Opinion
Bankruptcy No. 13 B 02610 Adversary No. 13 A 00860
01-31-2017
IN RE: SUSAN M. MORONI, Debtor. FORD MOTOR CREDIT COMPANY LLC, Plaintiff, v. SUSAN M. MORONI, Defendant.
Chapter 7
ORDER FINDING DEBT NON-DISCHARGEABLE UNDER 11 U.S.C. § 523(a)(4) and (a)(6)
I. INTRODUCTION
This matter is before the Court following a trial on the complaints filed by the plaintiff, Ford Motor Credit Company LLC, against John F. Moroni and Susan M. Moroni for a determination of the dischargeability of a debt under 11 U.S.C. § 523(a)(4) and (a)(6). For the reasons set forth herein, the Court finds that the debt owed by John F. Moroni and Susan M. Moroni to Ford Motor Credit Company LLC is non-dischargeable under § 523(a)(4) and (a)(6). However, the Court declines to enter a money judgment in favor of Ford Motor Credit Company LLC for the reasons set forth below.
II. FACTS AND BACKGROUND
The following facts are taken from the Court's docket, the joint pretrial statements, and the testimony and evidence presented and admitted at the trial. A. John F. Moroni and Susan M. Moroni (the "Debtors") operated three car dealerships: Melrose Lincoln-Mercury ("Melrose"), Elmhurst Lincoln-Mercury, Inc. ("Elmhurst"), and Elm Ford, Inc. ("Elm") (collectively, the "Dealerships"). Melrose and Elmhurst were jointly owned by the Debtors. Elm was owned solely by Ms. Moroni, who was also the president of the company. Mr. Moroni was listed as vice president of Elm on the sales and service agreement between Elm and FMCC (FMCC Ex. No. 27) and had authority to transact business at Elm including purchasing cars. The Debtors actively controlled the operations of each of the Dealerships. B. Ford Motor Credit Company LLC ("FMCC") entered into wholesale automotive financing and security agreements with each Dealership. Under each agreement, FMCC agreed to provide financing to the Dealerships for the purchase of vehicles (the "Wholesale Agreements"). (FMCC Ex. Nos. 1, 4, & 8.) Under the Wholesale Agreements, FMCC received a security interest in all of the vehicles acquired by the Dealerships, including the proceeds of any sale or disposition thereof. (Id.) In addition, the Dealerships executed security agreements granting FMCC a security interest in the Dealerships' tangible and intangible property located at the Dealerships, including machinery, supplies, and other equipment. (FMCC Ex. Nos. 2, 5, & 7.) These floorplan financing arrangements required the Dealerships to promptly remit to FMCC any and all proceeds of any sale, lease, or other disposition of the vehicles. C. The Debtors and David Mears, Ms. Moroni's father, executed guarantees agreeing to pay all of Melrose's obligations to FMCC in the event of Melrose's default or failure to pay any of its obligations to FMCC. (FMCC Ex. No. 3.) No evidence was presented identifying guarantors, if any, of Elmhurst's debts to FMCC. However, during closing arguments, Mr. Moroni stated that the only guarantor for Elmhurst was Mr. Mears. D. Ms. Moroni also executed a guaranty with respect to the obligations of Elm under the Wholesale Agreement. (FMCC Ex. No. 6.) Although the Elm guaranty also lists Mr. Moroni as a guarantor, the Debtors testified that Mr. Moroni did not sign this document and stated that his signature must have been affixed on that document by FMCC. The Debtors did not dispute, however, the authenticity of his signature on the guaranty for the master loan and security agreement between FMCC and Elm dated October 30, 2002. (FMCC Ex. No. 37.) According to Joe Susic, the regional manager for FMCC, FMCC requires the same guarantors for capital loans and wholesale agreements. E. The Court is persuaded by Mr. Susic's unrebutted testimony that FMCC requires that the guarantors for the dealerships' capital loan also guarantee the dealerships' wholesale agreements. The documentary evidence presented at trial—Mr. Moroni's signature on both the guaranties of the capital loan and the Wholesale Agreement—is consistent with that policy. Thus, the Court finds that Mr. Moroni was a guarantor of Elm's obligations under the Wholesale Agreement. F. The Dealerships defaulted on the Wholesale Agreements by, among other things, selling vehicles and failing to repay FMCC for the loans to acquire those vehicles. (Pretrial Stmt. Stip. Facts Nos. 8, 15, & 24.) Such sales are referred to in the industry as vehicles which have been "sold out of trust." (Id. at No. 8.) G. On March 13, 2007, FMCC sent the Debtors, as guarantors of all obligations owed by Melrose to FMCC, a letter demanding payment of $413,020.44 owed by Melrose. (FMCC Ex. No. 19.) Beginning in March 2007 and through July 2008, FMCC sent the Debtors, as guarantors of all obligations owed by Elm to FMCC, letters demanding payment for the debt owed by Elm. (FMCC Ex. No. 20.) These letters contained a list of vehicles that were sold out of trust. (Id.) FMCC also sent numerous demand letters to both Elmhurst and Mr. Mears between January 2007 and July 2008 for payment of the debt owed by Elmhurst to FMCC. (FMCC Ex. No. 21.) These letters