New Buffalo Savings Bank v. McClung

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AUTHENTICAT
U.S. GOVERNME
INFORMATIO

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Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page1of 25

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

In re
MICHAEL L. MCCLUNG, Case No. 8:04-bk-6835-KRM

Debtor.

mee ee ee

NEW BUFFALO SAVINGS BANK,
Plaintiff,
Vv. Adv. No. 04-412

MICHAEL L. MCCLUNG,

Defendant.

me

MEMORANDUM OPINION AND ORDER
GRANTING DEFENDANT’S MOTION FOR INVOLUNTARY
DISMISSAL OF COUNT II OF THE COMPLAINT (SECTION 523 (a) (6)}

New Buffalo Savings Bank (“NBSB”) seeks to have its
$617,485.83 unsecured claim excepted from the Chapter 7
discharge, alleging that the debtor’s receipt of about $1
million of the bank’s cash collateral two years before the
petition date, and the debtor’s reinvestment of about $480,000
of such funds in assets that were exempt or immune from

collection, was a “willful and malicious injury” to the bank

Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page 2 of 25

under Section 523(a) (6) of the Bankruptcy Code.? For the
reasons set forth below, the Court concludes there is not
sufficient proof of the debtor’s intent to injure the bank.
The loans were current when he and his wife received the funds
and he made substantial, voluntary pre-payments before and
after receipt of the funds. Therefore the bank’s claim is not
excepted from the discharge.

BACKGROUND

The Loans

The debtor and his wife, formerly residents of New
Buffalo, Michigan, had a long-standing relationship with NBSB.
The McClungs had borrowed anda repaid an estimated thirty loans
over a ten-year pericd.

On September 25, 2000, the debtor borrowed $900,080
from NBSB to purchase a boat. About five months later, on
March 9, 2001, he borrowed another $200,020 to purchase
another boat (collectively, both loans are hereinafter

referred to as the “Boat Loans”). Fach of the Boat Loans had

1 Initially NBSB filed a claim in the amount of

$753,250.80. After the debtor filed a counterclaim in this preceeding, the
parties agreed to the entry of an Agreed Order, allowing the bank's
unsecured claim in the amount of $617,485.83 [Dkt. 226]. In turn, the
debtor dismissed, with prejudice, its counterclaim and claim objection
[Dkt. 10).

Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page 3 of 25

a ten-year maturity and required only a single payment of
accrued interest each year.

The debtor was the sole obligor on the Boat Loans.
NBSB was aware that the debtor was obtaining the loans without
his wife’s knowledge and that he was using the loans to buy
the boats.

NBSB did not take a security interest in the boats,
but elected to obtain alternative collateral: a pledge of the
debtor’s interest in a limited partnership known as Cc. Blair
Partners, L.P. (“C. Blair”), valued at about $1.7 million when
the first loan was made. The debtor, the bank and C. Blair
entered into a four-page “Consent Agreement” [Pl. Ex. 3),
which provides that C. Blair will {1) not distribute funds to
the debtor without notifying NBSB and (2) deposit any funds
that are distributed into a special account to be established
at NBSB.

Paragraph 5 of the Consent Agreement provides:

Until such time as the
Partnership [c. Blair] shall
have received written notice
from the Bank [NBSB] that the
afore-mentioned pledge and
security interest have
terminated the Partnership shall
make any and all distributions
and withdrawals in respect of

the Collateral (whether made in
cash or in kind, and whether

Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page 4of 25

made by the Borrower or
otherwise) directly to an
account at the Bank.

Paragraph 6 of the Consent Agreement provides that
Cc. Blair can accept instructions from NBSB, without the
consent of the debtor, only after NBSB sends a “Notice of
Foreclosure.” In the last sentence of paragraph 6, the debtor
agrees not to give payment instructions to C. Blair unless the
instructions are signed by an officer of NBSB. On the first
page of the Consent Agreement, the parties agree that “the
[debtor] will continue to be a limited partner of the
partnership, and... . [NBSB] shall not be deemed to be or
become a partner in the Partnership by virtue of the pledge
and assignment” until the partnership receives a Notice of
Foreclosure.

