Lawrence T. Lasagna, Inc. v. Foster

• Decision Date: 07 December 1979
• Docket Number: No. 77-2664,77-2664
• Citation: 609 F.2d 392
• Parties: Bankr. L. Rep. P 68,315 LAWRENCE T. LASAGNA, INC., Plaintiff-Appellant, v. Gary L. FOSTER dba Sno-White Drive-In, Inc., Defendant-Appellee. LAWRENCE T. LASAGNA, INC., Plaintiff-Appellant, v. Gary L. SUTHERS, Defendant-Appellee. LAWRENCE T. LASAGNA, INC., Plaintiff-Appellant, v. Donald Hoyt HALL aka Don Hall, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 392

609 F.2d 392

Bankr. L. Rep. P 68,315

LAWRENCE T. LASAGNA, INC., Plaintiff-Appellant, v. Gary L. FOSTER dba Sno-White Drive-In, Inc., Defendant-Appellee.

LAWRENCE T. LASAGNA, INC., Plaintiff-Appellant, v. Gary L. SUTHERS, Defendant-Appellee.

LAWRENCE T. LASAGNA, INC., Plaintiff-Appellant, v. Donald Hoyt HALL aka Don Hall, Defendant-Appellee.

No. 77-2664.

United States Court of Appeals Ninth Circuit.

Dec. 7, 1979.

Fred H. Dill, Dill & Showler, Redlands, Cal., for plaintiff-appellant.

Robert J. Self, Young, Wooldridge, Paulden & Self, Bakersfield, Cal., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of California.

Before DUNIWAY and ELY, Circuit Judges, and PORT ^*, District Judge.

PORT, District Judge:

Plaintiff Lawrence T. Lasagna, Inc. (Lasagna) filed identical complaints in the separate bankruptcy proceedings of Gary L. Foster, Gary L. Suthers and Donald Hoyt Hall (bankrupts) seeking a determination of the nondischargeability of bankrupts' indebtedness to Lasagna pursuant to Sections 17(a)(4) and 17(a) (8) of the Bankruptcy Act, 11 U.S.C. §§ 35(a)(4) and 35(a)(8). ¹ The bankruptcy judge granted a motion to dismiss the amended complaint in each proceeding upon its face pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim. The judgments were affirmed by the District Court for the Eastern District of California in a single judgment. We reverse and remand to the district court for further proceedings in each case.

THE COMPLAINT

The complaint alleges :

Lasagna on or about September 19, 1973 furnished machinery and equipment to Progressive Farming, Inc. (Progressive), a corporation wholly owned and controlled by the bankrupts and of which they were the sole officers and directors. As a result of the transaction Progressive became indebted to Lasagna in the sum of $24,365.17.

Lasagna sued Progressive and the bankrupts on this claim in Superior Court of the State of California, County of Tulare. Summary judgment was granted in Lasagna's favor against Progressive; judgment was granted against bankrupts after a bench trial in the sum of $24,365.17 with interest and costs. It is this indebtedness of bankrupts that Lasagna's complaints seek to have determined nondischargeable. The state court found that the bankrupts' personal liability to Lasagna arose out of bankrupts' conduct of Progressive's business: Bankrupts (1) misappropriated funds of the corporation, (2) fraudulently transferred corporate property to themselves when Progressive was insolvent, by various means described in the findings, (3) violated their fiduciary obligations to Lasagna as officers and directors of Progressive, (4) caused Progressive to be further insolvent, and (5) unreasonably depleted its capital. As a result of the manner in which the affairs of the corporation were conducted, the state court disregarded the corporate entity and treated the bankrupts as its alter ego.

The complaint alleged all the facts found by the state court judge. It alleged, in addition, other transfers to the bankrupts without consideration and in fraud of creditors. The findings, conclusions of law and judgment of the state court were attached to the complaint as exhibits and incorporated in it by reference.

DISCUSSION

Applicability of § 35(a)(8) :

The bankruptcy judge properly starts his analysis "by assuming (pursuant to a stipulation of the parties) the allegations in Plaintiff's complaint and said findings of fact (in the state court action) to be true." CR 54. The complaint alleges that the debt from the bankrupts to Lasagna, evidenced by the state court judgment, arose by reason of the willful and malicious injury to Lasagna's claim against Progressive, resulting from bankrupts' conduct. He then opines that section 17(a)(8), 11 U.S.C. § 35(a)(8), is inapplicable and requires no discussion. The district court affirmed the holding of inapplicability, basing its determination upon the ground that § 17(a)(8) requires an injury to specific "ear-marked" property of the creditor and that Lasagna's right to be paid by Progressive for goods sold to it would not constitute such property, a conclusion with which the dissent "thoroughly agree(s)." See p. 397 Infra.

