Opinion
No. 7-00-12765 ML, Adv. No. 00-1210 M.
October 18, 2004
Frederick H. Sherman, Deming, NM, Attorney for the Bank.
Jennie D. Behles, Albuquerque, NM, Attorney for the Allens.
James I. Bartholomew, Albuquerque, NM, Attorney for the Debtors.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Joint Motion for Summary Judgment (the "Joint Motion") filed by Plaintiffs, First New Mexico Bank (the "Bank") and Bobby J. Allen and Margaret Allen (the "Allens") (collectively referred to as the "Plaintiffs"). Charles and Raybella Schnyder (together, the "Schnyders") filed a voluntary petition under Chapter 7 of the Bankruptcy Code on May 19, 2000. The Bank filed its Complaint Objecting to Discharge And For Determination of Dischargeability of Debt (the "Bank's Complaint") on September 25, 2000. The Allens filed their Complaint Objecting to Discharge and to Determine Dischargeability of Debt on March 22, 2001. An Amended Complaint was filed on April 3, 2001 (the "Allens' Complaint").
This adversary proceeding has been consolidated with the adversary proceeding, Bobby and Margaret Allen v. Charles and Raybella Schnyder, No. 01-1045 M. See Order Consolidating Adversary Proceedings For All Purposes and Postponement of Trial (Doc. 32; 00-1210 M) (Doc. 17; 01-1045M).
I. The Allens' Complaint
The Allens' Complaint alleges that their debt should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(3)(B) because the Schnyders failed to list them as creditors in time to permit the Allens to file a complaint under §§ 523(a)(2), (4) or (6). The Allens allege that the debt to them is nondischargeable pursuant to either § 523(a)(2)(A) or § 523(a)(4).
Section 523(a)(3) states in pertinent part:
(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —
(3) neither listed nor scheduled under section 521(1) of this title, with the name if known to the debtor, of the creditor to whom such debt is owed, in time to permit —
(B) if such debt is of the kind specified in paragraph (a)(2), (4), or (6) of this subsection, . . . timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request[.]
The Allens' Complaint also requests a denial of discharge pursuant to § 727(a)(2)(B) alleging that the Schnyders transferred, removed, destroyed, mutilated, or concealed, their property after the bankruptcy was filed with intent to hinder, delay, or defraud the Allens.
The Court finds the following undisputed facts with respect to the Allens' Complaint:
1. The Schnyders' Chapter 7 bankruptcy was filed on May 19, 2000.
2. Prior to the bankruptcy, the Schnyders operated Cars Plus, a used car business.
3. The Schnyders failed to list the Allens on their original schedules and statements. The Schnyders amended their schedules listing the Allens as creditors on January 18, 2001 (Doc. 42). The meeting of creditors was held on July 26, 2000. The deadline for filing dischargeability complaints was 60 days after the date of the creditors' meeting. Rule 4007(c), Fed.R.Bankr.P. The same deadline applies for filing objections to discharge. Rule 4004(a), Fed.R.Bankr.P. The Allens' Complaint was filed on March 22, 2001 after these deadlines expired.
4. The Allens arranged for and guaranteed loans on behalf of the Debtors at several banks. Affidavit of Bobby Allen, Bank's Exhibit 10 at ¶ 10 ("Allen Affidavit"). The loans guaranteed by the Allens were used to purchase used vehicle inventory to be sold by the Schnyders on the Cars Plus lot. Allen Affidavit at ¶ 10. The Schnyders were to deliver the vehicle titles to the lending bank for release only in exchange for payment upon sale. Allen Affidavit at ¶ 11.
5. Mr. Schnyder was charged with several crimes including fraud, embezzlement, conspiracy to commit fraud and forgery. See Criminal Complaint, Exhibit 7 to Joint Motion (the "Criminal Complaint").
6. On November 25, 2003, Mr. Schnyder entered into a Plea and Disposition Agreement (the "Plea Agreement") in which he pled guilty to conspiracy to commit forgery, a fourth degree felony, as a lessor offense of forgery. See Plea and Disposition Agreement, Exhibit 6 to Joint Motion.
