Opinion
Case No. 94-33189-T, Adversary Proceeding No. 95-3004-T
January 17, 2003
MEMORANDUM OPINION
This adversary proceeding raising the issue of dischargeability under 11 U.S.C. § 523(a)(6) is before the court on remand from the court of appeals and the district court. Trial on remand was held May 13, 2002, after which the parties submitted proposed findings of fact and conclusions of law. At the request of debtor's counsel, oral argument was held on August 1, 2002. Debtor was represented at trial on remand by new counsel who called several witnesses, including plaintiffs, and presented documentary evidence. Debtor did not appear at the remand trial.
In summary, the court finds that no new evidence has been presented on remand to change the district court's findings of fact in its original ruling issued on June 17, 1997. Moreover, although there has been intervening Supreme Court precedent applicable to the legal issue raised, the district court in its ruling of June 17, 1997, applied the appropriate legal standard to debtor's conduct. Accordingly, judgment will be entered in favor of the plaintiffs.
Background and Procedural History.
Debtor Hatsy Keep filed a chapter 7 bankruptcy petition on September 8, 1994. Subsequently, she remarried and became known as Hatsy Keep Shaffer. Throughout this opinion she is referred to variously as Keep or debtor.
Plaintiffs John P. and Janet E. Girardi initiated this adversary proceeding on January 5, 1995, by filing their complaint to except a judgment debt from debtor's discharge in bankruptcy pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(6).
Trial on plaintiffs' complaint was held before this court on April 29 and 30, 1996. At the conclusion of plaintiffs' evidence, the court ruled from the bench that debtor's motion to dismiss the complaint would be granted. Although plaintiffs called debtor to testify as an adverse witness, debtor was not called upon to present her own evidence due to the court's bench ruling. The court's memorandum opinion and judgment order were entered September 23, 1996.
Plaintiffs appealed the order of September 23, 1996, and on June 17, 1997, the United States District Court filed a memorandum opinion and order reversing this court's ruling. The district court granted judgment to plaintiffs, holding that debtor's judgment debt was excepted from discharge under Bankruptcy Code § 523(a)(6). Debtor, who was not represented by counsel at the time, did not appear in the district court or offer any opposition to the plaintiffs' appeal. Neither did she file a timely appeal of the district court's reversal order.
On April 7, 1998, debtor, now represented by counsel, filed a motion to reopen the district court's June 17, 1997, judgment pursuant to Federal Rule of Civil Procedure 60(b)(4). In a memorandum opinion and order entered June 5, 1998, the district court acknowledged that the bankruptcy court order should have been remanded rather than reversed and directed debtor to explain why had she delayed filing her motion and to proffer any evidence she would present in a remand of plaintiffs' appeal. Subsequently, the district court held an evidentiary hearing. On October 16, 1998, the district court, having fully considered debtor's position, entered an opinion and order denying debtor's motion to reopen.
Debtor appealed the district court's order of October 16, 1998, to the United States Court of Appeals. A majority of the court of appeals panel found in an unpublished opinion dated December 30, 1999, that because debtor had not had an opportunity to put on her own evidence before the bankruptcy court, she had been denied due process. The court of appeals thus reversed the district court, stating "we conclude that the district court's June 17, 1997 order is void." Girardi v. Heep, No. 98-2617, slip op. at 10 (4th Cir. Dec. 30, 1999). The case was remanded "with instructions to return the case to the bankruptcy court for completion of the trial." Id. The court of appeals mandate was entered on February 25, 2000.
Remand Instructions of District Court.
On March 8, 2000, the district court entered an order of remand to the bankruptcy court "for trial on the merits with said trial to be conducted in accordance with the controlling aspects of the Memorandum Opinions issued by this Court on June 17, 1997 and October 16, 1998." Girardi v. Heep, No. 3:96cv894, slip op. at 1 (E.D. Va. Mar. 8, 2000). Following another appeal by debtor, which was dismissed by the court of appeals, a second remand order was entered by the district court on December 28, 2000, remanding the case to the bankruptcy court "in accordance with the instructions issued in this Court's Order dated March 8, 2000." Girardi v. Heep, No. 3:96cv894, slip op. at 1 (E.D. Va. Dec. 28, 2000).
The district court's opinion of June 17, 1997, discussed but found it unnecessary to make a ruling on the plaintiffs fraud count under Bankruptcy Code § 523(a)(2)(A). Although the district court's remand orders do not rule out this court's consideration of the fraud count, plaintiffs have not pursued it on remand.
This court understands that the district court's remand orders bind this court to the earlier findings and conclusions as set out in the district court opinions of June 17, 1997, and October 16, 1998, except as they may be modified by new evidence received at trial on remand or intervening legal precedent. As it happens, important new legal precedent on the issue of willful and malicious injury under Bankruptcy Code § 523(a)(6) was handed down in an opinion by the U.S. Supreme Court on March 3, 1998. See Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974 (1998). The district court opinion of October 16, 1998, ruled on the debtor's motion for relief from the judgment of June 17, 1997. In denying the debtor's motion, the district court did not reexamine in any detail the controlling authorities on willful and malicious injury. However, the court did comment briefly on the Geiger decision of the Supreme Court but reached no conclusion on whether Geiger may have changed the ruling inHeep. See Girardi v. Heep, No. 3:96cv894, slip op. at 12 (E.D. Va. Oct. 16, 1998).
Because the district court did not rule on the impact of Geiger here, it is my understanding that it is appropriate for this court to determine what effect Geiger might have had on this remand.