The Consent Agreement grants a pledge of the
debtor’s interest in the “Partnership.” The Consent Agreement
does not preclude the debtor from using any distributions or
withdrawals, so long as the loans are not in default. The
only requirement is that any distributions or withdrawals be
deposited in the “Michael McClung Pledgee” account.

NBSB did not file a UCC-1 financing statement for

its security interest; nor did it set up the special account

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for receipts of any distributions. Apparently unbeknownst to
the debtor, NBSB intended to apply any funds it received to
pre-pay the loans.’

The promissory note for the first of the Boat Loans
expressly recognized that the value of the debtor’s
partnership account could fall below $1.0 million: in that
event, NBSB would “request” additional collateral [Pl. Ex. 2].
Before making the second boat loan, NBSB learned that the
partnership account had declined by almost $400,000 from the
$1.7 million valuation at the time of the first loan [Pl. Ex.
5]. The second note therefore provided that NBSB could
“request” additional collateral if the value of the
partnership fell below $1.2 million [Pl. Ex. 4].

It is undisputed that through 2002 the debtor made
the scheduled interest payments on time and voluntarily pre-
paid about $867,692 of the principal amount of the Boat Loans

(about 72%), as follows:

2 The “account number” in the original Consent Agreement
was not an account at all. It was NBSB’s internal number for the initial
boat loan. The Consent Agreement did not authorize NBSB to apply such
distributions to the outstanding balance of the Boat Loans when the Boat
Loans were not in default.

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$900,090 Boat Loan:

Date Principal Interest
03/13/2001 $ 3,500.00
12/27/2001 $607,580.09
03/25/2002 17,920.84
08/06/2002 150,000.00

$757,580.09
$200,020 Boat Loan:*

Date Principal Interest
11/01/2001 $ 85,015.00
12/28/2001 25,097.00
03/11/2002 $13,796.68

$110,112.00

The Distribution of C. Blair Funds

By June of 2002, C. Blair had elected to dissolve
the partnership and distribute funds to the limited partners.
C. Blair’s audited financials, as prepared by Ernst & Young,
contain the following note:

Pursuant ite) the provisions of the
Partnership Agreement, the General
Partner elected to terminate the
Partnership during 2003. During June
2002, the Partnership ceased all new
investment activities, liquidated
substantially all of its publicly traded
securities, and began Lo distribute
assets to the partners in proportion to
their respective capital accounts. A
distribution generally representing 90%
of each partner’s liquid capital was made
on or about June 29, 2002, with

3 In October 2001, in addition to the original principal
amount of $200,082, the debtor received another $110,030. This additional
advance was repaid by payments of $85,015 on November 1, 2001, and
$25,097.00, on December 28, 2001.

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subsequent distributions of approximately

53 and 2% of each partner’s liquid

capital made during September 2002 and

January 2003, respectively.

[Pl. Ex. 39 (McClung Affidavit) at Ex. 15 at p. 6]. The
debtor did not control the partnership or its operations.

In 2002, the McClungs received about $1,031,000 from
C. Blair, including about $737,000 in June. [Pl. Ex. 40
{Oscher Affidavit) at Ex. D)]. This was done without the
knowledge or consent of NBSB [Pl. Ex. 39 (McClung Affidavit) J
20-21). At the time of these distributions, the debtor was
current on all payments due to NBSB.

The funds were transmitted to the debtor or the
debtor’s wife as directed by the debtor. Approximately
$430,000 was wired to Mrs. McClung’s bank account in June
2002. She used the funds to purchase two houses in Sarasota,
Florida (the “Monroe” and “Jacinto” properties), which were
titled in the names of the debtor and Mrs. McClung, as tenants
by the entireties. The Jacinto property was purchased with
monies mostly derived from the C. Blair account; the Monroe
property was purchased, in part, from C. Blair funds and by a
mortgage loan of about $300,000.

Another $307,000 was distributed by C. Blair to the

debtor, who deposited these funds into his checking and

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securities trading accounts at institutions other than NBSEB.
These funds were gradually depleted to sustain the McClungs’
$20,000 per month lifestyle and pay certain extraordinary
expenses, including legal fees.

Other Events in 2002

In March 2002, the McClungs, together, borrowed
$900,000 from NBSB, as a “bridge loan,” to finance the
purchase of a new home in Sarasota before the sale of their
prior residence could be closed. In June 2002, the McCiungs
repaid this loan in full after their former home was sold and
after they obtained a first mortgage on the new home.

