In re Thiara

• Decision Date: 01 November 2002
• Docket Number: Adversary No. 00-2394.,BAP No. EC-01-1359-MAPB.,Bankruptcy No. 00-25481.
• Citation: 285 B.R. 420
• Parties: In re Sarbjit Singh THIARA, Debtor. Sarbjit Singh Thiara, Appellant, v. Spycher Brothers, a California general partnership, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

285 B.R. 420

In re Sarbjit Singh THIARA, Debtor Sarbjit Singh Thiara, Appellant, v. Spycher Brothers, a California general partnership, Appellee.

BAP No. EC-01-1359-MAPB.

Bankruptcy No. 00-25481.

Adversary No. 00-2394.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted March 21, 2002.

Filed November 1, 2002.

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Thomas A. Willoughby, Felderstein, Willoughby & Pascuzzi, Sacramento, CA, for Sarbjit Singh Thiara.

Walter J. Schmidt, Crabtree, Schmidt, Zeff, Jacobs & Farrer, Modesto, CA, for Spycher Brothers.

Before: MARLAR, PERRIS and BRANDT, Bankruptcy Judges.

OPINION

MARLAR, Bankruptcy Judge.

INTRODUCTION

The debtor/farmer obtained crop financing under the false pretense and misrepresentation that he would repay the shortfall for a 1998 crop advance as well as any new advances for the 1999 crop. He then converted insurance proceeds for the damaged 1999 crop, and refused to pay the shortfall. Because of supervening binding authority, we VACATE the judgment that the conversion liability is nondischargeable and REMAND, while (in an unpublished companion memorandum) AFFIRMING the nondischargeability of part of the debt based on fraud.

FACTS

Sarbjit Singh Thiara ("Debtor") farms almonds on a 500-acre ranch.¹ Spycher Brothers ("SB") is involved in the almond industry, and its business includes crop financing. Debtor and SB had, over many years, a "history ... of honorable dealings" with each other. (Transcript, Court's Findings, July 3, 2001, at 21:7-12.)

In May 1998, Debtor obtained a "crop advance" loan from SB in the amount of $576,000 ("1998 advance"). In connection with that advance, Debtor executed a three-year Almond Purchase Agreement ("Agreement"), whereby he agreed to sell SB his entire almond crop for 1998, 1999 and 2000. SB agreed to process and sell the crop and pay Debtor any excess profit. However, the Agreement gave Debtor the right to decide when the crop would be sold, provided that he consented to the sale price for each year's crop and designated a date no later than April 1st of the year following the fall harvest. Any sale proceeds were to be credited against Debtor's loan, and the repayment terms of the Agreement would be extended as necessary.² To secure the loan, SB obtained and perfected a security interest in Debtor's ranch, crops, and crop proceeds.

Debtor delivered his 1998 crop to SB, but the crop was not sold until March 1999. In the interval, almond prices had fallen. This resulted in a shortfall of $321,111 on the 1998 Agreement. SB maintained that the shortfall resulted from Debtor's delay in consenting to a sale. Debtor denied having given his consent, or alternatively, denied that his consent was required.

Pursuant to the Agreement, the shortfall was carried forward to the 1999 crop year. Unfortunately, there was a winter frost which destroyed most of the 1999 crop, and Debtor became "desperate for money." Transcript, June 27, 2001, at 99:26-100:1-4.

In April 1999, Debtor met with Roger Nunes ("Nunes"), general manager of SB, and SB's general partner, Hartley Spycher ("Spycher"). At that time, Debtor requested an additional advance for the 1999 crop and for "cultural" or orchard maintenance expenses. Nunes testified that Debtor assured him that he would repay the entire debt. However, Debtor testified that he had only intended to repay the 1999 advance but not the 1998 shortfall. In any event, Debtor did not communicate that intention to SB, and SB agreed to finance an additional $500,000, which sum included the 1998 shortfall as well as new advances for 1999. The actual additional advances were approximately $100,000.

In connection with the May, 1999 advance, Debtor executed new loan documents, including a promissory note for $500,000.³ The note provided:

All sums advanced or accruing under this Promissory Note are payable from sales proceeds of Borrower's almond crop to SPYCHER BROTHERS and are due when and as said sales proceeds are payable. In the event said crop sales proceeds are insufficient said sums shall become due and payable upon demand.

Promissory Note, dated May 26, 1999.

Debtor also signed a security agreement, giving SB a security interest in

[a]ll farm products, including but not limited to all crops growing or to be grown, all inventory, accounts, chattel paper, and general intangibles now owned or hereafter acquired with respect to that certain real property more particularly described in Exhibit "A" attached hereto and made part of.

Security Agreement, referencing Promissory Note dated May 26, 1999.