7. The Plaintiffs submitted an Affidavit for Arrest Warrant in which Detective Ron Huff of the Truth or Consequences, New Mexico police department described the information found in the investigation to support probable cause for the arrest of Mr. Schnyder. See Affidavit for Arrest Warrant, Exhibit 7 to the Joint Motion ("Affidavit for Arrest"). The Plaintiffs also submitted another affidavit of Detective Huff ("Huff's Affidavit") and the Criminal Complaint. See Joint Motion Exhibit 7.
DISCUSSION
Summary Judgment is appropriate when 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 a judgment as a matter of law. Rule 7056, Fed.R.Bankr.P. In applying this standard, the Court must examine the record and make all reasonable inferences in the light most favorable to the Schnyders, as non-movants. Munoz v. St. Mary Corwin Hospital, 221 F.3d 1160, 1164 (10th Cir. 2000). As the movants, the Plaintiffs shoulder "the initial burden of informing the court of the basis for [their] motion, and identifying those portions of the pleadings and/or discovery materials which demonstrate that there is no genuine disputed issue of material fact." Jones v. Warren Construction (In re Jones), 296 B.R. 447, 452 (Bankr. M.D. Tenn. 2003), citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the Plaintiffs meet this burden, the Schnyders must "go beyond the pleadings, and by affidavits, depositions, . . . designate specific facts showing that a genuine issue of fact remains for trial." Id. The Schnyders did not submit affidavits or other materials permitted under Rule 56(e), with their Response to the Joint Motion. Instead, they argue that the evidence presented with the Joint Motion is insufficient or inadmissible under Rule 56(e) to support summary judgment in favor of the Plaintiffs.
A. Objection to Discharge Under § 727(a)(2)(B).
Under § 727(a) (2)(B) the Court may not grant discharge if the debtor has concealed, transferred, or destroyed property of the estate after the bankruptcy petition was filed with intent to defraud a creditor. 11 U.S.C. § 727(a)(2)(B). Discharge of debts under § 727(a)(2) may be denied only upon a finding of actual intent to hinder, delay, or defraud creditors. See Hunter v. Sowers (In reSowers), 229 B.R. 151, 157 (Bankr. N.D. Ohio 1997). Intent may be established by inferences drawn from a course of conduct. Id.
The Allens cited § 727(a)(2) in their Complaint, but have limited their argument in the Joint Motion to denial of discharge under § 727(a)(2)(B).
The Plaintiffs assert that the facts contained in the Affidavit for Arrest, the Criminal Complaint, and the Plea Agreement prove that Mr. Schnyder transferred property of the estate, consisting of vehicles that were the collateral of several creditors, pledged those vehicles to other creditors, or sold vehicles using forged titles and concealed the sales or the vehicles themselves from creditors. The Plaintiffs argue that these actions constitute a pattern of conduct showing intent to delay, hinder or defraud creditors.
The Plaintiffs also rely on an affidavit of Mr. Allen concerning transfer and concealment of property of the estate. Mr. Allen states that the Schnyders purchased over $100,000.00 in jewelry, which was not scheduled in the Schnyders' bankruptcy. Allen Affidavit at ¶ 3. Mr. Allen stated that he personally verified that the Schnyders sold a large amount of jewelry after the bankruptcy was filed without disclosing those sales. Allen Affidavit at ¶ 4. Mr. Allen stated he was able to purchase some of the unique pieces of jewelry sold by the Schnyders post-petition and that he has those pieces in his possession. Allen Affidavit at ¶ 5.
The Schnyders argue that the Affidavit for Arrest and the Criminal Complaint contain hearsay and are inadmissible. The Schnyders also argue that the statements in the Allen Affidavit are inadmissible because they are either hearsay or are conclusory statements rather than statements of fact.
Rule 56(e) requires that an affidavit: "(1) must be made on personal knowledge of the affiant; (2) set forth facts that would be admissible in evidence; and (3) show affirmatively that the affiant is competent to testify to the matters stated therein." Fed.R.Civ.P. 56(e), made applicable to bankruptcy in Rule 7056(e), Fed.R.Bankr.P. "If an affidavit is insufficient under Rule 56(e), it must not be considered on summary judgment." Banner Oil Co. v. Bryson (In re Bryson), 187 B.R. 939, 950 (Bankr. N.D.Ill. 1995). The facts set forth in the Affidavit for Arrest were obtained from statements of various creditors allegedly defrauded by Mr. Schnyder, from Department of Motor Vehicle records and from records and property obtained from the execution of a search warrant at the Schnyders' residence. Consequently, these facts are based on inadmissible hearsay and will not be considered on summary judgment. See Harris v. Beneficial Okla., Inc. (In re Harris), 209 B.R. 990, 998 (10th Cir. BAP 1997) (affidavits containing hearsay cannot be considered as evidence on summary judgment).