contained a list of vehicles that were sold out of trust. (Id.) H. On September 9, 2008, FMCC filed a replevin action against Elmhurst seeking to recover its collateral under the Wholesale Agreement with Elmhurst. (Pretrial Stmt. Stip. Fact No. 26.) On September 15, 2008, an order of replevin was entered in favor of FMCC. (FMCC Ex. No. 9.) In defiance of the order of replevin, the Debtors conducted an auction of the assets of Elmhurst on July 22, 2010 without the knowledge or consent of FMCC. I. Similarly, on September 18, 2008, FMCC brought a replevin action against Elm to recover its security interest. (Pretrial Stmt. Stip. Fact No. 16.) On September 19, 2008, an order of replevin was entered in favor of FMCC. (FMCC Ex. No. 39.) FMCC took possession of vehicles, machines, and equipment to which it held a security interest and subsequently liquidated those items. J. In addition to the Wholesale Agreements, FMCC and Elmhurst entered into a Red Carpet Lease Agreement. (FMCC Ex. Nos. 10, 11, & 12.) Under this agreement, Elmhurst leased vehicles to customers for a certain term and assigned the leases to FMCC. (Pretrial Stmt. Stip. Fact No. 29.) These vehicles were purchased by and titled in FMCC's name. (Id.) Despite FMCC's ownership of these vehicles, Elmhurst sold thirteen of these leased vehicles after FMCC had commenced the replevin action against Elmhurst. Once it discovered these sales of its cars by Elmhurst, FMCC sued Elmhurst and the Debtors in state court. (Id. at No. 30.) On November 25, 2009, FMCC obtained a temporary restraining order against Elmhurst precluding Elmhurst from retaining, transferring, or selling any leased vehicles that were returned to the dealership. (FMCC Ex. No. 14.) On December 17, 2009, the state court granted FMCC a preliminary injunction against Elmhurst for the same relief contained in the temporary restraining order. (FMCC Ex. No. 15.) K. In July 2009, Elmhurst received a $120,000 rebate check from Ford Motor Company. As discussed below, Ford Motor Company sent this check in error. FMCC subsequently demanded its return. The Debtors refused this demand and kept these funds. L. On March 19, 2012, a judgment was entered by a state court against Ms. Moroni and in favor of FMCC in the amount of $414,777.34. (FMCC Ex. No. 17.) However, no evidence was presented regarding the factual or legal bases for this judgment. M. FMCC commenced separate adversary proceedings against the Debtors on June 13, 2013. FMCC asserts that the Debtors owe it $2,797,768.09. The complaints set forth the same five counts against each Debtor. The first four counts allege that the debt owed to FMCC should be found non-dischargeable under 11 U.S.C. § 523(a)(4). N. Count I of each complaint alleges that the Debtors committed defalcation while acting in a fiduciary capacity with respect to Melrose and Elm. Count II of each complaint alleges that the Debtors committed defalcation while acting in a fiduciary capacity regarding Elmhurst. These two counts were not addressed by FMCC in the pretrial statements. Nor, at trial, did FMCC argue that the Debtors committed defalcation while acting in a fiduciary capacity as to the Dealerships. Accordingly, because FMCC failed to present any evidence or argument in support of Counts I and II of its complaints, the Court finds that these claims have been waived and judgment will be entered in favor of the Debtors on Counts I and II of the complaints. See Goodpaster v. City of Indianapolis, 736 F.3d 1060, 1075 (7th Cir. 2013) (affirming the district court's dismissal of three claims as waived because the party "failed to present evidence or argument in favor of them at the evidentiary hearing"). O. Count III of each complaint alleges that the Debtors committed embezzlement at Melrose and Elm, and Count IV alleges that they committed embezzlement at Elmhurst. P. The last count of each complaint, Count V, seeks a determination that the debt be found non-dischargeable under 11 U.S.C. § 523(a)(6) because the Debtors willfully and maliciously converted FMCC's property. Q. On December 7 and 8, 2016, the Court held a trial on both complaints.
A dealer sells a vehicle out of trust when he or she sells it and then fails to remit the proceeds to the lender under the floor plan financing agreement. See Auto. Fin. Corp. v. Smart Auto Ctr., Inc., 334 F.3d 685, 687 (7th Cir. 2003). --------
III. DISCUSSION
A. The discharge provided by the Bankruptcy Code is meant to give debtors a financial "fresh start." In re Chambers, 348 F.3d 650, 653 (7th Cir. 2003); Vill. of San Jose v. McWilliams, 284 F.3d 785, 790 (7th Cir. 2002). This privilege is reserved for the "honest but unfortunate debtor." Grogan v. Garner, 498 U.S. 279, 286-87 (1991). B. The party seeking to establish an exception to the discharge of a debt bears the burden of proving each element by a preponderance of the evidence. Id. at 291. C. Exceptions to the discharge of a debt are to be construed strictly against a creditor and liberally in favor of a debtor. In re Morris, 223 F.3d 548, 552 (7th Cir. 2000).
