Crawford v. Johnson et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
fure 	)
)
CLINTON KELLY JOHNSON and 	)
NlKI LYNN JOHNSON, 	)
)
Debtors. 	)
)
W.ROYCRA~ORD, 	)
)
Plaintiff, 	)
)
v. 	)
)
CLINT JOHNSON and NlKI JOHNSON, 	)
)
Defendants. 	)
Case No. 	11-20050
Chapter 	7
Adv. No. 	11-2016
OPINION ON COMPLAINT
On May 2, 20 12, this matter came before the court for trial on the Complaint to
Determine Dischargeability under 11 U.S.C. §523(a)(6) filed by W. Roy Crawford
("Plaintiff') and the response filed by Clint Johnson and Niki Johnson ("Defendants"). The
parties were represented as stated on the record. At the conclusion of the trial, the court
took the matter under advisement. Upon review of the record, testimony and evidence, the
court is prepared to rule.
Jurisdiction
The court has jurisdiction over this adversary complaint pursuant to 28 U.S.C.
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§§ 157(a) and 1334(a). This is a core proceeding under§ 157(b)(2)(1). The complaint is
brought pursuant to 11 U.S.C. § 523(a)(6). 1
Findings of facts
The following facts are uncontroverted:
1. 	On July 18, 2007, Defendants purchased from the Plaintiff, the established business
ofW.R. Crawford, Inc. ("Crawford, Inc.") by entering into the "W.R. Crawford,
Inc., Stock Purchase Agreement ("Purchase Agreement").
2. 	Simultaneously, Clint Johnson and the Plaintiff executed a Security Agreement
granting the Plaintiff a security interest in the following collateral:
"(a) 	all accounts and contract rights owned by debtor with respect
to the oil and gas support services business operated by W.R.
Crawford, Inc. (the 'Business'), located at...; and
(b) 	all equipment, tools, furniture, supplies and other tangible
personal property of the above Business, and all other goods
and property of the same classes subsequently acquired or
owned by debtor with respect to the Business."
3. 	Defendants signed a promissory note in the amount of$1,100,000.00 payable to the
Plaintiff. Defendants were also provided a list of assets and equipment at the time of
the sale.
4. 	The Defendants made payments to the Plaintiff pursuant to the Purchase Agreement
from July 30, 2007 through Aprill6, 2010.
5. 	As of Aprill6, 2010, the balance due to the Plaintiff was the amount of
$1,069,937.52, including interest and late fee assessments.
6. 	On September 22, 2008, Crawford, Inc. and the Defendants, as individuals, applied
to First Bank located in Mountain View, Wyoming, for a loan in the amount of
$300,000.00. The loan was approved and a promissory note was signed, secured by:
(1) a Mortgage on the real property owned by Defendants; and, (2) a Commercial
Security Agreement which describes the collateral as "All Inventory, Accounts and
General Intangibles."
1 Unless otherwise indicated, all future statutory references are to the Bankruptcy Code, Title II of the United
States Code.
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7. 	First Bank filed a UCC-1 Financing Statement with the State of Wyoming Secretary
of State on February 18, 2009, describing the Collateral as: "All Accounts,
Inventory; General Intangibles; whether any of the foregoing is owned now or
acquired later; all accessions, additions, replacements, and substitutions relating to
any of the foregoing; all records of any kind relating to any of the foregoing; all
proceeds relating to any of the foregoing (including insurance, general intangibles
and other accounts proceeds)."
8. 	The Plaintiff filed a UCC Filing Statement with the Wyoming Secretary of State on
July 9, 2010.
9. 	The Defendants filed for Chapter 7 bankruptcy protection on January 20, 2011.
The court fmds the following additional facts. 	The Plaintiff owned and operated
Crawford, Inc., a well testing business, since 1993 and incorporated the business in 1995.
In early 2007, the Plaintiff retained Mr. Johnson as a subcontractor. This relationship lasted
for about five months. Neither party remembers who initiated the discussion, but on July
18,2007, the Defendants purchased Crawford, Inc. for the amount of$1,100,000.00. The
Plaintiff financed the purchase and the Defendants executed the Promissory Note and
Security Agreement described above. Each party had their own attorney representing them
throughout the sale.
After the sale was completed, the Plaintiff helped Mrs. Johnson set up the accounts
for the business' bookkeeping. The Defendants testified that they continued to use the
same accountant for Crawford, Inc. as was used by the Plaintiff.
Mr. Johnson testified that in 2008 and 2009, the industry became more regulated and
required new and special equipment. The business needed additional working capital,
equipment, valves, "iron" and to replace old equipment. The Defendants, as officers of
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Crawford, Inc. and individually, applied to First Bank for a loan in the amount of
$300,000.00.
At the time the Defendants applied for the loan, they testified that their home had
substantial equity. The amount owing on the home at that time appeared to be less than
$89,000.00. The home was used as collateral for the loan as evidenced by the mortgage
executed on behalf of First Bank. The Defendants provided additional collateral by
executing a Commercial Security Agreement granting First Bank a lien on "All Inventory,
Accounts and General Intangibles" of Crawford, Inc. 	Subsequently, the Debtors,
individually, borrowed additional funds from First Bank on September 30,2010 in the
principal amount of$34,273.32. The collateral provided for this loan was described as "All
Inventory, Accounts, Equipmenf and General Intangibles" of Crawford, Inc.
Discussion
Plaintiff alleges that the Defendants willfully and maliciously injured the Plaintiff by
converting the assets that were collateral for Plaintiffs loan to collateral for the loans to
First Bank.
