No. 00-8097United States Bankruptcy Court, C.D. Illinois
April 12, 2001
James G. Baber, Monmouth, IL.
Christopher W. Kanthak, Galesburg, IL.
U.S. Trustee, Peoria, IL.
OPINION
THOMAS L. PERKINS, United States Bankruptcy Judge.
Before the Court is the Complaint Objecting to Discharge and Objecting to Dischargeability filed by the RARITAN STATE BANK (RARITAN), pursuant to §§ 727(a)(2)(A) and (a)(5) and § 523(a)(6) of the Bankruptcy Code.
The Debtor, Shawn K. Adkisson (DEBTOR), was a cattle farmer, buying, raising, breeding and selling cattle. The DEBTOR had a lending relationship with RARITAN for a period of several years. In 1999, the DEBTOR signed a series of three notes with RARITAN. The first note was executed on Feb. 10, 1999, in the sum of $61,500, which represented a renewal and consolidation of ten prior notes. On March 18, 1999, the DEBTOR executed a second note to RARITAN in the sum of $98,429.99, representing a renewal of operating loans for prior years and for 1999 operating funds.
The DEBTOR executed a third note in the amount of $5,598 to RARITAN on March 26, 1999, for feed and pasture. These debts were secured by a security agreement and a properly filed financing statement. By the terms of the security agreement, RARITAN was granted a security interest in accounts, equipment, crops and livestock.
Throughout 1999, because of the DEBTOR’S continued losses, the DEBTOR was encouraged by RARITAN to seek an outside job to supplement his farm income and thereby cover his living expenses. The DEBTOR tried his hand at full time employment, but found that he could not properly care for the livestock. The DEBTOR’S financial difficulties escalated in 1999 as a result of a divorce.
In late September of that year, the DEBTOR sought to borrow additional operating funds, including money to pay a feed bill to Fairview Grain, but RARITAN, concerned with its undersecured position, declined to loan the DEBTOR any further funds. On October 6, 1999, with RARITAN’S consent, the DEBTOR sold 23 head of cattle for $4,995.90 and the proceeds were divided with a check for one-half of the net proceeds being issued to RARITAN and an equal amount being issued to the DEBTOR and Farmers Grain in payment of the feed bill. In October, 1999, Marc Coursey, a loan officer at RARITAN and Robert Schleich, RARITAN’S CEO, visited the DEBTOR’S farm to take an inventory.
As a result of the collateral inspection, RARITAN prepared the following list of the DEBTOR’S assets at that time:
50 bred cows 2 bulls 25 calves at father’s house 63 calves across road from father’s house 1460 Combine with both heads 4320 John Deere Tractor 15 foot mower
The DEBTOR was present and does not dispute the inventory prepared by RARITAN.
Between October, 1999 and mid December, 1999, the DEBTOR sold all his livestock and equipment. RARITAN received the proceeds from some of the sales. On December 7, 1999, the DEBTOR sold fifty cows and two bulls to his father for $31,200 and paid the proceeds to RARITAN.
On Dec. 8, 1999, RARITAN received $11,150 from the sale of calves. An auction sale of the DEBTOR’S machinery was held by Jack Lowderman Auction Company on Dec. 9, 1999, and the proceeds of $11,350.75 were sent directly to RARITAN. On Dec. 11, 1999, the DEBTOR sold one bull through the Fairview Sale Barn for $365.86 and paid the proceeds to RARITAN.
Other sales occurred and none of the proceeds were turned over to RARITAN. On Nov. 23, 1999, the DEBTOR sold fifteen heifers, steers and bulls at Galesburg Livestock Sales, Inc. for $5,424.42. On Nov. 24, 1999, he sold twenty-six head of cattle for $11,217.70. On Nov. 27, 1999, the DEBTOR sold six head at Fairview Sale Barn for $2,685.39.[1]
The DEBTOR filed a Chapter 7 petition on March 16, 2000. RARITAN filed this adversary proceeding seeking a determination that its debt is nondischargeable under § 523(a)(6) and objecting to the DEBTOR’S discharge under §§ 727(a)(2)(A) and (a)(5). A trial was held on March 16, 2001, and the Court took the matter under advisement.
§ 523(a)(6)
RARITAN contends that the DEBTOR’S actions in selling his cattle resulted in a willful and malicious injury rendering its debt nondischargeable under § 523(a)(6). RARITAN complains that the DEBTOR’S sale of livestock to his father was for less than a fair market value. RARITAN also contends that the DEBTOR’S failure to pay over all of the proceeds received from the sale of its collateral was unauthorized and constitutes a willful and malicious conversion.
Under § 523(a)(6), a discharge in bankruptcy does not discharge a debtor from a debt for “willful and malicious injury by a debtor to another entity or property of another entity.” 11 U.S.C. § 523(a)(6). Under the Supreme Court’s decision in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), in order for a debt to be nondischargeable under this provision, it must be a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.
