Cantrell, Bobbie D. v. McClellan, Harold W. ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-3923
Harold W. McClellan,
Plaintiff-Appellant,
v.
Bobbie Darrell Cantrell,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 5061--James F. Holderman, Judge.
Argued April 14, 2000--Decided July 5, 2000
Before Posner, Chief Judge, and Ripple and Rovner,
Circuit Judges.
Posner, Chief Judge. In the ordinary course of
bankruptcy, the debtor’s assets are applied to
the payment of his debts and, even though the
assets will usually be insufficient to pay those
debts in full, he will emerge from bankruptcy
with the unpaid balance discharged so that he can
start afresh with no overhang of debt. Some types
of debt, however, are not dischargeable, and
among them are debts "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
condition." 11 U.S.C. sec. 523(a)(2)(A). The most
common type of fraud involves a deliberate
misrepresentation or, what amounts to the same
thing, a deliberately misleading omission. E.g.,
In re Docteroff, 133 F.3d 210, 216 (3d Cir.
1997). The question this appeal presents is
whether, as the bankruptcy court and district
court ruled, this is the only type of fraud that
comes within the exception for "actual fraud." We
have not been able to find any reported appellate
cases that deal with this question.
Because the creditor’s case was dismissed for
failure to state a claim, we must take the
allegations of his complaint as true. In 1989
McClellan, the creditor, sold his business
assets, consisting of ice-making machinery, to
the debtor’s brother for $200,000, payable in
installments. McClellan retained, but did not
perfect, a security interest in the machinery.
The brother defaulted, owing McClellan more than
$100,000. McClellan sued the brother in an
Illinois state court, seeking among other things
an injunction against the brother’s transferring
the machinery. With the suit pending, the brother
"sold" the machinery to his sister, the debtor.
The bill of sale recites the price as $10, and
there is no reason to believe that it was more;
we may assume therefore that it was a gratuitous
transfer. The sister knew about the suit and in
accepting the transfer of the machinery was
colluding with her brother to thwart McClellan’s
collection of the debt that her brother owed him.
She turned around and sold the machinery for
$160,000--and she’s not telling anyone what has
happened to that money.
The sale took place in 1994 and the following
year McClellan added the sister as a defendant in
his state court action, claiming that her
brother’s transfer of the machinery to her had
been a fraudulent conveyance. 740 ILCS 160/5. Two
years later, with the state court suit still
pending, the sister filed for bankruptcy under
Chapter 7. Fearing lest her debt to him be
discharged at the conclusion of the bankruptcy
proceeding, McClellan filed an adversary
proceeding against her seeking to recover the
debt that he alleged she owed him as the
recipient of a fraudulent transfer of the assets
that secured her brother’s debt. The bankruptcy
court dismissed his complaint on the ground that
the debt was dischargeable, and the district
court affirmed because "the Supreme Court
recently scoffed at the idea that a debt could be
nondischarg[e]able under the fraud exception of
sec. 523(a)(2)(A) without a showing of material
misrepresentation and reliance on the statement.
See Field v. Mans, 516 U.S. 59, 68 (1995)."
Actually Field has nothing to do with this case.
The fraud there took the form of a
misrepresentation, and the only issue was the
nature of the reliance that a plaintiff must show
to prove fraud in such a case. Nothing in the
Supreme Court’s opinion suggests that
misrepresentation is the only type of fraud that
can give rise to a debt that is not dischargeable
under section 523(a)(2)(A). No other type of
fraud was alleged in the case or discussed in the
opinion.