Findings of Fact From Initial Trial Held April 29-30, 1996.
In plaintiffs' appeal of the bankruptcy court's original decision, the district court essentially adopted the bankruptcy court's findings of fact and made additional findings primarily with respect to other real property purchase contracts entered into by debtor. The following facts are taken from the district court's opinion of June 17, 1997:
I. The Girardi Contract.
In 1990, the Girardis owned three parcels of real estate on Brennan Road in Henrico County, Virginia. The lots were numbered 56-58. Faced with financial difficulties, the Girardis decided to sell Lot 57, on which their residence was located. They listed the property with a Richmond real estate agent at an asking price of $1,800,000.00, which was the fair market value of the property.
On Saturday, March 9, 1991, James Brooks, a buyer's broker for the debtor, Hatsy Heep, approached the Girardis and informed them that Heep was interested in buying a large home similar to theirs in the Richmond area. The following day, Brooks and Heep inspected the house.
Heep visited the house again on the following day, March 10, and at that time expressed an interest in purchasing the property. The parties then discussed possible terms of the purchase. Heep then extended an offer to purchase Lot 57 (and the residence) as well as the adjoining lot 56, even though it had not been listed for sale. The parties discussed and agreed to the following terms of the purchase contract:
1. Heep was to pay $1,800,000.00 for the residence and Lot 57 and $400,000.00 for Lot 56 provided that the Girardis vacated the residence by March 21, 1991, and allowed Heep pre-settlement possession.
2. Heep was to finance as much of the purchase as possible. The parties agreed that the contract would be contingent upon Heep finding financing that was satisfactory to her. The parties understood that the effect of the financing provision would be to allow Heep to "walk away" from the contract if she decided her financing arrangements were unsatisfactory.
3. Keep was obligated to provide financial statements to the Girardis within three days of execution of the contract.
4. Keep was to provide a $25,000.00 deposit at the signing of the contract.
5. Keep was to take pre-settlement possession of the residence; and upon taking possession, Heep was to make a $100,000.00 non-refundable deposit and was to pay $25,000.00 per month until settlement. Of each such monthly payment, $20,000.00 would be applied to the purchase price and the remaining $5,000.00 would represent monthly rent.
6. The settlement was to occur not later than September 15, 1991.
Brooks incorporated those terms into a written contract which Heep signed on Sunday, March 10, 1991. Pursuant to the terms of the contract, Keep gave Brooks a check in the amount of $25,000.00 for delivery to the Girardis as the contractually required deposit. The Girardis signed the contract on Monday, March 11, 1991, thus forming a binding contract between the parties. That same afternoon, Heep visited the home with her son and a friend, and discussed her intention to decorate the house. It appeared to the Girardis that Heep was still interested in purchasing the property.
Heep's subsequent performance, however, was significantly lacking. Although the parties had agreed that the exchange of Heep's financial information would be conducted between the parties' hired professionals, such an exchange was never performed. Further, Heep closed her bank account in Austin, Texas, before the Girardis could cash the $25,000.00 check she tendered. Finally, Heep never applied for a loan to finance the purchase of the Girardis' home.
So that Heep could move in on March 21, 1991, as the parties had agreed, the Girardis moved their possessions from the residence on Lot 57 to their newly purchased home during the weekend of March 15-17. The following Monday, the Girardis learned that Heep's bank account in Austin, Texas, lacked sufficient funds to cover the $25,000.00 check. Discovery in litigation showed that on March 14, 1991, Heep had closed her Texas bank account and transferred the funds in it to a bank in Richmond, Virginia, without informing the Girardis of the transfer. That same day, Heep's attorney informed the Girardis' attorney that Heep did not believe that a contract had been consummated, alleging that she never authorized Brooks to deliver the contract to the Girardis even though it mirrored the negotiated terms and she had signed it. On that basis, Heep purported to declare the contract "void." Brooks did not support Heep's version of events.
The Girardis eventually sold the house on Lot 57 and Lot 56 to another buyer for a total of $1,500,000.00 in June 1991. In August 1991, the Girardis sued Heep for breach of contract in Henrico County Circuit Court. The court ruled in favor of the Girardis, awarding damages for breach of contract in the amount of $873,248.18, plus attorneys' fees of $48,670.00. Heep later filed Chapter 7 bankruptcy on September 8, 1994.
II. Heep's Substantially Similar Real Estate Transactions.
The Girardis later discovered that, both before and after her contract with the Girardis, Heep had negotiated and/or entered into contracts with at least eight other sellers to purchase large, expensive homes. All of these transactions occurred within a nine-month period. As she had with the Girardi contract, in many of the transactions Heep required early occupancy as a pre-requisite to signing a purchase contract. Heep failed to close on each of these eight other transactions.
The record is replete with evidence, consisting of depositions and trial witness testimony, that Heep indeed entered into eight transactions similar to the Girardi contract lacking the intention to consummate each one. For example, Heep contracted in June, 1990 to purchase 8401 Lone Mesa Drive in Austin, Texas from the Waldens. She asked for early occupancy and to lease the home until closing. Keep later requested an extension of the closing date and the closing never occurred.
Heep also approached Mr. Howard Owen regarding the possible purchase of his home at 3900 Prentice Lane in Austin, Texas in January 1991. The parties entered into a contract, and again, Heep requested early occupancy. Heep failed to show up for closing. Within a month of the Owen contract, Heep made an offer to purchase 2518 El Greco Street in Austin, Texas. The closing was to take place on March 1, 1991, but the deal was never consummated. Heep accused the property owner of hiding unspecified defects in the property, and thus, Heep "voided" the contract on the day of closing.