After receiving the large C. Blair distributions in
June 2002, the debtor pre-paid another $150,000 of principal
of the Boat Loans, on August 6, 2002. The principal amount
was thus reduced to about $367,612. On November 11, 2002,
however, NBSB advanced another $100,000 to the debtor; but it
did so without verifying the current value of the debtor's
Cc, Blair account.

On the day after advancing the additional $100,000,
NBSB learned that C. Blair was terminating and = that
investments were being returned to the limited partners [Pl.

Ex. 6]. The debtor’s 2002 K-1 states that value of the

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debtor’s limited partnership interest was about $44,280 at the
end of 2002 [Pl. Ex. 11].

The Bankruptcy Case

From April 2002, through the end of that year, the
debtor was unemployed. He received severance, consisting of
salary and benefits, for four months while he searched for
employment. Additionally, the debtor and his wife maintained
their lifestyle by drawing off of the reinvested C. Blair
funds and proceeds from the sale of the Jacinto and Monroe
properties.

Upon learning that the debtor’s C. Blair account had
been substantially liquidated, NBSB elected to seek additional
collateral, specifically a lien against the McClungs’
homestead and other jointly owned assets. NBSB did not
attempt to recover the $44,280 remaining in the Cc. Blair
account. It was not until May 2003, that NBSB called the Boat
Loans in default, after the debtor failed to make the March
2003 interest payment.

It appears that the debtor was willing to provide
additional collateral, but his wife was not. She declined to
mortgage her interest in the homestead or other real estate to

recollateralize the loans, which had been concealed from her.

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NBSB then sued the debtor in Michigan; later it sued both the
debtor and his wife in Florida.

On April 7, 2004, the debtor filed a petition for
relief under Chapter 11. The debtor remained unemployed until
shortly after the filing of his Chapter 11 petition. He
proposed an amended plan that created a “creditor trust fund”
consisting of about $407,000, including $60,000 from an
I.R.A., about $300,000 remaining from the pre-petition sales
of the Monroe and Jacinto Properties, $35,000 to be paid by
the debtor’s wife, and cash from other sources. NBSB,
classified separately from other unsecured creditors, was to
receive: (a) the balance of the creditor trust fund after the
payment of administrative and priority claims; {b) $5,000 per
year, for six years, from the debtor’s future earnings; and
(c) a $70,000 second mortgage on the McClungs’ home. In
exchange for her contribution of $35,000 and the grant of the
second mortgage, Mrs. McClung was to receive a general release
from potential fraudulent transfer claims, estimated to be as
much as of $530,000, from her receipt of c. Blair
distributions in 2002.

This Court found that the plan was filed in “good
faith,” but denied confirmation because it was not feasible.

The debtor’s ability, while under-employed, to continue making

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the first mortgage payments on _ the homestead was not
sufficiently established. In the event of default and
foreclosure, the proposed junior lien to NBSB would be
extinguished. The plan was not “fair and equitable” to NBSB
either. Mrs. McClung’s proposed contribution was insufficient
to support both her release from liability and the “new value”
required to justify a cramdown of NBSB. The case was

converted to Chapter 7 on April 7, 2005.

DISCUSSION

Federal Rule of Civil Procedure 52(c)

At the end of NBSB’s case-in-chief, the debtor moved
for involuntary dismissal of Count II under Federal Rule of
Civil Procedure 41(b).* The Court will treat the motion,
however, as one for partial judgment under F.R.C.P. 52(c).
Rule 52(c), made applicable by Federal Rule of Bankruptcy
Procedure 7052, permits a party in a non-jury trial to move

for judgment against a party who has been fully heard on an

4 Earlier, the Court entered partial summary judgment in favor
of the debter on Count I and with respect to all but one of the specific
transfers alleged in Count III [Dk. 114]. The remaining factual allegation
in Count III (dealing with a post-petition paycheck) was later dropped by
NBSB at the commencement of trial. At the conclusion of NBSB’s case, the
Court granted the debtor’s motion to dismiss Count IV (11 U.S.c. §&
727(a)(3)}, but reserved ruling on the motion to involuntarily dismiss
Count II, which is decided by this Memeorandum Opinion and Order.