Plenty of cases, it is true, assume that fraud
equals misrepresentation, but like Field they are
cases in which the only fraud charged was
misrepresentation. In re Maurice, 21 F.3d 767,
773-74 (7th Cir. 1994); In re Ettell, 188 F.3d
1141, 1144 (9th Cir. 1999); In re Biondo, 180
F.3d 126, 133-34 (4th Cir. 1999); Sanford
Institution for Savings v. Gallo, 156 F.3d 71,
74-76 (1st Cir. 1998); Palmacci v. Umpierrez, 121
F.3d 781, 786 (1st Cir. 1997); In re Hashemi, 104
F.3d 1122 (9th Cir. 1996); In re Apte, 96 F.3d
1319, 1322 (9th Cir. 1996); In re Young, 91 F.3d
1367, 1373 (10th Cir. 1996); In re Eashai, 87
F.3d 1082, 1086-89 (9th Cir. 1996); In re Arm, 87
F.3d 1046 (9th Cir. 1996); In re Johannessen, 76
F.3d 347, 350 (11th Cir. 1996); In re Vann, 67
F.3d 277, 280 (11th Cir. 1995). Most frauds do
involve misrepresentation and so In re Biondo,
for example, describes the fraud involved there
as "the tort of fraudulent misrepresentation."
180 F.3d at 134; see also Field v. Mans, supra,516 U.S. at 70; In re Maurice, supra, 21 F.3d at
773-74. But section 523(a)(2)(A) is not limited
to "fraudulent misrepresentation." Although Santa
Fe Industries, Inc. v. Green, 430 U.S. 462, 472-
74 (1977), held that the concept of fraud in the
SEC’s Rule 10b-5 is limited to misrepresentation
and therefore did not reach the
nonrepresentational breach of fiduciary duty--a
squeeze out of minority shareholders--charged in
that case, there are no such holdings with regard
to the concept of "actual fraud" in 11 U.S.C.
sec. 523(a)(2)(A). There could not be; for by
distinguishing between "a false representation"
and "actual fraud," the statute makes clear that
actual fraud is broader than misrepresentation.
Collier’s treatise, while assuming along with the
cases that we have cited that "actual fraud"
involves a misrepresentation, defines the term
much more broadly--as "any deceit, artifice,
trick, or design involving direct and active
operation of the mind, used to circumvent and
cheat another," 4 Collier on Bankruptcy para.
523.08[1][e], p. 523-45 (15th ed., Lawrence P.
King ed., 2000)--which is a good description of
what the debtor is alleged to have done here.
Pressed at argument, her lawyer was unable to
suggest any reason why the type of fraud
presented by the allegations of McClellan’s
complaint should be treated differently from
other types of fraud. The two-step routine that
McClellan alleges and that we must take as true--
in which Debtor A transfers valuable property to
B for nothing in order to keep it out of the
hands of A’s creditor and B then sells the
property and declares bankruptcy in an effort to
shield herself from liability for having colluded
with A to defeat the rights of A’s creditor--is
as blatant an abuse of the Bankruptcy Code as we
can imagine. It turns bankruptcy into an engine
for fraud. Though cases often say that exclusions
from dischargeability should be narrowly
construed, Gleason v. Thaw, 236 U.S. 558, 562
(1915); Palmacci v. Umpierrez, supra, 121 F.3d at
786, we have emphasized that they "serve vital
functions." In re Mayer, 51 F.3d 670, 674 (7th
Cir. 1995). "Congress concluded that preventing
fraud is more important than letting defrauders
start over with a clean slate, and we must
respect that judgment." Id.No learned inquiry into the history of fraud is
necessary to establish that it is not limited to
misrepresentations and misleading omissions.
"Fraud is a generic term, which embraces all the
multifarious means which human ingenuity can
devise and which are resorted to by one
individual to gain an advantage over another by
false suggestions or by the suppression of truth.
No definite and invariable rule can be laid down
as a general proposition defining fraud, and it
includes all surprise, trick, cunning,
dissembling, and any unfair way by which another
is cheated." Stapleton v. Holt, 250 P.2d 451,
453-54 (Okla. 1952). Breaches of fiduciary
obligation are commonly punished as frauds even
when there is no misrepresentation or misleading
omission. E.g., Doner v. Phoenix Joint Stock Land
Bank, 45 N.E.2d 20, 24 (Ill. 1942); Conway v.
Conners, 427 N.E.2d 1015, 1020 (Ill. App. 1981).
