equitable relief constitutes a claim only if it is an alternative to a right to payment or if compliance with the equitable order will itself require the payment of money." Kennedy v. Medicap Pharmacies, Inc., 267 F.3d 493, 497 (6th Cir.2001).

Little was not a party to any agreement with CMEA, Citifinancial, or Conseco. The loan transaction involving Conseco was with Reynolds only. Further, there is no record that CMEA (or any of its predecessors in interest) has obtained a judgment lien against Little in a separate proceeding. In the pending state court proceedings, CMEA seeks to enforce its rights under the promissory note and mortgage, asking for a judgment against Reynolds in the amount of $94,914.78.³ CMEA also asks for an order "compelling the transfer of the title from Sheldon Little to Albert Reynolds."⁴ CMEA also includes a prayer for "all other relief, legal and equitable, as may be proper and necessary, including, for example, a writ of possession."⁵

The relief sought in CMEA's pending state court action sufficiently evinces the existence of a claim it has against Little. CMEA's interest is derivative of its assigned rights from Citi, which was a successor in interest to Conseco.

2. Dischargeability of Debt

CMEA cites two grounds upon which Little's debt should be found to be nondischargeable. First, CMEA accuses Little of fraud in connection with Conseco's loan to Reynolds. Second, CMEA argues that, by transferring the Real Estate to Ashraf despite knowing that the property had previously been transferred to Reynolds, Little committed a willful and malicious conversion of the property.

To block the discharge of a debt under § 523(a)(6), a claimant must show that 1) the debtor's conduct was willful and malicious, 2) the creditor suffered an injury to its legal rights, and 3) the creditor's loss was caused by the debtor's conduct. See, e.g., In re Best, 109 Fed.Appx. 1, 5-6 (6th Cir.2004); In re Jones, 300 B.R. 133, 139 (1st Cir. BAP 2003). Although relevant state laws may be instructive, "what constitutes `willful and malicious injury' under § 523(a)(6) is a matter of federal law." In re Baldwin, 249 F.3d 912, 917 (9th Cir.2001); In re Taylor, 322 B.R. 306, 309 (Bankr.N.D.Ohio 2004).

"The willful and malicious standard is a stringent one." In re Best, 109 Fed.Appx. at 5 (citing Kawaauhau v. Geiger, 523 U.S. 57, 64, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)). "[N]ondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Geiger, 523 U.S. at 61, 118...