Regarding the Allen Affidavit, the Court notes that Mr. Allen's statement that the Schnyders purchased valuable jewelry does show that he witnessed the purchases. Thus, this statement is not based on personal knowledge. Mr. Allen also does not state how he verified the post-bankruptcy sales. Thus, Mr. Allen has made statements not based on personal knowledge and which cannot be considered on summary judgment. Id. Mr. Schnyder's plea of guilty is discussed in Part II. A. below.
B. The Allens' Non-Dischargeability Claim under § 523(a)(3).
The Allens argue that their debt can be excepted from discharge under § 523(a)(3), even though they filed after the 60 day limitations period because they were not listed as creditors in the schedules and did not have actual notice of the bankruptcy in time to file a non-dischargeability complaint. The Allens bear the burden of proof to show that they did not have actual notice of the bankruptcy. Jones v. Warren Construction (In re Jones), 296 B.R. 447, 450 (Bankr. M.D.Tenn. 2003) (stating that creditor moving for summary judgment must show no actual notice of bankruptcy as well as meritorious claim under § 523(a)(2), (4) or (6)).
But see, In re Kean, 207 B.R. 118 (Bankr. S.C. 1996) (stating that once creditor shows that he has not been duly scheduled, the burden shifts to the debtor to show that creditor had actual notice); American Standard Insurance Co. v. Bakehorn, 147 B.R. 480, 482 (D. Ind. 1992) (stating that debtor bears burden of proving that creditor obtained notice or actual knowledge of the bankruptcy in time to protect its rights).
Neither the Plaintiffs nor the Schnyders have offered evidence from which the Court can ascertain whether the Allens had actual notice of the bankruptcy. This is a required element of § 523(a)(3); therefore, the Court cannot grant the Allens summary judgment on the claim under § 523(a)(3). Jones, 296 B.R. at 450. If at trial, the Allens show that they had no actual notice of the bankruptcy, the Allens may then show that their debt is the type that should be excepted from discharge pursuant to §§ 523(a)(2), (4), or (6). Therefore, the Court must deny summary judgment to the Allens on their cause of action for exception from discharge under § 523(a)(3) because issues of fact exist as to whether the Allens had actual notice of the bankruptcy filing.
The Allens asserted lack of notice in the Complaint but presented no evidence to support that assertion. The Schnyders asserted in their Answer that the Allens had actual notice of the bankruptcy but did not present evidence to that effect.
Jones describes three approaches to burden of proof in § 523(a)(3)(B) actions: 1) failing to timely schedule creditor automatically excepts debt from discharge; 2) allowing a "colorable" claim under § 523(a)(2), (4) or (6) to suffice; and 3) requiring creditor to prove merits of non-dischargeability claim. The court concluded that third approach was best. Jones, 296 B.R. at 450-51.
II. The Bank's Complaint
The Bank makes the following allegations:
Count I alleges that the Schnyders obtained a loan from the Bank using a false financial statement prepared with intent to deceive and upon which the Bank relied in approving and making the loan. The Bank alleges that its debt is non-dischargeable under § 523(a)(2)(B).
Count II alleges that the Schnyders sold vehicles without payment of the sales proceeds to the Bank in contravention of the Wholesale Floor Plan Agreement, which required the Schnyders to hold all proceeds of sales of vehicles in trust for the Bank. The Bank argues that its debt is nondischargeable under § 523(a)(4) for fraud or defalcation by the Schnyders as fiduciaries.
Count III alleges that the sale of collateral without payment of proceeds described above constitutes a willful and malicious injury to the Bank and its collateral, and asks the Court to declare the debt non-dischargeable under § 523(a)(6).
Count IV alleges that the Schnyders should be denied a discharge under § 727(a)(3) for concealing, destroying, falsifying or failing to keep or preserve records from which their financial condition or business transactions could be ascertained without justification.
