Murphy et al v. Spencer

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
DAVID A. SPENCER,
No. 15-10595 tf7
Debtor.
H. STEVEN MURPHY and
MKM INVESTMENTS, LLC,
Plaintiffs,
v. 	Adv. No. 15-01052 t
DAVID A. SPENCER,
Defendant.
MEMORANDUM OPINION
Before the Court is Plaintiffs’ motion for summary judgment on their §§ 523(a)(2)(A),
(a)(4), and (a)(6)1 nondischargeability claims against Defendant. 	Defendant did not respond to
the motion. 	The Court concludes that Plaintiffs’ claims based on the liens Defendant filed are
nondischargeable under §§ 523(a)(2) and (a)(6), in an amount to be determined by the Court.
The Court will permit Plaintiffs to supplement the record for the claims related to a development
agreement with Defendant.
I. 	FACTS
For the purpose of ruling on the motion, the Court finds that the following facts are not in
genuine dispute:
1 Unless otherwise stated, all statutory references are to 11 U.S.C.
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On March 12, 2015, Defendant filed his bankruptcy case. 	Plaintiffs2 brought this
adversary proceeding four months later.
MKM entered into an agreement with Defendant to develop real estate near Farmington,
New Mexico. The project was unsuccessful. On September 26, 2012, MKM sued Defendant in
New Mexico’s Eleventh Judicial District Court, in a cause styled MKM Investments, LLC v. The
Clark Spencer Estate, et. al., no. D-1116-CV-2012-01197 (the “Development Agreement
Action”). 	MKM asserted claims for breach of contract, fraud, negligent misrepresentation,
promissory estoppel, prima facie tort, unjust enrichment, and punitive damages relating to
Defendant’s conduct in connection with the development agreement.
The state court tried the action in November, 2013. 	Defendant did not appear. 	On
November 26, 2013, the state court entered a $75,488.70 judgment against Defendant, which
included punitive damages (the “Development Agreement Judgment”).3
On September 23, 2013, Plaintiffs filed a second state court action, styled H. Steven
Murphy and MKM Investments LLC v. David A. Spencer, as an individual, and Presidential
Construction, Inc., cause no. D-1116-CV-2013-01197 (the “False Lien Action”), asserting
claims for cancellation of liens, prima facie tort, fraud, abuse of process, malicious abuse of
process, and slander of title, all relating to two liens Defendant filed on Plaintiffs’ property.
The state court tried the action on September 10, 2014. 	The record indicates that
Defendant appeared at the trial and defended against the claims. The state court entered a final
2 Plaintiff MKM Investments, LLC (“MKM”) is a New Mexico limited liability company, owned
by Plaintiff H. Steven Murphy.
3 The judgment contained findings that Defendant “committed fraud on MKM” and that his
conduct was “willful, deliberate, wanton, and fraudulent” and done with “utter indifference and
… conscious disregard for the Plaintiff[s]’ rights under the [development] agreement.”
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judgment against Defendant for $84,763.69, which included $75,000 in punitive damages (the
“False Lien Judgment”). The state court found, inter alia (the “Findings”):
1. 	The action concerned the filing of two lien claims (the “Lien
Claims”) by the Defendant and Presidential Construction, Inc. (“Presidential”)
against real property owned by Plaintiffs, i.e., a parcel known as #4 Road 3263
(the “Road 3263 Property”) and a parcel known as 5601 Preserve Drive (the
“Preserve Drive Property”).
2. 	On August 7, 2013, Defendant and Presidential filed a Claim of
Lien on the Road 3263 Property (the “Road 3263 Lien”). In the Road 3263 Lien,
Defendant swore under penalty of perjury that there was an agreement for him to
provide labor or material for the Road 3263 Property—which Defendant asserted
was owned by MKM—between November 14, 2011 and April 29, 2012. 	It is
undisputed, 	however, 	that 	during 	that 	time 	the 	Clark 	Spencer 	Estate 	(the
“Estate”), of which Defendant was then the personal representative, owned the
Road 3263 Property. 	MKM bought the Road 3263 Property from the Estate on
June 28, 2013.