1. Counts III and IV of the Complaints —11 U .S.C. § 523(a)(4) A. Counts III and IV of each complaint allege that, pursuant to the Wholesale Agreements, the Dealerships were required to hold the sale proceeds from the sale of all vehicles in trust for the benefit of FMCC, and that the Debtors misappropriated the sales proceeds for their personal use. FMCC seeks a finding that the debt owed to it is non-dischargeable under the embezzlement prong of 11 U.S.C. § 523(a)(4). B. What constitutes embezzlement under § 523(a)(4) is a matter of federal law. Falk Eng'g & Surveying, Inc. v. Luedtke (In re Luedtke), 429 B.R. 241, 252 (Bankr. N.D. Ind. 2010). C. Embezzlement is the "fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." In re Weber, 892 F.2d 534, 538 (7th Cir. 1989). To prove embezzlement a creditor must show that the debtor (1) appropriated the property for his own benefit; and (2) that he did so with fraudulent intent or deceit. Id. at 538-39 (internal quotation omitted). D. The fraud associated with embezzlement is a positive fraud involving moral turpitude or intentional wrong. Bullock v. BankChampaign, N.A., 133 S.Ct. 1754, 1759 (2013). The wrongdoing must be "subjective, deliberate wrongdoing." Follett Higher Educ. Grp. v. Berman (In re Berman), 629 F.3d 761, 765 n.3 (7th Cir. 2011). Implied or constructive fraud is not enough. Bullock, 133 S.Ct. at 1759. E. Fraudulent intent "'is knowledge that the use is devoid of authorization. . . .'" FNA Group, Inc. v. Arvanitis (In re Arvanitis), 523 B.R. 633, 639 (Bankr. N.D. Ill. 2015) (quoting Sherman v. Potapov (In re Sherman), 603 F.3d 11, 13 (1st Cir. 2010)). F. A fiduciary or trust relationship need not be established in order to find a debt non-dischargeable by an act of embezzlement. Iwaszczenko v. Neale (In re Neale), 440 B.R. 510, 520 (Bankr. W.D. Wis. 2010); Moore v. Hermes (In re Hermes), 340 B.R. 369, 373 (Bankr. C.D. Ill. 2006). G. Numerous courts have held that a debtor commits embezzlement under § 523(a)(4) when the debtor sells mortgaged property and fails to remit the proceeds to the secured creditor or consignor. Jones v. Hall (In re Hall), 295 B.R. 877, 882 (Bankr. W.D. Ark. 2003) (citing cases). Particularly in the context of out of trust sales, courts have determined that such conduct by debtors constitutes embezzlement and conversion warranting excepting such debt from discharge. See, e.g., Chrysler Credit Corp. v. Rebhan (In re Rebhan), 45 B.R. 609, 612-14 (Bankr. S.D. Fla. 1985), aff'd, No. 85-2262-CIV-JCP, slip op. (S.D. Fla.), aff'd, 842 F.2d 1257 (11th Cir. 1988). H. Here, the Debtors do not dispute that they sold vehicles out of trust at all three Dealerships. The Debtors were aware that they had an affirmative duty under the Wholesale Agreements to pay the proceeds of the sale of the vehicles to FMCC. I. However, the Debtors deny that they appropriated any of those proceeds for their personal benefit. Rather, they testified that they used those funds, among other things, to pay salaries to their employees and to pay outstanding taxes, title, and licensing fees to the State of Illinois. J. Some courts have held that "a debtor did not have the necessary fraudulent intent when the debtor used money in violation of contractual obligations [but did so] with the intent to keep his company afloat so that it could eventually pay all of its debts." Sherman v. Potapov, 403 B.R. 151, 157 (D. Mass. 2009) (citing cases), aff'd, Sherman v. Potapov (In re Sherman), 603 F.3d 11 (1st Cir. 2010). Another line of cases runs in the opposite direction, holding that even where a debtor's "'intent was to repay [the lender] from future profits from the continued operation of the [business] it is no defense to the offense of embezzlement.'" Id. at 158 (quoting Nat'l Bank of Commerce of Pine Bluff v. Hoffman (In re Hoffman), 70 B.R. 155, 163-64 (Bankr. W.D. Ark. 1986)). K. The Court will follow the cases which hold that a debtor's failure to remit proceeds from the sale of collateral to the secured creditor in an effort to keep the debtor's business afloat is not a valid defense to a claim of embezzlement. "The essence of the common law concept [of embezzlement] is knowing use of entrusted property for an unauthorized purpose; there is no exception for financial joy riding (unauthorized 'borrowing' with intent to repay is still embezzlement, the borrowing being unauthorized). . . ." Sherman, 603 F.3d at 14 (citation omitted); see also Joyce v. Wish (In re Wish), 472 B.R. 763, 782 (Bankr N.D. Ill. 2012) (quoting Sherman). L. Here, the Debtors repeatedly sold vehicles out of trust and did not remit the proceeds to FMCC. The Debtors did this knowingly and without authorization from FMCC. M. The Debtors were directly involved with the management of the Dealerships, were directly involved in making the out-of-trust sales, and were directly involved in efforts to conceal those sales from FMCC. The Debtors were both actively managing the money generated by the Dealerships and made decisions regarding which expenses would be paid and which would not be paid. Thus, Mr. and Ms. Moroni are personally liable for damages to FMCC by virtue of the out-of-trust sales because they were both responsible for the day-to-day operations of the Dealerships and are thus liable for the Dealerships' failure to fulfill the obligations under the Wholesale Agreements. See Champion Home Builders Co. v. Tarrant (In re Tarrant), 84 B.R. 831, 833 (Bankr. M.D. Fla. 1988). N. Even though the Debtors' taking of FMCC's property knowingly and without authorization by itself satisfies the fraudulent intent element of embezzlement, the Court will discuss additional evidence of the Debtors' fraudulent intent as well as the Debtors' defense that they were using the proceeds of FMCC's collateral to keep their business afloat.