Count V alleges that the Schnyders should be denied a discharge under § 727(a)(4) because they knowingly and fraudulently made a false oath or account in connection with their bankruptcy proceeding.
Count VI alleges that the Schnyders should be denied a discharge under § 727(a)(5) for failure to explain satisfactorily the loss of assets or deficiencies of assets to meet liabilities.
The Court finds the following undisputed facts in connection with the Bank's Complaint:
1. On or about October 22, 1999, Schnyders executed a Promissory Note, Financing Statement, and Third Party Pledge Agreement in favor of the Bank in the principal amount of $50,000.00. See Bank's Exhibits 1-3. The Schnyders also entered into a Wholesale Floor Plan Agreement with the Bank, in which the Schnyders granted the Bank a security interest in all vehicles purchased with the loan proceeds. Bank's Exhibit 4.
2. The Bank agreed to consider the loan on the condition that the financial status of the Schnyders had not materially changed since the time an earlier loan was approved by the same bank officer. See Bank's Exhibit 8, Affidavit of Kelly Dunn, President of the Bank at ¶ 1 (the "Dunn Affidavit"). The Bank also required the Schnyders to submit a current financial statement. Dunn Affidavit at ¶ 1. The unsigned financial statement submitted by the Schnyders stated that the Schnyders had a total net worth of over $1,000,000.00. Bank's Exhibit 5. Mrs. Schnyder filled out the financial statement. Mrs. Schnyder's deposition taken on September 21, at p. 20, lines 10-11, Bank's Exhibit 9 ("Mrs. Schnyder's 2000 deposition"). Mrs. Schnyder knew that the loan from the Bank would not be made without sufficient assets listed on the financial statement. Mrs. Schnyder's 2000 deposition at p. 26, line 18 — p. 27, line 2.
Another deposition of Mrs. Schnyder was taken in March 2002 and will be referred to as Mrs. Schnyder's 2002 deposition.
3. In the Wholesale Floor Plan Agreement, the Schnyders warranted that they would not grant another security interest in the Bank's collateral without written consent from the Bank. See Wholesale Floor Plan Agreement at ¶ 9.
4. The Schnyders agreed to account for and deliver to the Bank the proceeds of sale of each vehicle subject to the Bank's security interest. The Schnyders agreed that, "[p]ending such accounting and delivery, the [Schnyders] will hold the proceeds in trust for the Bank as the Bank's property . . . in identical form received and separate and apart from the [Schnyders'] property." See Wholesale Floor Plan Agreement, at ¶ 9.
A. The Bank's Non-Dischargeability Claims under § 523(a)(2), (4) and (6).
First, the Bank asserts that its debt should be excepted from discharge pursuant to § 523(a)(2)(B). Under this provision, the Bank must show by a preponderance of evidence the
(B) use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which a creditor to whom the debtor is liable for such money, property, services, or credit [justifiably] relied; and
(iv) that the debtor caused to be made or published with intent to deceive[.]
11 U.S.C. § 523(a)(2)(B). See also, Fowler Bros. v. Young (In re Young), 91 F. 3d 1367, 1373 (10th Cir. 1996) (outlining requirements for § 523(a)(2)(B) claim); Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing "justifiable" standard of reliance); Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (establishing preponderance of evidence standard).