A separate provision in section 523 excludes from
discharge debts arising from fraud "in a
fiduciary capacity," 11 U.S.C. sec. 523(a)(4); it
would be shocking if that exclusion were limited
to misrepresentations by fiduciaries. And, coming
to this case, when a debtor transfers property to
a third party without adequate consideration, the
transfer is deemed a fraud on the debtor’s
creditors. 740 ILCS 160/5-6; Scholes v. Lehmann,
56 F.3d 750 (7th Cir. 1995). The fraud may be
either constructive or actual. (Sometimes the
terms "fraud in law" and "fraud in fact" are
used.) It is constructive if the only evidence of
it is the inadequacy of the consideration; it is
actual if the debtor intended by the transfer to
hinder his creditors. See, e.g., id. at 757; In
re Liquidation of MedCare HMO, Inc., 689 N.E.2d
374, 380-81 (Ill. App. 1997); Regan v. Ivanelli,
617 N.E.2d 808, 814 (Ill. App. 1993). The fraud
exception to the dischargeability of debts in
bankruptcy does not reach constructive frauds,
only actual ones, but the allegation here is that
the transfer involved an actual fraud; the
debtor’s brother was deliberately attempting to
thwart McClellan’s effort to collect the debt due
him. And while it is true that McClellan did not
rely on the brother’s retaining the security for
the loan, reliance is relevant only when a fraud
takes the form of a misrepresentation. And that,
as we have emphasized, is not the only form that
fraud can take or the only form that makes a debt
nondischargeable, given that debts created by
misrepresentations constitute a separate category
of nondischargeable debts.
The distinction between actual and constructive
fraud is the key to this case in two distinct
senses. First. To transfer property for less
than adequate consideration may be desperate,
foolish, or imprudent, and the receipt of such a
transfer a pure windfall, but neither the
transfer nor the receipt is in and of itself
dishonest, and so neither is an appropriate
ground for refusing to allow the debtor to
discharge the debt arising from the transfer and
thus to get on with his life without the debt
hanging over his head. The situation is entirely
different, and the debtor’s equities and argument
for discharge much weaker, when the debtor is
guilty of intent to defraud. The purpose of
section 523(a)(2)(A) in confining
nondischargeability to actual fraud is merely to
recognize this difference and thus to exclude
constructive fraud. See Neal v. Clark, 95 U.S.
704, 709 (1877); In re Anastas, 94 F.3d 1280,
1286 (9th Cir. 1996); 4 Collier on Bankruptcy,
supra, para. 523.08[1][e], p. 523-45. This
purpose is unrelated to whether the intent to
defraud was implemented by a misrepresentation or
by some other improper means.
Second. The distinction between actual and
constructive fraud answers the objection that
section 523(a)(2)(A) is intended to reach fraud
in the inception of a debt--fraud that created
the debt--whereas the law of fraudulent
conveyance is merely a method of facilitating the
collection of a previous debt that need not
itself have been created by a fraud. The first
point is correct; the second point is correct in
a case of a constructively fraudulent conveyance;
but when actual fraud is involved, the first
point is satisfied. To explain: when a conveyance
is merely constructively fraudulent, in the sense
that having transferred the property that secured
the debt without obtaining adequate consideration
the debtor is now unable to pay his creditor, the
transferee is not guilty of an actual fraud
against the creditor and so the creditor cannot
use section 523(a)(2)(A) to prevent the
transferee from discharging the debt in
bankruptcy. And so in this case, if though the
debtor’s brother intended to thwart McClellan and
was thus committing actual fraud, his sister was
innocent--if she had no intention of hindering
any creditor--the debt that McClellan is seeking
to collect from her would not have been obtained
by her by actual fraud. But she is alleged to
have been a full and equal participant in her
brother’s fraud, to have been in effect his
accomplice, as in Cenco v. Seidman & Seidman, 686
F.2d 449, 452-453 (7th Cir. 1982). The debt that
McClellan is seeking to collect from her (and
prevent her from discharging) arises by operation
of law from her fraud. That debt arose not when
her brother borrowed money from McClellan but
when she prevented McClellan from collecting from
the brother the money the brother owed him.
