Opinion
No. 01-82057, Adv. No. 01-8269
September 15, 2003
OPINION
This matter is before the Court after trial on the Complaint filed by the Plaintiff, Bank Star One ("BANK STAR"), against the Debtor, Bruce Tracy ("DEBTOR"), seeking a determination that its debt is nondischargeable under Sections 523(a)(2)(A), (a)(2)(B) and
FINDINGS OF FACT
The DEBTOR is forty years old and has never been married. He had been self-employed as a farmer all his life. A long-time boating enthusiast and frequent vacationer to the Lake of the Ozarks, the DEBTOR and Michael McNall, a close friend, purchased a 1990 Black Thunder 32' power boat with a three-axle trailer in the mid-nineties. The boat was titled in McNall's name, but the DEBTOR made all of the payments and was responsible for the insurance, upkeep, storage and operating expenses.
In early 1999, the DEBTOR developed a plan to refurbish the boat, with a view to starting a rental business at the Lake of the Ozarks. The DEBTOR intended to redo the interior, to have the boat's exterior surface repaired and repainted and to replace the boat's engines. The DEBTOR presented his loan proposal to BANK STAR in March, 1999, seeking a loan for an amount in excess of the current value of the boat. In response to the request of Cathryn Roberts, a BANK STAR loan officer, that the DEBTOR submit a financial statement, he furnished a financial statement which his accountant had prepared, dated March 1, 1999. After examining the financial statement and the DEBTOR'S credit report which she had obtained, Ms. Roberts advised the DEBTOR that BANK STAR would not be interested in making the loan. The DEBTOR explained that there were extenuating circumstances with his farm operation and that his credit issues had been resolved and he was back on track. At her request, he submitted a letter of explanation, addressing her areas of concern. The DEBTOR furnished the details of the souring of his relationship with First of America Bank which resulted in the liquidation of real estate and equipment and generated a significant capital gains tax which the DEBTOR had to borrow money to pay. The DEBTOR also submitted letters of recommendation from his current bankers, which, along with the DEBTOR'S explanation, satisfied Ms. Roberts' concerns. She prepared a proposal, ranking the DEBTOR as "adequate," which she submitted to the branch manager and the loan was approved.
Not willing to underwrite the full cost of the DEBTOR'S proposed renovations, BANK STAR agreed to make a loan based on the book value of the boat and trailer in their present condition, which was $46,400.00, with the idea that the DEBTOR would obtain the funds needed to complete the work from other sources. According to Ms. Roberts' testimony, in response to her inquiry whether the DEBTOR would have sufficient funds to complete the work on the boat, the DEBTOR showed her a bank bag full of cash and advised her that he would be able to get the remaining cash. She could not recall whether this occurred at their first meeting or on the date the DEBTOR returned to close the loan.
On April 17, 1999, BANK STAR loaned the DEBTOR $42,543.82, to be repaid in monthly installments of $524.73 with a balloon payment of $39,549.85 on April 17, 2002, secured by a first preferred ship mortgage on the boat and a lien on the trailer. In addition to the boat and trailer, the security agreement listed the collateral as two "600 HP/502 engines." The loan proceeds were used to purchase insurance for $1,342.82, to pay off the existing mortgage on the boat of $16,728.89, and documentation costs of $1,092.50. In addition, a check was issued to Competition Marine ("COMPETITION MARINE") and the DEBTOR in the amount of $23,318.51. When the DEBTOR delivered the check to COMPETITION MARINE, the company retained to do the power system work, a check in the amount of $3,000.00 was issued back to him at his request, as COMPETITION MARINE only required $20,000.00 as a down payment. The DEBTOR testified that the $3,000.00 was used to pay insurance on the boat. The old engines were sold for $5,300.00 to $5,600.00. The DEBTOR testified that he held the funds to be used for other work on the boat, and that some of the funds may have been spent for the paint job.