The dissent says that "the congressional intent is plainly apparent on the face of the statute." The intent observed is "that the Character of the interest alleged to have been injured . . . determine(s) dischargeability." See, p. 397 Infra (emphasis added). Not only do we fail to discover such intent as "plainly apparent", but we find no evidence of such an intent. The plain language of the section is all inclusive with one exception not pertinent here. "(L)iabilities for willful and malicious injuries to the person or Property of another" are declared nondischargeable. 11 U.S.C.A. § 35(a)(8) (West Supp. 1979) (emphasis added).

The dissent recognizes that the interest of Lasagna would be considered property if the debt from Progressive to Lasagna "had been secured by specified collateral which had been converted." This is a distinction without a difference. Property "denotes something subject to ownership, transfer, or exclusive possession and enjoyment, which may be brought within the dominion and control of a court through some recognized process." Gleason v. Thaw, 236 U.S. 558, 561, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915). The debt or account receivable from Progressive to Lasagna and the resultant judgment are specified property which can be sold, pledged or levied upon as readily as an automobile or any other property. Section 17(a)(8), 11 U.S.C. § 35(a)(8), is derived virtually without change from § 17(a)(2) of the Bankruptcy Act of 1898. There is nothing to indicate that "property" as used in this section was intended by Congress to have the limited meaning asserted by the dissent. ² See Tinker v. Colwell, 193 U.S. 473, 24 S.Ct. 505, 48 L.Ed. 754 (1904); 1A W. Collier, Bankruptcy P 17.17(1), at 1653 (14th ed. 1978). For instance, nothing in the Act indicates that liability resulting from a willful and malicious injury to an automobile is not dischargeable pursuant to § 35(a)(8), while liability resulting from similar conduct toward an account receivable or other indebtedness will be discharged. As this Court has indicated, dischargeability under § 35(a)(8) is determined by a bankrupt's conduct rather than the character of the property injured:

The statutory exception which measures non-dischargeability is ". . . for liabilities . . . for willful or malicious injuries to the person or property of another. . . ." The exception is measured by the nature of the act, I. e., whether it was one which caused willful and malicious injuries. All liabilities resulting therefrom are non-dischargeable.

Coen v. Zick, 458 F.2d 326, 329 (9th Cir. 1972).

We recognize, as does our dissenting Brother that "exceptions to the operation of a discharge . . . should be confined to those plainly expressed." Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915) (legal services held not property within purview of provision "for obtaining property by false pretenses or false representations" under 1898 Bankruptcy Act as amended in 1903). ³ What we said in Paton v. England, 462 F.2d 1099, 1100 (9th Cir. 1972), is apt here:

However, be that as it may, the Court, over the years, has frequently pointed out that the Congressional solicitude is limited to, and the prophylactic benefit of a discharge is exclusively reserved for, "the honest and unfortunate debtor . . ." the purpose being to afford him "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of a pre-existing debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934). There can be no doubt of the power of Congress to discriminate between the worthy and the unworthy debtor with respect to the matter of discharge. Hanover Nat. Bank v. Moyses, 186 U.S. 181, 192, 22 S.Ct. 857, 46 L.Ed. 1113 (1902).

The Congress early recognized the distinction between the ordinary indebtedness and the wrongfully incurred indebtedness and between the honest and the dishonest debtor. This distinction is recorded in many instances during the congressional debates on the Bankruptcy Act of 1898. For instance:

A discharge will be granted unless it shall be made to appear, speaking in general terms, that the defendant has been guilty of some act of dishonesty or has been guilty of the perpetration of frauds with reference to his property.

Although a discharge in bankruptcy may be granted, still it will not operate as against taxes or judgments which have been rendered in actions for the commission of frauds or the willful or malicious injury to persons or property, . . . or such claims as were created by his wrongdoing while acting as an officer or in a fiduciary capacity.

31 Cong.Rec. 1786 (1898); See also id. at 1784, 1785, 1788, 1790, 1795, 1796, 1797-98.

Applicability of § 35(a)(4) :

The bankruptcy court found § 35(a)(4) inapplicable because (1) the debt to Lasagna was not created by fraud or misappropriation but arose out of the machinery transaction with Progressive, and (2) no fiduciary relationship existed between Lasagna and bankrupts. This misconceives the nature of the debt or obligation: "To determine the character of the liability upon which the appellant's judgment was founded, we must look to the suit in which it was rendered." In re Hammond, 98 F.2d 703, 704 (2d Cir.) (citing In re Harber, 9 F.2d 551 (2d Cir. 1925)), Cert. denied, 305 U.S. 646, 59 S.Ct. 149, 83 L.Ed. 418 (1938). See Terzian v. California Casualty Indemnity Exchange, 42 Cal.App.3d 942, 946, 117 Cal.Rptr. 284, 287 (1974).

Although initially an indebtedness was created from Progressive to Lasagna, if the facts alleged are proven, the fraudulent conduct of the affairs of Progressive by bankrupts as officers and directors...