In re Watkins

• Decision Date: 19 September 1988
• Docket Number: 88-9021.,Bankruptcy No. 87-09770,Adv. No. 88-9020,87-09771
• Parties: In re Wilfred H. WATKINS, Robert Watkins and Sharon Watkins, Debtor. BORG-WARNER ACCEPTANCE CORPORATION, Plaintiff, v. Wilfred H. WATKINS, Sharon Watkins, Robert Watkins and Sharon Watkins, Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

90 B.R. 848 (1988)

In re Wilfred H. WATKINS, Robert Watkins and Sharon Watkins, Debtor BORG-WARNER ACCEPTANCE CORPORATION, Plaintiff, v. Wilfred H. WATKINS, Sharon Watkins, Robert Watkins and Sharon Watkins, Defendants.

Bankruptcy Nos. 87-09770, 87-09771, Adv. Nos. 88-9020, 88-9021.

United States Bankruptcy Court, E.D. Michigan, N.D.

September 19, 1988.

Webster C. Tally, Bay City, Mich., for plaintiff.

John Wesley Kline, Southfield, Mich., for defendants.

Memorandum Opinion Re: Standard of Proof In § 523(a)(6) Actions

ARTHUR J. SPECTOR, Bankruptcy Judge.

This matter is before the Court upon the plaintiff-creditor's complaint to have its claim declared nondischargeable pursuant to 11 U.S.C. § 523(a)(6). After a trial on the merits, the plaintiff has established by a preponderance of the evidence, but not by clear and convincing evidence, that this debt is one for willful and malicious injury by the defendant-debtors to property of the plaintiff. Herein lies the problem.

FACTS

The defendants operated a marina and also sold boats and boating equipment. The plaintiff loaned money to the defendants under a floor-plan financing agreement¹ which obligated the defendants to repay the plaintiff as each item on the floor-plan is sold. The complaint alleges that the defendants intentionally sold two boats and three pontoons "out of trust", i.e., title had been conveyed but the plaintiff had not been paid.

At trial, the plaintiff presented the testimony of one witness to support its claim that the out-of-trust sales were intentional acts. The witness, an investigator for a different, floor-plan financer² testified that her audit of the defendants' inventory on February 23, 1987 revealed that 10 boxes, each of which were supposed to contain an unsold engine, instead were either empty altogether or filled with wood and assorted junk such that the sealed boxes appeared as if they each contained an unsold boat engine. A cursory audit of the premises would, thus, have indicated to a less thorough investigator more engines on the premises than were actually present. The witness testified that one of the defendants tried to dissuade her from conducting a thorough audit. In defense, the defendants suggested that perhaps their employees stole the engines and, unbeknownst to them, replaced them with the dead weight.

Upon considering the testimony, credibility, and demeanor of the witnesses, I conclude that the plaintiff has established by a preponderance of the evidence that the defendants Wilfred and Robert Watkins willfully and maliciously sold inventory which was subject to plaintiff's floor-plan out of trust, thereby causing injury to the plaintiff. Defendant Sharon Watkins, the wife of debtor Wilfred Watkins (who did not join her husband in the petition for relief nor file her own), and Sharon Watkins, the wife of Robert Watkins, I find to be totally innocent, as there was no evidence that they had anything to do with running the business. Therefore, references to "defendants" hereafter mean Wilfred and Robert Watkins only.

LAW

The Sixth Circuit Court of Appeals has not ruled on the appropriate standard of proof for nondischargeability proceedings under § 523(a)(6). In In re Martin, 761 F.2d 1163 (6th Cir.1985), the court held the plaintiff to a clear and convincing standard of proof in a § 523(a)(2) action. However, neither the holding nor the reasoning of Martin are applicable in this § 523(a)(6) action.

The Court of Appeals' statement in Martin that the standard of proof in § 523(a)(2)(B) actions was "clear and convincing evidence" was dictum. The statement was made without discussion because the standard of proof was not the issue in the case. The comment is also no guide to the proper standard in § 523(a)(6) actions since § 523(a)(2)(B) does, but § 523(a)(6) does not mirror a common-law fraud action. It is likely that, to the extent that the court "chose" that standard for use in § 523(a)(2)(B) actions, it did so because, historically, "fraud" actions to avoid a commercial transaction have always required proof by clear and convincing evidence. See generally 9 Wigmore, Evidence § 2498 (Chadbourn rev. 1981); 1 Jones, Evidence § 224 (Bancroft-Whitney 1958); McCormick on Evidence, 3rd Ed., p. 960 (West 1984); Wright & Miller, Federal Practice and Procedure: Civil, § 1296 (West 1969).³

McCormick noted that the requirement for clear and convincing evidence in fraud cases "had its origins in the standards prescribed for themselves by the chancellors in determining questions of fact in equity cases." Wright & Miller explained:

Allegations of fraud or mistake frequently are advanced only for their nuisance or settlement value and with little hope that they will be successful. . . . Finally, as has been pointed out by the commentators, the old cliche that actions or defenses based upon fraud are disfavored and are scrutinized by the courts with great care because they often form the basis for "strike suits" still retains considerable vitality.