a) Additional evidence of the Debtors' fraudulent intent
i. Active concealment of sales out of trust A. The Debtors' intent to deprive FMCC of those proceeds is inferable from the facts and circumstances of their appropriation. After the state court orders were entered against Elmhurst, the Debtors continued to sell vehicles and keep the proceeds instead of turning over the vehicles or proceeds to FMCC. B. The Debtors attempted to hide the out-of-trust sales from FMCC. Ms. Laura Gersch, who was the office manager at Elmhurst from January 2008 through March 2010 with the responsibility for paying all the traditional expenses such as gas, electric, and telephone, testified that none of these checks would have been for traditional expenses of Elmhurst. She testified that when FMCC conducted audits at Elmhurst, per Mr. Moroni's instructions, she changed the date of the sale on the paperwork to make it appear that the vehicles had been sold recently. She stated that it was a general practice at Elmhurst to sell vehicles out of trust by not remitting payment to FMCC within five days of the sale. The Court finds Ms. Gersch's testimony regarding Mr. Moroni's attempts to hide the out-of-trust sales from FMCC by changing the dates of vehicle sales during FMCC's audits to be credible and uncontroverted.
ii. Contacting customers to return leased vehicles directly to Elmhurst C. Ms. Gersch also testified regarding the manner in which Mr. Moroni managed the leased vehicle program at Elmhurst under which the customers would either buy or return their vehicles at the end of the lease term. She stated that Mr. Moroni called customers and asked them to return their leased vehicles directly to Elmhurst, even though those vehicles could be returned to other dealerships, Similarly, Edward J. Buivis III, who worked in the body shop at Elmhurst from March 1991 to March 2010, testified that in late 2009 and early 2010 he observed JD, a salesman at Elmhurst, calling customers for the return of vehicles at the direction of Mr. Moroni. He stated that JD made notations of his phone calls to customers on a list contained in Ex. No. 25. (FMCC Ex. No. 25.) Mr. Moroni denied that he contacted customers to request that they return leased vehicles directly to Elmhurst. Mr. Moroni testified that he notified Joe Susic at FMCC on many occasions when payment from the sale of leased vehicles came in. D. When dealing with conflicting testimony of witnesses, a court should determine and favor the testimony which was coherent, facially plausible, and uncontradicted by documentary or objective evidence. In re Pearson Bros. Co., 787 F.2d 1157, 1162 (7th Cir. 1986). The Court finds that the Debtor's testimony was not credible. His testimony was vague and insufficient to overcome the detailed testimony of Ms. Gersch and Mr. Buivis. Further, the Debtor's testimony was self-serving while Ms. Gersch and Mr. Buivis were disinterested parties. E. According to Ms. Gersch, the customers who purchased vehicles at the end of the lease term made checks payable to Elmhurst. She testified that the checks contained in Exhibit No. 26 were written by customers to Elmhurst for the purchase of the leased vehicles. (FMCC Ex. No. 26.) Jack Hanson, Jr., the service director at Elmhurst, also testified that leased vehicles were returned to Elmhurst and sold. He stated that he received numerous complaints from customers who purchased their leased vehicles but did not receive title to those vehicles. F. Mr. Moroni admitted that Elmhurst sold thirteen leased vehicles and then failed to remit the sale proceeds to FMCC. (FMCC Ex. No. 24, p. 15, ¶ 75.) FMCC subsequently obtained state court orders which specifically precluded Elmhurst and the Debtors from selling leased vehicles titled in the name of FMCC that were returned to Elmhurst. (FMCC Ex. Nos. 14 & 15.) Mr. Moroni admitted that he continued to sell vehicles and did not remit the proceeds to FMCC. (FMCC Ex. No. 24, pp. 16-17, ¶¶ 77 & 79-83.) Instead, the funds were deposited into Elmhurst's bank account in violation of the state court orders. (Id. at p. 17, ¶ 83.) The Court finds that the Debtors' failure to remit proceeds to FMCC from the sale of leased vehicles that were returned by customers constitutes an intent to defraud FMCC.
iii. Concealment of the RV G. An order of replevin was entered on March 2, 2009 against Elm ordering seizure of a recreational vehicle with a VIN ending in 2255 (the "RV"). (FMCC Ex. No. 40.) Mr. Susic testified that this RV was never seized by FMCC. Both Mr. Buivis and Mr. Hanson testified that they saw the RV at Westgate Lincoln Mercury, a dealership that was owned by Mr. Moroni but that was no longer operating. According to Mr. Hanson, a janitor named Tom at Westgate advised him to pretend that "you didn't see that here." H. Mr. Moroni stated that he purchased the RV from an employee and then asked FMCC if he could place the vehicle on the Elm floor line. FMCC agreed and gave Elm funds for the RV. Mr. Moroni's testimony about the disposition of the RV was not clear. He testified that he wholesaled the RV to a dealer and paid it off. However, he did not produce any proof that FMCC was paid for the RV. Ms. Moroni also testified that the RV was paid off at the request of FMCC through Susan DiBartolo. However, the state court order is evidence that as of March 2009, the Debtors were required to turn over the RV to FMCC. Mr. Moroni's testimony is therefore inconsistent with the state court order. I. The Court finds that based on the testimony of Mr. Hanson and Mr. Buivis, Mr. Moroni placed the RV at a dealership that was no longer operational in an attempt to conceal the RV from FMCC. Despite the order of replevin, the RV was never turned over to FMCC. These actions show that the Debtors acted with an intent to defraud FMCC of its property.
