Kraus Anderson Capital, Inc. v. Bradley (In re Bradley)

• Citation: 507 B.R. 192
• Decision Date: 26 March 2014
• Docket Number: BAP No. 13–8010.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit
• Parties: In re Dean R. BRADLEY; Cynthia E. Bradley, Debtors. Kraus Anderson Capital, Inc., Plaintiff–Appellant, v. Dean R. Bradley, Defendant–Appellee.

507 B.R. 192

In re Dean R. BRADLEY; Cynthia E. Bradley, Debtors.Kraus Anderson Capital, Inc., Plaintiff–Appellant,

v.Dean R. Bradley, Defendant–Appellee.

BAP No. 13–8010.

United States Bankruptcy Appellate Panel for the Sixth Circuit.

Submitted: Nov. 5, 2013.

Decided and Filed: March 26, 2014.

ON BRIEF:Joseph A. Wentzell, Wentzell Law Office, PLLC, St. Anthony, MN, for Appellant. Michael J. Moran, Gibson & Lowry, Cuyahoga Falls, OH, for Appellee.

Before: GEORGE W. EMERSON, JR., GUY R. HUMPHREY and C. KATHRYN PRESTON, Bankruptcy Appellate Panel Judges.

OPINION

GEORGE W. EMERSON, Jr., Bankruptcy Judge.

Kraus Anderson Capital, Inc. (“Lender”) appeals the decision of the Bankruptcy Court determining that the debt owed by Dean R. Bradley (“Debtor”) is dischargeable. The adversary complaint asserted causes of action under 11 U.S.C. § 523(a)(2)(A), (a)(4) and (a)(6) based on Lender's claim that Debtor's failure to remit the proceeds of the sale of collateral in breach of the terms of certain agreements and his false representations regarding the status of the collateral render the debt non-dischargeable. Lender also appeals the Bankruptcy Court's decision denying its motion to amend and make additional findings of fact pursuant to Federal Rule of Bankruptcy Procedure 7052. For the reasons set forth below, the Panel REVERSES the decision of the Bankruptcy Court holding the debt owed to Lender dischargeable and REMANDS for a determination regarding the amount of damages.

I. ISSUES ON APPEAL

Appellant presents two issues in this appeal. The primary issue is whether the Bankruptcy Court erred in determining that the debt owed to Lender should be held dischargeable in bankruptcy. The second issue is whether the Bankruptcy Court erred in denying Lender's motion to amend or make additional findings of fact pursuant to Federal Rule of Bankruptcy Procedure 7052.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit (“BAP”) has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP, and no party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A “final” order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 797, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (internal quotations and citations omitted). Determinations of dischargeability are final orders for purposes of appeal. Cash Am. Fin. Servs., Inc. v. Fox (In re Fox), 370 B.R. 104, 109 (6th Cir. BAP 2007) (quoting Hertzel v. Educ. Credit Mgmt. Corp. (In re Hertzel), 329 B.R. 221, 224–25 (6th Cir. BAP 2005)).

Dischargeability determinations present mixed questions of law and fact. Hogan v. George (In re George), 485 B.R. 478, 2013 WL 135274, at *1 (6th Cir. BAP 2013) (table). When a mixed question of law and fact arises in the bankruptcy context, the reviewing court “must break it down into its constituent parts and apply the appropriate standard of review for each part.” Bank of Montreal v. Official Comm. of Unsecured Creditors (In re Am. HomePatient, Inc.), 420 F.3d 559, 563 (6th Cir.2005) (citations omitted). The appellate court reviews conclusions of law de novo and factual determinations are reviewed under a clearly erroneous standard. Van Aken v. Van Aken (In re Van Aken), 320 B.R. 620, 622 (6th Cir. BAP 2005). “Under a de novo standard of review, the appellate court must ‘review questions of law independent of the bankruptcy court's determination.’ ” Phillips v. Weissert (In re Phillips), 434 B.R. 475, 482 (6th Cir. BAP 2010) (citing Bailey v. Bailey (In re Bailey), 254 B.R. 901, 903 (6th Cir. BAP 2000)). “A finding of fact is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir.2007) (internal quotation marks and citation omitted).

Contract interpretation is a matter of law which is reviewed de novo. Bender v. Newell Window Furnishings, Inc., 681 F.3d 253, 259 (6th Cir.2012); Rhone–Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del.1992). The determination of whether a contract, or a term therein, is clear or ambiguous is also a question of law reviewed de novo. Official Comm. of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), 456 F.3d 668, 676 (6th Cir.2006).

The Panel reviews the denial of a motion to amend or make additional findings of fact pursuant to Federal Rule of Bankruptcy Procedure 7052 under the abuse of discretion standard. Besser v. Sepanak, 478 Fed.Appx. 1001 (6th Cir.2012).