3. 	On August 8, 2013 Defendant and Presidential filed a claim of lien
on the Preserve Drive Property (the “Preserve Drive Lien”). In the Preserve Drive
Lien, Defendant swore under penalty of perjury that “In accordance with an
agreement 	to 	provide 	labor 	and/or 	material 	and 	equipment,” 	he 	provided
$670,721.93 of materials and labor to build a house on the Preserve Drive
Property. Defendant admitted, however, that neither he nor Presidential supplied
any such materials or labor to the Preserve Drive Property.
4. 	Defendant attempted to support the validity of the Preserve Drive
Lien with a purported “Contract for Construction” and a Builder’s Risk Policy.
However, Murphy was the contractor for the house built on the Preserve Drive
Property. 	Neither Defendant nor Presidential had a contract to build a home on
the Preserve Drive Property. 	The construction contract attached to the Preserve
Drive Lien was a forgery.
5. 	Murphy completed construction of the house on the Preserve Drive
Property on March 31, 2011. The Preserve Drive Lien was filed August 8, 2013,
less than 25 days after Defendant’s arrest, and two years and five months after the
Preserve Drive house was completed.
6. 	As a building contractor, Defendant knew or should have known
that a claim of lien must be filed within 120 days after completion of the contract
and can only be filed if a contractor supplied the material or labor for the
construction. 	The 	Lien 	Claims 	did 	not 	comply 	with 	the 	New 	Mexico
Materialmen Lien Act (the “Lien Act”) and were invalid.
7. 	On 	April 	30, 	2012, 	Murphy delivered 	a 	letter 	to Defendant
outlining Defendant’s mismanagement of the Estate. Defendant was removed as
personal representative of the Estate because of the mismanagement. On July 17,
2013 Defendant was arrested for embezzlement of Estate assets. Defendant’s
arrest and charge was a direct and natural result of Murphy’s letter.
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8. 	The Lien Claims were filed in retaliation for Murphy acting as a
witness in Defendant’s criminal proceeding. Defendant made false statements in
order to file the Lien Claims, which Defendant knew were false and were made
with the intent to deceive. When Defendant filed the Lien Claims, he committed
perjury with the intent of harming Plaintiffs. Defendant misused the legal process
by wrongfully filing the Lien Claims. 	Defendant misused the legal process with
the intent to extort and/or harass and/or intimidate Plaintiffs. 	Defendant’s Lien
Claims were frivolous, fraudulent, malicious, and were made without reasonable
cause. 	Defendant’s primary motive in misusing the legal process was to
accomplish an illegitimate end.
9. 	Defendant’s conduct and actions caused harm and damages to
Plaintiffs. 	Defendant’s actions were willful, deliberate, wanton, outrageous,
fraudulent and were taken with utter indifference to and conscience disregard of
Plaintiffs’ rights. 	Plaintiffs should be awarded punitive damages to deter such
conduct.
II. 	DISCUSSION
A. 	Summary Judgment Standards.
Summary 	judgment 	is 	appropriate 	if 	the 	pleadings, 	depositions, 	answers 	to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter
of law. 	Fed.R.Civ.P. 56. 	“[A] party seeking summary judgment always bears the initial
responsibility of informing the … court of the basis for its motion, and … [must] demonstrate the
absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
In determining whether summary judgment should be granted, the Court will view the record in
the light most favorable to the party opposing summary judgment. 	Harris 	v. Beneficial
Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995 (10th Cir. BAP 1997).
To deny a motion for summary judgment, genuine factual issues must exist that “can be
resolved only by a finder of fact because they may reasonably be resolved in favor of either
party.” 	Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). 	A mere “scintilla” of
evidence will not avoid summary judgment. 	Vitkus v. Beatrice Co., 11 F.3d 1535, 1539 (10th
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Cir. 1993). Rather, there must be sufficient evidence on which the fact finder could reasonably
find for the nonmoving party. See Anderson, 477 U.S. at 251; Vitkus, 11 F.3d at 1539.
