Deluxe Motor Company Inc v. Hardman

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
In re
DEWEY FRANKLIN HARDMAN
LORI LYNN HARDMAN,
Debtors.
DELUXE MOTOR COMPANY INC.,
Plaintiff,
v.
DEWEY FRANKLIN HARDMAN and
LORI LYNN HARDMAN,
Defendants.
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) 	Case No. 	10-20359
) 	Chapter 	7
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) 	Adv. No. 	10-2015
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OPINION ON COMPLAINT
On September 19, 2011, this adversary proceeding came before the court for trial
on the Complaint to Determine Non-Dischargeability of Debt under Section 523(a)(6)
Willful and Malicious Injury, filed by Deluxe Motor Company Inc. ("Deluxe") and the
answer filed by Dewey and Lori Hardman. The plaintiff was represented by Phillip
Willoughby. The defendants were represented by Stephen Winship.
This adversary was initiated against both debtors in this case. At the trial, the
court granted the defendants' motion to dismiss as against Mrs. Lori Lynn Hardman and
entered its Order on September 28, 2011. This Opinion and accompanying Judgment is
applicable only to Mr. Hardman ("Hardman"). The court considered the testimony and
other evidence, the arguments of the parties and applicable law, and is prepared to rule.
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Jurisdiction
The court has jurisdiction over this complaint under 28 U.S.C. §§ 157(a) and
1334(a). This is a core proceeding under §157(b)(2)(1). The complaint is brought under
11 U.S.C. § 523(a)(6). 1
Findings of Fact
Mr. Hardman and his spouse, Lori Hardman ("Debtors"), filed for Chapter 7
bankruptcy protection on AprilS, 2010. The Debtors listed Deluxe Harley Davidson on
their Schedule F as a creditor holding an unsecured nonpriority claim in an "unknown"
dollar amount. Deluxe filed this adversary proceeding on June 20, 2010. 	The Debtors
filed their Answer on August 16, 2010.
Charles Ruiz ("Ruiz"), is a stockholder and president of Deluxe. In 1992, he
opened Deluxe as an exclusive Harley Davidson motorcycle ("Harley Davidson")
dealership in Casper, Wyoming. Later, he opened a satellite store in Gillette, Wyoming
and also began selling Buell motorcycles. Mr. Ruiz is a master technician, overlooks the
service department and assists Mrs. Ruiz with the bookkeeping duties of the business.
He generally oversees everything to do with the business and, in his words, "was the
ultimate authority."
1 Unless otherwise indicated, all future statutory references are to the Bankruptcy Code, Title II of the
United States Code.
2 Mr. Ruiz owns fifty percent of Deluxe's stock. Mrs. Maria Ruiz, his spouse, owns the other fifty percent.
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Mr. Hardman owned and operated his own motorcycle shop, Cycle Zone, prior to
being hired by Deluxe. He also worked as a consultant to Deluxe before being employed
as the sales manager. According to Ruiz's testimony, Hardman was hired because of his
motorcycle sales experience. Throughout Hardman's employment at Deluxe, Ruiz and
Hardman considered each other as trusted friends, traveled and raced motorcycles
together.
In 2003, shortly after Hardman began working for Deluxe, the parties entered into
an agreement whereas Deluxe would begin taking metric motorcycles 3 ("Motorcycles")
as a trade-in toward the purchase of a Harley Davidson. The Motorcycles would then be
consigned to Cycle Zone to sell. Prior to this arrangement, Deluxe would not accept a
Motorcycle as a trade-in for the purchase of a Harley Davidson. All the Motorcycles
went to Cycle Zone to be sold, except for the few that Ruiz kept for personal use. Mr.
Ruiz testified that the arrangement was initiated with the hopes that it would increase
sales at Deluxe. The agreement regarding the consignments, its procedures and
payments was verbal and never reduced to writing.
Mr. Ruiz testified that when a Motorcycle was taken in as a trade-in, a file was
established for that Motorcycle to include all documents, including the title, at Deluxe.
3 As Deluxe is an exclusive Harley Davidson dealership and also sold Buell motorcycles, the court
understands that the parties' references to "metrics," "metric bikes," "metric motorcycles," to mean any type of
motorcycle other than a Harley Davidson. The testimony presented that Cycle Zone did not sell any Harley
Davidsons, with the exception of one that may have been offered through Cycle Zone's Douglas, Wyoming location.
For the sake of clarity, the consigned motorcycles will be identified as "Motorcycles" throughout this opinion.
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The Motorcycle was delivered to Cycle Zone. As Cycle Zone sold the Motorcycle, it was
to pay Deluxe the amount allowed as trade-in and receive the title to transfer ownership
of the Motorcycle to the buyer. Deluxe would: (1) be paid the amount that the
Motorcycle was allowed at trade-in; (2) pay Cycle Zone for any repairs or maintenance
required on the Motorcycle to prepare it for sale; 4 and, (3) proceeds received from the
sale price over and above the above costs, were to be divided equally (50/50) between
Cycle Zone and Deluxe.
