Les Bois Leasing, Inc v. Lehman et al

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
______________________________________________________
In Re:
Bankruptcy Case
TRACY LEHMAN and 	No. 04-00078
NANETTE LEHMAN, husband
and wife,
Debtors.
______________________________________________________
LES BOIS LEASING, INC., an
Idaho corporation,
Plaintiff, 	Adv. Proceeding No. 04-6136
vs.
TRACY LEHMAN and
NANETTE LEHMAN, husband
and wife,
Defendants.
______________________________________________________
MEMORANDUM OF DECISION
_______________________________________________________
Appearances:
D. Blair Clark, RINGERT, CLARK, CHARTERED, Boise, Idaho,
Attorney for Plaintiff.
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1 Previously, Defendants filed a motion for summary judgment. Docket No. 8.
The Court granted that motion in part, leaving only Plaintiff’s claims under §§
523(a)(4), (a)(6), and 727(a)(5) for trial. Order, Docket No. 21.
2 During closing arguments, Plaintiff asked the Court, pursuant to Fed. R. Bankr.
P. 7015 and Fed. R. Civ. P. 15(b), to amend their complaint to conform to the proof and
to deny Defendants’ discharge under § 727(a)(3). Plaintiff’s complaint includes a claim
under this Code section, but Plaintiff abandoned that claim during the summary judgment
phase. Permitting such an amendment under these facts would be prejudicial to
Defendants. Plaintiff’s motion is denied.
MEMORANDUM OF DECISION - 2
Howard R. Foley, FOLEY, FREEMAN, BORTON & STERN,
CHARTERED, Meridian, Idaho, Attorney for Defendants.
Plaintiff Les Bois Leasing, Inc. leased cattle to Defendants, Chapter
7 Debtors Tracy and Nanette Lehman. When Defendants’ dairy operation failed,
they liquidated their herd, including Plaintiff’s cattle. However, there is a
discrepancy over the number of cattle leased and their disposition. Plaintiff alleges
that, under 11 U.S.C. § 727(a)(5), these discrepancies are grounds to deny
Defendants a discharge. Alternatively, Plaintiff seeks to have Defendants’ debt
under the cattle leases excepted from discharge under 11 U.S.C. § 523(a)(4) or
(a)(6). 1
The Court conducted a trial on April 14, 2005. 2 After considering
the evidence and testimony, arguments of the parties, and relevant legal
authorities, the Court makes the following findings of fact and conclusions of law.
Fed. R. Bankr. P. 7052.
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3 The Court’s findings of fact are based in part on its opportunity to observe the
witnesses testify, its assessment of their credibility, and its assignment of the appropriate
weight to be given to such testimony.
MEMORANDUM OF DECISION - 3
FACTS3
In connection with Defendants’ motion for summary judgment, the
Court previously examined many of the undisputed facts regarding Plaintiff’s and
Defendants’ business transactions. Docket No. 22. Rather than repeat those
details here, with its prior decision as a basis, the Court will set out only those
facts relevant to Plaintiff’s remaining claims.
Plaintiff is a leasing business. Defendants owned and operated
Lehman Dairy, Inc. (the “dairy”). The dairy leased equipment from Plaintiff in the
1990s, and on December 1, 1999, both Defendants signed a “continuing guaranty”
in favor of Plaintiff, Ex. 3, which made Defendants liable for obligations under the
leases.
During the summer of 2002, on behalf of the dairy, Mr. Lehman
executed two written cattle leases with Plaintiff. The first, dated June 20, 2002,
provided for the lease of forty-five Holstein cows; the second lease, dated July 8,
2002, covered an additional fifty Holstein cows. Importantly, both leases required
the dairy to maintain the number of cows stated in the lease, notwithstanding
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MEMORANDUM OF DECISION - 4
losses due to culling, death, or disease. With respect to offspring, the leases
provided:
4. TITLE: The Dairy Livestock and their
Progeny shall remain the property of Lessor. Lessee
will defend Lessor’s ownership against claims or
creditors including without limitation all charges and
taxes but excluding taxes measured by Lessor’s
income.