Heep then began making offers on homes in Virginia. About five days prior to placing an offer on the Girardis' property, Heep entered into negotiations with Stuart Siegel for the purchase of his Running Cedar Farm in Goochland, Virginia. Again Heep requested early possession, and the parties entered into a contract. Siegel soon thereafter became wary of whether Heep could afford the house when she asked for owner financing and seemed unable to tender a $75,000.00 deposit. Accordingly, Siegel ceased dealing with Heep.
Only days after her dealings with the Girardis, Heep contracted to purchase a home owned by the Estate of Gertrude Massey on March 21, 1991. At the time of the contract, there were no liens or mortgages on the home. Heep asked for early possession and suggested a closing date of May 15, 1991. As closing approached, the parties discussed a reduction in purchase price to cover some repairs. The closing never occurred because Heep voided the contract, asserting that the estate would not be able to pass clear title, notwithstanding the complete absence of liens or mortgages on the property.
In April of 1991, Heep contracted to purchase another large home from the B.O. Williams Company. Heep, however, eventually voided the contract, asserting without justification that the seller rejected her offer. Within a week, Heep had signed an offer to purchase the home of Robert and Cathy Saunders located on River Road in Richmond, Virginia. According to Heep, however, that home was sold to another buyer before she could tender her final offer. Finally, on April 20, 1991, Heep contracted to purchase a home owned by J.L. Stinson located at 103 Lockgreen Place in Richmond, Virginia. In each instance, Heep offered spurious reasons, or no reason at all, for her refusal to proceed. Girardi v. Heep, No. 3:96cv894, 1997 U.S. Dist. LEXIS 19468, at *1-*8 (E.D. Va. June 17, 1997).
Discussion, Additional Findings of Fact On Remand and Conclusions of Law.
The court first notes that after the long history of this case and debtor's efforts to present her own evidence, she failed to appear at the trial on remand. Debtor now resides in Austin, Texas. However, it appears that she decided not to appear at the last moment and for unverified reasons. Debtor's nonappearance was a surprise to the court and apparently to all counsel.
Next, the court should make clear what is at issue here. The decision of the court of appeals reversing the district court stated that the district court's order of June 17, 1997, "is void." Nevertheless, it is clear from the record and certainly from District Judge Payne's remand orders that the findings of facts as stated in his opinions of June 17, 1997, and October 16, 1998, remain the operative facts of the case unless changed by debtor's evidence at trial on remand. Moreover, his conclusions of law remain the law of the case except to the extent that the underlying facts might have changed on remand or there has been intervening legal precedent.
The district court's findings of fact based upon plaintiffs' evidence at the original trial are set out above. Because the impact of the debtor's evidence on remand requires discussion, I have included any new or revised findings of fact separately in this section of the opinion.
On remand debtor's counsel called five witnesses, including Mr. and Mrs. Girardi. The principal witness was Carroll D. Hurst, a Richmond certified public accountant, who has been debtor's financial advisor for the past 20 years, including the period of the Girardi contract. The thrust of Mr. Hurst's testimony was to disclose debtor's financial and tax situation at the time, and the circumstances from debtor's standpoint surrounding her various real estate transactions. His evidence is largely uncontradicted.
Debtor's Capital Gain Tax Rollover.
On February 17, 1989, debtor sold a residence in Goochland County, Virginia, for a substantial capital gain. Under income tax law in effect at the time, she had a period of two years to purchase a new residence in order to defer paying tax on the gain. The two year period ended on February 17, 1991. In 1990, debtor was living in Austin, Texas, and she returned to Virginia to live in March 1991. During 1990 and early 1991, debtor actively looked at several residences in Texas but did not purchase a replacement property prior to the February tax deadline. However, she continued to look at residential properties to purchase in the Richmond area, including the Girardi residence.
Because debtor had net operating loss carryfowards, she was able to offset her tax liability from the sale of the residence. To that extent she lost the benefit of using the losses to offset income in future years.
Debtor's Beneficial Trust Interests.
Since at least the early 1980s, debtor and her sisters have been beneficiaries under the Herman Heep Trusts, which are under jurisdiction of a state court in Austin, Texas. In 1985, debtor initiated litigation against the trustees of the trusts. During the pendency of the trust litigation the trustees made substantial distributions to debtor's sisters but not to debtor. The litigation was settled in January 1991, at which time debtor's financial advisor and her Richmond attorney requested that the trustees equalize the distributions that had been made to her sisters.
Although debtor's financial advisor testified that an equalization distribution to debtor could have amounted to approximately $585,000.00, the evidence does not establish whether there was ever a realistic probability that any amount would be paid. None was forthcoming in 1990 and early 1991 when debtor was signing contracts to purchase residences. In mid-April 1991, debtor's advisors were told by the trustees that a significant equalization trust distribution was unlikely in the near future, and in fact none was ever paid.
Carroll Hurst testified at trial that prior to mid-April he felt it was "likely" that a distribution of some sort would be made. See R. at 135, 136, 175.
Additionally, or alternatively to an equalization distribution, debtor's advisors requested that the Heep trustees make a distribution of approximately $100,000.00 to $200,000.00 for the purpose of allowing debtor to make a down payment on a residence. The amount of distribution sought was to depend upon the purchase price. According to Hurst, debtor's monthly trust income at this time was approximately $40,000.00 per month, and he believed that a $200,000.00 distribution would have enabled her to finance a home purchase in the range of $1,000,000.00.