Defendant’s failure to respond to the summary judgment motion does not mean it must be
granted. 	Reed v. Bennett, 312 F.3d 1190, 1195 (10th Cir. 2002) (“[A] party’s failure to file a
response to a summary judgment motion is not, by itself, a sufficient basis on which to enter
judgment against the party.”). Rather, the Court must “examin[e] the moving party’s submission
to determine if it has met its initial burden of demonstrating that no material issues of fact remain
for trial and the moving party is entitled to judgment as a matter of law.” 	Id. 	See also United
States v. One Piece of Real Property Located at 5800 SW 74th Avenue, Miami, Florida, 363 F.3d
1099, 1101 (11th Cir. 2004) (court cannot base summary judgment on mere fact that the motion
is unopposed, but must consider the merits of the motion); D.H. Blair & Co. Inc. v. Gottdiener,
462 F.3d 95, 110 (2d Cir. 2006) (citing and following 5800 SW 74 th Street).
In doing so, the Court “should accept as true all material facts asserted and properly
supported in the summary judgment motion.” Reed, 312 F.3d at 1195.
B. 	Issue Preclusion.
Plaintiffs argue they are entitled to summary judgment based on principles of issue
preclusion.4 Bankruptcy courts may use issue preclusion in determining whether a debt is
nondischargeable. 	See Grogan v. Garner, 498 U.S. 279, 284 n. 11 (1991) (collateral estoppel
principles apply in discharge exception proceedings under § 523); Lopez Roofing Serv. v. Baker
(In re Baker), 2013 WL 6528813, at *3 (Bankr. D.N.M. 2013) (discussing elements for issue and
claim preclusion).
4 The Court will use the terms “claim preclusion” and “issue preclusion,” which are less
ambiguous than “res judicata” and “collateral estoppel.”
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Under New Mexico law,5 issue preclusion bars re-litigation of an ultimate fact if: “(1) the
party to be estopped was a party to the prior proceeding, (2) the cause of action in the …
[present] … case is different from the cause of action in the prior … [case], (3) the issue was
actually litigated in the prior adjudication, and (4) the issue was necessarily determined in the
prior litigation.” 	Ideal v. Burlington Res. Oil & Gas Co. LP, 233 P.3d 362, 365 (N.M. 2010)
(citing Shovelin v. Cent. N.M. Elec. Coop., Inc., 850 P.2d 996, 1000 (N.M. 1993)). 	See also
Deflon v. Sawyers, 137 P.3d 577, 583 (N.M. 2006) (the difference between claim preclusion and
issue preclusion is that the latter does not require that both suits be based on the same cause of
action).
Default judgments cannot form the basis for issue preclusion. Blea v. Sandoval, 761 P.2d
432, 435 (N.M. Ct. App. 1988) (a default judgment has no issue preclusion effect); In re
Martinez, 476 B.R. 627, 633 (Bankr. D.N.M. 2012) (citing and following Blea); In re Beaver,
437 B.R. 410 (Bankr. D.N.M. 2010) (same).
C. 	Development Agreement Judgment.
MKM contends the Development Agreement Judgment provides a sufficient basis for
summary judgment on its development agreement claims. 	In the Development Agreement
Judgment, the state court explicitly found that Defendant defrauded MKM. 	Defendant did not
appear at trial, however, and it is not clear from the record how much, if any, he participated
before that. 	The Development Agreement Judgment therefore appears to be in the nature of a
default judgment, and is not entitled to preclusive effect. 	Blea, 761 P.2d at 436. 	In addition,
there were no findings about the amount of damage MKM suffered because of Defendant’s
alleged fraud.
5 New Mexico law governs because the judgments Plaintiffs rely upon are state court judgments.
Strickland v. City of Albuquerque, 130 F.3d 1408, 1411 (10th Cir. 1997).
