Tennessee Commerce Bank v. Detweiler

OCR transcription for search; preserved printed pages are authoritative

The court incorporates by reference in this paragraph and adopts as the findings and orders
of this court the document set forth below.

Russ Kendig
United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO

EASTERN DIVISION
IN RE: CHAPTER 11
JOSEPH J. DETWEILER, CASE NO. 09-63377
Debtor. ADV. NO. 09-6105
TENNESSEE COMMERCE BANK, JUDGE RUSS KENDIG
Plaintiff, )
Vv.
) MEMORANDUM OF OPINION
JOSEPH J. DETWEILER, ) (NOT INTENDED FOR
) PUBLICATION)
Defendant. )
)

Plaintiff's section 523(a)(6) action is before the court following trial on May 10,
2011. Plaintiff contends Debtor-defendant’s sale of collateral, without Plaintiff's consent,
was a willful and malicious injury and seeks a finding of nondischargeability from the court.
Debtor denies Plaintiffs contention. Both sides submitted post-hearing briefs to the court.

The court has jurisdiction of this proceeding pursuant to 28 U.S.C. § 1334 and the
general order of reference entered in this district on July 16, 1984. Venue in this district and
division is proper pursuant to 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C.
§ 157(b)(1). The following constitutes the court’s findings of facts and conclusions of law

under Federal Rule of Bankruptcy Procedure 7052.

This opinion is not intended for publication or citation. The availability of this
opinion, in electronic or printed form, is not the result of a direct submission by the Court.

FACTUAL BACKGROUND

Debtor Joseph J. Detweiler is the principal and president of J.J. Detweiler
Enterprises, Inc. (““JJDE”), a land development company. On September 10, 2007 and

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December 31, 2007, JIDE borrowed money from American Bank Leasing Corporation. The
loans were secured by properly perfected security interests in equipment (“the sawmills”).

The loan documents required the consent of the lender before JJDE could transfer, assign or
convey the sawmills and Debtor was aware of these loan covenants. Debtor personally

guaranteed the loan. The debts were later assigned to Plaintiff.

JJDE used the sawmills for timbering 7,500 acres of land in rural Tennessee (“the
tract”). JJDE had no previous timbering experience. The sawmills at issue were the only
ones operated by JIDE. The bank holding a mortgage on the tract withdrew its consent for
the timbering operation. JIDE considered moving the sawmills to another location for use
but found that cost prohibitive. JJDE attempted, but was unable to obtain, theft insurance
on the property. It hired a watchman to guard the sawmills because of previous experiences
of theft and property damage at the site. JIDE offered the sawmills for sale and received
several low offers for the sawmills, including a $40,000 offer, which Debtor described as

“ridiculous.”

In December 2008, JJDE sold the sawmills to a third-party, Kelly Woodyards, Inc.
(“Woodyards”) for $70,000. JIDE did not have Plaintiffs consent to sell the sawmills. The
purchase agreement between JIDE and Woodyards required $50,000 down and four monthly
installments of $5,000 on the remaining balance. Woodyards paid approximately $65,000
under the agreement: $50,000 down and three installments of approximately $5,000 each.
The dates of the installment payments are unknown. Debtor did not pay the initial $50,000
in proceeds from Woodyards to Plaintiff. The proceeds were deposited in a general business
account of JJDE and used to pay business expenses. Debtor did not receive any of the funds

personally.

After the non-consensual sale of the sawmills, Debtor paid a total of $14,926.20! on
the accounts via payments dated December 31, 2008, January 16, 2009 and May 1, 2009.
JJDE filed a chapter 11 petition on June 18, 2009. Debtor filed for protection under chapter
11 on August 17,2009. When JJDE filed bankruptcy, Plaintiff was owed $76,529.39 on the
September 2007 loan and $17,520.04 on the December 2007 loan.

Plaintiff submitted the video deposition testimony of Dan Graber, the former general
manager in charge of construction at Sequatchie Point. Mr. Graber was also a personal
acquaintance of Debtor, who had been a friend of Mr. Graber’s father. Mr. Graber had
worked with Debtor and JJDE for several years, first selling land and then as a contractor.
He was employed with JJDE at the time of the sale of the sawmills and had knowledge of
the transaction. He stopped working for JIDE in August 2009, shortly after the bankruptcy

filing.

Timothy Mortimer, an assistant vice-president with Tennessee Commerce Bank, also
testified that if Debtor had sought approval for the equipment sale, the bank would have

declined.