Discussing the standard to be applied in cases involving conversion of collateral under § 523(a)(6) after Kawaauhau, the court in In re Kidd, 219 B.R. 278, 285 (Bankr.D.Mont. 1998), stated:
[A] creditor, in order to prevail under § 523(a)(6), must demonstrate by a preponderance of the evidence, that the debtor desired to cause the injury complained of, or that the debtor believed that the consequences were substantially certain to result from the debtors acts. In other words, in the case of a conversion, a creditor must show that a debtor, when converting collateral, did so with the specific intent of depriving the creditor of its collateral or did so knowing, with substantial certainty, that the creditor would be harmed by the conversion. This subjective test focuses on whether the injury was in fact anticipated by the debtor and thus insulates the innocent collateral conversions from non-dischargeability under § 523(a)(6).
Though the standard in these cases may have changed, it remains clear that each case must be determined on its unique facts. Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934); In re Endicott, 254 B.R. 471 (Bankr.D.Idaho 2000).
Part of RARITAN’S contention is that the DEBTOR did not receive a fair value for the cattle sold to his father. RARITAN’S appraiser, Eddie Malone, a licensed representative of Galesburg Livestock Sales, testified that he visited the farm of Roy Adkisson, the DEBTOR’S father, in the summer of 2000 and viewed cattle in a pasture pointed out by Mr. Schleich. Mr. Malone stated that he viewed the cattle from the roadside. At RARITAN’S request, he appraised the cattle as of December, 1999, and in his opinion, the cattle had a value of $38,450 to $40,000. He based his opinion upon certain assumptions provided by Mr. Schleich. Mr. Schleich advised him of the approximate ages of the cattle and asked Mr. Malone to assume that the cows were in the second and third stages of pregnancy. Mr. Malone conceded that if the cows were in the first stage of pregnancy in December, 1999, their values would be lower. Mr. Malone acknowledged that if the cattle were sold at auction, certain expenses would be incurred including commission, trucking, and pregnancy and blood testing. Recognizing that the market price in early October for bred cows was between $400 and $525 per head, Mr. Malone testified that the prices for bred cows would substantially increase as the winter went on. Mr. Malone explained that his appraisal was based on prices taken from “special sales” which occur three times a month and attract out of state buyers. Mr. Malone added that it would be unusual for a cow to be in its first trimester in December and that when he viewed the cows in July they had calves. Based upon his estimation of the age of the calves, the cows would have been in their mid to late second stage of pregnancy in December of 1999.
The DEBTOR’S father was also a cattle farmer and he owned cattle prior to his purchase from the DEBTOR. The DEBTOR broke down the sale of cattle to his father as follows:
4 open cows,[2] 1,100 lbs each @ 35 cents/lb $ 1,540.00 19 cows, 6-8 years old, 1st trimester, $650 each 12,350.00 27 aged cows,[3] 2nd trimester, $595 each 16,065.00 2 bulls, 1500 lb/each @ 41 cents/lb 1,230.00 TOTAL $31,185.00
The DEBTOR testified that the herd of cattle he sold to his father was a cross-bred herd, consisting of shorthorn cross, simmental cross and red angus cross. He and his father obtained prices from several different sale barns in order to arrive at a fair price for the livestock. The DEBTOR testified that the cows were pregnancy tested by vets at the time of sale and weighed by him and his father.
This Court is simply not willing to accept, over the credible and sincere testimony of the DEBTOR, the opinion of RARITAN’S appraiser, based on a drive-by sighting. The evidence offered by RARITAN suffers on two grounds. Primarily, this Court is not convinced, despite Mr. Schleich’s insistence, that the cattle viewed by RARITAN’S appraiser were the same cattle sold by the DEBTOR.
The DEBTOR testified that his herd was a “mongrel” herd and not the uniform hereford herd which Mr. Schleich pointed out to the appraiser as they stopped along the roadside. Mr. Schleich admitted that the full herd was not in sight. Moreover, the DEBTOR testified that his father did not keep the cattle he acquired from the DEBTOR separate and apart from his other cattle. Mr. Schleich’s certainty that the cattle he viewed from the road were the same animals that he inventoried eight months earlier, based only on their location in the same pasture, is less than convincing.
Second, Mr. Schleich provided the appraiser certain assumptions which were not substantiated at trial. Mr. Malone based his appraisal on Mr. Schleich’s representation that the cows were four to six years old. The inventory taken by RARITAN in October, 1999, however, made no note of any ages for the cattle. The DEBTOR testified that he never purchased cows that young, for he could not afford to, and that nineteen of the cows he sold to his father were between six and eight years old and that twenty-seven cows were nine years old and over. The DEBTOR testified that one of the bulls could not reproduce. Mr. Schleich also told Mr. Malone that the cows would have been in the second or third stage of pregnancy in December. The DEBTOR testified that the cows were pregnancy tested before the sale to his father and that not all of the cows were in the second or third stage of pregnancy.
According to RARITAN’S appraiser, both the ages of the cows and their condition at the time of the sale would significantly affect their value. For those reasons, this Court finds that RARITAN has failed to establish that the price received by the DEBTOR for the livestock sold to his father was not a fair one.