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issue. In 1991, subdivision (c) was added to Rule 52 to
replace part of former Rule 41{b).

Rule 52(c) thus authorizes the court to enter
judgment at any time it can appropriately make a dispositive
finding of fact on the evidence. Martinez v. United States
Sugar Corp., 880 F. Supp. 773, 775 (M.D. Fla. 1995), aff'd, Ti
F.3d 497 (lith Cir. 1996). The Court may enter judgment
against the plaintiff or decline to render any judgment until
the close of all the evidence. See Smith Petroleum Serv.,
Ince. v. Monsanto Chem. Co., 420 F.2d 1103, 1116 (5th Cir.
1970) (ruling on former version of Rule 4l(b}}.

In reviewing the evidence in a non-jury

case, the court need not review the

evidence in the light most favorable to

the plaintiff. Instead, the judge has the

duty to take an unbiased view of all the

evidence, both direct and circumstantial

and evaluate it and accord it the weight

that he believes it is entitled to

receive.

Waikiki Hobron Assocs. v. Investment Mortgage Inc. (in re
Waikiki Hobron Assocs.), 6 B.R. 643 (Bankr. D. Hawaii 1980)
(Rule 41(b)} (citing Weissinger v. U.S., 423 F.2d 795 (Sth Cir.
1970}). A dispositive ruling is appropriate in the present

case because the debtor and the debtor’s expert testified in

NBSB’s case-in-chief.

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Willful and Malicious Injury

Section 523(a) (6) of the Bankruptcy Code excepts
from discharge a debt for “willful and malicious injury by the
debtor to another entity. . . .” Courts generally construe
the statutory exceptions to discharge “liberally in favor of
the debtor,” and recognize that “‘{t]he reasons for denying a
discharge . . . must be real and substantial, not merely
technical and conjectural.’” In re Miller, 39 F.3d 301, 304

(llth Cir. 1994) (citations omitted}.

Under Section 523 (a} (6), the creditor must
establish: (1) willful conduct, (23 malice, and (3)
causation. Schlenkerman v. Goldbronn (In re Goldbronn), 263

B.R. 347, 366 (Bankr. M.D. Fla. 2001) (citing Japra v. Apte
(In re Apte), 180 B.R. 223, 230 (9th Cir. BAP 1995)); Hope v.
Walker (In re Walker), 48 F.3d 1161, 1163-64 (llth Cir. (Ga.)
1995}). Each element must be proven by a preponderance of the
evidence. Grogan v. Garner, 498 U.S. 279, 111 5S. Ct. 654, 112
L.Ed.2d 755 (1991).

In 1995, the Eleventh Circuit decided that a debtor
acted “willfully,” for purposes of Section 523(a) (6), when
that person acts with the intent to cause injury or when that
person is substantially certain that an injury will occur.

Hope v. Walker (In re Walker), 48 F.3d 1161 (11th Cir. 1995)

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(holding that an employer’s failure to obtain statutorily
required workmens’ compensation insurance was not 4 willful
and malicious injury to an injured employee). It is not
clear, however, to what extent the “substantially certain”
requirement is still applicable as a distinct standard of
intent.

In 1998, the Supreme Court in Kawaauhau v. Geiger,
523 U.S. 57, 118 S. Ct. 974, 140 L.Ed. 2d 90 (1998), held that
a debt arising from a physician’s maipractice, based on
negligent or reckless conduct, was not a willful and malicious
injury excepted from discharge. The Court concluded that
“Inlegligent or reckless acts . . . do not suffice to
establish that a resulting injury is willful and malicicus.”
523 U.S. at 64.

The word “willful” in {a)(6) modifies the

word “injury,” indicating that non-
dischargeability takes a deliberate or
intentional injury, not merely a

deliberate or intentional act that leads
to injury. Had Congress meant to exempt

debts resulting from unintentionally
inflicted injuries, it might have
described instead “willful acts that cause
injury.” Or, Congress might have selected
an additional word or words, i.é.,
“reckless” or “negligent,” Lo modify

“injury.” Moreover, as the Eignth Circuit
observed, the (a)(6) formulation triggers
in the lawyer’s mind the category
“intentional torts,” as distinguished from
negligent or reckless torts. Intentional

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torts generally require that the actor
intend “the consequences of an act,” not
simply “the act itself.”