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Nevertheless, the Court believes MKM should be given an opportunity to supplement the
summary judgment record. 	See Fed.R.Civ.P. 56, made applicable by Fed.R.Bankr.P. 7056
(rather than denying summary judgment, courts may allow a party to supplement the record if the
party fails to properly support an assertion of fact). MKM may submit independent evidence, if
any exists, that Defendant’s claims under the development agreement are nondischargeable, and
what damages were caused thereby.
D. 	False Lien Judgment.
Plaintiffs argue that the False Lien Judgment establishes the nondischargeability, under
§§ 523(a)(2)(A) and 523(a)(6),6 of the claims litigated in the False Lien Action.
1. 	§ 523(a)(2)(A). 	Section 523(a)(2)(A) excepts from a debtor’s general
discharge any debt “for money, property, services, or an extension, renewal, or refinancing of
credit, to the extent obtained by - false pretenses, a false representation, or actual fraud, other
than a statement respecting the debtor’s or an insider’s financial condition.”
To establish a claim for false representation or false pretenses under § 523(a)(2)(A), “the
claimant must prove by a preponderance of the evidence that: 1) the debtor made a false
representation [or in the case of a false pretense, an implied misrepresentation meant to create or
foster a false impression]; 2) with the intent to deceive the creditor; 3) the creditor relied on the
false representation; 4) the creditor’s reliance was [justifiable]; and 5) the creditor was damaged
as a result.” 	In re Sturgeon, 496 B.R. 215, 222-223 (10th Cir. BAP 2013). 	See also In re
Mosley, 2012 WL5193956 at *5 (Bankr. D.N.M. 2012).
The Tenth Circuit Bankruptcy Appellate Panel recently recognized that, in addition to
6 Plaintiffs also assert that their claims are nondischargeable under § 523(a)(4) (embezzlement,
larceny, and defalcation while acting in a fiduciary capacity). 	Neither judgment has findings
sufficient to grant summary judgment on the § 523(a)(4) claim.
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false representation and false pretenses, actual fraud supplies a separate basis for excepting a
debt from discharge. In re Vickery, 488 B.R. 680, 691 (10th Cir. BAP 2013). A debtor commits
actual fraud when he “intentionally engages in a scheme to deprive or cheat another of property
or a legal right.” 	Id. (quoting In re Vitanovich, 259 B.R. 873, 877 (6th Cir. BAP 2001)). 	It
includes “any deceit, artifice, trick, or design involving direct and active operation of the mind,
used to circumvent and cheat another.” McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000)
(quoting 4 Collier on Bankruptcy ¶ 523.08[1][e], p. 523-545 (15th ed., Lawrence P. King ed.,
2000)). 	“Actual fraud is broader than misrepresentation.” 	Vickery, 488 B.R. at 690 (quoting
Vitanovich, 259 B.R. at 877).
Examples of actual fraud include a check kiting scheme or accepting a fraudulent transfer
from a family member in violation of the creditor’s lien rights, disposing of the property, and
absconding with the proceedings. Vitanovich, 259 B.R. 873; McClellan, 217 F.3d 890. In such
cases, there are no misrepresentations or misleading omissions, but the debtor clearly engaged in
a fraudulent scheme.
The False Lien Judgment can be the basis for issue preclusion: Plaintiffs and Defendant
were parties to the False Lien Action; the causes of action are different; and the Findings were
actually litigated and necessarily determined.
The False Lien Judgment establishes that Defendant committed “actual fraud” under
§ 523(a)(2)(A). 	First, the Findings show that the false Lien Claims were part of a fraudulent
scheme to deprive or cheat Plaintiffs of property or a legal right.7 The Findings also show that
the Lien Claims were a “deceit, artifice, trick, or design involving direct and active operation of
7 Findings, ¶¶ 2-8.
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the mind, used to circumvent and cheat another.”8 Finally, the Findings show that fraudulent
scheme caused damage or harm to Plaintiffs.9
Plaintiffs are entitled to summary judgment that their claims arising from Defendant’s
fraudulent Lien Claims are nondischargeable under § 523(a)(2)(A).