Debtor's advisors continued to seek a trust distribution for debtor's purchase of a residence after the deadline for a tax rollover had expired. She ultimately received trust funds that enabled her to purchase a residence on Hanover Avenue in Richmond for a price in the range of $450,000.00 to $500,000.00. In view of this purchase price, the trustees must have made a distribution in a smaller amount than anticipated.
The court has been unable to find the amount of the distribution in the record.
The Heep-Girardi Real Estate Contract.
Debtor contracted on about March 10, 1991, to purchase plaintiffs' residence on Brennan Road, Henrico County, Virginia, for a price of $1,800,000.00 plus $400,000.00 for an adjoining lot. Debtor's breach of this contract resulted in the Girardis' state court judgment against debtor in the amount of $873,248.18 plus attorney fees of $48,670.00.
It is undisputed that at the time of the contract the Girardis were having financial and marital problems, including their dire need to sell the property and avoid an impending foreclosure. Debtor's evidence and argument on brief emphasize her concerns about aspects of the Girardis' problems. From the beginning of debtor's dispute with the Girardis, she has maintained that there was no contract because she never authorized her real estate broker to deliver a fully executed contract to the Girardis. This argument was made in the state court trial and rejected by that court. On remand brief, debtor's counsel recognize that she is bound by the state court's holding that a contract was created. See Catercorp. Inc. v. Henicheck (In re Henicheck), 186 B.R. 211, 214-15 (Bankr. E.D. Va. 1995). However, they argue that debtor's unwavering position on the absence of a contract is evidence of her state of mind and demonstrates that she did not intend to act willfully or maliciously with respect to the Girardis.
Debtor called a qualified handwriting expert as a witness who testified that the purported signature of Mrs. Girardi on the contract was not Mrs. Girardi's. Not only is it too late to question execution of the contract, the court finds that Mrs. Girardi did sign the contract.
The problem with this debtor's state of mind argument is that the evidence she entered into a contract is overwhelming. This evidence includes the credible trial testimony of debtor's real estate broker to the effect that on Sunday night, March 10, 1991, debtor instructed him to deliver the contract, signed by her, along with a $25,000.00 check for the deposit to the sellers. Debtor further instructed the broker to point out to the Girardis what a good offer it was and to urge their prompt acceptance. The broker delivered the offer on Sunday night, and the next day, Monday, the Girardis accepted it by signing the contract and receiving debtor's deposit.
Additionally, debtor's regular real estate agent and close friend, who had been out of town over the weekend of March 9-10, 1991, testified in a 1993 deposition and on remand that debtor told him on the following Tuesday or Wednesday that she had signed a contract and that she had "bought" the Girardis' residence. The witness's further testimony concerning the unreliability of statements by debtor raises question not just about debtor's acknowledgment of having contracted to buy the house but also about her testimony that she had not authorized delivery of the contract. See Trial test, of Philip Hoppe, R. at 112-15, Girardi v. Heep, Ch. 7 Case No. 94-33189, Adv. No. 95-3004 (May 13, 2002).
I have carefully examined debtor's original trial testimony surrounding the Girardi negotiations and contract, and I find her testimony that she did not intend to enter into a contract simply unbelievable in light of the other evidence. According to her, the other witnesses were lying about the contract. She also denied other credible testimony about her close involvement in the negotiations and the time she spent going through the house. She was very emphatic that the contract was but a draft and had draft written on it. See R. at 77 (Apr. 30, 1996). Of course, the contract in evidence is not labeled a draft. Perhaps the most telling point about debtor's testimony, given her experience in real estate negotiations, is her failure to satisfactorily explain why she would have signed a draft contract and given her broker a deposit check if she did not intend to make a contract.
Moreover, the district court's opinions of June 17, 1997, and October 16, 1998, considered debtor's original trial testimony disputing the existence of a contract. The district court stated that debtor's testimony "is entirely unsupported by the record and it is inconsistent with the rest of Heep's conduct during the transaction." Girardi v. Heep, No. 3:96cv894, slip op. at 12 (E.D. Va. June 17, 1997).
In conclusion, on remand this court finds no basis to modify the district court's findings of fact regarding debtor's contract with the Girardis.
Debtor's Other Residential Real Estate Purchase Activities.
During the time period at issue in this case, debtor negotiated for or contracted to purchase residential real estate in eight other instances where no sale was completed. As a general observation, the court notes that the evidence surrounding these transactions reveals debtor as one who was an astute negotiator, who made her own decisions about rescinding contracts, and who could be quite difficult in that process. Most of the contracting sellers gave in to her demands and willingly let her walk away.
The evidence surrounding debtor's direct involvement in dealings with other sellers also undercuts her testimony about the Girardi contract.
Judge Payne, in his opinion of June 17, 1997, found these other negotiations or transactions to be compelling evidence supporting his ruling in favor of the Girardis. See Girardi v. Heep, No. 3:96cv894, slip op. at 13 (E.D. Va. June 17, 1997).
Debtor's financial advisor Hurst testified in a general way on remand about debtor's purchase negotiations in 1990 and 1991, primarily with respect to her tax situation and her hope for trust funds to finance a purchase. However, there is no new significant evidence concerning debtor's motivation in avoiding eight real estate purchases that was not previously considered by the district court.