523 U.S. at 61 (citations omitted).
In a later case, involving an alleged conversion of
a creditor’s collateral, Bankruptcy Judge Funk reasoned that:

...Kawaauhau stands for the proposition
that a complainant seeking an exception to
discharge pursuant tc § 523 (a) (6) must
show that the debtor acted with the intent
to cause injury. The Court notes,
however, that Eleventh Circuit precedent
indicates that a “willful and malicious
injury” includes acts “substantially
certain to cause injury.” To the extent
that Walker may be inconsistent with
Kawaauhau, this Court strictly interprets
Kawaauhau as requiring a showing of
intentional and deliberate injury for
purposes of § 523(a) (6). As such,
Defendant’s failure to remit the inventory
sale proceeds must have been done with the
actual intent to cause injury in order to
fit within the dischargeability exception
of § 523(a) (6).

In re Tomlinson, 220 B.R. 134, 137-38 (Bankr. M.D. 1998
{citations omitted). Accord, In re Buck, 220 B.R. 999 (10th
Cir. BAP 1998) (holding that the “willful” standard requires
evidence that the debtor had “motive to harm” the creditor}.
Judge Funk concluded that the debtor’s sale of the lender’s
collateral was not a willful and malicious injury because the
debtor had used the money to keep his business going for the

purpose of repaying the debt, not of injuring the lender.

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After Kawaauhau, proof of deliberate acts, alone, is
not a sufficient basis for excepting a debt from discharge
under Section 523 (a) (6). The operative language of Kawaauhau
is that “{tlhe word ‘willful’ in (a) (6) modifies the word
‘injury,’ indicating that nondischargeability takes a

deliberate or intentional injury, not merely a deliberate act

that leads to injury.” 118 S$. Ct. at 977 (emphasis in
original). The injury must be intended -- not predictably or
“substantially” certain to result from a deliberate act. See

In re Jenkins, 258 B.R. 251 (Bankr. N.D. Ala. 2001) (finding
the Supreme Court appears to require a showing of mens rea to
injure).

Even those courts which have applied the
“substantially certain” standard, post Kawaauhau, disagree as
to whether it requires evidence of the actor’s subjective
intent, as determined from circumstantial evidence. See,
e.g., In re Howard, 261 #2B-.R. 513 (Bankr. M.D. 2001)
(substantial certainty stancaard survives, but the standard is
subjective). See generally, In re fTinkler, 311 B.R. 869
‘Bankr. D. Cole. 2004) (discussing the split of authorities).

There is also the expressed view that a borrower's
conversion of a creditor’s collateral may be a per se “willful

and malicious” injury. See In re Giffen, 195 B.R. 951 (Bankr.

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M.D. Fla. 1996) (selling collateral in violation of the terms
of an unperfected security agreement was a willful and
malicious injury); Jn re Russell, 262 B.R. 449, 4595 (Bankr.
N.D. Ind. 2001) (intentional injury when debtor intended to
improperly use the creditor’s collateral or proceeds from the
collateral for purposes other than the payment of the debt
that the property secured). This Court dees not adopt a per
se approach in this case.

First, the tort of conversion is an inappropriate
remedy where a claim is based on a breach of contract. United
American Bank of Cent. Fla., Inc. v. Seligman, 599 So.2d 1014,
1017 (Fla. 5th DCA 1992) (breach of contractual duty, not an
act of conversion, where defendant rightfully came into
possession of escrowed funds, yet failed to deliver said funds
to the proper person); Pathway Fin. v. Miami Int/’l Realty Co.,
588 So.2d 1000, 1004 (Fla. 3rd DCA 1991) (civil theft or
conversion could not have occurred where defendants did not
engage in fraud or misrepresentation). There is no evidence
that NBSB was defrauded in the disbursement of funds to the

debtor.°

5 The record, in fact, is clear that NBSB could monitor the

status of the account at any time by a telephone call to C. Blair. There
is no evidence of concealment or misrepresentation regarding the status of
the account.

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Given the Supreme Court’s directive in Kawaauhau,
that there must be a proven intent to injure, this Court is
compelled to examine all of the circumstances necessary to
discern the debtor’s intent. Accordingly, when a secured
creditor seeks to have a debt held nondischargeable on the
basis that the debtor converted its collateral, the creditor
must do more than prove that its collateral was diminished.
It must establish that the debtor intended to injure the
creditor. See In re Tomlinson, supra.