The Bank has shown that the Schnyders made widely varying statements regarding the value of their personal property on the financial statement, as compared to their bankruptcy schedules filed several months later. The Bank argues that this difference in values shows that the Schnyders fraudulently inflated their personal net worth to induce the Bank to loan them money. Specifically, the Bank centers its argument around the values given for these items on the financial statements: 1) time deposits in banks $9,000 (the "CD's"); 2) household goods $75,000.00; 3) jewelry $60,000; 4) guns $12,000,00 and 5) radio controlled boats and accessories $30,000. Mr. Schnyder admitted that the CDs had been cashed out by Mrs. Schnyder's aunt who was a co-owner of the CDs. The Schnyders testified that they knew that Mrs. Schnyder's aunt cashed the CD's, but they did not remember when they found this out. Mr. Schnyder's 2000 deposition at p. 37 lines 10-21; Mrs. Schnyder's 2000 deposition at p. 39 lines 2-4 . As to the difference in the amount of jewelry valued on the financial statements at $60,000 and the value of $2,000 listed on the bankruptcy schedules, Mrs. Schnyder testified that the amount of jewelry in their possession would fluctuate because purchasers sometimes used jewelry as down payments for vehicles, and Mr. Schnyder would later sell the jewelry. Mrs. Schnyder's 2000 deposition at p. 60 lines 7-19. Mrs. Schnyder admitted that at the time of the bankruptcy, they owned two wedding rings, two watches and four dinner rings, but she could not even guess at their value. Mrs. Schnyder's 2000 deposition at p. 67 lines 20-22; p. 68 lines 2 — p 70 line 9. Mrs. Schnyder stated that she arrived at the $60,000 value for jewelry on the financial statement essentially by guessing. Mrs. Schnyder's 2000 deposition at p. 70 lines 10-21. As for the guns valued at $12,000.00, Mrs. Schnyder directed the inquiry to Mr. Schnyder. Mrs. Schnyder's September 2000 deposition at p. 76 lines 4-9. No statement from Mr. Schnyder regarding the guns was included in the record. Mrs. Schnyder testified that Mr. Schnyder raced radio controlled boats as a hobby, but that he had not raced in a long time. Mrs. Schnyder's 2000 deposition at p. 76 lines 10-23; p. 77 lines 2-14. On the financial statement, the business Cars Plus was valued at $75,000.00 as a projected figure, not based on an appraisal, and by the time of the bankruptcy, Mrs. Schnyder stated that it was worth nothing. Mrs. Schnyder's 2000 deposition at p. 79 line 2 — p. 80 line 18.
P. 70 lines 10-21 of the deposition states,
Q. How did you evaluate the $60,000 you put on your financial statement for the jewelry?
A. Well, like I said, you guess at what it might cost if you sent in to buy it or whatever was present at that time. Like I said, some of that would come and go because it was not personal things that you're going to keep.
The Schnyders argue that these different values do not prove that at the time of the financial statement they misrepresented these values. The Schnyders argue that they should have the opportunity to explain those differences and let the Court determine the credibility of their valuations.
Even though these are widely disparate values, the Bank has not shown the Court that at the time the financial statement was submitted, the Schnyders' net worth was misstated or that misstatement was the result of an intent to fraudulently induce the Bank to loan money. The Court finds that reasonable minds could differ as to the factual interpretation of the representations in the financial statement and the Schnyders' testimony. Miller v. Pulos (In re Pulos), 168 B.R. 682, 689 (Bankr. D. Minn. 1994) citation omitted. Therefore, the Court cannot rule as a matter of law that the debt is nondischargeable for false representation under § 523(a)(2)(B). See First Commercial Financial Group, Inc. v. Hermanson (In re Hermanson), 273 B.R. 538, 544 (Bankr. N.D. Ill. 2002) (plaintiff asserting summary judgment bears burden to show that no issue of material fact exists on every element of its cause of action).
The Bank next asserts that the debt is non-dischargeable under § 523(a)(4) because the Schnyders incurred the debt through "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny."
The Bank argues that the Schnyders were under a fiduciary duty to separate the proceeds of sale, hold them in trust, and remit the proceeds to the Bank. See, Wholesale Floor Plan Agreement at ¶ 9. Fiduciary duties for non-dischargeability purposes arise only where an express or technical trust exists. Young, 91 F.3d at 1371. The Bank argues that the Wholesale Floor Plan Agreement created an express trust with respect to the proceeds of the sales of vehicles until those proceeds were remitted to the Bank. The Court agrees that an express trust was created by the Wholesale Floor Plan Agreement. If the Schnyders failed to remit the proceeds of sales to the Bank in accordance withe the Wholesale Floor Plan Agreement, they committed a defalcation while in a fiduciary capacity making the debt non-dischargeable under § 523(a)(4). See Ford Motor Credit Co. v. Marinko (In re Marinko), 148 B.R. 846, 850-51 (Bankr. N.D. Ohio 1992) (granting summary judgment of non-dischargeability under § 523(a)(4) where undisputed facts showed requirement to separate and hold proceeds in trust for floor plan financier and failure to remit proceeds).