The Bankruptcy Code defines "debt" very broadly,
as "liability on a claim," 11 U.S.C. sec.
101(12), and "claim" very broadly, as any "right
to payment," whether liquidated or unliquidated,
disputed or undisputed, legal or equitable. sec.
101(5); see generally Johnson v. Home State Bank,
501 U.S. 78, 83-84 and n. 5 (1991). A debt need
not, therefore, arise from a loan. The brother’s
original debt to McClellan arose from a loan, but
is not the debt at issue here. The debt at issue
here is the debt that the sister incurred to
McClellan by committing a fraud against him.
Because it was an actual fraud, the debt that it
gave rise to is not dischargeable.
This result would be paradoxical if it meant
that while the sister could not discharge her
fraud debt in bankruptcy, the brother could have
discharged the same debt had he declared
bankruptcy. It does not mean this. What is true
is that if he had merely defaulted on his
original debt to McClellan, which so far as
appears was not created by a fraud, and later
declared bankruptcy, that debt would have been
dischargeable. If, however, he had rendered the
debt uncollectible by making an actually
fraudulent conveyance of the property that
secured it, his actual fraud would give rise to a
new debt, nondischargeable because created by
fraud, just as in the case of the sister, his
accomplice in fraud. But it would be a new debt
only to the extent of the value of the security
that he conveyed, for that would be the only debt
created by the fraud itself. For example, if he
owed McClellan $100,000 and defaulted after
having transferred to his sister property
securing the debt worth $10,000, he would be
entitled to discharge $90,000 of the debt, for
only the $10,000 was a debt created by fraud.
Another feature of the case, however, may seem
to tell against our interpretation of section
523(a)(2)(A). We have been speaking of the
nondischargeability of a debt that is created by
fraud, but the actual language of the statute is
"any debt . . . for money, property, [or]
services . . . to the extent obtained by . . .
actual fraud." The words "obtained by" go with
"money, property, [or] services," not with
"debt." E.g., In re Mones, 169 B.R. 246, 251 n. 2
(Bankr. D. Colo. 1994). A debt is not something
you obtain; it is something you incur as a
consequence of having obtained money or something
else of value from another person (the creditor).
The sister obtained, for $10, machinery that she
was able to sell for $160,000. It is true that
she didn’t obtain this money by a fraud against
her brother. They were acting in cahoots. But the
statute does not require that the transferor be
the victim of the fraud, but only that money,
property, or services be obtained by fraud, and
but for fraud the sister would not have obtained
a $160,000 windfall. What is more, the property,
the machinery, was not really the brother’s to
give away; he was not the equitable owner; equity
would have imposed a constructive trust for
McClellan’s benefit on the machinery wrongfully
conveyed by the brother. Wal-Mart Stores, Inc.
Associates’ Health & Welfare Plan v. Wells, No.
99-2018, 2000 WL 631028, at *1 (7th Cir. May 17,
2000); Clair v. Harris Trust & Savings Bank, 190
F.3d 495, 498-99 (7th Cir. 1999); Beatty v.
Guggenheim Exploration Co., 122 N.E. 378 (1919)
(Cardozo, J.); 1 Dan B. Dobbs, Law of Remedies:
Damages--Equity--Restitution sec. 4.3(2) (2d ed.
1993). Stated differently, the brother gave his
sister McClellan’s security interest, McClellan’s
property, which means that she was taking
property from--defrauding--McClellan directly.
For completeness we note that it might also be
possible to shoehorn the facts of this case into
another provision of section 523, the provision
that excludes from discharge debts arising from
"willful and malicious injury by the debtor to
another entity or to the property of another
entity." 11 U.S.C. sec. 523(a)(6); see In re
Bammer, 131 F.3d 788 (9th Cir. 1997) (en banc).