As explained in Avco Fin. Services of Billings v.
Kidd (In re Kidd), 219 B.R. 278 (Bankr. D. Mont. 1998):

The problem with conversion cases .. . is

that rarely are the debtors acting out of

a desire to injure the creditors, even

though the injury to the creditor,

although not desired, is almost always

substantially certain to result from a

debtor’s actions. Thus, the key in

conversion cases is to analyze each set of

circumstances on a case-by-case basis to

determine whether the conversion is in the

nature of an intentional tort or whether

the conversion is a result of a negligent

or reckless tort - but not willful of

Malicious.

Td. at 284, See also Idaho Fed. Credit Union v. Thomason (in
re Thomason), 225 B.R. 751 (Bankr. D. Idaho 1998); In re
Thiara, 285 B.R. 420 (9th Cir. BAP 2002) (reckless or

negligent acts of conversion which inflict consequential

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injury do not fall within the ambit of exceptions to discharge
for debtor’s “willful and malicious injury”).

It is not even clear that the debtor actually
“converted” NBSB’s collateral. It was C. Blair that violated
the Consent Agreement by distributing funds to the McClungs.
The loans were current when the debtor and his wife received
the funds. There is no provision in the Consent Agreement, as
is typically found in mortgages and other security agreements,
requiring the debtor to hold any distributions “in trust” for
the bank. There is no provision requiring the debtor to
transmit any such distributions to the bank while the loans
were current.

C. Blair breached the Consent Agreement by making
distributions to the debtor and his wife. Nothing in evidence
suggests that this breach of the Consent Agreement was
anything more than negligent or reckless. When the
partnership distributions were made, the debtor was current on
his loan payments. Later, he pre-paid another $150,000 of the
outstanding principal. The timing of the withdrawals from C.
Blair coincided with either the debtor’s payment of income
taxes and interest payments on the Boat Loans or with C.
Blair's distributions to all limited partners, not with any

evidence of malice or intention to harm NBSB.

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C, Blair, was subject to the same contractual
requirements as the debtor with respect to withdrawals and
Gistributions from the partnership. The debtor candidly
admitted that he did not contact NBSB about the distributions
or termination of C. Blair. Rather, he presumed that C. Blair
was obtaining the appropriate consent from NBSB. Indeed, on
direct examination in NBSB’s case, the debtor pointed to an e-
mail from which he understood that C. Blair was obtaining
“everyone’s paperwork” in response to an early request for a
withdrawal. [Pl. Ex. 10 (BAM 128)]. He acknowledged NBSB’s
lien, but presumed that NBSB had given C. Blair its consent
pursuant to the Consent Agreement. No evidence was introduced
to suggest that the debtor’s presumption, although incorrect,
was implausible or even unreasonable in view of the fact that
he was current on his payments and had made significant
principal reductions.

Under either a subjective or objective standard, to
the extent the standard applies, it was not “substantially
certain” that NBSB would be injured when the debtor retained
and reinvested the funds distributed by C. Blair. Before the
large distributions were received in June 2002, the debtor had
pre-paid about $717,000, or about 553, of the principal amount

of the Boat Loans from the sales of the boats, even though

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they were not subject to any lien. That left about $517,000
outstanding that was secured by about $828,000 in the Cc. Blair
account in June 2002.

The debtor later pre-paid another $150,000 from the
C, Blair funds that he received in June 2002. At the end of
August 2002, the principal balance was about $367,612, secured
by $44,280 in the C. Blair account; but the debtor held over
$300,000 in non-exempt assets. Thus, until about February
2003, the debtor had sufficient assets to collateralize the
Boat Loans or keep them current [Pl. Ex. 8].