The Bank presents Dunn's Affidavit to show that the Schnyders' failed to remit the proceeds of sales. Dunn, stated that the "Bank found out after the filing of the bankruptcy that the Schnyders intentionally sold the vehicles, did not advise the Bank of the sale, did not hold the proceeds in trust for the Bank so they could purchase other vehicles, so the Bank would not know which vehicles were being purchased." Dunn Affidavit at ¶ 4. The Schnyders argue that the affidavit should be disregarded by the Court because it is based on hearsay.
Dunn's Affidavit does not state how the Bank learned of the Schnyders allegedly improper actions. On its face, this statement appears to be based on hearsay, and the Court will not consider it on summary judgment. The Bank also refers to portions of Mr. Schnyders' deposition in which he allegedly admits that he sold vehicles and did not remit the proceeds to the Bank, but the Bank failed to present those portions of the deposition.
The Bank next argues that Mr. Schnyder's conviction on a plea of guilty to the crime of conspiracy to commit forgery is evidence that Mr. Schnyder sold vehicles out of trust or otherwise breached his fiduciary duty to the Bank because the forgery charges involved a series of related actions which included the Bank. The Bank cites the Affidavit of Detective Ron Huff as support for this argument, which states:
"The conviction of conspiracy to commit forgery which was pled to by Charles Frederick Schnyder . . . was part of a pattern of conduct . . . that included a course of conduct involving Charles Frederick Schnyder with First New Mexico Bank. A criminal charge was not filed as to the Deming transactions as it was outside the jurisdiction of the Truth or Consequences police department. It is clear from my investigation that the activities were a kiting scheme which had significant overlap, which actions taken in the investigation of criminal activities of the Schnyders in Truth or Consequences, . . . Huff Affidavit at ¶ 2.
The officer did not explain whether the Deming transactions involved the Bank's collateral and did not clearly tie the "kiting scheme" to the Bank. Therefore, this affidavit is insufficient to prove a defalcation. The conviction for conspiracy to commit forgery also does not prove that Mr. Schnyder actually forged titles to the Bank's collateral and sold those vehicles out of trust. Conspiracy is a separate offense and does not require the conspirators to commit the subject felony. See NMSA § 30-28-2 (conspiracy is knowingly combining with another for purposes of committing a felony).
The Court concludes that genuine issues of material fact exist as to whether the Schnyders committed a defalcation while acting as fiduciaries of the sales proceeds derived from the Bank's collateral. Therefore, the Court will deny summary judgment on the claim of non-dischargeability under § 523(a)(4).
The Bank next asserts that the Bank's debt should be excepted from discharge under § 523(a)(6) because the Schnyders caused willful and malicious injury to the Bank or its property by failing to remit the proceeds of the sales or by pledging the Bank's collateral to other creditors. Section 523(a)(6) requires that a debtor intend to injure either a creditor or a creditor's property. MitsubishiMotors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 656 (10th Cir. BAP 1999) (surrendering encumbered car to gun-wielding drug dealer was intentional but not with intent to injure secured party). The Bank argues that by selling collateral without remitting the proceeds, the Schnyders committed conversion. Conversion can, under certain circumstances, give rise to a non-dischargeable debt pursuant to § 523(a)(6). Longley, 235 B.R. at 657. To be the basis of a nondischargeable debt, conversion must be both willful and malicious. Id. Willful and malicious conversion may be established by direct evidence of specific intent to harm a creditor or the creditor's property. More commonly willful and malicious conversion is established indirectly by evidence of both the debtor's knowledge of the creditor's lien rights and the debtor's knowledge that the conduct will cause a particularized injury. See Bombardier Capital, Inc. v. Tinkler (In re Tinkler), 311 B.R. 869, 884 (Bankr. D. Colo. 2004) (stating that intent to injure can be shown if creditor shows that debtor knew that he was acting contrary to creditor's rights and that his actions were substantially certain to harm creditor).
As stated above, Dunn's Affidavit does not contain admissible evidence that establishes that the Schnyders sold the Bank's collateral out of trust, in contravention of the Wholesale Floor Plan Agreement. The Bank also did not submit admissible evidence that the Schnyders pledged the Bank's collateral to other lenders. As discussed above, the statements by Dunn are based on hearsay and cannot be considered as evidence that the Schnyders pledged the Bank's collateral to other lenders.
Dunn states as follows: "After the proceedings filed in this action, the Bank discovered that the Schnyders had pledged the same assets [Bank's collateral] to another creditor."
