In re Stephen, Case No. 04-11096-R (Bankr. N.D.Okla. 7/9/2007)
| Decision Date | 09 July 2007 |
| Docket Number | Adv. No. 04-1116-R.,Case No. 04-11096-R. |
| Parties | IN RE: BREEDLOVE, STEPHEN J., Chapter 7, Debtor. COMMERCIAL BANK, Plaintiff, v. STEPHEN J. BREEDLOVE, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Oklahoma |
This matter came on for trial on the merits on April 9 and 10, 2007, on Commercial Bank's Amended Complaint to Determine Non-Dischargeability of a Debt (Doc. 50), filed by Plaintiff Commercial Bank (the "Bank") against Defendant/Debtor Stephen J. Breedlove ("Breedlove"). In its Complaint, the Bank claims that Breedlove owes the Bank a debt in excess of one million dollars, and that the debt is non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2), (a)(4) and (a)(6). The Bank appeared through its Vice President, Ray Feess, and its counsel, David Wheeler and Robert Butler, and Breedlove appeared in person and through his counsel, Paul Tom. Prior to the commencement of the trial, the Bank withdrew its claim under 11 U.S.C. § 523(a)(4).
Upon consideration of the pleadings, including stipulations contained in the Pretrial Order, the testimony and documentary evidence admitted at trial, the arguments of counsel1 and applicable law, the Court finds and concludes as follows:
I. Jurisdiction
The Court has jurisdiction of this "core" proceeding by virtue of 28 U.S.C. §§ 1334, 157(a), and 157(b)(2)(I); and Local Civil Rule 84.1(a) of the United States District Court for the Northern District of Oklahoma.
II. Contentions of the parties
The Bank contends that Breedlove "obtained money, property, services or an extension, renewal or refinancing of credit" by employing "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition," and that any benefits so obtained by Breedlove constitute a non-dischargeable debt to the Bank. 11 U.S.C. § 523(a)(2)(A). Generally, the Bank alleges that Breedlove requested the Bank to renew a promissory note and line of credit in favor of Breedlove Automotive Group, Inc. ("Breedlove Automotive") (an automobile dealership wholly owned by Breedlove), when Breedlove knew that Breedlove Automotive was unable to repay the debt and/or that at the time of the renewal, Breedlove Automotive, acting through Breedlove, did not intend to repay the Bank.
The Bank also alleges that contrary to the terms of a Floor Plan Agreement between the Bank and Breedlove Automotive, pursuant to which the Bank advanced funds to Breedlove Automotive to purchase specific vehicles as inventory, Breedlove sold floor-planned vehicles "out of trust," that is, he sold approximately twenty (20) automobiles without remitting the agreed portion of the proceeds (i.e., the amount loaned to Breedlove to acquire the vehicle) to the Bank to reduce the indebtedness for which the vehicles served as security. The Bank further alleges that Breedlove used the proceeds of the Bank's collateral to enrich himself personally at the expense of the Bank. The Bank contends that by selling the cars "out of trust," Breedlove converted the Bank's collateral, which the Bank argues constituted a "willful and malicious injury by the debtor to another entity or to the property of another entity," and thus any damages incurred by the Bank as a result of such conversion are non-dischargeable. 11 U.S.C. § 523(a)(6).
In defense of the Section 523(a)(2)(A) claim, Breedlove contends that he did not make any false representation to the Bank regarding Breedlove Automotive's ability to repay the Bank and that because the Bank had knowledge of Breedlove Automotive's precarious financial position, the Bank could not have justifiably relied on any such representation. Further, Breedlove argues that to the extent the Bank contends that Breedlove orally or by implication made a representation of financial ability to pay the Bank, such a non-written representation does not bar a resulting debt from discharge. Finally, to the extent the Bank contends that Breedlove misrepresented his intent to repay the Bank, his efforts to repay the Bank negate the implication of a lack of intent to repay.
In defense of the Section 523(a)(6) claim, Breedlove argues that the Floor Plan Agreement2 was not an enforceable contract,3 and that if it was an enforceable contract, that the Bank waived various terms of the Floor Plan Agreement, or is estopped from enforcing them, including the requirement that Breedlove Automotive remit the proceeds of the sale of a floor-planned vehicle within three days of the sale, by the parties' course of dealing and performance of the agreement, and that Breedlove's reliance on the established course of performance negates any intent to harm the Bank. Breedlove also contends that the Bank failed to properly apply payments made to the Bank by Breedlove Automotive against the advances for the "out of trust" vehicles.