But why shoehorn? What happened here was fraud--
though this is on the assumption, of course, that
McClellan can prove the allegations of his
complaint. If they are true, however, he has
stated a claim. He is entitled to try to prove
that they are true.
Reversed and Remanded.
RIPPLE, Circuit Judge, concurring. In looking at
the facts of this case, as alleged by Mr.
McClellan and taken as true by us on this motion
to dismiss, there is an intuitive sense that Ms.
Cantrell should not be able to escape the
consequences of her deception. Our task, however,
is to determine whether there is any specific
statutory exception to the discharge of debts in
bankruptcy, as set forth in 11 U.S.C. sec. 523,
that applies.
1.
Given the overall structure of sec. 523, it
seems clear that Congress intended sec.
523(a)(2)(A) to cover debts relating to the
procurement of money or property by fraud and
sec. 523(a)(6) to apply in a situation such as
the one before us. Section 523(a)(2)(A) excepts
from discharge any debt "for money, property,
services, or an extension, renewal, or
refinancing of credit, to the extent obtained
by--(A) false pretenses, a false representation,
or actual fraud . . . ." 11 U.S.C. sec.
523(a)(2). The language "obtained by" clearly
indicates that the fraudulent conduct occurred at
the inception of the debt, i.e., the debtor
committed a fraudulent act to induce the creditor
to part with his money or property. Ms. Cantrell
played no role, fraudulent or otherwise, in
inducing Mr. McClellan to part with his money or
property. Nevertheless, the majority makes a
plausible argument that a literal, although
perhaps strained, reading of sec. 523(a)(2)(A)
would permit the subsection to cover the
situation before us. Section 523(a)(6), however,
more easily covers our facts because it reaches
any debt for willful and malicious injury to
another’s property. I think it is important to
point out that sec. 523(a)(6) provides a far more
direct avenue for dealing with a situation such
as the one we have before us.
Although Mr. McClellan raised his sec. 523(a)(6)
claim originally, he unfortunately did not make
this argument to the district court, and
therefore we would consider such an argument to
have been waived. Under the circumstances here,
however, I think it makes little sense to invoke
the waiver doctrine when we are according the
creditor the same relief under another
subsection. Under the majority’s approach, we are
now ignoring the proper avenue of relief in favor
of an awkward and ill-fitting one. We ought not
allow a litigant to impede this court from
fulfilling its duty to clarify the law for future
litigants.
2.
In looking at sec. 523, I believe, as stated
above, that the provision that most aptly
describes the situation here is sec. 523(a)(6).
This subsection exempts from discharge any debt
"for willful and malicious injury by the debtor
to another entity or to the property of another
entity." 11 U.S.C. sec. 523(a)(6).
According to Mr. McClellan, he entered into an
agreement to sell his ice machines to Ms.
Cantrell’s brother, Rodney Cantrell. Although the
sales agreement provided that a security interest
would secure the purchase price of the ice
machines, Mr. McClellan never perfected or filed
his security interest. Rodney Cantrell paid the
initial installment but failed to pay the
remainder of the purchase price. Mr. McClellan
then filed an action in Illinois state court for
an injunction and damages. Two years later and
while the state court suit was still pending,
Rodney Cantrell sold the ice machines to Ms.
Cantrell for $10.00 and "other good and valuable
consideration." Over a year later, Ms. Cantrell
sold the ice machines to a third party for
$160,000. Mr. McClellan then amended his state
court complaint to include Ms. Cantrell. This
amended complaint alleged that Ms. Cantrell had
participated in the fraudulent acquisition and
transfer of the ice machines in violation of the
Uniform Fraudulent Transfer Act, 749 Ill. Comp.
Stat. Ann. 160/5. Ms. Cantrell later filed for
bankruptcy under Chapter 7 of the Bankruptcy
Code, and Mr. McClellan then filed an adversary
complaint seeking the nondischargeability of Ms.
Cantrell’s debt to him, which he claims arose
from his security interest.