iv. Failure to remit a $120,000 rebate check to FMCC J. Ford Motor Company sent Elmhurst a rebate check for $120,000. Ms. Moroni testified that after the rebate check was received, she telephoned Ford Motor Company and was told that it was okay to cash the check. She stated that she deposited those funds in Elmhurst's account. According to Mr. Susic, if a dealership is in default or makes sales out of trust, FMCC gives a document to Ford Motor Company which instructs it to pay FMCC instead of the dealership. He stated that because Elmhurst was selling vehicles out of trust, FMCC instructed Ford Motor Company to send any funds due Elmhurst to it. He stated that Ford Motor Company sent the rebate check to Elmhurst in error. Mr. Susic met with Mr. Moroni and asked him to return the rebate check to FMCC. According to Mr. Susic, Mr. Moroni simply responded, "thank you," but refused to return the funds to FMCC. K. According to Mr. Moroni, Elmhurst returned the funds to FMCC in the form of a $120,000 deduction in connection with a buy/sell agreement between, among others, Elmhurst, the Debtors, and Edward F. Napleton. (FMCC Ex. No. 18.) Pursuant to that agreement, Mr. Napleton was to purchase Elmhurst for the sum of $100,000 and pay a total of $400,000 to the Debtors for their services as consultants. (Id. at p. 5.) The parties do not dispute that Ford Motor Company, the parent of FMCC, had a right of first refusal whenever there was a sale of a dealership, and if Ford Motor Company did not approve the sale to a third party, it would be required to purchase the dealership itself. Ford Motor Company exercised its right of first refusal and the sale of Elmhurst did not go through to Mr. Napleton. L. Mr. Moroni testified that "Ford" received a deduction in connection with the right of first refusal exercised by Ford Motor Company. Mr. Moroni's testimony on this point was vague and seemed to imply that FMCC, not Ford Motor Company, received the $120,000 through this transaction. However, the right of first refusal concerns the relationship between Elmhurst and Ford Motor Company, not Elmhurst and FMCC. Thus, it is unclear how FMCC could have received a $120,000 deduction—if such a deduction did occur, it would have been in favor of Ford Motor Company, not FMCC. Indeed, Mr. Susic testified that FMCC never received the $120,000 from this transaction. M. Because the Debtors failed to introduce any evidence to support their claim that FMCC received the $120,000 in the form of a deduction, the Court is unable to conclude that FMCC did in fact receive these funds from the Debtors in any form. Moreover, even if the Debtors had been able to prove that FMCC took a $120,000 deduction, that would not have excused the Debtors from their obligation to turn over the rebate check to FMCC upon its receipt. Accordingly, the Court finds that FMCC did not receive $120,000 from the Debtors. N. Instead, the Court finds that the Debtors appropriated the $120,000 rebate check for their own benefit and, in doing so, acted with intent to defraud FMCC. During closing arguments, Mr. Moroni stated that the Debtors' withdrawal of $105,000 from the Elmhurst bank account in 2010 was part of the proceeds of the $120,000 rebate check. Significantly, the Debtors failed to explain how they used these funds. This failure is another indication that they did not intend to repay FMCC for the vehicles that were sold out of trust. O. In an attempt to show that the Debtors intended to repay FMCC, Ms. Moroni testified that the Debtors paid FMCC $20,000 from their daughter's settlement of a lawsuit. She did not state when this payment was made. Even if the Court were to accept her testimony that the Debtors did in fact pay $20,000 to FMCC, the Debtors' acceptance of the $120,000 rebate check that was required to be turned over to FMCC shows a lack of intent to repay FMCC.
v. Unauthorized sale of assets at an auction P. Further evidence of the Debtors' intent to defraud FMCC can be inferred from the Debtors' unauthorized sale of certain property of the Dealerships at an auction on July 22, 2010 without the permission or knowledge of FMCC. (See FMCC Ex. No. 22.) FMCC learned of the auction when it was notified by the mechanics' union. After intervening in a lawsuit filed by the mechanics' union against Elmhurst and the Debtors, FMCC was awarded $41,998 from the gross proceeds of that auction. (FMCC Ex. No. 41.) Q. The Debtors' actions demonstrate an intent to keep the proceeds of FMCC's collateral without paying FMCC the debt that was owed to it and to try to hide that fact from FMCC. Such conduct constitutes an intent to defraud. R. Based upon the foregoing, the Court finds that FMCC has established the elements of embezzlement.