Malicious injury, within the meaning of Section
523(a) (6), requires evidence that the injury was “wrongful and

without just cause or excessive, even in the absence of

hatred, spite or ill-will.” In re Latch, 820 F. 2d 1163 (1lith
Cir. 1987). There must be a consciousness of wrongdoing. In
re Stanley, 66 F.3d 664, 668 (4th Cir. 1995). It is this

knowledge of wrongdoing that is the key to malicious injury
under Section 523{a)(6), not the wrongfulness of the debtor’s
actions. In re Posta, 866 F.2d 364, 367 (10th Cir. 1989); In
re Cardillo, 39 B.R. 548, 550 (Bankr. D. Mass. 1984). Accord,
In re Grier, 124 B.R. 229, 233 (Bankr. W.D. Tex. 1991)
(“Simply because the sale was in violation of the security

agreement and was in fact an intentional sale on the part of

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the debtor should not be enough to trigger a finding of
malice.”). See also, Davis v. Aetna Acceptance Co., 293 U.S.
at 328, 332, 55 S. Ct. at 153 (a willful and malicious injury
does not automatically result from every tortious conversion).
E.g., In re Caruth, 2002 WL 1770523 (Bankr. N. D. Iowa 2002)
(holding that malicious conduct must be targeted at the
creditor and finding no malice where debtor sold collateral
and used the proceeds to pay bills).

The debtor was unemployed for most of 2002. The
debtor eventually liquidated his securities accounts to pay
expenses and maintain his lifestyle. Undoubtedly, the
debtor’s maintenance of his $20,000 per month lifestyle was
reckless. It appears, however, that instead of intending
injury to the bank, the debtor was in denial about his
financial situation, believing that he would regain suitable
employment. The debtor’s actions were directed at maintaining
his lifestyle and marital harmony.® His conduct may have been
reckless, but was not directed at NBSB. Even though
approximately $430,000 of the funds received from C. Blair
were sheltered from collection in the Monroe and Jacinto

Properties, the remaining funds totaling about $351,280, were

6 At the time of trial the McClungs had separated.

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Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page 23 of 25

not so sheltered. The debtor elected instead to take out a
$300,000 mortgage to acquire the Monroe Property, which belies
the charge that he intended to injure NBSB. Considering all
of the circumstances -- (a) it was C. Blair that elected, in
2002, to terminate its operations and make distributions to
partners, ({b) C. Blair failed to notify NBSB, fc) in June of
2002, the McClungs paid off NBSB’s $900,000 bridge loan, (d)
the debtor refrained from sheltering $307,000 he received from
C. Blair, opting instead to buy the Monroe Property with a
$300,000 mortgage loan, (e) the debtor had already prepaid a
significant portion of the Boat Loans, and (f) the principal
balances of the Boat Loans were not due until 2010 -- the
Court is unable to conclude that the debtor acted with malice
directed at NBSB or intended to injure NBSB.

CONCLUSION

In reviewing the evidence and assessing the
credibility of the witnesses, the Court concludes that the
debtor, even though unemployed at the time, did not intend to
injure NBSB when he and his wife received and retained the
funds from the limited partnership account pledged to the
bank. The debtor was motivated more by marital and personal
concerns - maybe irresponsibly so - than by an intent to

injure the bank. At that time, it was not even “substantially

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Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page 24 of 25

certain” that the bank would be injured. The Court concludes
that the debtor did not willfully and maliciousiy injure NBSB.
Accordingly, it is hereby

ORDERED:

1. The debtor’s Motion for Involuntary Dismissal,
taken as a motion for partial judgment on Count II be, and the
same is hereby, granted.

2. A separate partial judgment shall be entered in
favor of the debtor and against NBSB with respect to Count Il.

DONE and ORDERED at Tampa, Florida, on December 6,

A(cl M—

K. RODNEY MAY *
U.S. Bankruptcy Judge

2005.

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Case 8:04-ap-00412-KRM Doc130 Filed 12/06/05 Page 25 of 25

Copies to:

Michael L. McClung, Debtor, 2222 615* Street, Sarasota, Florida
34242

Roberta A. Colton, Esquire, Trenam, Kemker, et al., Attorney
for Debtor, P. G. Box 1102, Tampa, Florida 33601

Michael P. Brundage, Esquire, Hill, Ward, et al., Attorney for
Creditor, P. ©. Box 2231, Tampa, Florida 33601

Traci Stevenson, Esquire, Chapter 7 Trustee, P. O. Box 86690,
Madeira Beach, FL 33738

United States Trustee, Timberlake Annex, Suite 1200, 501 E.
Polk Street, Tampa, Florida 33602

1323241¥1

25