In re Longley, BAP No. NO-98-061. Bankruptcy No. 97-03188. Adversary No. 97-0334.

• Decision Date: 09 July 1999
• Docket Number: BAP No. NO-98-061. Bankruptcy No. 97-03188. Adversary No. 97-0334.
• Citation: In re Longley, 235 B.R. 651 (B.A.P. 10th Cir. 1999)
• Parties: In re Timothy J. LONGLEY, Debtor. Mitsubishi Motors Credit of America, Inc., Plaintiff-Appellee, v. Timothy J. Longley, Defendant-Appellant.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

235 B.R. 651 (1999)

In re Timothy J. LONGLEY, Debtor Mitsubishi Motors Credit of America, Inc., Plaintiff-Appellee, v. Timothy J. Longley, Defendant-Appellant.

BAP No. NO-98-061. Bankruptcy No. 97-03188. Adversary No. 97-0334.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

July 9, 1999.

COPYRIGHT MATERIAL OMITTED

Submitted on the briefs:^* H. Gregory Maddux of Maddux & Maddux, Tulsa, Oklahoma, for Defendant-Appellant.

Bruce F. Klein of Metheny, Mitchell, Davis & Klein, Oklahoma City, Oklahoma, for Plaintiff-Appellee.

Before McFEELEY, Chief Judge, BOULDEN, and KRIEGER, Bankruptcy Judges.¹

OPINION

KRIEGER, Bankruptcy Judge.

At gunpoint, a debtor relinquished his 1994 Mitsubishi 3000 GT to a drug dealer. He filed for Chapter 7 bankruptcy relief several months later. The creditor who held a recorded lien against the vehicle obtained a judgment declaring the debtor's obligation to be non-dischargeable as a willful and malicious injury pursuant to 11 U.S.C. § 523(a)(6). For the reasons set forth below, we conclude that the Bankruptcy Court's judgment must be REVERSED.

I. JURISDICTION AND STANDARD OF REVIEW

With the consent of the parties, a Bankruptcy Appellate Panel has jurisdiction to hear appeals from final judgments and orders of Bankruptcy Courts within the circuit. 28 U.S.C. § 158(a), (b)(1), (c)(1). As neither party has opted to have this appeal heard by the United States District Court for the Northern District of Oklahoma, each is deemed to have consented to the jurisdiction of the Bankruptcy Appellate Panel. 10th Cir. BAP L.R. 8001-1(d).

A Bankruptcy Appellate Panel may affirm, modify or reverse a Bankruptcy Court's judgment or order, or remand for further proceedings. Conclusions of law are reviewed de novo. Pierce v. Underwood, 487 U.S. 552, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988). Findings of fact shall not be set aside unless clearly erroneous. Fed. R. Bankr.P. 8013; First Bank v. Reid (In re Reid), 757 F.2d 230, 233-34 (10th Cir.1985). Factual findings, even those based on stipulated facts presented by the parties, are subject to a "clearly erroneous" standard of review. Adair State Bank v. American Cas. Co., 949 F.2d 1067, 1072 (10th Cir.1991); see Anderson v. City of Bessemer City, 470 U.S. 564, 573-75, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). "A finding of fact is `clearly erroneous' if it is without factual support in the record, or if the appellate court, after reviewing all the evidence, is left with the definite and firm conviction that a mistake has been made." Cowles v. Dow Keith Oil & Gas, Inc., 752 F.2d 508, 511 (10th Cir.1985) (citation omitted).

II. BACKGROUND

Timothy Longley (Longley) filed his bankruptcy petition on July 11, 1997. Mitsubishi Motor Credit (Mitsubishi) filed an adversary proceeding seeking either denial of Longley's discharge pursuant to 11 U.S.C. § 727(a)(2)(A), or alternatively, a determination that Longley's obligation was excepted from discharge pursuant to 11 U.S.C. § 523(a)(6) because prior to the bankruptcy Longley had, without Mitsubishi's consent, transferred a vehicle against which Mitsubishi held a recorded lien. The parties filed a written factual stipulation with the Bankruptcy Court. According to the record on appeal, no other evidence was presented.² Based upon the stipulated facts, the Bankruptcy Court denied Mitsubishi's objection to Longley's discharge but determined that Longley's debt to Mitsubishi was non-dischargeable, and set a hearing to quantify the amount of the debt. The parties stipulated to the value of the vehicle, resulting in a nondischargeable judgment of $15,000.00. Longley appeals the Bankruptcy Court's determination of non-dischargeability. Mitsubishi has not appealed the Bankruptcy Court's denial of its objection to discharge.