What is new on remand is that debtor's counsel have had the opportunity to present argument on the import of these transactions. Relying largely on debtor's trial testimony, her counsel argue there is no evidence that debtor was at fault in any of the transactions. Because counsel's argument presents new aspects that may not have been considered by the district court, I have examined the record in detail on debtor's other real estate negotiations and make the following findings:
1. Walden. In June 1990 debtor and her then husband contracted to lease and purchase a home at 8401 Lone Mesa Drive in Austin, Texas, from Charles and Laura Walden. Debtor moved in shortly afterwards and occupied the home from June 1990 until late February or early March 1991. Debtor refused to close on this transaction. The Waldens sued her for eviction, specific performance of the contract, and for damages to the property. The debtor claimed that she refused to close because of a title problem. However, the more probative evidence is that there was no title problem. Debtor vacated the property around the end of February or early March 1991. After the sellers filed bankruptcy, their trustee in bankruptcy dropped the suit against debtor.
See Test, of debtor, R. at 10-26, Girardi v. Heep, Ch. 7 Case No. 94-33189, Adv. No. 95-3004 (Apr. 30, 1996); Pls.' Ex. 31, 40-47; Dep.of Charles Walden, August 18, 1995.
2. Owen. In January 1991, while she was still under contract to the Waldens and occupying their residence, debtor made a verbal offer to purchase a residence from Howard Owen at 3900 Prentice Lane, Austin, Texas. The purchase price was $850,000.00. Debtor sought an early settlement, advising Owen of her income tax situation. After debtor had the house inspected she proposed that the seller reduce the price by $50,000.00 to $75,000.00. The proposal was refused. The parties never executed a written contract, and debtor did not close on the transaction.
See Test, of debtor, R. at 27-33 (Apr. 30, 1996); Dep.of Howard Owen, August 18, 1995.
3. Franklin Federal Bancorp. On February 15, 1991, debtor entered a contract to purchase from Franklin Federal Bancorp a residence at 2518 El Greco, Austin, Texas, for $950,000.00. Because Franklin Federal had acquired the property in a foreclosure, it included in the contract an extensive addendum providing the property was being sold "as is." The contract also contained a standard clause that provided for the seller to pay for necessary repairs up to $10,000.00. Debtor made a $10,000.00 deposit and provided financial information to Franklin Federal for the purpose of obtaining mortgage financing. Before Franklin Federal had an opportunity to approve the financing, debtor asked for and received the return of her financial information. By letter dated March 1, 1991, debtor's attorney advised Franklin Federal that debtor had "concluded that the repairs far exceed the $10,000.00 allowance provided in the contract." She accused Franklin Federal of failing to disclose defects and accused her own real estate agent of covering up flaws in the property. The trial record contains no documentation in support of debtor's assertions, and debtor's testimony at trial regarding defects in the property is unpersuasive in light of the other evidence surrounding this transaction. Franklin Federal's representatives denied that excessive repairs were necessary, but because debtor had threatened litigation they released her from the contract and returned her deposit. Negotiations for this transaction were terminated around March 1, 1991.
See Test. of debtor, R. at 33-39 (Apr. 30, 1996); Pls.' Ex. 49-66; Deps. of Betty Kuykendall and William Clyde Sheen, August 18, 1995.
4. Siegel. In early March 1991, debtor left Texas and returned to the Richmond area. During the week of March 4, she negotiated with Stuart Siegel to purchase Siegel's residence and adjoining property in Goochland County, Virginia, for a price in the range of $3,000,000.00. Debtor sought early occupancy based upon her putting up a $25,000.00 refundable deposit. She also wanted Siegel to finance $800,000.00 of the price on an unsecured basis. The negotiations lasted approximately six days, and the parties never reached agreement.
See Test. of Siegel, R. 46-60; Test, of debtor, R. 104-17 (Apr. 30, 1996); Pls.' Ex. 12-15.
5. Massey Estate. On March 21, 1991, debtor contracted to purchase a residence at 6345 Ridgeway Road, Richmond, Virginia, from the Estate of Gertrude Massey for $1,600,000.00. Debtor sought early possession prior to settlement, but the seller's representatives refused. Debtor had the property inspected, and she advised the representatives that she wished to make substantial renovations, but the representatives would not agree to allow renovations prior to settlement. In a series of letters beginning April 5, 1991, debtor's counsel advised counsel for the estate of myriad concerns debtor had with the contract, including her threats of legal proceedings based upon seller's refusal to permit debtor early possession. Debtor's most serious assertion was that the estate, due to the recent death of Mrs. Massey, was not in position to convey good title under Virginia law in a timely manner. The estate strongly disputed this assertion. However, the parties' counsel agreed to a mutual termination of the contract by letters exchanged on April 10, 11, and 12, 1991.
See Test, of debtor, R. 136-43 (Apr. 30, 1996); Pls.' Ex. 18-30; Dep. of William Blair Massey, Mar. 26, 1996.
6. B.O. Williams Company. On April 11, 1991, debtor executed a contract to purchase from B.O. Williams Company a new residence located at 8104 Spencely Place, Henrico County, Virginia, for a price of $1,100,000.00. On April 15 the seller signed the contract after making several changes and returned it to debtor. At trial debtor testified that she had made an offer to purchase, and the seller by his changes made a counteroffer she did not accept. There was no settlement under the contract.
See Test, of debtor, R. 144-45 (Apr. 30, 1996); Pl's Ex. 35.