Section 523(a)(6) applies when the debtor
willfully and maliciously injures the property of
another. We therefore need to ask whether Ms.
Cantrell has a debt to Mr. McClellan for (1)
willfully and maliciously (2) injuring (3) Mr.
McClellan’s property.
The first question is whether Ms. Cantrell has
a debt owing to Mr. McClellan. The definitions
section of the Bankruptcy Code defines "debt" as
a liability on a claim, see 11 U.S.C. sec.
101(12), and "claim" as a right to payment, see
id. sec. 101(5). According to the legislative
history of the Code, a "claim" is any right to
payment, and the term is to be given the broadest
possible definition. See S. Rep. No. 95-989, at
21 (1978), reprinted in 1978 U.S.C.C.A.N. 5787,
5807-08. Thus, a "claim" includes all legal
obligations of the debtor, no matter how remote
or contingent. See id. at 5808. The legislative
history also explains that the term "debt" is
coextensive with the term "claim," i.e., when the
debtor has a debt owing to the creditor then the
creditor has a claim against the debtor. See id.
at 5809. If Mr. McClellan has a right to payment
from Ms. Cantrell, then she has a debt owing to
Mr. McClellan. Thus, the question remains whether
Mr. McClellan has a right to payment from Ms.
Cantrell.
At this point, we look to Illinois law. Mr.
McClellan has a security agreement with Rodney
Cantrell, which he failed to perfect. An
unperfected security agreement is always valid
between the parties, that is, between Rodney
Cantrell and Mr. McClellan. See 810 Ill. Comp.
Stat. Ann. sec. 5/9-201 ("[A] security agreement
is effective according to its terms between the
parties . . . ."). Thus, Mr. McClellan could
pursue, and currently is pursuing, an action
against Rodney Cantrell in state court for the
amount Rodney Cantrell owes Mr. McClellan.
Rodney Cantrell always had the right to sell the
collateral covered by his security agreement. See
id. sec. 5/9-205. Similarly, Mr. McClellan always
had the right to payment under his security
agreement, even after the sale of the collateral
because, under Illinois law, Mr. McClellan has a
security interest in the proceeds from the sale
of the collateral. See id. sec. 5/9-203(3).
Unfortunately, in this case, the proceeds from
the sale of the collateral--the ice machines--
were only $10 and other good and valuable
consideration. Thus, we now need to consider
whether Mr. McClellan may proceed against Ms.
Cantrell, as the purchaser of the collateral,
pursuant to his security interest.
According to the official comment to the
Illinois Commercial Code sec. 9-201, the general
rule is that a security agreement is effective
between the parties and against third parties.
See id. sec. 5/9-201. An exception to this
general rule is for a security interest that has
not been perfected. Then, the unperfected
security interest is subordinate to the rights of
perfected security interests, lien creditors,
including trustees in bankruptcy, and a buyer not
in the ordinary course of business to the extent
the buyer gives value and receives delivery of
the collateral without knowledge of the security
interest and before it is perfected. See id. sec.
5/9-301. A "buyer in the ordinary course of
business" buys the goods "from a person in the
business of selling goods of that kind." Id. sec.
5/1-201(9). Thus, Ms. Cantrell was a buyer not in
the ordinary course because Rodney Cantrell was
not in the business of selling ice machines. See
Arcadia Upholstering, Inc. v. 165 Restaurant,
Inc., 516 N.E.2d 523, 526 (Ill. App. Ct. 1987).
Although Ms. Cantrell is a buyer not in the
ordinary course of business, Mr. McClellan’s
complaint alleges that Ms. Cantrell did not
satisfy the other requirements for priority, that
is, she did not give value nor receive the
collateral without knowledge of Mr. McClellan’s
security interest. Therefore, because Ms.
Cantrell was not a good faith purchaser of the
collateral, Mr. McClellan’s security interest
takes priority over her interest in the
collateral, that is, she takes the collateral
subject to his security interest. See
Milledgeville Community Credit Union v. Corn, 716
N.E.2d 864, 870 (Ill. App. Ct. 1999) (recognizing
the general rule set forth in the Code that "’a
security interest continues in collateral despite
a sale or other disposition of that collateral’"
(quoting Martin Brothers Implement Co. v.