An amended UCC-2 financing statement was filed with the Secretary of State on June 1, 1999. It was undisputed that these documents gave SB a valid and perfected security interest ("Security Interest") in crop loss insurance proceeds for the 1999 crop, although Debtor later challenged whether the Security Interest extended to insurance proceeds paid for damaged but unharvested crops.

As further security for the loan, Debtor executed an Application for Assignment of Indemnity ("Assignment") to SB of all of his rights and interest in insurance indemnity payments for any crop loss claim on the entire 1999 crop. The Assignment stated that the insurance company would determine who was entitled to the indemnity payments, and would then make payment by joint check.

At the end of May, 1999, SB gave Debtor the first cash advance of $78,889. Sometime between April and July, 1999, Debtor filed an insurance claim and settled with the insurance company for the damaged 1999 crop. In July 1999, Debtor received a check from the insurance company, payable only to him, for $452,212. Debtor did not disclose to SB, either at the April 1999 meeting or the May 1999 loan transaction, that he had made an insurance claim or that he had received the check. Debtor then spent this money, allegedly on farm expenses, and did not pay any portion thereof to SB. SB learned about the insurance proceeds in August 1999, and thereafter sought to collect the loan debt. Debtor then made a $50,000 payment.⁴

As part of the 1999 advance, SB also charged Debtor $24,000 in order to harvest what crop there was, which Nunes described as being in "terrible condition." The bankruptcy court found that the balance due on Debtor's $500,000 note, as of July, 2001, including legal fees and interest, was $402,499.78.

Proceedings in Bankruptcy

Debtor filed a voluntary chapter 11⁵ petition on May 9, 2000. SB filed a timely complaint to determine the nondischargeability of its debt, and filed a motion for summary judgment. SB alleged that Debtor had obtained the advances from SB through fraud, false representation, or false pretenses (§ 523(a)(2)(A)), and that he had willfully and maliciously injured it by converting the insurance proceeds (§ 523(a)(6)). SB also alleged that Debtor had committed fiduciary fraud or defalcation (§ 523(a)(4)).

Debtor opposed the motion for summary judgment and filed a "counter-motion," which was essentially an objection to SB's claim.⁶ A combined hearing on the motions and trial was then conducted.

Spycher, Nunes and Debtor testified at the trial.⁷ The pertinent testimony focused on three areas: (1) the sale of the 1998 crop, which resulted in the shortfall; (2) the parties' intentions when entering into the renewal loan transaction in April 1999; and (3) SB's rights in the 1999 crop insurance proceeds.

On July 3, 2001, the bankruptcy court orally announced its findings and conclusions. See Fed. R. Bankr.P. 7052, incorporating Fed.R.Civ.P. 52(a). The court found that Debtor knew that the 1999 transaction included the 1998 shortfall amount, but that he did not intend to pay that amount and deliberately kept such intention secret. It found that SB justifiably relied on Debtor's representation that he would pay the entire amount represented by the 1999 renewed financing, and that SB was proximately damaged in the sum of the 1999 advances. The court found that the damages proximately caused by the misrepresentation were the new loan advances, totaling approximately $100,000, made by SB on or after May 26, 1999, and determined that portion of the debt nondischargeable under § 523(a)(2)(A).

The bankruptcy court further found that SB had a Security Interest in both the growing crops and the crop insurance proceeds. Alternatively, it determined that there was a valid and enforceable Assignment of such proceeds to SB from Debtor.⁸ The court also determined that Debtor converted the insurance proceeds, and such conversion was a willful and malicious injury. Therefore, the court held that the entire debt of $402,499.78 was nondischargeable under § 523(a)(6).

The court did not resolve the § 523(a)(4) count, having ruled in SB's favor on other grounds. Nevertheless, Debtor has raised issues concerning the § 523(a)(4) count. We decline to reach the issue whether the debt was also nondischargeable under § 523(a)(4) as it is unnecessary to the disposition of this case, because the trial court, considering it moot, did not resolve this count, and because no cross-appeal was filed by SB. Compare Diamond v. Kolcum (In re Diamond), 285 F.3d 822, 826 n. 1 and 828 n. 2 (9th Cir.2002) (Ninth Circuit reviewed the merits of an alternative count resolved in bankruptcy court's summary judgment).

Judgment in favor of SB was entered on July 9, 2001, and Debtor timely appealed.

ISSUE⁹

Whether the bankruptcy court correctly determined that Debtor converted the crop insurance proceeds, and that such conversion was a "willful and malicious" injury nondischargeable under § 523(a)(6).

STANDARDS OF REVIEW

Because the bankruptcy court entered its judgment after trial, we review the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo. Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir.2002). A finding is clearly erroneous "when although there is evidence to support it,...