Despite this historic judicial antipathy toward fraud claims, the "modern tendency", Jones, Evidence, supra, is away from that standard. See the cases collected in 37 Am.Jur.2d, Fraud and Deceit, § 468, p. 642-643, n. 4-13; p. 645-646, n. 18-10; and in 1987 pocket part. This modern trend away from the clear and convincing evidence standard may be because in modern jurisprudence a fraud claim can be vindicated by mere monetary damages at law whereas, historically vindication had to be sought by an action in equity for rescission of the completed commercial transaction.⁴

Research reveals a split of authority on the appropriate burden of proof in § 523(a)(6) actions. One line of cases applies a clear and convincing standard. See e.g. American Honda Finance Corp. v. Loder, 77 B.R. 213 (N.D.Iowa 1987); In re Hensley, 87 B.R. 164 (D.Kan.1988); In re Moore, 87 B.R. 499 (Bankr.S.D.Ohio 1988); In re Cerar, 84 B.R. 524 (Bankr.C.D.Ill. 1988); In re Peoni, 67 B.R. 288 (Bankr.S.D. Ind.1986); In re Holtz, 62 B.R. 782 (Bankr. N.D.Iowa 1986); In re Alexander, 58 B.R. 160 (Bankr.W.D.Wis.1984); In re Wintrow, 57 B.R. 695 (Bankr.S.D.Ohio 1986); In re Kaufmann, 57 B.R. 644 (Bankr.E.D.Wis. 1986); In re Branch, 54 B.R. 211 (Bankr.D. Colo.1985); In re Egan, 52 B.R. 501 (Bankr.D.Minn.1985); In re Contento, 37 B.R. 853 (Bankr.S.D.N.Y.1984); In re Capparelli, 33 B.R. 360 (Bankr.S.D.N.Y.1983); In re Bothwell, 32 B.R. 617 (Bankr.N.D. Iowa 1983); In re Irvin, 31 B.R. 251 (Bankr.D.Colo.1983); In re DeRosa, 20 B.R. 307 (Bankr.S.D.N.Y.1982); In re Grainger, 20 B.R. 7 (Bankr.D.S.C.1981). The other line applies a preponderance standard. See e.g., Combs v. Richardson, 838 F.2d 112 (4th Cir.1988); In re Shepherd, 56 B.R. 218 (W.D.Va.1985); In re Dubian, 77 B.R. 332, 16 B.C.D. 428, 17 C.B.C.2d 516 (Bankr.D.Mass.1987); In re Clark, 50 B.R. 122 (Bankr.D.N.D.1985); In re Boren, 47 B.R. 293, 295, n. 8 (Bankr.W. D.Ky.1985); In re Stephens, 26 B.R. 389 (Bankr.W.D.Ky.1983); In re Tanner, 17 B.R. 201 (Bankr.W.D.Ky.1982); In re Baiata, 12 B.R. 813, 817 (Bankr.E.D.N.Y.1981).⁵

Only one circuit of the Court of Appeals has addressed the question of which standard to apply in § 523(a)(6) cases.⁶ In Combs, the Fourth Circuit held that the standard of proof in § 523(a)(6) cases is by a preponderance of the evidence. It said:

The Bankruptcy Code is silent as to the standard of proof necessary to establish the exceptions to discharge in § 523. In the face of this silence, courts may not imply a higher standard than the preponderance standard normally applied in civil proceedings. Although the "fresh start" philosophy of bankruptcy law requires that exceptions to discharge "be confined to those plainly expressed," Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915), this policy does not justify judicial imposition of a heavier burden of proof on creditors seeking to have a debt determined non-dischargeable under § 523(a)(6).

Congress had reasons for enacting the exceptions to discharge in bankruptcy embodied in § 523. While bankruptcy proceedings are intended to afford debtors a "fresh start," the provision at issue here expresses Congress\' determination that debts incurred as the result of a debtor\'s willful and malicious injury of another are of a type that bankruptcy ought not to forgive. The balance of these competing policies does not require a heightened standard of proof of the § 523 exception, . . . we hold that the policies of the Bankruptcy Code are best effectuated by requiring that creditors prove by a preponderance of the evidence the willfulness and maliciousness of the debtors\' acts under § 523(a)(6) and by waiting for Congress, not the courts, to signal a departure from this standard.

Combs, 838 F.2d at 116.

The bulk of the cases which even dare⁷ to elect one standard of proof over the other do so without explanation. Since they do not even attempt to persuade, they offer no persuasive authority on this question. The remainder offer tidbits of analysis, but on closer inspection, either the analysis or the case authority underlying it are suspect. For example, Wintrow merely cited Martin for the proposition that a § 523(a)(6) action must be proven by clear and convincing evidence. Yet, as we have seen, Martin said no such thing. It merely stated, without explanation, or indication that it intended its comment to be read expansively, that the standard of proof in § 523(a)(2) actions was by clear and convincing evidence.

Cerar did the same thing. It, too, extrapolated from the opinion of the Court of Appeals from its own circuit and a district court opinion which followed it, which dealt with actions under § 523(a)(2) to somehow find that standard appropriate to § 523(a)(6).

The court in DeRosa did do some analysis of the issue. DeRosa dealt with a complaint which alleged that a certain debt was non-dischargeable under § 523(a)(2), (4) and (6). When determining the appropriate...