Diepholz, 440 N.E.2d 320 (Ill. App. Ct. 1982))).
Because she sold the collateral to a
disinterested third person, Mr. McClellan has a
security interest, and right to payment, in the
proceeds from the sale, see 810 Ill. Comp. Stat.
Ann. sec. 5/9-203(3), and Ms. Cantrell has a debt
owing to Mr. McClellan. To continue with the
other elements of sec. 523(a)(6), Mr. McClellan’s
property is his security interest, which carried
over on the ice machines because Ms. Cantrell was
not a good faith purchaser. See 810 Ill. Comp.
Stat. Ann. sec. 5/1-201(37) ("’Security interest’
means an interest in personal property or fixture
which secures payment or performance of an
obligation."); see also Williams v. Chartwell
Fin. Servs., Ltd., 204 F.3d 748, 754 (7th Cir.
2000) (Under Illinois law, "the creation of a
security interest gives a creditor an interest in
property."). Ms. Cantrell injured Mr. McClellan’s
property because she prevented him from
collecting on the debt he was owed. Finally, Mr.
McClellan has alleged that Ms. Cantrell
intentionally and maliciously injured his
property because she intended to prevent him from
collecting on his claim. He states that, in the
face of Rodney Cantrell’s debt to him and of the
ensuing lawsuit, she purchased the ice machines
and then sold them to a disinterested third
party. These acts, Mr. McClellan claims, show
that she had the requisite state of mind for
willful and malicious injury. Therefore, Mr.
McClellan has alleged that Ms. Cantrell owes him
a debt for willfully and maliciously injuring his
property, and he could have pursued his claim
against Ms. Cantrell under sec. 523(a)(6).
Instructive in this case is In re Bammer, 131
F.3d 788 (9th Cir. 1997) (en banc). In that case,
the mother embezzled money from several victims,
including the plaintiff, and was indicted. While
she was negotiating a plea agreement, which
included an order for restitution, she
transferred her real property to her son. This
act prevented the plaintiff from recovering on
his claim against the mother under the
restitution order, a consequence the son knew
about. The plaintiff then filed an action against
both the mother and the son for fraudulent
transfer. When the son filed for bankruptcy, the
plaintiff was allowed to prevent the discharge of
his debt in the son’s bankruptcy proceedings. The
Ninth Circuit held that, under sec. 523(a)(6),
the son maliciously injured the plaintiff’s
property by impairing the plaintiff’s right to
recover his debt from the mother.
Here, while Mr. McClellan’s suit was pending
against Rodney Cantrell, Ms. Cantrell bought the
ice machines, which prevented Mr. McClellan from
recovering on his claim under the security
agreement. When Ms. Cantrell filed for
bankruptcy, Mr. McClellan should have been able
to prevent the discharge of the debt because Ms.
Cantrell had willfully and maliciously injured
Mr. McClellan’s property, his security interest,
by impairing his right of collection./1
I would hold that sec. 523(a)(6) requires an
exception to the discharge of this debt.
/1 This conclusion holds despite the Ninth Circuit
opinion of In re Saylor, 108 F.3d 219 (9th Cir.
1997). In Saylor, the plaintiff filed suit for
fraudulent transfer against the defendant. The
defendant, however, filed for bankruptcy before
the plaintiff was awarded judgment on his claim.
The plaintiff then attempted to prevent the
discharge of his debt in the defendant’s
bankruptcy proceeding under sec. 523(a)(6). The
court held that he did not have "property" that
was injured because he did not have a judgment at
the time the defendant filed for bankruptcy, nor
did he have a security interest. Obviously, the
distinguishing factor here is that Mr. McClellan
held a security interest at the time Ms. Cantrell
filed for bankruptcy, and, therefore, he had
property capable of being injured.