b) The Debtors' defense to out-of-trust sales A. Even if the Court were to consider the Debtors' argument that they kept funds held in trust for FMCC solely for the purpose of keeping the Dealerships in operation, the facts established at trial demonstrate that the Debtors used those proceeds for their own benefit and did not intend to repay FMCC. B. For example, Ms. Moroni testified that she did not use FMCC's funds for personal use but instead used the money for business expenses. But FMCC introduced into evidence Exhibit No. 38, which consisted of copies of checks written on Elmhurst's business account, many of which were made payable to "Cash." Ms. Moroni testified that either she or Mr. Moroni would write checks made payable to cash and then decide which expenses to pay. According to Ms. Moroni, she would take the cash to the bank and obtain a certified check to pay for licenses, titles, and taxes for the vehicles that were sold. She also stated that some of the cash was used to pay the employees. However, Ms. Moroni did not identify the employees who were paid. Both Ms. Gersch and Mr. Buivis testified that during the period of January through March 2010, they were not paid for their services. C. The Debtors did not produce any documentation to show that they paid any business expenses from the cash withdrawals that were made from Elmhurst's bank account. They also did not adequately show that the funds which were unremitted to FMCC were reinvested in the business for traditional business purposes and used to pay normal business debts. Among the checks made payable to cash are three checks issued in March 2010 for the following sums: $5,550, $6,500, and $105,000 which were written by Mr. Moroni. (Id. at MAP 00471, 00472, & 00473) The check for $105,000 was endorsed by Ms. Moroni. (Id. at MAP 00473.) Neither of the Debtors explained the purpose for which these funds were used. D. According to Ms. Gersch, the largest monthly utility expense was electricity, with average payments totaling several hundred dollars. Ms. Gersch wrote checks payable to "cash" on the Elmhurst bank account in the following amounts between January and March 2010: $100; $238; $250; $100; $160; $150; $303.96; $200; and $226.80. (See FMCC Ex. No. 38.) She stated that she believed these checks were written for incidental business expenses such as utility bills and gas for vehicles. Significantly, however, Ms. Gersch testified that during the entire time she was employed at Elmhurst she saw non-business related expenses being paid from Elmhurst's account, including payments made to L.A. Tan, Tiffany, a sporting goods store, and for the purchase of sporting event tickets. Ms. Moroni testified that none of the checks contained in Exhibit No. 38 were written for such purchases. However, she did not deny that during the period the vehicles were sold out of trust, she and Mr. Moroni did pay for non-business personal expenses out of the Elmhurst business account. The checks contained in Exhibit No. 38 are limited to a three-month time period of January through March 2010, which does not include the entire time period during which the Debtors sold vehicles out of trust. In light of Ms. Gersch's testimony that the Debtors wrote checks to stores for personal expenses and Ms. Moroni's failure to deny making those payments during the time that the vehicles were sold out of trust, the Court finds Ms. Gersch's testimony to be credible and uncontroverted. E. The Court is particularly troubled by the $105,000 withdrawal from the Elmhurst account by Ms. Moroni via check made payable to "Cash" dated March 26, 2010. (FMCC Ex. No. 38, MAP 00473.) The Debtors failed to produce any evidence showing how this sizable withdrawal was spent. In addition, the Debtors did not account for over $12,000 that was withdrawn from the Elmhurst bank account on March 27, 2010. (Id. at MAP 00471 & 00472.) Mr. Moroni testified that from January through March 2010, Elmhurst was winding down, there was no property at the dealership to speak of, and there was only a skeleton crew of employees. Thus, it is unreasonable to assume that these withdrawals were used primarily to keep Elmhurst running. These admissions further support Ms. Gersch's testimony that the Debtors were utilizing proceeds from FMCC's collateral for their personal expenses. F. The Court therefore finds that the Debtors failed to show that the funds from out-of-trust sales were used to keep their business operating in order to eventually repay FMCC. Rather, based on the totality of the circumstances, the Court finds that the Debtors used the proceeds from the out-of-trust sales for their own personal gain. G. Thus, the Court finds that the Debtors failed to show that they used FMCC's property with an intent to repay FMCC from the future profits from the continued operation of their business. H. In sum, the Court finds that FMCC has established by a preponderance of the evidence that the debt owed to it by the Debtors with respect to the out-of-trust sales was incurred by embezzlement and is non-dischargeable under § 523(a)(4). I. The Court will address the specific amount of the debt that is non-dischargeable in a separate discussion below.