At the same time the DEBTOR was seeking funds to renovate the boat, he was attempting to restructure his agricultural debt to convert his short-term balloon loans into long-term installment debt. In January, 1999, prior to contacting BANK STAR, the DEBTOR and his farm lender, Farmers State Bank ("FSB"), struck an agreement whereby the DEBTOR would contract to sell his 1998 and 1999 crops on the futures market. In the DEBTOR'S estimation, by hedging his crops, he could increase his profit by $104,000.00. The balloon payment to Met Life was picked up by FSB. It agreed to extend its note payment of $40,000.00 from June to December. With the assistance and cooperation of FSB, the DEBTOR submitted an application for a guaranteed loan through a program offered by the Illinois Farm Development Authority ("IFDA"), targeted at younger farmers. The DEBTOR'S application was eventually turned down.
FSB subsequently insisted that the DEBTOR make the $40,000.00 land payment in June. In order to make the payment, the DEBTOR used funds in his commodity account. In July, 1999, the futures market took an adverse turn. The DEBTOR was able to meet the first margin call, but was unable to comply with the second, requested within days of the first, coming up $8,000 short. The DEBTOR suffered a loss of $52,000.00.
The painting and graphics work on the boat was to be done prior to the power system work. The painting and graphics were completed by Pro Body Works, whom the DEBTOR paid in full on November 20, 1999, in the amount of $7,228.00. Between May and July, 2000, the DEBTOR paid Monmouth Interior Specialists a down payment of $1,500.00 to refurbish the interior of the boat, which was never done.
In March of 2000, one year after obtaining the loan from BANK STAR, the DEBTOR returned to Ms. Roberts and requested additional funds to complete the boat and to purchase limousines. BANK STAR denied the DEBTOR'S request. The DEBTOR made the first twelve monthly payments to BANK STAR on a timely basis, through April, 2000. Between July and October, 2000, the DEBTOR made six additional payments to bring the loan current through October. The DEBTOR made no further payments.
On August 14, 2000, the DEBTOR entered into an agreement with FSB for partial liquidation of his farming operation, signing a note for $70,015.00. The loan proceeds were applied to the DEBTOR'S ASCS debt of $64,680.00 and the remaining funds were used for 2000 operating monies. The DEBTOR, however, was unable to make the payment when it came due on January 2, 2001, and FSB foreclosed on his residence and obtained a judgment of replevin against his equipment.
After the DEBTOR failed to pay COMPETITION MARINE the balance due of $23,728.56, COMPETITION MARINE removed the new engines and other parts which it had installed on the boat. BANK STAR arranged for the boat to be stored at another facility. When the boat was picked up, it was little more than a shell. BANK STAR charged off the principal loan balance of $33,974.07 on April 30, 2001. The DEBTOR filed a Chapter 7 petition on May 7, 2001. BANK STAR was granted relief from the automatic stay and sold the boat in June, 2002, for $6,200.00.
ANALYSIS
A creditor seeking to establish an exception to the discharge of a debt bears the burden of proof. Matter of Scarlata, 979 F.2d 521 (7th Cir. 1992). A creditor must meet this burden by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In order to afford the debtor a "fresh start," exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor. Meyer v. Rigdon, 36 F.3d 1375 (7th Cir. 1994). BANK STAR filed a complaint seeking a determination that the unpaid balance of the DEBTOR'S obligation of his loan is nondischargeable under Sections 523(a)(2)(A) and (a)(2)(B). BANK STAR also contends that the DEBTOR converted property pledged as collateral for the loans and seeks a determination of nondischargeability premised upon Section 523(a)(6). A. Section 523(a)(2)(B).
BANK STAR'S primary claim is based on Section 523(a)(2)(B). In order for a loan obtained by a false financial statement to be nondischargeable under Section 523(a)(2)(B), the creditor must establish each of the following elements: (1) the debtor made a statement in writing; (2) the statement was materially false; (3) the statement concerned the debtor's financial condition; (4) the debtor intended to deceive the creditor; and (5) the creditor reasonably relied upon the misrepresentation. Matter of Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). The parties do not dispute the first or the third requirements. The written statement at issue was given by the DEBTOR to obtain the loan and the statement concerns the DEBTOR'S "financial condition." At issue are the remaining three elements of Section 523(a)(2)(B).