Breedlove also argues that in the event that any debt is determined to be non-dischargeable, the amount of the debt should be reduced because the Bank (1) repossessed inventory when Breedlove Automotive was not in default; (2) did not sell the repossessed inventory in a commercially reasonable manner; (3) did not properly apply the proceeds of the inventory against the debt; (4) did not mitigate its damages by auto-debiting Breedlove Automotive's operating account; and (5) did not mitigate its damages to the extent that the Bank loaned funds to purchasers of several of the "out of trust" vehicles, and deposited the loan proceeds into Breedlove Automotive's operating account rather than applying the proceeds to reduce Breedlove Automotive's debt related to the vehicles.
III. Evidentiary issues
Prior to trial, Breedlove filed Defendant's Breedlove's Motion in Limine Based on Spoliation of Evidence, Estoppel and Negative Inference (Doc. 67) ("Motion in Limine"). Breedlove alleged that the Bank had discarded, destroyed or failed to preserve check stubs4 that were attached to checks written and delivered by Breedlove Automotive to the Bank during August and September 2002, the relevant time period. Breedlove alleged these check stubs would establish that he had indeed remitted the proceeds of the sales of cars the Bank alleges were sold "out of trust." As a sanction for the alleged spoliation of relevant evidence, Breedlove requested that the Court "employ the negative presumption that all payments made by Breedlove Automotive shall be applied to the `out of trust' vehicles" or, in the alternative, require the Bank to retroactively apply all payments made by Breedlove Automotive to the "out of trust" vehicles before applying such payments to other indebtedness. Motion in Limine at 5-6.
In Plaintiff's Response to Defendant's Motion in Limine Dated March 15, 2007 (Doc. 89), the Bank denied that it intentionally disposed of check stubs instructing the application of funds to a particular vehicle for the purpose of obstructing discovery, and argues that it never possessed certain "missing"check stubs because it never received the checks. Because the motion generated disputed issues of fact, the parties were instructed to present evidence on the issue during the trial, after which the Court would consider whether spoliation occurred and if so, what sanction was appropriate.
Breedlove, as the movant, had the burden of establishing spoliation by a preponderance of evidence. United States v. Krause (In re Krause), No. 05-5775, 2007 WL 1597937 (Bankr. D. Kan. June 4, 2007), at *18. "[T]he general rule is that bad faith destruction of a document relevant to proof of an issue at trial gives rise to an inference that production of the document would have been unfavorable to the party responsible for its destruction." Aramburu v. Boeing Co., 112 F.3d 1398, 1407 (10th Cir. 1997). "The adverse inference must be predicated on the bad faith of the party destroying the records." Id. "Mere negligence in losing or destroying records is not enough because it does not support an inference of consciousness of a weak case." Id.5 Moreover, unless a duty otherwise exists a party has no duty to preserve evidence unless and until "he knows or should know [that the evidence] is relevant to imminent or ongoing litigation." Krause, 2007 WL 1597937 at *18. "A party can only be sanctioned for destroying evidence that it had a duty to preserve." Id.
At trial, Breedlove tendered bank statements and a summary exhibit as evidence that during the month of August 2002, Breedlove Automotive wrote and the Bank processed forty-six checks payable to the Bank in the total amount of $426,620.80. Breedlove Exhibits 11, 12. Breedlove contends that attached to each check was a stub which contained instructions for application of the payment, i.e., that the payment was intended to pay off a particular floor-planned vehicle, or was an interest payment or a reduction of principal. Breedlove failed to present any evidence that the Bank disposed of the stubs at a time when the Bank had notice that the stubs would be relevant evidence in litigation. The Bank's president testified that because of the volume of business it does each day, it did not normally retain Breedlove Automotive's check stubs because it assumed that if there was a dispute about the application of funds, Breedlove Automotive would have a copy of the stub as proof of payment. Transcript of Deposition of Philip Eaton, Breedlove Exhibit 8, at 11-12, 16, 14-45. The Court cannot infer that the Bank sought to destroy relevant evidence if, in August 2002, it disposed of check stubs because at that point, proper application of payments had not been at issue. Id. at 15. In addition, as of August 2002, Breedlove Automotive was not in default on its loans. Id. at 90.
The absence of a check stub in the Bank's records relating to a particular vehicle sold by Breedlove Automotive could mean that the Bank lost or disposed of the stub, but it could ...
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