Zolnier v. Collins ( 2021 )

Case: 21-20260 Document: 00516117990 Page: 1 Date Filed: 12/06/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
December 6, 2021
No. 21-20260
Lyle W. Cayce
Clerk
In the Matter of: Michell Zolnier
Debtor,
James K. Collins, Medical Doctor,
Appellee,
versus
Michell R. Zolnier, doing business as CKC Properties,
Top Star Leases,
Appellant.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:16-CV-2670
Before Higginbotham, Stewart, and Wilson, Circuit Judges.
Per Curiam:*
*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
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This case concerns whether Debtor-Appellant Michell Zolnier’s debt
to Appellee Dr. James Collins is subject to discharge in bankruptcy.
Dr. Collins sought to exempt the debt from discharge under either 11 U.S.C.
§ 523(a)(2)(A) or § 523(a)(6). After trial, the bankruptcy court held that
Dr. Collins failed to prove those claims against Michell Zolnier or that he
suffered damages. The district court reversed, holding that record evidence
supports both of Dr. Collins’s claims. Although we hold that Dr. Collins did
not prove his § 523(a)(2)(A) claim, we agree with the district court’s
determination that the record supports the § 523(a)(6) claim. However, the
district court did not consider the bankruptcy court’s conclusion—with
which we agree—that the debt remains dischargeable because Dr. Collins
failed to substantiate his damages. Accordingly, we REVERSE the district
court’s decision and AFFIRM the bankruptcy court’s judgment, as
modified by this opinion.
I. Facts & Procedural Background
In 2003, Michell Zolnier and her then-husband, William Zolnier,
leased commercial real estate in Magnolia, Texas from Dr. Collins. 1 They
used the property, commonly known as the “Big Red Barn,” as a showroom
for their furniture business. In 2007, the Zolniers fell behind on their rent and
asked Dr. Collins for assistance. Dr. Collins agreed to work with them, and
for the next two years, the Zolniers leased the Big Red Barn on a month-to-
month basis, only paying “what [they] could.” In 2009, the parties renewed
their lease. Under the lease, which both Zolniers signed, the Zolniers agreed
to pay their rent arrearage. They also offered Dr. Collins their inventory as
1
Both Michell and William Zolnier participated in the district court proceedings.
However, William Zolnier, who proceeded pro se below, did not appeal the district court’s
order. Thus, we only address Michell Zolnier’s claims on appeal.
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collateral to secure their debt, conveying to him a security and superior lien
interest in their inventory.
Subsequently, the Zolniers did not pay their arrearage, causing
Dr. Collins to sue them in state court for back rent in early 2012. Pursuant to
that litigation, Dr. Collins and the Zolniers executed an agreement under
Texas Rule of Civil Procedure 11 in which the Zolniers agreed not to “sell,
mortgage, transfer, liquidate or distribute” any of their inventory
encumbered by Dr. Collins’s lien without first providing him ten days’
notice. After two years of litigation, the parties attempted mediation on
February 18, 2014. Settlement talks failed, however, and within hours, the
Zolniers began removing inventory from the Big Red Barn. The Zolniers say
they only removed items that were on consignment, awaiting delivery, or on
layaway. Allegedly, they left “about $105,000 worth of merchandise” in the
store. Dr. Collins, in contrast, says the Zolniers removed their entire
inventory, including items encumbered by his lien, in violation of the Rule 11
agreement.
In August 2014, a Texas jury rendered a verdict against the Zolniers,
awarding Dr. Collins $218,649.15 in back rent, plus interest and attorney’s
fees. The Zolniers filed for Chapter 7 bankruptcy a month later. In February
2015, Dr. Collins initiated an adversary proceeding against the Zolniers in
bankruptcy court, seeking a declaration that their debt to him was not
dischargeable under 11 U.S.C. § 523. He alleged that the Zolniers “obtained
commercial rental property from” him by “actual fraud” based on an alleged
fraudulent transfer and “willfully and maliciously injured” him in violation
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of § 523(a)(2)(A) and § 523(a)(6), respectively. 2 Meanwhile, the Zolniers
divorced in January 2016.