A financial statement is materially false if the information offers a substantially untruthful picture of the financial condition of the debtor that affects the creditor's decision to extend credit. Matter of Bogstad, 779 F.2d 370, 375 (7th Cir. 1985); In re Bryson, 187 B.R. 939, 962 (Bankr.N.D.Ill. 1995). The measuring stick of material falsity is whether the financial institution would have made the loan if the debtor's true financial condition had been known. Bogstad, supra, 779 F.2d at 375; see, also, In re Eckert, 221 B.R. 40 (Bankr.S.D.Fla. 1998) (citing Matter of Stratton, 140 B.R. 720, 722 (Bankr.N.D.Ill. 1992)). A huge discrepancy in the actual net worth listed in a financial statement gives rise to an inference of material falsity. See, e.g., Regency Nat. Bank v. Blatz, 67 B.R. 88, 91 (E.D.Wis. 1986).
Many decisions have also employed a more subjective "but for" analysis, which the Seventh Circuit describes as a "recurring guidepost" for determining materiality under Section 523(a)(2)(B). Matter of Harasymiw, 895 F.2d 1170, 1172 (7th Cir. 1990); Eogstad, supra, 779 F.2d at 375 (7th Cir. 1985); In re Bailey, 145 B.R. 919, 930 n. 7 (Bankr.N.D.Ill. 1992). Under that test, a creditor must establish that "but for" a material misrepresentation, it would not have extended money, property, services, or credit. In re Grossman, 174 B.R. 972, 984 (Bankr.N.D.Ill. 1994).
BANK STAR contends that the DEBTOR'S financial statement was false in that he overstated his assets by including real estate and vehicles which he did not own, understated his liabilities, and failed to inform BANK STAR of a delinquent balloon payment. BANK STAR also contends that the DEBTOR failed to advise it of subsequent transactions which adversely affected his financial position. The DEBTOR maintains that there were no material inaccuracies which affected BANK STAR'S decision to make the loan to the DEBTOR.
BANK STAR first points to the DEBTOR'S listing of an account receivable for $17,500.00, noting that the monies are owed by one of the DEBTOR'S relatives and that the DEBTOR never pursued collection. BANK STAR does not contend that the DEBTOR had no right to payment at the time the financial statement was submitted nor does it contend that the DEBTOR had no intention of pursuing his claim at that time. According to the DEBTOR'S testimony, the monies were owed by his uncle for custom farm hire performed by the DEBTOR. Because of a falling out between them, the DEBTOR never collected any monies on the account. BANK STAR failed to establish any specific facts which would support an inference that the account was uncollectible. Absent any proof that the collectability of the account receivable was doubtful at the time the financial statement was submitted, the DEBTOR properly included it as an asset.
Second, BANK STAR contends that the DEBTOR'S listing of the H. Johnson home with a value of $20,000.00 was false because he did not have title to the property. BANK STAR is correct that the interest of an optionee under an option contract is not an interest in land. See, Fried v. Band, 175 Ill. App.Sd 382, 530 N.E.2d 93, 125 Ill. Dec. 175 (Ill.App. 1 Dist. 1988). The DEBTOR testified that FSB had given him the go-ahead and on December 23, 1998, shortly after Ms. Johnson's death, pursuant to the option contract, he made a payment of $1,000.00 to exercise the option. The DEBTOR testified that FSB later declined to finance the purchase of the real estate, but that the transaction was still pending on the date of the financial statement. When an option contract is accepted and exercised according to its terms, it becomes a present contract for the sale of the property and equity regards the property as that of the vendee. Wolfram Partnership, Ltd. v. LaSalle Nat. Bank, 328 Ill. App.3d 207, 765 N.E.2d 1012, 262 Ill. Dec. 404 (Ill.App. 1 Dist. 2001). The DEBTOR listed only the value of the property above the option price, including that amount in the category of "current assets" rather than with the other tracts of real estate he owned which were listed as "fixed assets." While not technically correct, the DEBTOR'S inclusion of the property at that value did not render the financial statement false.