7. Saunders. On April 18, 1991, debtor signed a contract offering to purchase the residence of Robert M. and Cathy Jean Saunders, 6705 River Road, Henrico County, Virginia, for a price of $2,000,000.00. The sellers did not accept the offer, and debtor testified that they had previously accepted another offer.
See Test, of debtor, R. 147-48 (Apr. 30, 1996); Pls.' Ex 36.
8. Stinson. On April 20, 1991, debtor contracted to purchase a newly constructed residence from J.L. Stinson located at 103 Lockgreen Place, Richmond, Virginia, for a price of $1,340,000.00. Debtor testified that she later learned that the trustees of the Heep trusts would not make a distribution that would enable her to make a down payment on the Stinson contract. Mr. Stinson let debtor out of the contract.
See Test, of debtor, R. 145-50 (Apr. 30, 1996); Pls.' Ex 37-39.
Debtor's Purchase of Residence.
Debtor finally purchased a home on Hanover Avenue in Richmond in June 1991 for a price of approximately $450,000.00 to $500,000.00. She received a trust distribution sufficient for her to make a down payment on the property.
See Test, of debtor, R. 134-35 (Apr. 30, 1996).
Final Analysis of Debtor's Purchase Activities.
The testimony of debtor's financial adviser indicates that on paper debtor may have been wealthy. However, it is clear that during the period June 1990 through April 1991, debtor had only a hope of adequate financial resources to make a down payment on a home purchase in the price range that she was negotiating. The fact that debtor did not receive any substantial distribution during this period could account for her repeatedly walking away from real estate purchase negotiations or contracts.
On remand debtor's counsel argue that she was not at fault in her failed real estate purchases. Counsel's argument is based upon their analysis of the original trial evidence rather than any new evidence on remand. To the contrary, the court is satisfied that at least four of the transactions, Walden, Owen, Franklin Federal, and Massey, demonstrate debtor's propensity to break purchase contracts when she decided they did not suit her. In each of these transactions, the weight of the evidence supports plaintiffs' argument that debtor concocted reasons to rescind the agreements. Of course, the Girardi contract is another example. These transactions are sufficient to support the district court's original conclusion that the other transactions are material evidence of willful and malicious injury in the Girardi contract.
In summary, this court finds that the factual basis upon which the district court based its decisions of June 17, 1997, and October 16, 1998, remains essentially the same on remand.
Willful and Malicious Injury.
While the evidence remains essentially the same on remand, there has been intervening case law pertaining to Bankruptcy Code § 523(a)(6) that requires this court to reconsider the district court's previous ruling. In 1998 the Supreme Court handed down its decision in Kawaauhau v. Geiger, 523 U.S. at 57, which heralded a change in the way courts approach discharge of willful and malicious injury damages in bankruptcy. In Geiger the Supreme Court, resolving a split in the circuits, ruled that willfulness under § 523(a)(6) requires a debtor to have committed an intentional injury (intentional tort) for the discharge exception to apply. See id. at 61-63.
The district court's ruling of June 17, 1987, was based in part on the 8th Circuit Court of Appeals decision in Geiger, affirmed by the Supreme Court. See Geiger v. Kawaauhau (In re Geiger), 113 F.3d 848 (8th Cir. 1997), aff'd, 523 U.S. 57 (1998). The district court also considered the Supreme Court's decision in the opinion of October 16, 1998, but did not make a ruling on its applicability in the instant case. See Girardi v. Heep, No. 3:96cv894, slip op. at 12 (Oct. 16, 1998).
Debtor's counsel argued both before Judge Payne and here on remand that after Geiger breach of contract is not a basis for the application of § 523(a)(6). The Supreme Court's Geiger decision came down after the district court's 1997 opinion but before the 1998 opinion. In the latter opinion, Judge Payne acknowledged that there is language in Geiger that "bolsters Heep's argument, but the issue is far from settled." Girardi v. Heep, No. 3:96cv894, slip op. at 12 n. 9 (E.D. Va. Oct. 16, 1998).
Section 523(a)(6) excepts from the discharge of an individual debtor a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 532(a)(6). It has been held that the injury must have been both willful and malicious. See Branch Banking and Tr. Co. of Va., Inc. v. Powers (In re Powers), 227 B.R. 73, 77 (Bankr. E.D. Va. 1998); see also Hope v. Walker (In re Walker), 48 F.3d 1161. 1164-65 (11th Cir. 1995); DeBellis v. Maula (In re Maula), 166 B.R. 49, 52 (Bankr. M.D. Pa. 1994).
The burden of proof rests with a plaintiff to establish by a preponderance of the evidence that a debt owed by debtor is excepted from discharge under § 523(a). See Grogan v. Garner, 498 U.S. 279, 286-91 (1991).
Willfulness
In Geiger, the Supreme Court held that a "willful" injury under § 523(a)(6) required the debtor to have committed an intentional tort. See Geiger, 523 U.S. at 62. The Court effectively overruled previous decisions of some courts that had recognized reckless or negligent injury as willful and malicious. See id. at 61-63; see also 4 Collier on Bankruptcy ¶ 523.12[1] (Lawrence P. King ed., 15th ed. rev. 2000). Previously, the Fourth Circuit had defined willful under § 523(a)(6) as "deliberate" or "intentional," a definition that remains valid. First Nat'l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir. 1995); Kaufman v. Vamvakaris (In re Vamvakaris), 197 B.R. 228, 231 (Bankr. E.D. Va. 1996).