Dr. Collins’s claims proceeded to a bench trial before the bankruptcy
court in August 2016. After trial, the bankruptcy court ruled orally that the
Zolniers’ debt was dischargeable. Before reaching the merits, the bankruptcy
court “reiterate[d] . . . for the record” that this case, as prosecuted and
defended, was “just one big mess.” It then summarily dismissed
Dr. Collins’s claim under § 523(a)(2)(A), noting that “[t]he facts don’t come
anywhere close to” establishing “a fraudulent transfer.” As for Dr. Collins’s
claim for “willful and malicious injury” under § 523(a)(6), the bankruptcy
court found that he failed to prove his case against Michell Zolnier because
at every “critical point in the case, [the] conduct was always [William]
Zolnier’s, not [Michell] Zolnier’s.” With respect to William Zolnier,
however, the bankruptcy court found that he engaged in conduct that should
render his debt non-dischargeable. Even so, it ruled begrudgingly that the
entire debt was dischargeable because Dr. Collins failed to prove a “critical
element” of a § 523(a)(6) claim. Namely, Dr. Collins did not offer any
evidence establishing the value of the encumbered property that the Zolniers
allegedly absconded with. The bankruptcy court therefore rendered final
judgment against Dr. Collins.
Dr. Collins appealed to the district court. Ruling from the bench, the
district court found that the Zolniers were jointly liable for deliberately
evading Dr. Collins’s lien since they were both “partners at law in Texas”
actively involved in the business. The district court then stated that, in
rejecting Dr. Collins’s claims, the bankruptcy court erroneously assumed the
2
Dr. Collins also asserted that the debt was not dischargeable under 11 U.S.C.
§ 523(a)(4), but he abandoned that claim at trial.
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Zolniers behaved innocently. For that reason, the district court reversed and
vacated the bankruptcy court’s judgment. It later issued an order to that
effect. Citing Husky International Electronics, Inc. v. Ritz, 578 U.S. 356, 360
(2016), the district court ruled that the Zolniers’ debt was non-dischargeable
because they committed “actual fraud” by wrongfully conveying
encumbered property. Michell Zolnier now asks us to decide whether the
district court erred in reversing the bankruptcy court.
II. Standard of Review
“We review the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court.” In re
Entringer Bakeries, Inc., 548 F.3d 344, 348 (5th Cir. 2008) (quoting In re
Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003)). “Thus, we review the bankruptcy
court’s findings of fact for clear error and its legal conclusions de novo.” In
re Goodrich Petroleum Corp., 894 F.3d 192, 196 (5th Cir. 2018).
III. Discussion
On appeal, Michell Zolnier argues that the bankruptcy court correctly
held that her debt to Dr. Collins was dischargeable. She contends that her
conduct did not constitute “actual fraud” under § 523(a)(2)(A) or “willful
and malicious injury” under § 523(a)(6), and that to the extent William
Zolnier’s conduct falls under either provision, culpability for that conduct
cannot be imputed to her. We address each contention in turn.
A. Section 523(a)(2)(A)
Section 523(a)(2)(A) excludes from discharge any debt “for money,
property, services, or an extension, renewal, or refinancing of credit, to the
extent obtained by . . . false pretenses, a false representation, or actual fraud,
other than a statement respecting the debtor’s or an insider’s financial
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condition.” 11 U.S.C. § 523(a)(2)(A). Generally, to prove “actual fraud”
under § 523(a)(2)(A), the creditor must show that the debtor made a false
representation with intent to deceive the creditor and that the creditor
“actually and justifiably relied on the representation,” sustaining “a loss as
a proximate result.” Saenz v. Gomez, 899 F.3d 384, 394 (5th Cir. 2018).