LAW AND ARGUMENT

The issue is whether Debtor’s sale of the sawmills was a willful and malicious injury

' JJDE made three payments of $4,047.59 on the September 2007 Master Equipment
Financing Agreement and three payments of $927.81 on the December 2007 Master

Equipment Financing Agreement.

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under 11 U.S.C. § 523(a)(6). Ifitis, the debt owed Plaintiff is excepted from the section 727
discharge. To facilitate a fresh start for debtors, exceptions to discharge are strictly construed
against creditors. Rembert v. AT & T Universal Card Serv., Inc. (In re Rembert), 141 F.3d
277 (6" Cir. 1998). The burden of proof, by a preponderance of the evidence, is on the
Plaintiff. Sanderson Farms, Inc. v. Gasbarro, 299 Fed.Appx. 499 (6" Cir. 2008)
(unpublished) (citing Meyers v. IRS (Inre Meyers), 196 F.3d 622 (6" Cir. 1999)). If Plaintiff
meets its burden, and “establishes a prima facie case, the burden shifts to [Debtor] to present
credible evidence that a defense to the liability exists.” JP Morgan Chase Bank, N.A. v.
Zwosta (In re Zwosta), 395 B.R. 378, 382-83 (B.A.P. 6" Cir. 2008) (citing Sears, Roebuck
& Co. v. Miller (In re Miller), 70 B.R. 55, 56 (Bankr. S.D. Ohio 1987)).

To satisfy the willful requirement, Plaintiff must show that Debtor either (1) willed
or desired harm or (2) believed that injury was substantially likely to result from his conduct.

Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 465 n.10 (6 Cir. 1999). Injuries

caused by recklessness or negligence do not meet the willful standard. Kawaauhau v.
Geiger, 523 U.S. 57 (1998). The malicious requirement is satisfied by proof that the Debtor
acted “in conscious disregard of his duties or without just cause or excuse.” Gonzalez v.
Moffitt (In re Moffitt), 252 B.R. 916, 923 (B.A.P. 6" Cir. 2000) (citing Murray v. Wilcox (In
re Wilcox), 229 B.R. 411, 419 (Bankr. N.D. Ohio 1998) (citations omitted)).

Clearly, Debtor intended to sell the sawmills. That cannot be disputed. By selling
the sawmills without obtaining the consent of Plaintiff, which Debtor admits that he knew
was required, Debtor acted in derogation of Plaintiff's rights. The record clearly supports
a conclusion that Debtor exercised no care for the bank’s interest in the property, but the

question is whether he intended harm through his conduct.

The background is important. Debtor was involved in a single timbering operation.
When the bank prohibited further timbering, the cost prevented Debtor from moving the
equipment to another location. Debtor had experienced losses at the site where the sawmills
were located and could not obtain theft insurance to protect the sawmills. He incurred
expenses hiring a watchman to guard the equipment. During the same period, he admitted
to experiencing financial problems. The payment history on Plaintiffs loans shows several
late payments in the year before the sale occurred. Debtor not only wanted to sell the

equipment, but probably needed to sell it.

Debtor admittedly knew of the bank’s interest and knew he needed approval for a
sale. Mr. Graber testified to a heated discussion with Debtor regarding the bank’s security
interest in the sawmills. According to Mr. Graber, when Debtor was reminded of the bank’s
interest, Debtor said “f*** the bank” and said it was his equipment and would file
bankruptcy if things went awry. And less than six months later, JJDE filed. Two months

after that, Debtor filed.

Mr. Graber indicated that he was personally advised not to get involved in the sale
of the sawmills by Cheryl McDonald, Debtor’s daughter and the secretary of JJDE, as well
as counsel. As a result, Debtor was solely responsible for approving the deal with
Woodyards. This testimony establishes that people around Debtor were concerned about the
transaction. Debtor denied the conversation with Mr. Graber and denied any similar

communications with others.

Debtor finally received an acceptable offer and sold the sawmills to Woodyards for
$70,000. He testified that, at the time the equipment was sold, he intended to pay back the
bank’s loan. However, upon receipt of the initial $50,000 proceeds from the sale, the money

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was deposited in JJDE’s general account and used to pay general operating expenses. This
action refutes his claimed intention to repay the bank. It creates a disconnect in Debtor’s

purported intent and his actions.