An issue not clearly addressed by Geiger is whether a debtor must have specifically intended to cause injury or whether the debtor's intentional commission of a wrongful act that necessarily leads to injury is sufficient to except the debt from discharge. See 4 Collier on Bankruptcy at ¶ 523.12[1], suggesting that the latter approach is appropriate under the Supreme Court's holding in McIntyre v. Kavanaugh, 242 U.S. 138 (1916).
In an early court of appeals decision following the Supreme Court'sGeiger decision, the Fifth Circuit ruled in Miller v. J.D. Abrams, Inc. (Matter of Miller), 156 F.3d 598 (5th Cir. 1998), that the test for willfulness under § 523(a)(6) is met "by any tort substantially certain to result in injury, or any tort motivated by a desire to inflict injury." Id. at 603. Under this test, "either objective substantial certainty or subjective motive meets the Supreme Court's definition of `willful . . . injury' in § 523(a)(6)." Id.: see also Johnson v. Davis (In re Davis), 262 B.R. 663, 670 (Bankr. E.D. Va. 2001); Harry Ritchie's Jewelers. Inc. v. Chlebowski (In re Chlebowski), 246 B.R. 639, 643 (Bankr. D. Or. 2000); Fidelity Financial Servs. v. Cox (In re Cox), 243 B.R. 713, 718-19 (Bankr. N.D. Ill. 2000); Britt's Home Furnishing. Inc. v. Hollowell (In re Hollowell), 242 B.R. 541, 546 (Bankr. N.D. Ga. 1999).
In Miller, the Fifth Circuit observed that the Supreme Court inGeiger had left three possible "readings" to a finding of willfulness under § 523(a)(6):
The standard might be met by any tort generally classified as an intentional tort, by any tort substantially certain to result in injury, or any tort motivated by a desire to inflict injury. We hold that the label "intentional tort" is too elusive to sort intentional acts that lead to injury from acts intended to cause injury. Rather, either objective substantial certainty or subjective motive meets the Supreme Court's definition of "willful . . . injury" in § 523(a)(6).
156 F.3d at 603.
However, the court has found no court of appeals decision outside of the Fifth Circuit that would recognize a willfulness standard of "objective substantial certainty." Instead in the most recent appeals court opinion, the Ninth Circuit strongly rejected the objective standard because it "disregards the particular debtor's state of mind and considers whether an objective, reasonable person would have known that the actions in question were substantially certain to injure the creditor." Carillo v. Su (In re Su), 290 F.3d 1140, 1145 (9th Cir. 2002). The court thus likened the objective standard to the "reckless disregard" standard of negligence law. Id. The standard for nondischargeability for willfulness adopted by the Ninth Circuit was that the debtor must have had "either a subjective intent to harm, or a subjective belief that harm is substantially certain." Id. at 1144.
Other courts of appeal have applied the subjective intent standard for willfulness. For example, Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir. 1999), stated that a debtor has not committed a willful and malicious injury unless debtor "desires to cause consequences of his act, or . . . believes that the consequences are substantially certain to result from it." Id. (quoting language taken from the Restatement (Second) of Torts § 8A at 16 (1964)). The court notes that this section of the Restatement was also cited by the Supreme Court in Geiger, although the Supreme Court did not expressly adopt the Restatement language. Id. at 464: see also Kennedy v. Mustaine (In re Kennedy), 249 F.3d 576 (6th Cir. 2001): Siemer v. Nangle (In re Nangle), 274 F.3d 481 (8th Cir. 2001); Roumeliotis v. Popa (In re Popa), 140 F.3d 317, 318 (1st Cir. 1998).
There is no binding authority reported from the Fourth Circuit under Code § 523(a)(6) after Geiger, Based upon the court's own precedent in First Nat'l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir. 1995), and recent case decisions in other circuits, I believe it likely that our court of appeals would adopt the strictly subjective standard followed in most of the circuits.
In this district there are two reported bankruptcy court decisions on the issue adopting the subjective standard. See KMK Factoring. L.L.C. v. Mcknew (In re McKnew), 270 B.R. 593, 636 (Bankr. E.D. Va. 2001): Branch Banking and Tr. Co. v. Powers (In re Powers), 227 B.R. 73, 76 (Bankr. E.D. Va. 1998). Malice
In In re Davis, 262 B.R. 663, 670 (Bankr. E.D.Va. 2001), this court applied the subjective test to find that debtor acted willfully but recognized also that debtor's conduct would have met the objective test of the Fifth Circuit's Miller case, 156 F.3d at 603.
The Supreme Court's Geiger decision did not discuss the malice element of § 523(a)(6). Instead, the court's definition of willfulness changed the complexion of court decisions under the statute as it made willfulness the principal issue for resolution in these cases. Thus, it might seem that a finding of willfulness, i.e., that a debtor committed an intentional tort, would carry a finding of malice with it. However, only one court of appeals has explicitly so held. See Miller, 156 F.3d 598 (5th Cir. 1998). In Miller, the Fifth Circuit effectively held that the test of malice was subsumed in the test for willfulness. Id. at 606.
The majority of cases following Geiger continue to require that a debtor's actions must be both willful and malicious, and this court finds it necessary to consider the well established Fourth Circuit precedent on the issue of malice.