Mr. Ruiz testified that at some point, Hardman took the Motorcycles' titles,
without his knowledge, from the files at Deluxe. In some files, instead of leaving the
title, Hardman executed a consignment agreement and placed that in the file. Mr. Ruiz
alleges that because Hardman was in charge, as sales manager, he did what he wanted
and took the titles without authorization. Upon the sale of a Motorcycle, the proceeds
were deposited into Cycle Zone's account, then Cycle Zone would pay Deluxe.
According to Ruiz, the payments from Cycle Zone, for the sale of the Motorcycles, came
at irregular intervals. Mr. Ruiz did not know how many Motorcycles were consigned to
Cycle Zone over the years that the arrangement was in place.
Mr. Hardman testified that during 2006, he was managing the two locations for
Deluxe, Cycle Zone and then opened a second Cycle Zone location in Douglas,
4 Cycle Zone did not present any repair or maintenance bills to Deluxe for work performed on the
Motorcycles.
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Wyoming. His job duties at Deluxe were often more than just a sales manager. He
testified that, although he did not have the title, he performed the duties of a general
manager. He had authority to sign checks for payroll and UPS deliveries. Mr. Ruiz was
responsible for the accounting, so he did not input sales or pay bills. Mr. Ruiz was
servicing the Harley Davidsons and "doing whatever was necessary to stay in compliance
with the Harley Davidson guidelines." Mr. Hardman and Ruiz talked on the telephone
on a daily basis to discuss business.
In operating Cycle Zone, Hardman did the bookkeeping using a basic accounting
program. He briefly used H&R Block to prepare federal tax returns. Later, he prepared
Cycle Zone's tax returns.
At Deluxe, a monthly inventory report was generated on the Harley Davidson
inventory. However, the Motorcycles were not inventoried. Mr. Hardman testified that
the accounting procedures at Deluxe were "very poor." Throughout the years he worked
for Deluxe, there were numerous accountants retained. Its system did not have the ability
to charge or send out statements. There was not any monitoring of the consigned
Motorcycles until March 2006, when Deluxe upgraded its accounting system. At that
time, because the new system did not have the capabilities needed to inventory the
Motorcycles, each was shown as sold to Cycle Zone, taken out of inventory and put in
Deluxe's system as a receivable.
Mr. Hardman agreed that the initial procedure that was established for the sale of
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a consigned Motorcycle included: Cycle Zone would sell a Motorcycle, pay Deluxe for
the amount of the trade-in, and then receive the title. However, he testified that the
procedure did not work "in the real world." Motorcycles would arrive at Cycle Zone
with the titles. Motorcycles were delivered to Cycle Zone from Casper and/or Gillette
without his knowledge. 	Cycle Zone also took consignments from others. Those sale
proceeds were not segregated from the proceeds of Deluxe Motorcycles. Mr. Hardman
admitted that Cycle Zone did not pay Deluxe for the sale of Motorcycles on a regular
basis. He testified that,"when he had time, he would do it." Over the course of the seven
years, Cycle Zone sold approximately 150 Motorcycles on consignment from Deluxe for
the amount of"roughly $550,000.00."
Mr. Hardman testified that he had found a buyer for Cycle Zone. To conclude the
sale, Cycle Zone had to account for its inventory. Part of the inventory included
Motorcycles on consignment from Deluxe. Cycle Zone, after negotiations with Deluxe,
purchased the inventory of Motorcycles for the amount of $185,068.80. Mr. Hardman
sent the check, along with his resignation letter to Deluxe on August 25, 2009. Mr. Ruiz
testified that he cashed the check on the advice of his attorney, although he did not want
to. On October 21, 2009, Ruiz sent a letter to Hardman listing several additional
Motorcycles that were not listed in the settlement listing. Mr. Hardman mailed his
response and included checks to pay for two Motorcycles that "fell through the cracks"
on December 2, 2009.
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Mr. Hardman's letter closed with the following statement,
"I did state in my resignation letter (copy enclosed) that if there were
any issues to let me know as soon as possible. It took you two months to
get back to me with those issues .. .I am also a very busy person and do not
have any people to help me do the research. It will take some time. You
will be paid for everything that is owed to Deluxe Harley Davidson ... "
At trial, Mr. Ruiz presented evidence of Deluxe bills of sale, Deluxe invoices,
Cycle Zone's sales slips and Department of Transportation certificate of title information
for 13 Deluxe Motorcycles that were consigned to Cycle Zone. Mr. Ruiz alleges that
Hardman sold the Motorcycles and converted the money to his own use. Based upon the
amount of trade in and the proceeds received by Cycle Zone upon the sale of the
Motorcycle, Deluxe alleges that the total amount of funds converted is $79,477.76.
Deluxe argues that Hardman should not be allowed to discharge this debt in his Chapter
7 bankruptcy case.
