Morgan v. Sissell

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
Daniel Paul Sissel
Debtor
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Herman Morgan
Plaintiff
vs.
Daniel Paul Sissel
Defendant
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Case No. 04-16004
Adversary No. 04-1383
Chapter 7
Judge Burton Perlman
DECISION
In a simple and short complaint, Plaintiff alleges that
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: August 09, 2005
____________________________________________________________
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Defendant “converted to his own use” certain funds which were
insurance proceeds for wind damage to real estate. Plaintiff
asserts that the proceeds constitute a debt owing to him which
should be held non-dischargeable.
This court has jurisdiction of this matter pursuant to 28
U.S.C. §1334(b) and the General Order of Reference entered in
this district. This is a core proceeding arising under 28
U.S.C. §157.
The proceeding came on for trial before the court. Testimony
was taken and exhibits received. From the evidence we find the
following facts. Plaintiff for some years has been a
catastrophe adjuster and currently resides, and for some time
has resided, in Racine, Wisconsin. Plaintiff had formerly been
a resident of Portsmouth, Ohio where the several transactions
involved in this case occurred.
In the early 1990's the parties to this lawsuit entered into
what they called a partnership. This was done only verbally.
The partnership was to acquire properties with money therefor to
be provided by Plaintiff while Defendant provided maintenance
and collected rents. Defendant put in no money. Title to
properties was taken in Defendant’s name because there were
federal tax claims against Plaintiff and he feared that the
government would take any property in his name. Four rental
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properties were acquired. One was identified as the West End
Furniture building at 518 Second Street in Portsmouth. Another
was 524 Second Street identified as the “motorcycle shop”. In
addition there were two Walnut Street properties. Plaintiff had
said that he would from time to time be in Portsmouth and would
help Defendant, but he was seldom if ever in Portsmouth. The
parties were fifty/fifty partners. Plaintiff entered into the
partnership because he hoped that it would develop enough income
so that he could afford to come back and live in Portsmouth.
He, however, knew that Defendant needed help in the management
of the buildings. The purchase price for the West End
Furniture building on Second Street was $50,000.00. Plaintiff
contributed $10,000.00 to acquire it. Defendant obtained a
mortgage for the balance.
There came a time which may have been as early as 1997 when
the parties decided to dissolve the partnership. Defendant
wanted out of the arrangement because he found managing and
maintaining the properties was getting too much for him.
Plaintiff believed that the partnership was dissolved. The
dissolution gave Plaintiff the West End Furniture building and
the motorcycle shop building, the two Second Street properties.
Title to all the properties remained in Sissel. In the
dissolution Defendant retained the Walnut Street properties.
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On April 7, 2001 there was serious damage to the roof by the
wind at the West End Furniture building. A claim on account of
the damage was submitted to the insurance company. The
insurance company issued a check on account of that damage on
October 12, 2001 in the amount of $23,197.65. The check was
issued to payees Dan Sissel and Citizens Deposit. Citizens
Deposit released the check to Sissel who cashed it. After the
dissolution, Plaintiff collected rent from the West End
Furniture building. Plaintiff then gave checks to Defendant to
pay taxes and insurance, as well as to make mortgage payments on
that building.
In 2002 Plaintiff filed suit in State Court against
Defendant. While a transcript of a deposition of Plaintiff
Morgan here, taken in the State Court case, has been made a part
of the record by agreement of the parties in this case, there is
no indication of the basis for that State Court litigation.
While Defendant had collected the insurance proceeds prior to
the initiation of the State Court litigation, it does not appear
that a recovery of that amount was the substance of the State
Court litigation. The State Court litigation terminated with a
settlement by the parties in 2003. The settlement is part of
the record on the deposition of Plaintiff Morgan taken in that
lawsuit. The agreement was as follows:
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It’s my understanding that we have an agreement
between Mr. Morgan and Mr. Sissell involving the
litigation in this case number 02-CIN-0289; that as
part of that agreement, that Mr. Sissell will have
undisputed ownership from Mr. Morgan on the properties
located at primarily the 518 Second Street, which is
also known as the West End Furniture building; that
with that, that Mr. Morgan will sign a deed back to
Mr. Sissell on the property at 524 Second Street, also
known as the motorcycle shop; that the other
properties that were already exchanged between the
parties known as Poor Boys, 2926 Walnut Street, and
the property on Sixth Street that I don’t have the
address of, would remain Mr. Sissell’s - 1410 Sixth
Street; that in exchange, Mr. Sissell will pay to Mr.
Morgan the sum of $51,000; that Mr. Sissell will sign
a note with interest to begin 30 days from today’s
date at the rate of 11 percent, and that he’ll have no
later than six months to close on that with interest
added to the payment to Mr. Morgan; that Mr. Morgan
will provide receipts and/or cancelled checks
involving payments made to Chase Kennedy; and that
he’s agreed to sign a joint letter to the tenants
currently on the West End Furniture property
indicating that Mr. Sissell will take over the
property upon closing; and that he’ll also sign a
cancellation of note and mortgage that was originally
on the property also known as Poor Boys on Walnut
Street.