Through these above facts, Plaintiff established a prima facie case of a willful and
malicious injury. The court finds Debtor knew that harm to the bank was substantially
certain to result from his sale of the bank’s collateral and the usurpation of the proceeds from
the sale to pay other business expenses. Debtor was already making late payments on the
accounts, yet he chose not to divert the proceeds. In this regard, the injury was willful.
Debtor acted in conscious disregard of the rights of the bank. Debtor simply did not care that
the sawmills were subject to liens in favor of Plaintiff and expressed as much to Mr. Graber.

This satisfies the malice portion of the inquiry.

Debtor’s defense is his claim that he intended to pay the bank and three additional
payments were made.’ Debtor is not completely credible on the former point and the court
is not persuaded the payments have the import intended by Debtor. At the time of the sale
of the sawmills, the December payments were already late, as evidenced by the late payment
charges assessed on December 22, 2008. Debtor made two payments on the accounts in
short order following the sale: one dated December 31, 2008 and one dated January 16, 2009.
At this point, JIDE had $50,000 from the sale of the sawmills and was paying its normal
expenses. The court concludes that the $50,000 allowed Debtor to fund the December 2008
and January 2009 payments. After that, JIDE missed three monthly payments (February,
March and April 2009) and remitted the May 2009 payments prior to filing bankruptcy. This
transaction history suggests as much of a planned cover-up as an intent to pay.

Also problematic is the fact that Debtor offered no explanation other than “I intended
to pay.” At some point JJDE received an additional $15,000 from Woodyards. Plaintiff's
account histories show it only received approximately $5,000 after the January 16, 2009.
The suggestion is that not only did Debtor take all or some of the initial $50,000 proceeds
and use them for general expenses, but also did the same with the three $5,000 installment
payments. Paying the secured party and paying general business expenses are not equivalent.

Mr. Graber was credible and provided corroborating testimony about statements of
others and related facts. Debtor did nothing to rebut any of this except to blankly deny.

Plaintiff has shown that the greater weight of the evidence is in its favor. Debtor has
not offered a plausible defense. The court finds that Debtor acted willfully and maliciously
when he sold the sawmills and the debt resulting from the conversion is nondischargeable.

The parties dispute the amount of the debt which is nondischargeable. Plaintiff
argues the debt is $70,000, the value of the collateral at the time of the sale, while Debtor
contends it is $70,000 less the subsequent payments. Plaintiff is correct. “Where a debtor
is found liable for conversion under 11 U.S.C. § 523(a)(6), the appropriate measure of
damages is an amount equal to injury caused by the Debtor, rather than any other sum owed
by the debtor.” Bonfiglio v. Harkema Assoc., Inc., 171 B.R. 245, 251 (E.D. Mich. 1994)
(citing In re Modicue, 926 F.2d 452, 453 (5" Cir. 1991)); see also Panel Town of Dayton,
Inc. v. Corrigan (In re Panel Town of Dayton, Inc.), 338 B.R. 764 (Bankr. S.D. Ohio 2006)
(citing Tabar v. Charlie’s Towing Serv., Inc., 97 Ohio App.3d 423 (8 Dist. Ct. App. 1994)

2 The court interprets this the “three payments” to encompass three payments on each of
the Master Equipment Financing Accounts held by Plaintiff.

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discretionary appeal denied, 70 Ohio St.3d 1428 (1994)); Warren Producers, Inc. v. Abbott,
2009 WL 151556 (Bankr. W.D. Ky. 2009).

Debtor’s testimony established the fair market value of Plaintiffs collateral was
$70,000, the selling price. When the collateral was sold, Plaintiff lost the $70,000 protection
offered by the collateral and was thereby damaged $70,000. The fact that Plaintiff received
payments after this is immaterial because the sale deprived it of its security. The subsequent
payments did not compensate it for the loss but merely reduced the overall debt. The total
debt still exceeds the value of the collateral. Consequently, Debtor’s position is not well-
taken. The measure of Plaintiff's damages is from the conversion is $70,000.

An appropriate order shall be entered in conjunction with this opinion.

# # #

Service List:

Christy A. Prince

65 East State Street
Suite 1800
Columbus, OH 43215

Kenneth R Cookson
65 East State Street
18th Floor
Columbus, OH 43215

Anthony J DeGirolamo
116 Cleveland Ave., N.W.
Suite 307

Canton, OH 44702

Scott M Zurakowski

PO Box 36963

4775 Munson St NW
Canton, OH 44735-6963

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