BANK STAR also contends that the inclusion on the financial statement of automobiles which were not titled in the DEBTOR'S name was a false statement. The DEBTOR listed autos totaling $101,000.00. Admitting that three of the vehicles were titled in the name of Julie Crabil, his former fiancee, the DEBTOR testified that when the relationship ended, the loans were refinanced and Julie voluntarily signed over the titles to the vehicles to the DEBTOR or to his corporation. The DEBTOR explained that the vehicles were placed in her name due to personal animosity of one of the directors of FSB toward the DEBTOR and his father. The DEBTOR'S testimony was uncontradicted. Because the DEBTOR had the equitable ownership of the vehicles, they were properly listed on his financial statement.
BANK STAR also contends that the DEBTOR'S inclusion of the value of the boat in this category was improper. The DEBTOR testified that while the boat's value of $43,000.00 was included in the asset value for automobiles, the mortgage against the boat was also included as part of the liabilities against those assets. Ms. Roberts testified that the DEBTOR advised her that the boat was titled in McNeil's name. The DEBTOR'S testimony that he had made all of the payments on the boat and was solely responsible for its upkeep was not contradicted. BANK STAR was well aware that the DEBTOR had an existing interest in the boat of substantial value. Absent a place on the financial statement to specifically include such an asset, the DEBTOR'S inclusion of the boat under "autos" was perhaps the best place to put it. The value of the DEBTOR'S interest in the boat was properly included as an asset on the financial statement.
Relying on the provision of the financial statement obligating the DEBTOR to "promptly notify Lender of any subsequent changes which would affect the accuracy of this Statement," BANK STAR contends that the DEBTOR failed to notify it of several transactions occurring between March 29, 1999, when BANK STAR received the financial statement, and April 17, 1999, when the loan was made. The DEBTOR admits that the cash he displayed to Ms. Roberts was received upon the sale of one of the vehicles listed on the financial statement. Ms. Roberts admitted that she did not ask, and the DEBTOR testified that he did not advise her of the source of the cash. BANK STAR cannot, however have it both ways. It cannot hold the DEBTOR to an exacting standard as to his assets as of March 1, 1999, accounting for each and every transaction which takes place after the date of the financial statement, yet blindly presuming when he appears in the office two weeks later with $7,000.00 to $12,000.00 cash that he must have hit the jackpot. A simple inquiry by Ms. Roberts would have disclosed the transaction. The Court agrees with the DEBTOR'S perception that the substitution of cash for the vehicle did not affect his net worth.
BANK STAR'S major focus is upon the additional liabilities it alleges the DEBTOR incurred after March 1, 1999. Relying on a letter from FSB to the DEBTOR'S attorney (Exhibit 37), BANK STAR contends that FSB made four new loans to the DEBTOR between March 9, 1999, through April 14, 1999, prior to the loan closing on April 17, 1999. Computer printouts attached to the letter show that the following loans were made on the dates shown:
Date Amount Notation
March 9, 1999 $34,000.00 "New Loan Proceeds"
March 19, 1999 20,010.00 "New Loan Proceeds"
March 24, 1999 26,386.00 "Principal Advance"
April 14, 1999 33,010.00 "New Loan Proceeds"
Matching up some of the loan proceeds to transfers by the DEBTOR to Harris Trust and Savings (Exhibit 49), BANK STAR asserts that the monies loaned were in fact "new" advances or loans and did not, as the DEBTOR testified at trial, pay off existing loans. The following transfers were made from the DEBTOR'S checking account at FSB to his commodity account:
Date Amount March 9, 1999 $8,500.00 March 12, 1999 12,000.00 March 19, 1999 20,000.00
The transfer slips show that the funds were to be credited to the DEBTOR'S commodity account at R.J. O'Brien.