Husky held, however, that “actual fraud” as used in § 523(a)(2)(A)
also “encompasses forms of fraud, like fraudulent conveyance schemes, that
can be effected without a false representation.” 578 U.S. at 359. As the Court
explained, the term “actual fraud” has common law origins and “denotes
any fraud that ‘involv[es] moral turpitude or intentional wrong.’” Id. at 360
(alteration in original) (quoting Neal v. Clark, 95 U.S. 704, 709 (1878)). In
other words, “anything that counts as ‘fraud’ and is done with wrongful
intent is ‘actual fraud.’” Id. The Court recognized that “[a]lthough ‘fraud’
connotes deception or trickery generally, the term is difficult to define more
precisely.” Id. Yet it had no trouble concluding that “fraud” at least includes
“a debtor’s transfer of assets that . . . impairs a creditor’s ability to collect the
debt.” Id.Dr. Collins argues that the Zolniers “fraudulently transferred [his]
secured property” to prevent him from collecting his debt within the
meaning of § 523(a)(2)(A), as interpreted in Husky. He emphasizes that
while he and the Zolniers were mediating their case, the Zolniers were
simultaneously “orchestrat[ing] the complete conversion of Dr. Collins’s
secured assets in violation of” the lease, Rule 11 agreement, and “all morals
and justice.” He thus concludes that the bankruptcy court erred when it held
that the facts were insufficient to establish a fraudulent transfer because this
“case is Husky on steroids.”
“Fraudulent conveyances typically involve ‘a transfer to a close
relative, a secret transfer, a transfer of title without transfer of possession, or
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grossly inadequate consideration.’” Husky, 578 U.S. at 361 (quoting BFP v.
Resol. Tr. Corp., 511 U.S. 531, 541 (1994)). Under Texas law, the elements of
fraudulent transfer include “(1) a creditor; (2) a debtor; (3) the debtor
transferred assets shortly before or after the creditor’s claim arose; (4) with
actual intent to hinder, delay, or defraud any of the debtor’s creditors.” In re
Life Partners Holdings, Inc., 926 F.3d 103, 117 (5th Cir. 2019) (emphasis
added). Texas law defines “transfer” to encompass “every mode . . . of
disposing of or parting with an asset or an interest in an asset,” including
“payment of money, release, lease, and creation of a lien or other
encumbrance.” Tex. Bus. & Com. Code Ann. § 24.002(12). “The
essence of a transfer is the relinquishment of a valuable property right[.]”
Hometown 2006-1 1925 Valley View, L.L.C. v. Prime Income Asset Mgmt.,
L.L.C., 847 F.3d 302, 308 (5th Cir. 2017) (alteration omitted) (quoting In re
Commodity Merchs., Inc., 538 F.2d 1260, 1263 (7th Cir. 1976)).
Although Dr. Collins says the Zolniers fraudulently transferred
secured assets to avoid his lien, neither the record nor law support that
conclusion. To be sure, the Zolniers intentionally sought to hinder
Dr. Collins’s collection of his collateral. But because there is no evidence that
the Zolniers disposed of or parted with those assets, Dr. Collins failed to
prove a “transfer,” which is an essential element of a fraudulent transfer
claim. See Life Partners Holding, 926 F.3d at 117. 3 Husky does not require
otherwise despite its holding that “actual fraud” in § 523(a)(2)(A) covers
“forms of fraud, like fraudulent conveyance schemes, that can be effected
without a false representation.” 578 U.S. at 359. In Husky, it was undisputed
3
Although the Zolniers may have literally physically “conveyed” or “transferred”
secured property from one location to another to evade Dr. Collins’s lien, holding that this
conduct was a “fraudulent transfer” constituting “actual fraud” under § 523(a)(2)(A)
would be inconsistent with the principle that “[e]xceptions to dischargeability should be
construed in favor of the debtor.” In re Quinlivan, 434 F.3d 314, 318 (5th Cir. 2005).
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that the director and partial owner of a corporate debtor “drained [his
company] of assets it could have used to pay its debts to creditors . . . by
transferring large sums of . . . funds to other entities [the director]
controlled.” Id. at 358. In other words, there was no question that the director
transferred assets. Dr. Collins, in contrast, failed to show that the Zolniers
similarly “dispos[ed] of or part[ed] with an asset or an interest in an asset.”
Tex. Bus. & Com. Code Ann. § 24.002(12). We therefore agree with
the bankruptcy court’s determination that the facts fall short of a fraudulent
transfer.
