Rockstone Capital, LLC v. Walker-Thomas Furniture Co, Inc. et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
SYLVIA M. SMITH,
Debtor.
____________________________
ROCKSTONE CAPITAL, LLC,
Plaintiff,
v.
WALKER-THOMAS FURNITURE
COMPANY, INC., et al.,
Defendants.
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Case No. 04-01581
(Chapter 7)
Adversary Proceeding No.
04-10457
MEMORANDUM DECISION RE MOTION TO
DISMISS COUNT IV OF THE SECOND AMENDED COMPLAINT
The defendant Sylvia Smith has filed a motion to dismiss
Count IV of the Second Amended Complaint, and the plaintiff,
Rockstone Capital, LLC (“Rockstone”), has opposed that motion.
The court will grant the motion for the following reasons.
The Memorandum Decision below is hereby signed. The
court does not request that the Memorandum Decision
be published in West's Bankruptcy Reporter. Dated:
July 17, 2007.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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I
Count IV of the Second Amended Complaint seeks a declaration
that Rockstone’s claim against Smith is nondischargeable based on
11 U.S.C. § 523(a)(6). 	It is premised on the following
allegations.
Rockstone is the holder of a note and guarantee executed by
William Smith and Sylvia Smith in 1993. 	Pursuant to the
guarantee, Rockstone obtained a confessed to judgment against
William Smith and Sylvia Smith in Prince George’s County,
Maryland in 2001. 	A notice of the judgment was filed with the
Superior Court of the District of Columbia on November 11, 2002.
First Transfer. 	On October 28, 2002, before Rockstone filed
the notice of judgment, Sylvia Smith conveyed the property
commonly known as 3013 Georgia Ave, NW, Washington, DC, to her
son Andre Smith. 	She did so with the intent to delay, hinder,
and defraud Rockstone. 	Sylvia Smith was aware that the note and
guarantee were in default. 	She had no intention of paying
Rockstone pursuant to the note and guarantee. 	At the time the
conveyance was made, Sylvia Smith was either insolvent or was
rendered insolvent as a result of the conveyance, and Sylvia
Smith did not receive fair consideration for the conveyance of
the property to her son. 	The conveyance is fraudulent pursuant
to DC Code §28-3104, et seq.
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Second Transfer. 	Later, in 2003, Andre Smith, by his
attorney in fact, Sylvia Smith, transfered the property to
Mohamed Afrah. 	As part of the transfer, Afrah borrowed $30,130
from Andre Smith and granted him a deed of trust to secure
repayment of that $30,130. 	Sylvia Smith took part in the
transfer of the property in an attempt to put the property out of
the reach of Rockstone.
Rockstone alleges that in making the first and second
transfers, Sylvia Smith
• 	willfully caused malicious injury to Rockstone;
• 	maliciously took part in the first and second transfers
in conscious disregard of Rockstone’s right to the
collateral;
• 	absorbed all the equity in the property and left no
monies for Rockstone to satisfy its confessed judgment;
• 	acted willfully, and in knowing disregard of the rights
of Rockstone without justification; and
• 	caused malicious injury to Rockstone’s right to recover
under the confessed judgment.
As set forth below, these allegations do not suffice to state a
claim under § 523(a)(6).
II
Section 523(a)(6) provides in relevant part that a discharge
under § 727 does not discharge an individual debtor from any debt
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“for willful and malicious injury by the debtor to another entity
or to the property of another entity.” 	For § 523(a)(6) to apply,
Rockstone was required to plead either a debt for an injury to
itself or a debt for injury to its property.
A.
Rockstone contends that the debtor’s acts injured Rockstone
as an unsecured creditor with respect to its ability to collect
its judgment, in particular, the prospect that it would record
its judgment in the District of Columbia and obtain an
enforceable lien against the property. 	However, although
Rockstone may have been injured by the debtor’s acts, Rockstone
has pointed to no basis in law for holding the debtor liable for
such injury.
Rockstone has failed to identify any nonbankruptcy law that
imposes an independent and separate obligation on a debtor for
frustrating collection of a debt she already owes when the
debtor’s acts do not entail an injury to existing property rights
of the creditor. 	If the debtor engaged in a transfer that is
fraudulent as to an unsecured creditor, the remedy under
nonbankruptcy law is to set aside the fraudulent conveyance and
then to proceed against the property, or to proceed against the
transferee for the value of the transfer if the property has been
transferred to a bona fide purchaser. 	As the party whose debt to
the creditor makes the transfer fraudulent, the transferor is
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1 	In contrast, a New York statute makes a debtor liable for
attorney’s fees of a creditor or bankruptcy trustee who sets
aside an intentionally fraudulent conveyance, and § 523(a)(6) may
make such fees a nondischargeable debt. 	See Gentry v. Kovler (In
re Kovler), 249 B.R. 238, 262 n.17 (Bankr. S.D.N.Y. 2000).
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already indebted to the creditor for the amount owed. 	Here, the
judgment debt is the debt the debtor Smith owes Rockstone, not a
debt for having made the fraudulent transfer. 	Rockstone points
to no statutory or other basis for an independent debt to be
found owing by the debtor based on her having made the transfer.