Discussion
The Bankruptcy Code provides that debts resulting from a willful and malicious
injury by the debtor to another entity or to the property of another entity are not
dischargeable. 5 A creditor has the burden to prove by a preponderance of the evidence
that a debt is nondischargeable. 6
To be nondischargeable, a debt must be for willful and malicious injury.
Negligent or reckless acts do not suffice to establish that a resulting injury is wilful and
5 § 523(a)(6).
6 In re Pasek, 983 F.2d 1524 (lOth Cir. 1993).
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malicious. 7 Willful and malicious injury occurs when a debtor, without justification or
excuse and with full knowledge of the specific consequences of his conduct, acts
notwithstanding, knowing full well that his conduct will cause particularized injury.
Such a standard is consistent with the rule that§ 523(a)(6) requires not only intentional
conduct on the part of the debtor, but also intentional or deliberate injury. 8
The test of dischargeability in the Tenth Circuit still requires proof of deliberate
and intentional injury. However, the court also recognizes that secured creditors are not
restricted to direct evidence of specific intent to injury in satisfying the requirements of
§523(a)(6). The requisite malicious intent may be demonstrated by evidence that the
debtor had knowledge of the creditor's rights and that, with that knowledge, proceeded
to take action in violation of those rights. The debtor's actual knowledge or the
reasonable foreseeability that his conduct will result in injury to the creditor, are highly
relevant. 9
Evidence of the debtor's motives, including any claim justification or excuse,
must be examined to determine whether the requisite "malice" in addition to
"willfulness" is present. 	One without the other will not suffice to bar a discharge under
§523(a)(6). All the surrounding circumstances are relevant to determine whether the
debtor acted with a culpable state of mind resulting in the actual injury. Thus, the
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7 Kawaauhau, et vir v. Geiger, 523 U.S. 57 (1998).
8 Pasek at 1527.
9 Supra.
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conversion of another property without his knowledge or consent, done intentionally and
without justification and excuse, to the other's injury is a willful and malicious injury
within the meaning of the exception to discharge. 10 The word "willful" in § 523(a)( 6)
modifies the word "injury," indicating that nondischargeability takes a deliberate or
intentional injury not merely a deliberate or intentional act that leads to injury .11 Section
523 requires willful and malicious injury by the debtor, which is interpreted to mean that
the debtor must intend that the conversion of the collateral injury the creditor. 12 A willful
act is one in which the debtor must desire to cause the consequences of his act or believe
that the consequences are substantially certain to result from it. The elements of malice
are that a malicious injury occurs when there is proof that the debtor either intended the
resulting injury or intentionally took action that was substantially certain to cause the
injury. This is a subjective test. The court must determine what the debtor knew or
intended with respect to the consequences of his actions. 13
In order for Deluxe to prevail under the §523(a)(6) exception, it must establish
that when Hardman did not pay Deluxe upon the sale of the Motorcycles, it intended to
injure Deluxe. The court, reviewing the personal and professional relationship between
Ruiz and Hardman, notes that the parties were intricately involved. The gentlemen
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10 Supra.
11 In re Moore, 357 F.3d 1125 (1 0 1h Cir. 2004).
12 In re Daviscourt, 353 B.R. 674 (10 1h Cir. B.A.P. 2006).
13 In re Schoen, 407 B.R. 420 (Bankr. D. Okla, 2009).
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worked together in Ruiz's business, Deluxe. Hardman maintained his own businesses.
Ruiz and Hardman recreated together. The arrangement to sell the Motorcycles through
Cycle Zone was mutually beneficial to both businesses. It appears the relationship was
sustained for a period of over seven years. Unfortunately, the relationships,
professionally and personally, dissolved.
It does not appear to the court that Deluxe, Cycle, Ruiz or Hardman considered
the accounting of the Motorcycles as a priority throughout their business relationship.
The consignment agreement was loosely arranged. As the Motorcycles were delivered to
Cycle Zone, then sold, the funds were deposited and then an accounting and check cut to
Deluxe when Hardman had time to deal with it. There was not any testimony presented
that Deluxe objected to this procedure until the end of the relationship.
The allegations that thirteen Motorcycles were not paid for by Cycle Zone, was
controverted. The court finds credible, Hardman's testimony, that all efforts to identify,
located and pay for consigned Motorcycles was made. Deluxe has not produced any
evidence to show that Hardman intended, or intentionally took action that was
substantially certain to injure Deluxe with his handling of payments for the Motorcycles.
The facts indicated that the lack of a formal inventory of the Motorcycles as they left
Deluxe and came into the possession of Cycle Zone and accounting were mutually
sloppy.
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The court finds that Deluxe did not carry its burden of proving, by a
preponderance of the evidence, that Hardman willfully and maliciously injured Deluxe.
The court will enter a judgment against Deluxe on his §523(a)(6) claim for relief.
DATED this 	r:::<?J day of October, 2011.
Service to:
Page II
Phillip Willoughby
Stephen Winship
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