By its language, it may be seen that the agreement was
contingent upon a payment by Defendant to Plaintiff of $51,000.
Defendant never made that payment.
The foregoing is the factual background relevant to this
case. We look now to see whether Plaintiff has established a
basis for liability. In his complaint, Plaintiff cites only 11
U.S.C. §523 (a)(2)(A). To make out a case under that section,
Plaintiff must show that the money in question was obtained by
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“false pretenses, a false representation, or actual fraud, other
than a statement respecting the debtor’s or an insider’s
financial conditions;”. The burden which a Plaintiff seeking
to establish nondischargeability of a debt must carry, is to
prove the case by a preponderance of the evidence. Grogan v.
Garner 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991)
In the Sixth Circuit a §523 (a)(2)(A) case must meet the
standard set In re Rembert 141 F.3d 277 (6th Cir. 1998). In
Rembert the Court held:
In order to except a debt from discharge under § 523
(a)(2)(A), a creditor must prove the following
elements: (1) the debtor obtained money through a
material misrepresentation that, at the time, the
debtor knew was false or made with gross recklessness
as to its truth; (2) the debtor intended to deceive
the creditor; (3) the creditor justifiably relied on
the false representation; and (4) its reliance was the
approximate cause of loss. See Longo vs McLaren (In
re McLaren), 3 F.3d 958, 961 (6th Cir. 1993) In order
to accept a debt from discharge, a creditor must prove
each of these elements by a proponderance of the
evidence. See Grogan vs Garner, 498 U.S. 279, 291,
111 S.Ct. 564, 661, 112 L. ED 2d 755 (1991). Further,
exceptions to discharge are to be strictly constructed
against the creditor. See Manufacturer’s Hanover
Trust vs Ward (In re Ward), 857 F. 2d 1082, 1083 (6th
Cir. 1988).
We look to the evidence in the record before us to test
whether Plaintiff has proved the Rembert elements. The evidence
shows that after the wind damage occurred Plaintiff spent
$7,500.00 out of his pocket to stop the roof on the building
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from leaking. This by no means remedied all the damage which
had been done, for there was damage to the interior as well as
to the roof. It is uncontested that the insurance company gave
Defendant a check in the amount of $23,197.65 on account of the
wind damage to the West End Furniture building. Prior to this
time Plaintiff and Defendant had agreed to dissolve their
partnership, and in the dissolution Plaintiff took the West End
Furniture building. Upon dissolution, he collected rents from
the building, and paid the expenses in operating the building.
Except for the fact that legal title remained in Defendant, the
parties treated the West End Furniture property as that of
Plaintiff. The insurance check for wind damage was paid to
Defendant because he was the title owner of the building. Both
parties knew, however, that Plaintiff was the equitable owner of
the building. After Defendant received the insurance check,
Plaintiff asked that it be turned over to him. Defendant
refused to do so. He refused, he said, because he could have
the work done more cheaply then the amount of the check. In
fact, however, Defendant did not use the money from the
insurance check to complete the repair of the wind damage at the
West End Furniture building. It is clear that Defendant made a
misrepresentation to Plaintiff regarding the repair of the wind
damage, because it was implied in his response to Plaintiff that
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he could have the work done at less expense, that the complete
repair would be done, and that at least part of the insurance
payment was going to be used for that purpose. It was not.
Instead, Defendant used the money to “fix up” the other
buildings which had been held by the parties jointly during
their partnership. So there was a misrepresentation by
Defendant to Plaintiff.
The second necessary element in a fraud case is intent to
deceive. After a careful review of the record, the court
concludes
that Plaintiff has failed to prove this element. The history
between the parties, where they had been engaged in a joint
enterprise in which Defendant had the responsibility for
maintenance of the properties, while Plaintiff had taken up
residence away from Portsmouth, suggests that it may be that at
the time that he made the statement Defendant intended to
perform it, but later exigencies compelled him to do otherwise.
There is no evidence, even circumstantial, that Defendant
intended to deceive Plaintiff, when he made the statement
committing him to repairing the roof. Plaintiff has failed to
prove his fraud case.
While not stated in his complaint, in his pre-trial
statement, Plaintiff asserts that the insurance check “was
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embezzled by the bankrupt in violation of 11 U.S.C. §523
(a)(4)”.
The elements of an embezzlement case are;
A creditor proves embezzlement by showing that: (1) he
entrusted his property to the debtor; (2) the debtor
appropriated the property for a use other than that
for which it was entrusted; and (3) the circumstances
indicate fraud. Brady, supra, at 1172-1173; Ball vs
McDowell (In re McDowell), 162 B.R. 136, 140 Bankr.
N.D. Ohio 1993).