The other part of RARITAN’S contention is that the DEBTOR’S failure to turn over the entire net proceeds from all sales of cattle renders the debt nondischargeable to the extent of approximately $15,000.[4] Mr. Schleich testified that he had several conversations with the DEBTOR during 1999 concerning the reduction of the loan balances, and that the visit made to the farm in October was “to be sure what was out there to be sold as part of the plan.” According to Mr. Schleich, the DEBTOR was going to sell the calves and the machinery, and retain the cows for long-term income. Mr.
Schleich testified that there was no agreement that the DEBTOR could continue to pay expenses from the proceeds of the sale of the cattle, but that the sale occurring in early October whereby the DEBTOR paid a feed bill was an exception by special agreement. According to both Mr. Coursey and Mr. Schleich, the DEBTOR was to turn over all proceeds from the sales to RARITAN and was not permitted to use any portion of the proceeds to pay other bills or expenses.
The DEBTOR admitted that he knew RARITAN had a security interest in his machinery and the cattle herd, characterizing that interest as a “barnyard lien.” The DEBTOR testified that when RARITAN turned down his request for additional operating funds, Mr. Coursey agreed that the DEBTOR could pay the expenses incurred because of the livestock and normal operating expenses of the farm from the sale proceeds, before turning over the monies to RARITAN. The DEBTOR’S belief was buttressed by their course of dealing in the past, whereby the DEBTOR paid farm-related and living expenses prior to remitting proceeds from collateral sales to RARITAN. The DEBTOR stated that the proceeds from the sale of the livestock that were not turned over to RARITAN paid fuel bills, veterinary expenses, feed bills and other ordinary farming expenses as well as court-ordered child support payments and other ordinary living expenses. The DEBTOR maintained a checking account at RARITAN and some of the sale proceeds were deposited in that account. Throughout the period in question, the DEBTOR wrote checks for miscellaneous expenses from this account. The DEBTOR stated that his bankruptcy was precipitated by the financial obligations resulting from the divorce.
Based on the evidence presented at trial, it is the opinion of this Court that RARITAN has failed to sustain its burden of proof that the DEBTOR’S actions in liquidating his cattle herd constituted a willful and malicious injury. RARITAN knew that the DEBTOR had no source of income other than from the sale of cattle. RARITAN also knew that the DEBTOR lacked operating funds. Mr. Schleich acknowledged that RARITAN expected the DEBTOR to continue, after their agreement in October of 1999, to care for and maintain the herd, including feeding, pasturing and incurring veterinary expenses if appropriate and necessary. The proceeds from the sale of livestock on November 24, 1999, in the amount of $5,434.85 and on November 26, 1999, in the amount of $11,217.70 were both deposited in his checking account at RARITAN and identified on the deposit slips as livestock sales. While not evidence of knowledge on RARITAN’S part, such actions evince a lack of subjective intent by the DEBTOR to cause injury to RARITAN and supports the DEBTOR’S testimony that he believed he could use the proceeds as necessary to pay his operating and living expenses. Furthermore, Mr. Schleich expected that the DEBTOR would continue his cattle operation, albeit on a downsized basis, and necessarily incur further expenses. RARITAN is not claiming that it directed the DEBTOR to liquidate his entire herd. Under these circumstances, the DEBTOR’S belief that he could continue to use a portion of the proceeds from sale of cattle to pay his expenses is reasonable and credible.
§ 727(a)(2)(A) and § 727(a)(5)
Section 727(a)(2)(A) provides that the court shall grant the debtor a discharge unless:
(2) the debtor, with intent to hinder, delay or defraud a creditor . . . has transferred, removed, destroyed, mutilated or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition . . . .
Section 727(a)(5) provides that the court shall grant the debtor a discharge unless:
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities . . . .
RARITAN premises its objection to the DEBTOR’S discharge on the same allegations upon which it bases its objection to the dischargeability of its debt under § 523(a)(6). For the same reasons that this Court determined that the DEBTOR’S sales of the livestock did not constitute a willful and malicious injury, it finds that RARITAN has failed to sustain its burden of proof that the DEBTOR transferred or concealed property with the intent to hinder, delay or defraud RARITAN or that the DEBTOR has failed to account for any assets. This Court has determined that the livestock was sold at fair value and the proceeds of sale were turned over to RARITAN or deposited in the DEBTOR’S checking account and used to pay operating and living expenses. The DEBTOR kept standard business records, accounting for all his income and expenses. RARITAN’S argument that the DEBTOR failed to satisfactorily explain the livestock sales at his Rule 2004 exam is not determinative. It is enough that he gave a satisfactory explanation at trial.
An Order should be entered granting judgment for the Defendant. This Opinion constitutes this Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that Judgment on all counts of the Complaint is entered in FAVOR of the DEFENDANT, Shawn K. Adkisson, and AGAINST the PLAINTIFF, Raritan State Bank.