In any event, even if the Zolniers had engaged in a fraudulent transfer
scheme, Dr. Collins’s claim would fail because he “has not produced any
facts to suggest that [they] obtained a debt from [their] alleged fraud,” as
§ 523(a)(2)(A) requires. In re Green, 968 F.3d 516, 521 (5th Cir. 2020) (citing
Husky, 578 U.S. at 365). To review, for a debt to be excluded from discharge
under § 523(a)(2)(A), it must be, among other things, “obtained by . . . false
pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A)
(emphasis added). The Court in Husky observed that “[i]t is of course true
that the transferor does not ‘obtain’ debts in a fraudulent conveyance.”
Husky, 578 U.S. at 356 (alteration omitted). Instead, only “the recipient of
the transfer . . . can ‘obtain’ assets ‘by’ his or her participation in the fraud.”
Id. (alteration omitted). Here, to the extent any asset transfer occurred, the
Zolniers were the transferors, not the recipients. “Section 523(a)(2)(A) is
thus inapplicable.” Green, 968 F.3d at 521 n.13.
B. Section 523(a)(6)
Section 523(a)(6) bars discharge of a debt “for willful and malicious
injury by the debtor to another entity or to the property of another entity.”
11 U.S.C. § 523(a)(6). “[A]n injury is ‘willful and malicious’ where there is
either an objective substantial certainty of harm or a subjective motive to
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cause harm.” In re Miller, 156 F.3d 598, 606 (5th Cir. 1998). “This
encompasses the wrongful sale or conversion of encumbered property by the
debtor.” In re Modicue, 926 F.2d 452, 453 (5th Cir. 1991). The bankruptcy
and district court agreed that at minimum William Zolnier’s conduct
satisfied § 523(a)(6). 4 Moreover, the bankruptcy court expressly found that
William Zolnier improperly took property subject to Dr. Collins’s lien and
that “[h]e knew it was wrong.” Indeed, William Zolnier admitted to the
district court that he understood it was wrong to convert the collateral
regardless of whether it was consigned or paid for.
The bankruptcy and district courts reached different conclusions
regarding Michell Zolnier’s culpability. As to this issue, the district court
held that the Zolniers, as business partners, were jointly responsible for
injuring Dr. Collins. The bankruptcy court, in contrast, found that Michell
Zolnier was not culpable because at every “critical point in the case, [the]
conduct was always [William] Zolnier’s, not [Michell] Zolnier’s.” The
bankruptcy court’s finding cannot be disturbed unless it is “clearly
erroneous” and leaves this court “with the definite and firm conviction that
a mistake has been made.” Saenz, 899 F.3d at 395 (quoting Otto Candies,
L.L.C. v. Nippon Kaiji Kyokai Corp., 346 F.3d 530, 533 (5th Cir. 2003)).
The parties disagree on whether evidence supports the bankruptcy
court’s finding. Michell Zolnier cites her own testimony that she effectively
4
The district court observed that the bankruptcy court characterized the Zolniers’
removal of inventory from the Big Red Barn as “an innocent business-as-usual transfer of
the stock.” The district court deemed that finding erroneous, observing that “there is
nothing about [the Zolniers’ conduct] that [qualifies as] customary, usual, standard,
ordinary business practices. [William Zolnier] packed it up and ran off with it.” It is clear
from the record, however, that the bankruptcy court did not consider William Zolnier’s
conduct innocent and instead found that he “improperly impaired the security interest held
by Dr. Collins.”
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stopped working at the furniture store in 2011, after she separated from her
husband. Around the same time, William Zolnier removed her from the
company’s bank account. Dr. Collins responds that, contrary to the
bankruptcy court’s finding, record evidence proves Michell Zolnier’s
culpability. Specifically, evidence shows that she signed the 2009 lease
agreement conveying Dr. Collins a security interest in the store’s inventory.
Moreover, Michell Zolnier, through her lawyer and with William, agreed not
to remove any inventory from the Big Red Barn outside of the ordinary course
of business without notifying Dr. Collins. The Zolniers then proceeded to
empty their store, without providing notice, immediately after mediation
failed.
We agree with the district court’s conclusion that Michell Zolnier is
culpable for injuring Dr. Collins. Although Michell Zolnier testified that she
and William only removed “stuff that was already purchased” and therefore
excluded from the scope of their agreements with Dr. Collins, the bankruptcy
court found otherwise when it observed “that Mr. Zolnier did improperly
take property that was subject to [Dr. Collins’s] liens.” It is undisputed that
Michell Zolnier actively participated in that conduct. Because Michell
Zolnier does not identify any evidence rendering the bankruptcy court’s
finding clearly erroneous, we are bound by it. See Saenz, 899 F.3d at 395.