Abuse of discretion exists when the court “ ‘relies upon clearly erroneous findings of fact or when it improperly applies the law or uses an erroneous legal standard.’ ” Corzin v. Fordu (In re Fordu), 209 B.R. 854, 858 (6th Cir.BAP1997) (citation omitted). If a trial court's decision determining dischargeability is based on the correct law and facts, the court has not abused its discretion in denying a party's motion to amend or make additional findings of fact.

Lowry v. Nicodemus (In re Nicodemus), 497 B.R. 852, 855 (6th Cir. BAP 2013).

III. FACTS

On November 30, 2010, Debtor and his wife Cynthia E. Bradley, filed a joint petition for relief under chapter 7 of the Bankruptcy Code. Debtor owns Bradley Machinery, LLC (“Bradley Machinery”), which was in the business of selling and renting construction equipment. Bradley Machinery did not file a bankruptcy petition.

On March 21, 2011, Lender filed an adversary proceeding against Debtor pursuant to § 523(a)(4) and (a)(6). Lender asserts Debtor caused Bradley Machinery to sell equipment “out of trust,” that is, without remitting the proceeds of the sale of collateral to Lender. Lender argues this constituted embezzlement under § 523(a)(4) and was a willful and malicious injury under § 523(a)(6). Lender subsequently amended its complaint to add a cause of action under § 523(a)(2)(A). The § 523(a)(2)(A) cause of action is based on a settlement agreement reached by the parties after the sale of some equipment “out of trust.” Lender asserts that Debtor obtained an extension of credit through false representations to Lender regarding the status of certain pieces of its collateral. Kraus–Anderson Capital, Inc. v. Bradley (In re Bradley), Adv. Case No. 11–05082, ECF. Nos. 36, 43.¹

Prior to trial, Lender and Debtor filed three separate stipulations of fact. The facts stipulated by the parties are as follows:

Defendant owns Bradley Machinery, LLC (“Bradley Machinery”).

Plaintiff and Bradley Machinery entered into various loan and security agreements ... whereby Plaintiff provided financing for Bradley Machinery's purchase of equipment used in Bradley Machinery's business. The equipment purchased with the financing from Plaintiff was subject to security interests in favor of Plaintiff.

Defendant personally guaranteed the performance of Bradley Machinery's obligations under the Loan Documents pursuant to a written guaranty dated January 27, 2005.

In the spring of 2008, Bradley Machinery's bank required a modification to the terms [of a loan] and an increase in the monthly payment amount of Bradley Machinery's loan, which caused cash flow problems for Bradley Machinery.

By the summer of 2008, Bradley Machinery was unable to pay its bills in the ordinary course of business and did not reveal this information to Plaintiff.

Second Joint Stipulations, ¶ 4–8, ECF No. 35.

In December 2008, Defendant met with Plaintiff's representatives, Carl Carlson and James Stephen Jarussi, in Defendant's offices, and at that meeting Defendant informed Plaintiff that he had caused Bradley Machinery to sell certain equipment subject to Plaintiff's security interest but did not pay the proceeds to Plaintiff. Defendant did not at that time disclose that three other pieces of equipment subject to Plaintiff's security interests had been sold.

Second Joint Stipulations, ¶ 10, ECF No. 35.

Within weeks after meeting with Plaintiff's representatives and signing the Amendment to the Loan Documents, Defendant caused Bradley Machinery to sell equipment subject to Plaintiff's security interests without paying the proceeds to Plaintiff.

Second Joint Stipulations, ¶ 13, ECF No. 35.

Bradley Machinery sold or caused to be sold the following equipment subject to Plaintiff's security interest:

2007 Gehl Skid Loader, Model 6640E, S/N 606828

2007 Gehl Skid Loader, Model CTL70, S/N 405302

Bobcat T190 Loader, S/N 527717582

Yanmar Vio45, S/N 50616

Yanmar Vio45, S/N 50712

Yanmar Vio35, S/N 51695

Yanmar Vio35–5, Komac Hammer KB300SL

Upon the sale of such equipment, the obligations to Kraus Anderson secured by the equipment were not paid in full.

Second Joint Stipulations, ¶ 18, ECF No. 35; See also Ex. 29–4, Equip. List.

Defendant knows the equipment was sold because he helped sell it.

Second Joint Stipulations, ¶ 19, ECF No. 35.

Defendant knew that Bradley Machinery and Defendant himself were experiencing financial problems when he sold the equipment.

Second Joint Stipulations, ¶ 22, ECF No. 35.

A Settlement Agreement (“Settlement Agreement”) was agreed to in December 2008 and entered into between Plaintiff, Bradley Machinery, and Defendant on March 27, 2009.

Second Joint Stipulations, ¶ 15, ECF No. 35; Ex. 29.

As part of the Settlement Agreement, Bradley Machinery and Defendant executed a Confession of Judgment, which authorized Plaintiff to enter judgment against Bradley Machinery and Defendant in the amount of $308,828.12 or the portion of that amount that remains unpaid if Bradley Machinery and Defendant default in any...