Next, the Bank argues that the guilty plea resulting in the conviction of Mr. Schnyder for conspiracy to commit forgery is binding on this Court and is the basis for a finding of nondischargeability under § 523(a)(6). See Wright v. Richards (In re Richards), 87 B.R. 977, 979 (Bankr. S.D Ill. 1988) (state court adjudication of fraud is binding on bankruptcy court with regard to whether underlying debt is non-dischargeable if elements are the same). In applying issue preclusion, the Court must review the record to determine whether the elements for non-dischargeability have been met. Id. The Bank argues that the conviction for conspiracy to commit forgery, along with the information contained in the Affidavit for Arrest and the Criminal Complaint establish that Mr. Schnyder participated in a scheme to convert the Bank's and other lenders' collateral through forgery of duplicate titles in order to sell the Bank's collateral without its knowledge with intent to injure the Bank. See Jones v. Hall (In re Hall), 295 B.R. 877, 880 (Bankr. W.D.Ark. 2003) (debt found nondischargeable under § 523(a)(6) when debtor sells collateral without remitting proceeds to lender). The Schnyders argue that the conviction for conspiracy to commit forgery is peripheral to the alleged conversion of the Bank's collateral and cannot be given preclusive effect. While the sale of vehicles through forgery of duplicate titles can constitute conversion, as stated above, the conviction for conspiracy to commit forgery does not directly establish Mr. Schnyder's culpability for forgery itself. Also, as stated above, the Affidavit for Arrest is inadmissible as hearsay. Moreover, the Criminal Complaint charging Mr. Schnyder with fraud, embezzlement, forgery and conspiracy cannot support a factual finding of forgery because these charges were not actually litigated. Richards, 87 B.R. at 979.
The Bank has failed to show by admissible evidence that the Schnyders intentionally harmed the Bank or its lien rights. Therefore, the Court will deny the Joint Motion for summary judgment that the Bank's debt is non-dischargeable under § 523(a)(6). B. Denial of Discharge Under § 727(a)(3) Adequacy of Records.
The Bank asserts that the Schnyders concealed, destroyed, mutilated, falsified or failed to keep and preserve records from which their business status could be ascertained and should be denied a discharge under § 727(a)(3). The Tenth Circuit has stated that a prima facie case under this section requires the creditor to show that the debtor "failed to maintain and preserve adequate records and that the failure made it impossible to ascertain his financial condition and material business transactions." Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1295 (10th Cir. 1997) (citation omitted) (emphasis in original). Claims under this provision are not usually decided on summary judgment because they require a fact intensive inquiry regarding the adequacy of the debtor's records Butler v. Liu (In re Liu), 288 B.R. 155, 161 Bankr. N.D.Ga. 2002) (holding in case where debtor had substantial gambling losses that triable fact issues remained on § 723(a)(3) claim).
The Bank supported its argument with depositions of the Schnyders taken on September 21, 2000 and the Allens presented depositions of the Schnyders taken on January 18, 2002. Mr. Schnyder testified that the inventory of the business was periodically disposed of and replaced as inventory was sold and new inventory was acquired. Mr. Schnyder's 2000 deposition at p. 56 lines 1-24. As a way to verify inventory, Mr. Schnyder testified that inventory was recorded in a handwritten stock book. Mr. Schnyder's 2002 deposition at p. 65 line 16 — p. 66 line 9. When asked about a certain vehicle that was sold, Mr. Schnyder produced the title and stated that he had several titles to vehicles. Mr. Schnyder's 2000 deposition at p. 60. The Schnyders prepared computer generated profit and loss statements, which were sent to an accountant who prepared their taxes. Mrs. Schnyder's 2002 deposition at p. 15; Mr. Schnyder's 2002 deposition at p. 55. The Schnyders had a folder for each vehicle held at the Cars Plus lot where the titles were kept. Mr. Schnyder's 2000 deposition at p. 60 line 3 — p. 61 line 21. The Schnyders did not maintain a deposit book, "[w]e used, if there was deposit slips in the bank of this, we used that, or we used the bank." Mrs. Schnyder's 2000 deposition at p. 112 lines 9-11; Mr. Schnyder's 2000 deposition at p. 112 lines 1-14. Mr. Schnyder wrote checks to himself for cash, which was used to purchase cars but could not tell from the check records from whom the cars were purchased. Mr. Schnyder's 2000 deposition at p. 118 lines 1-24. Mrs. Schnyder was issued checks from Cars Plus to pay for her mother's expenses. Mr. Schnyder's 2000 deposition at p. 112 lines 15-25 and p. 115 lines 2-25. Both of the Schnyders testified that the police confiscated a large number of their records from their house after the bankruptcy was filed. Mrs. Schnyder's 2000 deposition at p. 44 lines 4-17; Mr. Schnyder's 2002 deposition at p. 65 line 7-10; Mr. Schnyder's 2002 deposition at p. 56-57. The Bank has not shown that those records were unavailable for their inspection. Based on the evidence presented, the Court finds that material fact issues exists as to the adequacy of the Schnyders' records precluding a summary judgment in favor of the Bank and the Allens on this cause of action.