Thus, Michell Zolnier, like William, willfully and maliciously injured
Dr. Collins under § 523(a)(6) by converting his collateral. See Modicue, 926
F.2d at 453. To the extent the bankruptcy court concluded otherwise, it
clearly erred. 5 We therefore affirm the district court as to this issue.
5
Because we conclude that Michell Zolnier’s conduct independently satisfied
§ 523(a)(6), we need not decide whether (as the district court held) William Zolnier’s
conduct can be imputed to her or instead whether (as the bankruptcy court held) it cannot.
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C. Damages
Even still, Michell Zolnier’s debt may be discharged under
§ 523(a)(6) if the bankruptcy court correctly concluded that Dr. Collins failed
to prove the value of the taken property. “Section 523(a)(6) is based on tort
principles rather than contract” and is “designed to compensate the injured
party for the injury suffered.” Modicue, 926 F.2d at 453. Thus, “the
appropriate measure for non-dischargeability under § 523(a)(6) is an amount
equal to the injury caused by the debtor rather than any other sum owed by
the debtor on a contractual basis.” Id. In Modicue, we explained that the injury
to the creditor was “the loss of [converted] collateral securing the [debtors’]
indebtedness to which” the creditor had priority. Id. “Therefore, under
§ 523(a)(6), [the creditor was] entitled to the value of the collateral denied it
by the [debtors’] wrongful actions.” Id.
Applying that principle here, we conclude that the bankruptcy court
rightly determined that Dr. Collins was entitled to the value of the converted
collateral when the Zolniers removed it from the Big Red Barn. That is when
the conversion injuring Dr. Collins occurred. The bankruptcy court then
pointed out that Dr. Collins failed to prove his § 523(a)(6) claim because he
offered no evidence of the value of the collateral at that time. The bankruptcy
court was at pains to explain that although this fact “bother[ed] [it] a
tremendous amount,” it had “no alternative but to find that . . . Dr. Collins
as [a] creditor has failed to meet his burden” because “there is no record of
what was taken.” The bankruptcy court noted that it would have been
amenable to calculating the collateral’s value “us[ing] a number close in
time” or tax records from the year the conversion occurred. But Dr. Collins
presented “simply nothing” on this issue at trial. On appeal, the district
court did not consider this potential defect in Dr. Collins’s case.
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Likewise, before this court, Dr. Collins has not identified any record
evidence establishing the value of the converted collateral. Rather,
Dr. Collins says he has satisfied his burden under § 523(a)(6) because he
possessed “a quantifiable state court judgment for rent arrearage due by the
Zolniers” and “the Zolniers converted all the encumbered property in the
leased location and tendered Dr. Collins nothing from the proceeds.” This is
insufficient. As to the Zolnier’s failure to pay their rent arrearage, that is not
the type of injury § 523(a)(6) is designed to address. See Modicue, 926 F.2d at
453; see also 4 Collier on Bankruptcy ¶ 523.12 (16th 2021) (“Section
523(a)(6) generally relates to torts and not to contracts.”). Nor is it germane
to Dr. Collins’s § 523(a)(6) claim, which is for the conversion of his
collateral. As to the conversion, Dr. Collins’s assertion that the Zolniers
failed to compensate him does not address the defect the bankruptcy court
identified in his case. Namely, Dr. Collins has not pointed to any evidence
relating to the value of the encumbered property at the time of conversion.
We thus agree with the bankruptcy court that Dr. Collins failed to prove his
case and therefore affirm its judgment.
V. Conclusion
In summary, although the bankruptcy court correctly determined that
Michell Zolnier did not commit “actual fraud” under § 523(a)(2)(A), it erred
to the extent it found that she did not willfully and maliciously injure
Dr. Collins under § 523(a)(6). However, we agree with the bankruptcy court
that Dr. Collins failed to prove damages as to his § 523(a)(6) claim.
Accordingly, we REVERSE the decision of the district court and AFFIRM
the judgment of the bankruptcy court, as modified by this opinion.
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