Under the Bankruptcy Code, a discharge under §727 does not discharge an
individual debtor from any debt for willful and malicious injury by the debtor to another
entity or to the property of another entity. 3 There is substantial case law interpreting this
section of the Bankruptcy Code.
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2 Emphasis added.
3 §523(a)(6).
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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. Negligent or reckless acts do not suffice to establish that
a resulting injury is "willful and malicious." Intentional torts generally require that the
actor intends "the consequence of an act" not simply the act itself." 4 A court must not
overlook the criticality of the terms "willful" act and "malicious" injury. In §523(a)(6),
without proof of both, an objection to discharge under the section must fail. 	The term
"malicious" requires proof that the debtor either intended the resulting injury or
intentionally takes action that is substantially certain to cause the injury. Unless a debtor as
the result of a willful and malicious act, intended to do injury to a person, the debt is
discharged. 5 The Supreme Court's ruling in Geiger, is a narrow reading of"willful" and is
akin to the standard of deliberate injury necessary for an intentional tort. It appears to be
the same for conversion as for any other injury; to be willful, the debtor must intend that
conversion of the collateral injure the creditor or the creditor's lien interest. Willful injury
may be established indirectly by evidence of both the debtor's knowledge of the creditor's
lien rights and the debtor's knowledge that the conduct will cause particularized injury. 6
The Plaintiff asserts he was willfully and maliciously injured by the Defendants
when they converted the assets of Crawford, Inc. to First Bank by executing the
Commercial Security Agreement that granted First Bank a lien on the assets of Crawford,
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4Kawaauhau v. Geiger, 523 U.S. 57 (1998).
5 Panalis v. Moore, 357 F.3d 1125 (IOili Cir. 2004).
6Jn re Longley, 235 B.R. 651 (10'' Cir. BAP 1999).
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Inc. The Plaintiff argues that the Defendants intentionally failed to disclose their debt and
the security agreement with the Plaintiff when they applied for loan from First Bank.
During the course of the transactions, First Bank filed the required UCC Financing
Statements with the Wyoming Secretary of State obtaining a priority position as to the
collateral. The Plaintiff argues that Defendants caused his injury, i.e. that of having a lien
on the collateral that was after that of First Bank's, causing his injury.
In this case the court would have to fmd that the Defendants intended that First
Bank's security interest in the collateral have a higher priority than that of the Plaintiff to
fmd that the Defendants willfully and maliciously injured the Plaintiff. The court does not
fmd the facts and evidence support this assertion.
The court fmds that Mr. Johnson, although knowledgeable about the type of service
that Crawford Inc provides, was not sophisticated about the accounting side of operating a
business. Mrs. Johnson did not appear to have a business or bookkeeping background or
experience either. The Defendants testified that the Plaintiff helped Mrs. Johnson set up the
account for Crawford, Inc. characterizing the payments to the Plaintiff as a payroll
deduction. The Defendants testified that they considered the debt owed to the Plaintiff a
business debt not a personal debt, although the documents reflect that they signed the
Purchase Agreement, promissory note and security agreement with the Plaintiff as
individuals.
The Plaintiff presented the court with numerous business records for both Crawford,
Inc. and the Defendants. The documents ranged in dates from prior to the Defendants
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purchase of Crawford Inc through the period of time they applied for loans from First Banlc
These documents consisted of Personal Financial Statements, Profit & Loss Statements and
a Balance Sheet. Plaintiff asserts that these fmancial documents reflect Defendants'
intentional act of not disclosing to First Bank that they owed Plaintiff the amount of the
purchase price for the business or that they executed a securing agreement granting the
Plaintiff a lien on the assets of the business. Subsequently, First Bank approved the loans
and placed liens on the same collateral as the Plaintiff. First Bank then filed the UCC
Financing Statement with the Secretary of State according to the requirements of Wyoming
State law to perfect their security interest. As the Plaintiff failed to record his UCC
Financing Statement with the Wyoming Secretary of State until July 9, 2010, First Bank
had a priority security position in the collateral.
Marty Watkins, president of First Bank located in Mountain View, Wyoming
testified that he knew both the Plaintiff and the Defendants as both parties banked with
First Bank. Mr. Watkins also knew the parties personally from the community. Upon
review of the Defendants' profit and loss statement, Mr. Watkins testified that he did not
see any notation about the debt owed to the Plaintiff on those documents. More
importantly, Mr. Watkins testified that he would not expect to see this debt listed as " ... this
is a profit and loss statement...[it] does not list debts, but lists income and expenses ..."
Additionally, the Defendants testified that the payments to the Plaintiff were reflected on
Crawford, Inc.'s Profit and Loss Statements under the category of payroll expenses. The
Defendants had placed the payments under this category under the advisement of Plaintiff
when he helped Mrs. Johnson set up the accounts for Crawford, Inc.
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The evidence reflects that the Defendants knew that they had given a security
interest in the assets of Crawford, Inc. as collateral for the purchase of the business from the
Plaintiff. However, there is not any evidence that the Defendants intended that Plaintiff's
security interest would be preempted by First Bank. The Plaintiff did not prove that the
Defendants caused willful and malicious injury to the Plaintiff, Therefore, Plaintiffs
objection to Defendants' discharge fails.
This opinion constitutes the Court's findings of fact and conclusions oflaw. A
separate order shall be entered pursuant to Fed. R. Bankr. P. 9021.
DATED this 	/:£ day of May, 2012
Service to:
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Loretta Howieson Gerrard
Clark Stith
By the Court
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