Without any explanatory testimony by a representative of FSB, Exhibit 37 is ambiguous at best and incomprehensible at worst. It appears that the DEBTOR had at least four, and possibly more, outstanding loans with FSB at any given time, and that each loan was renewed at least once. The cover letter of Exhibit 37 lists nine different loans totaling $525,034.00. The DEBTOR testified that some of these, including the largest loan amount of $300,000.00, were consolidations or renewals of prior loans. BANK STAR chose not to call a witness from FSB to testify that the notes dated in March and April, 1999, represented new advances, not renewals. BANK STAR'S allegation that four new loans (not renewals) were made by FSB to the DEBTOR between March 9, 1999, and April 14, 1999, is not proved by Exhibit 37 or any other evidence presented by BANK STAR.
Exhibit 49 is not ambiguous, but gains BANK STAR no ground. It evidences several transfers from the DEBTOR'S FSB checking account to an account at Harris Trust and Savings Bank in the name of R.J. O'Brien for credit to "Bruce Tracy DBA Thunder Ridge Grain Farms." R.J. O'Brien is a futures brokerage firm at which the DEBTOR maintained a brokerage account. Exhibit 49 evidences transfers of funds by the DEBTOR into his personal brokerage account. There was no evidence introduced as to what the funds were used for. Nor was there any evidence introduced tracing those funds to new loans made by FSB. BANK STAR speculates that that was the case, but failed to sufficiently connect the dots. The DEBTOR'S checking account statements were not introduced at trial. Without those, the Court cannot conclude that the brokerage account deposits came from new FSB loans. No reasonable inference to that effect may be drawn from the evidence in the record. BANK STAR also speculates that the funds were used to pay indebtedness owed Harris Trust Savings Bank, pointing out that Harris Trust Savings Bank was not disclosed as a creditor on the DEBTOR'S financial statement. Here, again, such speculation is not supported by any evidence. The only conclusion that can be drawn from Exhibit 49 is that the DEBTOR transferred funds from his FSB checking account to his brokerage account, a transaction that would have had no effect on his net worth. The DEBTOR was not required to disclose those transfers to BANK STAR.
Even if the DEBTOR did obtain new credit from FSB in March and April, 1999, BANK STAR'S position that these new loans represented new liabilities incurred by the DEBTOR which are not reflected on his financial statement, was contradicted by the DEBTOR'S testimony. The DEBTOR testified that FSB covered both the final balloon payment due Met Life and a final lease payment of $26,734.00 on a 4WD tractor. In addition, FSB was loaning the DEBTOR operating funds for his 1999 farming operation. BANK STAR did not request any income/ expense information from the DEBTOR'S farming operations. To the extent that the loans were operating funds for the production of that year's crop, and presumably payable from the proceeds of sale of that crop, the inclusion of those obligations would have had no impact upon BANK STAR'S decision to grant the loan. Given the DEBTOR'S denial that he incurred new liabilities which were not reflected on his financial statement, BANK STAR'S proof falls short of that needed under Section 523(a)(2)(B).
BANK STAR also contends that the DEBTOR failed to inform it that a payment due Met Life in the amount of $56,500.00 was delinquent, owing and past due on the date the financial statement was signed. The reverse side of the financial statement lists the due date of the mortgage held by Met Life as "Feb. 99." At the time the DEBTOR submitted the financial statement, he was pursuing a refinancing of his farm debt through IFDA. FSB had accepted the DEBTOR'S plan to hedge his crops and to postpone the payment on his real estate loan from June to December. FSB had also advised the DEBTOR that it would provide a take-out loan for the Met Life mortgage, which it eventually did. The DEBTOR listed the debt as a long-term liability, based on the expectation that FSB would refinance the debt. At most, the DEBTOR'S characterization of the debt as of March 1, 1999, as "long term" was technically incorrect at that time but eventually turned out to be accurate because of FSB'S refinancing.
In addition to rebutting BANK STAR'S allegations of falsity, the DEBTOR presented substantial evidence corroborating the other information disclosed on the financial statement, including values for his machinery and equipment. Considering all of the evidence, the Court concludes that the financial statement was not materially false and that the DEBTOR did not intend to deceive BANK STAR. Rather, the statement presented a substantially accurate and truthful snapshot of the DEBTOR'S financial condition.