See Quarré v. Saylor (In re Saylor), 178 B.R. 209, 213-14 (B.A.P.
9th Cir. 1995) (in § 523(a)(6) proceeding, creditor did not show
that a debt was owed by transferor as a result of the
transferor’s fraudulent transfer; California law imposes
liability on transferees of fraudulent transfers), aff’d on basis
of B.A.P. decision, 108 F.3d 219 (9th Cir. 1997); Master-Halco,
Inc. v. Picard (In re Picard), 339 B.R. 542, 554-55 (Bankr. D.
Conn. 2006) (“Debtor was contractually liable to the Plaintiff on
the Guaranty. His alleged transfers may have made him incapable
of performing on the Guaranty thus breaching and ‘injuring’ it in
some sense. However, a breach of contract unaccompanied by
tortious conduct (e.g., conversion of collateral) does not give
rise to a Section 523(a)(6) nondischargeability claim.”
[Citations omitted.]). 1
Nonbankruptcy law may, however, impose liability on the
transferee, whose debt might be nondischargeable if the
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transferee obtained a bankruptcy discharge, see Murray v. Bammer
(In re Bammer), 131 F.3d 788 (9th Cir. 1997); McCain Foods USA,
Inc. v. Shore (In re Shore), 305 B.R. 559, 569 (Bankr. D. Kan.
2004) (distinguishing Saylor), aff’d, 317 B.R. 536 (B.A.P. 10th
Cir. 2004), but it simply does not impose liability on the
debtor-transferor whose pre-existing debt is what rendered the
transfer fraudulent. 	Without a debt arising from the transfer,
Rockstone has not pled a valid § 523(a)(6) claim for a debt for
injury to itself.
In contrast to nonbankruptcy law, the Bankruptcy Code
imposes a consequence on a debtor for having engaged in certain
fraudulent transfers. 	Section 727(a)(2) of the Bankruptcy Code
authorizes a denial of discharge to a debtor who engages in
certain attempts to hinder or defraud a creditor by transferring
property, but Rockstone’s request belatedly to amend its
complaint to raise a claim under § 727(a)(2) has been denied.
B.
Rockstone has pointed to no property owned by it as to which
the debtor inflicted willful and malicious injury. 	Rockstone had
no lien upon the subject property at the time of the first and
second transfers. 	Accordingly, the debtor did not engage in a
conversion of a lien.
Rockstone contends that the debtor knew that Rockstone was
able to obtain a lien on her property and was in the process of
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taking the steps to do so. 	It then contends that “[i]f Plaintiff
can prove that the debtor knew of the security interest, and also
that the debtor knew that a transfer of the property was wrongful
and certain to cause financial harm to the creditor, then such a
debt should be found nondischargeable under § 523(a)(6),” citing
Navistar Fin. Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (2d
Cir. 1996). 	In Stelluti, however, the court upheld a ruling that
the debtor’s debt “was nondischargeable under 11 U.S.C. §
523(a)(6) because her actions in helping her husband transfer
funds that were the property of [the creditor] to out-of-state
bank accounts were willful and malicious.” 	Id. (emphasis
added). 	Here, Rockstone has not established a property interest
that the debtor injured.
Rockstone only points to a possible judgment lien it could
obtain on the property in the future. 	If it had a lien on the
property, the property would have passed subject to the lien.
Having not obtained a lien on the property, it was only an
unsecured creditor and fares no better than any other creditor
who could in the future obtain a judgment and then take steps to
impose a lien for the judgment on the property. 	Accordingly,
Rockstone has not shown a valid claim under § 523(a)(6) based on
a debt for injury to its property.
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III
In accordance with the foregoing, an order will follow
dismissing Count IV of the Second Amended Complaint, and
directing the plaintiff to file a status report regarding its
views with respect to the timing of disposition of the counts
that remain.
[Signed and dated above.]
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9	O:\Judge Temp Docs\Rockstone Capital vs Walker-Thomas (In re Sylvia Smith) Memorandum Decision re MTD 523(a)(6) Claimv2.wpd
Copies to:
James E. Clarke
Rita Ting-Hopper
Draper & Goldberg, PLLC
803 Sycolin Road
Suite 301
Leesburg, VA 20175
Counsel for the plaintiff Rockstone Capital, LLC
Vere O. Plummer
Plummer and Associates
1090 Vermont Avenue, NW Suite 800
Washington, DC 20005
Counsel for the debtor Sylvia M. Smith
Walker-Thomas Furniture Co, Inc.
c/o William Smith, President
6804 25th Avenue
Hyattsville, MD 20782
Co-defendant
William Smith
6804 25th Avenue
Hyattsville, MD 20782
Co-defendant
Andre L. Smith
9490 Timesweep Lane
Columbia, MD 21045
Co-defendant
Mohamed O. Afrah
2229 10th Street, NW
Washington, DC 20001
Co-defendant
Wendell W. Webster
Chapter 7 Trustee
Webster, Fredrickson & Brackshaw
1775 K Street, NW
Suite 600
Washington, DC 20006
Office of the United States Trustee
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