The stipulated facts presented to the Bankruptcy Court follow. Longley purchased a 1994 Mitsubishi 3000 GT (the vehicle) in 1994. He financed the purchase price of $25,495.00 by executing a Consumer Credit Sale Agreement and secured the debt with a lien in favor of Mitsubishi. During the following two years, Longley experienced financial difficulties and ultimately lost his job. While unemployed, he agreed to participate in an illegal drug transaction with John Doe (Doe), but backed out of the transaction before it was completed. As a result of the failed transaction, Doe repeatedly demanded that Longley pay him $16,000.00. To escape such demands, Longley and his wife moved from Tulsa to Skiatook, Oklahoma.

In early March 1996, Doe and three unidentified individuals confronted Longley and his wife at their residence. Brandishing weapons, Doe and the others threatened Longley and his wife with immediate bodily harm if Longley did not pay Doe. When Longley stated that he did not have the $16,000.00, Doe took possession of the vehicle, purportedly as collateral until the debt was paid. Doe also demanded that Longley sign over the vehicle title, but Longley replied that he would not be able to get the title from his safe deposit box until the following Monday morning. Doe agreed to meet Longley the following Monday, but before departing with the vehicle threatened Longley and his wife with physical harm if they reported the car as stolen. Longley ultimately signed over the title the following Monday.³

Several weeks later, Doe and two unidentified individuals returned to Longley's residence and again demanded $16,000.00. Longley replied that he did not have the money and advised Doe that if Doe appeared at his residence again, he would contact the police. That was the last time Longley saw the vehicle.

The vehicle remains registered in Longley's name subject to Mitsubishi's lien and has not been re-tagged. Longley made payments to Mitsubishi through November 1996, but did not advise Mitsubishi of the status of the vehicle until after his bankruptcy filing.

III. DISCUSSION

The question presented in this appeal is whether the Bankruptcy Court erred in concluding that Longley willfully and maliciously injured Mitsubishi by transferring the vehicle to Doe. We hold that the Bankruptcy Court failed to apply the appropriate legal standard and clearly erred in making its factual findings.

Relying upon the Tenth Circuit authority of Dorr, Bentley & Pecha, CPA's, P.C. v. Pasek (In re Pasek), 983 F.2d 1524 (10th Cir.1993), the Bankruptcy Court reasoned that a debtor's conversion of secured property gives rise to a non-dischargeable debt. It then found that Pasek was unaffected by the unanimous decision of the United States Supreme Court in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). Applying the Pasek standard to the stipulated facts, the Bankruptcy Court found:

. . . that the transfer of the Car by Longley to John Doe constitutes conversion. Longley deliberately and intentionally transferred possession and title to the Car to John Doe in total disregard of the lien interest of Mitsubishi. Longley was fully aware that Mitsubishi had a valid security interest in the Car and neither had consented nor would consent to the transfer. When Longley transferred the Car to John Doe, he told Doe to never return. Certainly he knew that if John Doe did not return, the Car would not return of its own accord. Longley\'s conduct caused Mitsubishi to lose its collateral. Mitsubishi\'s rights as a secured party with a security interest in the Car as collateral were converted.

Mitsubishi argues that the Bankruptcy Court correctly determined that Longley willfully and maliciously injured its rights by conversion. Longley argues that the Bankruptcy Court erred because the facts presented to it established only Longley's intentional transfer of the vehicle but no intent to injure Mitsubishi or its lien interest.

Section 523(a)(6) of the Bankruptcy Code provides that a debt "for willful and malicious injury by a debtor to another entity or the property of another entity" is not subject to discharge. 11 U.S.C. § 523(a)(6). The burden of proof is upon the creditor to establish that the debt is non-dischargeable by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

The legal question presented is the meaning of "willful and malicious injury" in the context of a debtor's conversion of secured property. This requires analysis of three pivotal Tenth Circuit cases interpreting § 523(a)(6), and of the United States Supreme Court's recent decision of Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).

In the Tenth Circuit, the phrase "willful and malicious injury" has been interpreted as requiring proof of two distinct elements — that the injury was both "willful" and "malicious." Failure of a creditor to establish either willfulness or malice renders the debt dischargeable. Farmers Ins. Group v. Compos (In re Compos), 768 F.2d 1155 (10th Cir.1985). In Compos, the Tenth Circuit addressed the situation of a debtor who, while driving under the influence of alcohol, ran into the plaintiff's car. The Court reasoned that "willful" modified "injury." Thus, it ruled that § 523(a)(6) excepts from discharge only obligations arising from acts intended to cause injury. Compos, 768 F.2d at 1158. Although the debtor knew of his inebriated condition and intentionally drove the car, because the debtor did not intend to injure the victim, the willfulness requirement of § 523(a)(6) was not satisfied.

In CIT Financial Services, Inc. v. Posta (In re Posta), 866 F.2d 364 (10th Cir.1989), the Tenth Circuit held that a debt arising from an unsophisticated debtor's technical conversion of a trailer by sale without the secured creditor's knowledge was dischargeable. The Court departed from its analysis in Compos by concluding that a debtor's intent to injure may be established by proof that it was reasonably foreseeable that a debtor's conduct would result in injury. The Court first construed willful with regard to the debtor's conduct...