Aristocrat Lakewood Nursing Home vs Dryja (In re
Dryja) 259 BR 629 Bankr. N.D. Ohio 2001)
The first step that Plaintiff must take to prove his case
of embezzlement is to prove that the res in question, the
$23,197.65 payment, was his property. We conclude that it was.
After the dissolution of the partnership between the parties in
1999, Plaintiff was at least the equitable owner of the West End
Furniture building. He collected the rents there, and he paid
the various expenses in maintaining and operating the building,
utilities, taxes, insurance, and mortgage. When the wind damage
loss occurred at the building, he filed the claim with the
insurance company. It would be inequitable then to hold that
the insurance payment on account of the wind damage loss was not
his property.
As to the balance of the first element to make out an
embezzlement, it can fairly be said that Plaintiff entrusted the
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insurance payment to Defendant. This is the only conclusion
that can be reached when Plaintiff allowed legal title to remain
in Defendant, and it was this which enabled Defendant to secure
possession of the insurance payment.
The second element of the test for embezzlement is also met.
The insurance payment was entrusted to Defendant for the purpose
of repairing the damage for which the insurance claim was made,
and Defendant did not do that. Instead he used the fund for
other purposes.
Finally, we hold that the surrounding circumstances do
indicate fraud on the part of Defendant. He was a party to the
agreement of dissolution and knew that Plaintiff exercised all
aspects of ownership of the West End Furniture building.
Further, he knew of the wind damage loss and that the purpose of
the insurance payment was to repair that loss. He knowingly
disregarded his obligations pursuant to the agreement of
dissolution that he entered into with Plaintiff when he devoted
the insurance proceeds to other purposes.
The evidence is that when Plaintiff asked Defendant to give
him the check from the insurance company, Defendant responded
that he could do the work for less money than the amount of the
check. Implicit in this is that he would see that the wind
damage was repaired. It was not. Instead, Defendant used the
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money for maintenance in his other properties. The
circumstances indicate fraud.
In reaching a conclusion on this matter we adopt and keep
in mind the following statement:
The proper inquiry for the court concerning the intent
of the debtor is whether there is “intent to convert,
not intent to harm.” In re Taylor, 58 B.R. at 855.
Thus, ill will toward the plaintiff is unnecessary and
a plaintiff “need not prove that the debtor acted out
of spite, ill will, or hatred in order to prove
embezzlement within the meaning of section 523(a)(A).”
In re McKnew 270 B.R. 593 (Bkrtcy E.D.Va. 2001)
Actual fraud has been defined as consisting
of any deceit, artifice, trick, or design involving
direct and active operation of the mind, used to
circumvent and cheat another - something said, done or
omitted with the design of perpetrating what is known
to be a cheat or deception.
4 Collier on Bankruptcy (15th ed rev)§523.08(1)(3).
Defendant’s conduct is clearly within that language. We hold,
therefore, that Defendant embezzled the insurance proceeds from
Plaintiff.
Defendant argues that he should not be held liable in
this case because there was an accord and satisfaction.
Defendant’s basis for saying this is a claim that the
settlement agreement entered into between the parties in 2003,
the terms of which are detailed above, ended Defendant’s
obligation to Plaintiff for the insurance payment. The 2003
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settlement agreement was subsequent to Defendant’s acceptance
of the insurance payment.
“Accord and satisfaction” is defined at 1 Am Jur 2d
Accord and Satisfaction §1 as:
A method of discharging a claim whereby the parties
agree to give and accept something other than that
which is due in settlement of the claim and to
perform the agreement. An “accord” is the
agreement, and “satisfaction” is its execution or
performance.
At §47 that treatise states:
...failure to make a payment or otherwise perform an
act required by a new agreement entered into in
satisfaction of a claim leaves such an agreemen t a
mere executory accord which is unenforceable and will
not bar an action on the original obligation.
Defendant’s accord and satisfaction argument fails. There
is no showing in the record before the Court that in entering
into the agreement in 2003, the parties were negotiating in
respect to the insurance payment. Instead, it was an agreement
whereby Plaintiff would be divested of all property in
Portsmouth since he no longer intended to return to Portsmouth.
Additionally, the agreement in 2003 was an executory bilateral
contract, the vital condition of which was that Defendant would
pay $51,000 to Plaintiff to conclude the transaction. That
payment was never made. Thus, even if there had been an accord,
there was no satisfaction of it. The defense of accord and
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satisfaction fails.
In view of the foregoing discussion, we hold that Defendant
has embezzled the sum of $23,197.65 from Plaintiff, that such a
debt is owed by Defendant to Plaintiff, and it is
nondischageable.
Copies to:
Michael H. Mearon, Esq.
812 Sixth Street
Portsmouth, OH 45662
Cynthia Koehler Gerlach, Esq.
Gerlach & Gerlach
814 Seventh Street
Portsmouth, OH 45662
Office of the U.S. Trustee
36 E. Seventh Street; Ste 2030
Cincinnati, OH 45202
David W. Kuhn, Esq.
612 Sixth Street
Courthouse Annex, Suite A
Portsmouth, OH 45662
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