2. Count V of the Complaints —11 U .S.C. § 523(a)(6) A. Finally, Count V of the complaints is brought under 11 U.S.C. § 523(a)(6). FMCC alleges that the Debtors' sale of vehicles out of trust (i.e. by failing to remit the sales proceeds to FMCC under the Wholesale Agreements) constitutes conversion of FMCC's property. In addition, FMCC alleges that the Debtors concealed and prevented FMCC from taking possession of a certain Navigator vehicle (the "Navigator") in which FMCC had a security interest. B. Section 523(a)(6) excepts from discharge a debtor's debt if he willfully and maliciously injured the creditor or the creditor's property. Gambino v. Koonce, 757 F.3d 604, 607 (7th Cir. 2014). C. For a finding of non-dischargeability of a debt under § 523(a)(6), a creditor must prove three elements by a preponderance of the evidence: (1) the debtor caused an injury to its person or property interest; (2) the debtor's actions were willful; and (3) the debtor's actions were malicious. First Weber Grp., Inc. v. Horsfall, 738 F.3d 767, 774 (7th Cir. 2013); Zamora v. Jacobs (In re Jacobs), 448 B.R. 453, 480 (Bankr. N.D. Ill. 2011). D. The Seventh Circuit has recently stated that a willful and malicious injury "is one that the injurer inflicted knowing he had no legal justification and either desiring to inflict the injury or knowing it was highly likely to result from his act." Jendusa-Nicolai v. Larsen, 677 F.3d 320, 324 (7th Cir. 2012). E. Willfulness requires "'a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.'" Gerard v. Gerard, 780 F.3d 806, 811 (7th Cir 2015) (quoting Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998)). F. Willfulness is determined by an objective standard: "it can be found either if the debtor's motive was to inflict the injury, or the debtor's act was substantially certain to result in injury." Id. (internal quotation omitted). G. As to the malice element, conduct is "malicious" if it is taken "in conscious disregard of one's duties or without just cause or excuse. . . ." In re Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994). H. The test for malice under § 523(a)(6) is (1) a wrongful act, (2) done intentionally, (3) which causes injury to the creditor, and (4) is done without just cause or excuse. Park Nat'l Bank & Trust of Chi. v. Paul (In re Paul), 266 B.R. 686, 696 (Bankr. N.D. Ill. 2001). I. Section 523(a)(6) mirrors the definition of an intentional tort, which requires the actor to intend the consequences of the act, not simply the act itself. Wish Acquisition, LLC v. Salvino, No. 07 C 4756, 2008 WL 182241, at *3-4 (N.D. Ill. Jan. 18, 2008). Thus, § 523(a)(6) is intended to prevent the discharge of debts as a result of intentional torts. Radivojevic v. Pickens (In re Pickens), 234 F.3d 1273 (7th Cir. 2000). J. It is well-established that conversion, an intentional tort, will support a claim under § 523(a)(6). First Nat'l Bank of Red Bud v. Kimzey (In re Kimzey), 761 F.2d 421, 424 (7th Cir. 1985); Schaul v. Ludwig (In re Ludwig), 508 B.R. 48, 57 (Bankr. N.D. Ill. 2014). K. Under Illinois law, the elements of conversion are "'(1) an unauthorized and wrongful assumption of control, dominion, or ownership by a person over the property of another; (2) plaintiff's right in the property; (3) plaintiff's right to immediate possession of the property; and (4) a demand by plaintiff of possession thereof."" Ludwig, 508 B.R. at 57 (quoting Eggert v. Weisz, 839 F.2d 1261, 1264 (7th Cir. 1988) (internal citation omitted)). L. "A debtor who enters into a security agreement is presumed to know that a sale of secured property would harm the secured creditor." N. Inv. Co. v. Haynes (In re Haynes), 54 B.R. 20, 21 (Bankr. W.D. Wis. 1985). "Business persons are frequently presumed to know that harm will result from conversion of a secured party's collateral and a debtor who actively participates in such a conversion is personally liable." Standard Bank & Trust Co. v. Iaquinta (In re Iaquinta), 95 B.R. 576, 581 (Bankr. N.D. Ill. 1989). M. Courts have found sales out of trust to constitute conversion of the secured creditor's collateral. Auto. Fin. Corp. v. Penton (In re Penton), 299 B.R. 701, 706 (Bankr. S.D. Ga. 2003); Internet Auto. Grp. v. Shaffer (In re Shaffer), 305 B.R. 771, 777-78 (Bankr. D.S.C. 2004). N. "[T]he key in conversion cases is to analyze each set of circumstances on a case-by-case basis to determine whether the conversion is in the nature of an intentional tort or whether the conversion is a result of a negligent or reckless tort—but not willful or malicious." Bank Calumet v. Whiters (In re Whiters), 337 B.R. 326, 345 (Bankr. N.D. Ind. 2006) (internal quotation omitted). "[I]n the case of a conversion, a creditor must show that a debtor, when converting collateral, did so with a 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." Id. This inquiry "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)." Id. O. The evidence established, and the Debtors did not dispute, that they sold vehicles out-of-trust. The Debtors attempt to avoid responsibility for the conversion by claiming that the proceeds were used to keep the Dealerships afloat. Courts have held that a debtor has not committed a willful and malicious act within the meaning of § 523(a)(6) when the debtor uses the secured creditor's property, without the creditor's consent, in an attempt to keep the debtor's business afloat. Commerce Bank, N.A. v. Hammitt (In re Hammitt), 289 B.R. 681, 690-92 (Bankr. C.D. Ill. 2001). P. However, for the reasons discussed above with respect to the § 523(a)(4) claim, the Court finds that the Debtors did not use the proceeds from out of trust sales in an effort to save their business and eventually repay FMCC. Instead, the following evidence demonstrates that the Debtors intended to deprive FMCC of its collateral and the proceeds thereof: (1) Mr. Moroni instructed Ms. Gersch, the office manager at Elmhurst, to change the date of the sale on the paperwork during FMCC's audits of Elmhurst to make it appear that the vehicles were sold recently in an effort to disguise that the vehicles