Although the Allens do not allege denial of discharge under § 727(a)(3), the evidence submitted by them in connection with the Joint Motion can be used to support the Bank's claim under § 727(a)(3).
C. Denial of Discharge Under § 727(a)(4) for False Oath.
The Bank and the Allens assert that discharge should be denied to the Schnyders under § 727(a)(4) for making a false oath in connection with their bankruptcy. Under this provision a creditor must demonstrate that the debtor knowingly and fraudulently made an oath and that the oath relates to a material fact. Brown, 108 F.3d at 1294. A misrepresentation in the debtor's bankruptcy schedules, as to the identity or value of his assets, is a "false oath" for the purposes of § 727(a)(4). In re Mathern 137 B.R. 311, 320 (Bankr. D. Minn. 1992) (citations omitted). Omitted assets are material if those assets "bear a relationship to the bankrupt's business transactions or estate, . . ." Id. (quoting, Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992).
The Bank argues that Mrs. Schnyder made two false statements under oath in her 2000 deposition supporting a denial of discharge under § 727(a)(4). Mrs. Schnyder stated that the Schnyders executed no other promissory notes after the note was executed to the Bank in July 1998, but the Affidavit for Arrest states that the Schnyders entered into floor plan financing agreements with a creditor named Charles Schwab after July 1998. Affidavit of Arrest at p. 4. Mrs. Schnyder also stated in her deposition that their bankruptcy attorney did not help them appraise their personal property to put in the schedules. When corrected by their attorney, Mrs. Schnyder stated that the attorney helped them value their property based on their description. Mrs. Schnyder's September 2000 deposition at pp. 53-60. First, as discussed above, the Affidavit for Arrest contains facts based on hearsay and cannot be considered. Moreover, Mrs. Schnyder corrected her testimony stating that her attorney helped her prepare the schedules.
Both Plaintiffs argue that the Schnyders failed to schedule a substantial amount of their property, including jewelry and other assets. They also point to the great discrepancies in value of property listed in the financial statement and the much smaller amount of assets listed on their bankruptcy schedules as proof that they made a false oath on their schedules. The Court finds that the discrepancy in value of personal property listed on the financial statements as compared to the schedules, without more, is insufficient even when considered with the deposition testimony. Mr. Allen's affidavit concerning the missing jewelry is inadmissible. Summary judgment is, therefore, not appropriate on this claim.
D. Denial of Discharge under § 727(a)(5) Loss or Deficiency of Assets
Section 727(a)(5) provides: "The court shall grant the debtor a discharge, unless — . . . (5) the debtor has failed to explain satisfactorily, . . . any loss of assets or deficiency of assets to meet the debtor's liabilities[.]" 11 U.S.C. § 727(a)(5). Under this provision, "[a] party objecting to discharge . . . has the burden of proving facts establishing that a loss or shrinkage of assets actually occurred. . . . the burden then shifts to the debtor to explain the loss or deficiency of assets in a satisfactory manner." Stewart, 263 B.R. at 618. For the reasons discussed above, the Court finds that issues of fact are presented as to whether the Schnyders' assets were actually lost or were dissipated. Therefore it is inappropriate to grant the Joint Motion on this claim.
In sum, the Court finds that the Plaintiffs have failed to show that they are entitled to summary judgment on any of their claims. An appropriate order will be entered. This opinion shall constitute the Court's findings of fact and conclusions of law under Rule 7052, Fed.R.Bankr.P.