BANK STAR also failed to prove that it would not have made the loan but for the alleged misrepresentations. BANK STAR ranked the DEBTOR'S creditworthiness as "adequate," but the parameters of that ranking were not defined. The loan was made as a fully secured loan. In addition, BANK STAR'S loss derives directly from what happened to its collateral. The boat was newly painted and fully refurbished as of October, 2000, and, presumably, worth much more than the loan balance. The DEBTOR'S failure to pay COMPETITION MARINE its balance ultimately led to the improvements being stripped out of the boat by COMPETITION MARINE in 2001. The DEBTOR'S inability to pay COMPETITION MARINE resulted from his losses in the futures market and the farm foreclosure by FSB, events that occurred after the BANK STAR loan was made. Any connection between the financial statement and BANK STAR'S collateral loss is tenuous at best. B. Section 523(a)(2)(A).
BANK STAR next contends that its debt is excepted from dischargeability under Section 523(a)(2)(A). BANK STAR claims that the DEBTOR'S actions in procuring a return of $3,000.00 from COMPETITION MARINE constituted a misrepresentation because it violated the DEBTOR'S oral representation that he would comply with the conditions of the loan. Ordinarily, a fraudulent misrepresentation must relate to a past or existing fact, and may not be based upon a failure to perform a promise or agreement to something at some future time. Only where the debtor never intended to perform at the time he made the promise will the misstatement of intention constitute a fraudulent misrepresentation. In re Alicea, 230 B.R. 492 (Bankr.S.D.N.Y. 1999).
Subsections (A) and (B) of Section 523(a)(2)are mutually exclusive. In re Sacco, 270 B.R. 382, 385 (Bankr.W.D. Pa. 2001). BANK STAR'S allegations of nondischargeability underlying subsection (A) do not involve a statement by the DEBTOR regarding his financial condition, but a misrepresentation regarding the use of the funds.
Applicable here is the Seventh Circuit's holding in Matter of Poppas, 661 F.2d 82, 86 (7th Cir. 1981), that when a creditor loans the debtor money to be used for a specific purpose, and the debtor has no intention of using the money for that purpose, a misrepresentation exists upon which a debt can be determined to be nondischargeable. See, Matter of Sheridan, 57 F.3d 627 (7th Cir. 1995). The requisite intent can be inferred from proof that the debtor never put the money toward the purposes he had represented. Id. If the debtor misapplies only a portion of a loan, the amount of the loan not used in the required manner will be determined to be nondischargeable. In re Segala, 133 B.R. 261 (Bankr.D.Mass. 1991).
In the present case, BANK STAR issued a check payable to COMPETITION MARINE and the DEBTOR. The DEBTOR admits that he knew that the entire proceeds of the check payable to COMPETITION MARINE were to remain with that company. The DEBTOR delivered the check to COMPETITION MARINE on April 17, 1999, the same day the loan was closed and requested that he be issued a check back for $3,000.00. The proximity of those events demonstrates that he had no intention of using all of the funds to pay COMPETITION MARINE. The DEBTOR'S explanation that he used a significant portion of those funds to obtain insurance for the boat is unavailing. The funds were entrusted to the DEBTOR to pay COMPETITION MARINE and for no other purpose. Accordingly, this Court holds that DEBTOR'S receipt of the $3,000.00 from COMPETITION MARINE gives rise to a nondischargeable debt owed to BANK STAR in that amount. C. Section 523(a)(6).
Finally, BANK STAR contends that its debt is nondischargeable under Section 523(a)(6). BANK STAR asserts that the DEBTOR willfully and maliciously injured it by taking the $3,000.00 from funds intended to be paid solely to COMPETITION MARINE and by keeping the proceeds from the sale of the original engines. Having determined that the debt for the $3,000.00 is nondischargeable under Section 523(a)(2)(A), it is not necessary to address the dischargeability of that debt under this provision.