2. 	§ 523(a)(6) Claim. 	Debts arising from “willful and malicious injury by
the debtor to another entity or to the property of another entity” are excepted from the general
discharge. 11 U.S.C. § 523(a)(6).
Section 523(a)(6) requires that the debtor’s actions be both willful and malicious.
Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004) (holding that there must
be proof of both a “willful act” and “malicious injury” to establish nondischargeability under
Section 523(a)(6)). The “willful” element requires both an intentional act and an intended harm;
an intentional act that leads to an unintended harm is not sufficient. Kawaauhau v. Geiger, 523
U.S. 57, 61 (1998). A “willful act” is therefore one in which the debtor “‘desire[s] to cause the
consequences of his act or ... believe[s] that the consequences are substantially certain to result
from it.’” Moore, 357 F.3d at 1129 (quoting Mitsubishi Motors Credit of America, Inc. v.
Longley (In re Longley), 235 B.R. 651, 657 (10th Cir. BAP 1999)). For a debtor’s actions to be
malicious, they have to be intentional, wrongful, and done without justification or excuse.
Fletcher v. Deerman (In re Deerman), 482 B.R. 344, 369 (Bankr. D.N.M. 2012).10
8 Findings, ¶8.
9 Findings, ¶9.
10 See also Saturn Systems, Inc. v. Militare (In re Militare), 2011 WL 4625024, *3 (Bankr. D.
Colo. 2011) (“[A] malicious act under § 523(a)(6) is a wrongful act, done intentionally, without
just cause or excuse.”) (internal quotations omitted); Tso v. Nevarez (In re Nevarez), 415 B.R.
540, 544 (Bankr. D.N.M. 2009) (“‘Malicious’ requires that an intentional act be performed
without justification or excuse.”) (internal quotations omitted).
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The Tenth Circuit applies a subjective standard in determining whether a defendant
desired to cause injury or believed the injury was substantially certain to occur. 	Via Christi
Regional Medical Ctr. v. Englehart (In re Englehart), 2000 WL 1275614, at *3 (10th Cir. 2000)
(“[T]he ‘willful and malicious injury’ exception to dischargeability in § 523(a)(6) turns on the
state of mind of the debtor, who must have wished to cause injury or at least believed it was
substantially certain to occur.”). Evidence of the debtor’s state of mind may be inferred from the
surrounding circumstances. 	Nat’l Labor Relations Board v. Gordon (In re Gordon), 303 B.R.
645, 656 n. 2 (Bankr. D. Colo. 2003) (it is “absolutely permissible to infer … actual intent to
cause injury from … evidentiary facts”) (internal citations omitted).
The state court’s findings in the False Lien Judgment establish Plaintiffs’ § 523(a)(6)
claim: Defendant committed intentional acts;11 he intended to harm Plaintiffs by the acts;12 the
acts were wrongful;13 Defendant had no justification or excuse for the acts;14 and the acts injured
Plaintiffs or their property.15
Plaintiff’s 	claims 	arising 	from 	Defendant’s 	fraudulent 	Lien 	Claims 	are 	also
nondischargeable under § 523(a)(6).
3. 	Damages.
The state court did not make any findings about the amount of damages Plaintiffs
suffered because of the false claims of lien, only that the liens “caused harm and damages.” The
Court therefore will allow Plaintiffs to supplement the record on damages.
11 Findings, ¶¶ 2, 3, 6, 8.
12 Findings, ¶ 8.
13 Id.
14 Id.
15 Findings, ¶ 9.
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III. 	CONCLUSION
Plaintiffs’ claims arising from the false Lien Claims are excepted from discharge under
§§ 523(a)(2)(A) and (a)(6). The amount of the claims must still be determined. The Court will
permit Plaintiffs to supplement to record on this issue and on the dischargeability of any claims
arising from the development agreement.
The Court will enter a separate order and a partial summary judgment.
_____________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered: November 19, 2015.
Copies to:
Leslie Maxwell
500 Marquette Ave., Suite 650
Albuquerque, NM 87102
David A. Spencer
3318 Ciniza Dr.
Gallup, NM 87301
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