were sold out of trust; (2) Mr. Moroni instructed salespeople to tell customers to return leased vehicles directly to Elmhurst; (3) the Debtors failed to remit proceeds of the sales from the returned vehicles to FMCC; (4) Mr. Moroni stored the RV at a dealership that was no longer operating in an effort to conceal the RV from FMCC in violation of a state court order; (5) the Debtors deposited the erroneously issued $120,000 rebate check into Elmhurst's business account when the Debtors were required to turn it over to FMCC; (6) the Debtors auctioned FMCC's collateral without its consent and in defiance of a state court replevin order; and (7) the Debtors withdrew $105,000 and another $12,000 from the Elmhurst business account at a time when Elmhurst had ceased operating, without explaining the disposition of those funds. Q. The Court finds that the Debtors' actions of selling vehicles out of trust were willful because they knew that FMCC would be injured when they failed to remit the proceeds of the sale of the vehicles to FMCC. Ms. Moroni admitted that she knew that FMCC would be injured financially if she did not pay FMCC. R. Further, their actions in converting FMCC's property were malicious because they were taken in conscious and knowing disregard of their duties under the agreements (as well as in violation of state court replevin orders) and were taken with no just cause or excuse. S. In addition, FMCC alleges in the complaints that the Debtors prevented it from taking possession of a Navigator vehicle—VIN ending in 0256—despite the order of replevin dated September 15, 2008, which directed Elmhurst to turn over all vehicles in its possession to FMCC. (FMCC Ex. No. 9.) FMCC alleges that the Debtors concealment of the Navigator was willful and malicious which warrants a denial of discharge of this debt under § 523(a)(6). T. However, at trial, FMCC did not present any evidence with respect to the alleged concealment of the Navigator. As a result, FMCC failed to meet its burden to prove that the debt incurred with respect to the Navigator is non-dischargeable under § 523(a)(6). U. In sum, the Court finds that FMCC has established by a preponderance of the evidence that the debt owed to it by the Debtors with respect to the out of trust sales, including the RV (to the extent this action is separate from the sales out of trust) was incurred by willful and malicious conduct and is therefore non-dischargeable under § 523(a)(6). However, with respect to the Navigator, FMCC failed to prove that this debt was the result of the Debtors' willful and malicious conduct. Thus, the Court finds in favor of the Debtors with respect to this debt.
3. Determination of the Amount of the Debt that is Non-Dischargeable A. Damages are an element of the cause of action under § 523(a). See Brihn v. Truch (In re Truch), 508 B.R. 616, 625 (Bankr. D.N.J. 2014). When damages are claimed they are an essential element of the plaintiff's proof. Morris St. Assocs., I v. Welch (In re Welch), 211 B.R. 788, 797 (Bankr. D. Conn. 1997). "A plaintiff has the burden of proving damages to a reasonable degree of certainty." Haslund v. Simon Prop. Grp., Inc., 378 F.3d 653, 658 (7th Cir. 2004) (internal quotation omitted); see also R & L Pricecorp LLC v. Hall (In re Hall), Bankr. No. 11-35350, Adv. No. 12-3026, 2013 WL 1739658, at *4 (Bankr. E.D. Tenn. Apr. 23, 2013). B. FMCC asserts in the complaints that it is owed $2,797,768.09 by the Debtors. At trial, Mr. Susic testified that Exhibit Nos. 31 and 32 contain the amount owed to FMCC from the Dealerships. These exhibits contain numerous loss statements for each of the Dealerships for the time period 2008 through May 15, 2009. (FMCC Ex. Nos. 31 & 32.) A statement of loss for Elmhurst is also contained in Ex. No. 30, but it does not correspond with the loss statement for Elmhurst in Ex. No. 32. (FMCC Ex. No. 30.) Exhibit No. 32 contains a statement which shows the total debt due by the Debtors as of May 15, 2009 is $2,479,828.37, and lists the "estimated net due" amount of $2,297,355.13. (FMCC Ex. No. 32 at MAP 00432.) C. Neither the statements contained in these exhibits nor Mr. Susic's testimony shed any light on how FMCC arrived at the damages sought in the complaints. Without specific testimony explaining how FMCC calculated its total damages, the Court is not in a position to determine the amount of debt owed by the Debtors to FMCC in connection with the Dealerships. Mr. Susic's testimony regarding these exhibits was vague and lacked sufficient detail to establish the amount of the debt. Moreover, Exhibit Nos. 31 and 32 and Mr. Susic's testimony cannot be reconciled with the $2,797,768.09 figure alleged in the complaints. Thus, the Court finds that FMCC failed to prove its damages with reasonable certainty. D. Further, the measure of damages under § 523(a)(6) is the value of the converted collateral, not the debt balance. Cent. Bank of Ill. v. Gregory (In re Gregory), Bankr. No. 13-82196, Adv. No. 14-8024, 2015 WL 2414917, at *7 (Bankr. C.D. Ill. May 19, 2015). FMCC has not provided the Court with the value of the collateral that was converted by the Debtors. Therefore, the Court is not able to determine the measure of damages for conversion under § 523(a)(6). E. For the reasons stated above, the Court finds that the debt owed by the Debtors to FMCC incurred through the out of trust sales at the Dealerships is not dischargeable under § 523(a)(4) and (a)(6). However, the Court denies FMCC's request for a determination that the debt owed to it is in the amount of $2,797,768.09. FMCC may seek a declaration of its damages in a non-bankruptcy forum.
IV. CONCLUSION
For the reasons discussed above, judgment is entered in favor of the Debtors on Counts I and II of the complaints. The Court finds in favor of FMCC on Counts III, IV, and V of the complaints. Thus, the debt owed by the Debtors to FMCC is non-dischargeable under § 523(a)(4) and (a)(6). However, the Court declines to enter a money judgment in favor of FMCC. DATE: JAN 31 2017
ENTERED:
/s/ _________
Donald R. Cassling
United States Bankruptcy Judge