Section 523(a)(6) provides that a debtor cannot discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). To establish nondischargeability under this provision, the creditor must prove that (1) the debtor caused an injury; (2) the debtor's actions were malicious; and (3) the debtor's actions were willful. In general, a conversion of a creditor's collateral will not result in a nondischargeable debt unless the creditor shows that the debtor converted the collateral 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. In re Kidd, 219 B.R. 278, 285 (Bankr.D.Mont. 1998). Essential to a determination of nondischargeablility is that the debtor used the creditor's collateral improperly. See, In re Russell, 262 B.R. 449, 455 (Bankr.N.D.Ind. 2001); In re Lock, 2002 WL 32001417 (Bankr.C.D.Ill. 2002).
At the time BANK STAR granted the loan, the boat was equipped with two 454 cubic inch, 365 horsepower engines. About half of the loan proceeds were designated to replace those engines with more powerful ones. When BANK STAR prepared the note, it listed the new engines which the DEBTOR intended to purchase from COMPETITION MARINE. Ms. Roberts admitted that she did not give any direction to the DEBTOR with respect to the use of the proceeds from the sale of the old engines. She knew that the total cost of refurbishing the boat exceeded the amount of the loan proceeds and had inquired of the DEBTOR whether he had the funds necessary to have the work completed. The DEBTOR testified that he sold the old engines for $5,300.00 to $5,600.00 and that he held the proceeds back to do some of the work on the boat. The DEBTOR paid Pro Body $7,900.00 for painting the boat and made a deposit of $1,500.00 in May, 1999, for work on the interior of the boat.
Given BANK STAR'S failure to restrict the DEBTOR'S use of the proceeds from the sale of the old engines, his expenditure of those funds to make other improvements to the boat, as contemplated by the parties when the loan was made, does not constitute a willful and malicious injury under Section523(a)(6) of the Bankruptcy Code. The DEBTOR did not intend to cause any harm to BANK STAR. To the contrary, the DEBTOR'S use of the funds only served to enhance the value of its collateral.
Apart from the limited amount of BANK STAR'S debt determined to be dischargeable under Section 523(a)(2)(A), the loss suffered by BANK STAR resulted from a series of unfortunate events, not all of which may be pinned on the DEBTOR. By the time the boat had been painted and COMPETITION MARINE got around to and completed its work, the DEBTOR'S financial circumstances had taken several turns for the worse. Because the DEBTOR was unable to pay the balance due, the boat remained out of doors, unprotected, save for a tarp protecting the new engines. But the most that can be said about the DEBTOR'S responsibility in this regard is that he was negligent in failing to ensure that COMPETITION MARINE, at all times, protected the boat from deterioration due to weather. There was no evidence presented, and it is contrary to logic, that the DEBTOR intended to have the boat's condition deteriorate and its value depreciate, so that he would be left with a larger unsecured deficiency balance. The evidence indicated that the DEBTOR failed to pay COMPETITION MARINE its balance because he did not have the funds, not because he intended to harm BANK STAR.
BANK STAR is entitled to prejudgment interest on the nondischargeable amount of $3,000.00 at its contract rate of 12.56%. The interest accrues from April 17, 1999, the date of misappropriation of the funds, to September 15, 2003, the date of judgment, in the total amount of $1,663.08.
BANK STAR also requests reimbursement of its attorney fees as provided by its Note. Prior to trial, BANK STAR had already incurred in excess of $20,000.00 in attorney fees. The most important factor in determining the reasonableness of an attorney fee award is the result obtained. Johnson v. Kakvand, 192 F.3d 656, 662 (7th Cir. 1999). Given that BANK STAR has obtained a determination that only $3,000.00 of its debt is nondischargeable, plus interest of $1,659.98, the Court finds that $2,330.00, an amount representing 50% of that total, is a reasonable attorney fee award in light of the result.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that a determination of nondischargeability is granted in FAVOR of BANK STAR ONE in the amount of $3,000.00, plus interest and attorney fees, and DENIED as to the balance of the indebtedness; Judgment is hereby entered in FAVOR of BANK STAR ONE and AGAINST BRUCE A. TRACY in the amount of $3,000.00, plus prejudgment interest in the amount of $1,663.08, plus attorney fees of $2,330.00.