Malice does not mean the same thing for nondischargeability purposes under § 523(a)(6) as it does in contexts outside of bankruptcy. In bankruptcy, a debtor may act with malice without bearing any subjective ill will toward a plaintiff creditor or any specific intent to injure.See In re Stanley, 66 F.3d at 667 (citing St. Paul Fire Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1008-09 (4th Cir. 1985)). The Fourth Circuit defines malice as an act causing injury without just cause or excuse. See In re Powers, 227 B.R. at 76; Johnson v. Davis (In re Davis), 262 B.R. 663, 670-71 (Bankr. E.D. Va. 2001).
Debtor's subjective mind set is central to the inquiry as to whether debtor acted deliberately in knowing disregard of a creditor's rights in property. In fact, a plaintiff creditor can even establish malice on an implied basis from a showing of debtor's behavior, as well as a presentation of the surrounding circumstances. See St. Paul Fire Marine Ins. Co., 779 F.2d at 1010 (stating that "[i]mplied malice, which may be shown by the acts and conduct of the debtor in the context of their surrounding circumstances, is sufficient under . . . § 523(a)(6)"); Hagan v. McNallen (In re McNallen), 62 F.3d 619, 625 (4th Cir. 1995). What is required is that plaintiff prove that debtor's injurious act was done deliberately, intentionally, and with knowing disregard for plaintiff's rights. See In re Stanley, 66 F.3d at 667. Further, a debtor's "state of mind can be established through circumstantial evidence." In re McKnew, 270 B.R. at 640.
Analysis and Conclusions.
It cannot be doubted that debtor intentionally breached the Girardi contract. Under Geiger, whether debtor acted "willfully" turns on whether she committed an intentional tort.
The basis for the Girardis' injury is debtor's breach of their contract. The Girardis' damages arose when they sold their realty for less than debtor had contracted to pay. Debtor's counsel point out that the Girardis knew within two or three weeks that debtor was not going to settle on the contract. Debtor's counsel further argue that the evidence does not prove either that debtor intended for plaintiffs to sell their residence at such a reduced price or that the damages were a natural consequence of the breach.
As mentioned previously, debtor's counsel have argued that after the Supreme Court's Geiger decision, breach of a contract cannot be the basis for nondischargeability under § 523(a)(6). As a general proposition, I do not agree with this argument. For example, this court held in Traditional Indus., Inc. v. Ketaner (In re Ketaner), 149 B.R. 395, 400-01 (Bankr. E.D. Va. 1992), appeal dismissed, 154 B.R. 467 (E.D. Va. 1993), that a debtor's breach of a covenant not to compete that had resulted in a $500,000.00 judgment against debtor was excepted from discharge as a willful and malicious injury under § 523(a)(6). Id. In Ketaner, the debtor left the employ of plaintiff and induced almost the entire staff of plaintiff to join him in a new company conducting the same business as plaintiff. The same result in plaintiff's favor would likely be reached under Geiger, Also of continuing validity is the following dicta set out in Ketaner, 149 B.R. at 400-401:
It is almost always foreseeable in the abstract that a breach of contract will result in some form of economic harm to the other party to the contract. A breach of contract frequently results from an intentional act by the party which chooses not to complete its obligation under the contract for whatever reason. For example, a company may intentionally choose to discontinue performing under a contract that proved unprofitable. That choice is an intentional act that foreseeably will result in economic injury to the other party. However, an intentional breach of contract, without more, is not sufficient to establish a willful and malicious injury for the purposes of § 523(a)(6).
The focus, for dischargeability purposes, is not on the wrongfulness of the intentional breach. Instead, the focus for § 523(a)(6) is on the debtor's intent when he took the action. If, for example, the company in the above example breached the contract for the express purpose of putting the other company, which was a business rival, out of business, then the intent to injure, and therefore the willfulness of the actions, is established.
Id. at 400-01 (italics omitted) (citing Dorr Associates v. Pasek (In re Pasek), 129 B.R. 247, 252 (Bankr. Wyo. 1991)).
While there would seem little doubt that under the right circumstances, breach of contract can qualify as willful and malicious injury, the court has been unable to find a reported decision involving a breach of contract to purchase property. The absence of a precedent is not important because this type of case, revolving around a debtor's motivation, must be decided on its own facts.
As stated above, the applicable standard is that debtor's judgment debt to the Girardis will be excepted from discharge if she desired "to cause consequences of [her] act or . . . [believed] that the consequences [were] substantially certain to result from it. . . ." In re Markowitz, 190 F.3d at 464; Restatement (Second) of Torts § 8A at 16. The similar standard adopted by the Ninth Circuit is that debtor must have had "either a subjective intent to harm, or a subjective belief that harm is substantially certain." In re Su, 290 F.3d at 1144.
In finding that debtor acted "willfully" the district court in its opinion of June 17, 1997, cited among other opinions that of the Court of Appeals for the Eighth Circuit in Geiger v. Kawaauhau (In re Geiger), 113 F.3d 848, 852 (8th Cir. 1997), the same case that was later affirmed by the Supreme Court in 523 U.S. 57. The district court also quoted from the Eighth Circuit opinion the same language set out above from § 8A of the Restatement (Second) of Torts. The district court went on to discuss in some detail the conduct of debtor that the court found persuasive regarding whether that debtor acted both willfully and maliciously in breaching the Girardis' contract.
See infra at 23.
Because the district court applied the appropriate legal standard for willful injury as it was subsequently announced in the Supreme Court'sGeiger decision and because the factual basis for the district court's ruling has not been changed on remand, this court is bound by the district court's ruling of June 17, 1997. Accordingly, judgment will be entered for the Girardis.
A separate order will be entered.