. . . .
10. PROGENY: All Heifer Calves shall be and
will remain the property of Lessor. Branding or
eartagging shall be accomplished at the appropriate
time per item # 14. Disposition of Progeny shall be as
follows:
10. A. Heifer Calves are to be raised and
retained for use as replacement livestock. They will
only be sold at such time as there is an excess of
Heifer Calves in relation to need. Funds from the sale
of Heifer Calves will be deposited into an interest
bearing account to be established at Lessee’s bank.
Funds will be withdrawn only by dual signature by
check with Lessor and Lessee’ signatures. Funds will
be withdrawn only for purchase of replacement stock
pertinent to this lease. Ownership of all Heifer Calves
will remain with the Lessor during the term of this
lease. Ownership of all Heifer Calves in excess of the
original Lease amount shall be passed to the Lessee
upon expiration of this lease, excluding early
termination or default.
Exs. 1, 2.
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MEMORANDUM OF DECISION - 5
In connection with the June lease for forty-five cows, Mr. Lehman
arranged for the purchase of forty-five Holsteins from the Vancouver, Washington
area. The record shows that the total purchase price for these cows was $64,800.
Ex. C. Plaintiff issued a check to fund the purchase of these cows. Ex. D.
Neither party disputes that Defendants took possession of these cattle. Mr.
Lehman testified that none of the forty-five cows were pregnant at the time of
purchase, and in the approximately eighteen months he cared for these cows, they
yielded only a few calves.
Regarding the July lease, the parties dispute how many cows were
leased. Mr. Ver Mett, Plaintiff’s owner and manager, contends Defendants agreed
to lease fifty cows for the dairy. He testified that he provided Defendants with
$60,000 to purchase the fifty cows. Ex. 8. The parties’ lease and a livestock
acceptance form signed by both Defendants support Mr. Ver Mett’s suggestion
that fifty cows were leased.
In contrast, Mr. Lehman testified that the $60,000 Plaintiff provided
was not enough to purchase fifty cows because prices in the dairy livestock market
were rapidly climbing. Instead, from the money advanced by Plaintiff, on June
25, 2002, Mr. Lehman purchased twenty-nine cows from the Emmett Valley
Livestock Auction for a total of $36,980. Ex. A. Then, on July 9, 2002, Mr.
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MEMORANDUM OF DECISION - 6
Lehman purchased another twelve cows through the auction for $16,930. Ex. B.
Mr. Lehman stated that he then bought another two cows from private sellers for a
total price of $3,000. He says he deposited the remaining $3,000 into the dairy’s
business account, where it was ultimately used to pay operating expenses.
According to Mr. Lehman, the July lease, livestock acceptance form and other
documents showing that the dairy leased fifty cows were prepared before the cows
were actually purchased. These documents were never amended to reflect the true
details of the transaction.
While the facts are disputed, on this point, the Court accepts Mr.
Lehman’s explanation as correct. The Court finds that Mr. Lehman acquired only
forty-three cows, not fifty, with the funds advanced by Plaintiff, and that Mr.
Lehman spent $3,000 of Plaintiff’s funds on dairy expenses, despite the fact those
funds had been advanced solely to purchase cattle for the July lease.
Of the forty-one cows Mr. Lehman bought through the auction, all
were pregnant at the time of purchase. However, Mr. Lehman testified that many
of the cows he purchased had been bred with non-Holstein bulls, and as a result,
the cross-bred, heifer offspring they produced were unsuitable for use as
replacements for the milking herd. In addition, he testified that several of these
leased cows and calves died during the birth process. Mr. Lehman estimated that
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MEMORANDUM OF DECISION - 7
this group of cows produced fewer than ten replacement heifers. Based on his
understanding of the lease, Mr. Lehman assumed he was permitted to and did sell
the cross-bred heifer calves and bull calves directly to third party purchasers.
All the cows were to be identified with ear tags. Mr. Lehman
combined the eighty-eight cows leased from Plaintiff with another approximately
220 cows he had purchased with financing provided by Wells Fargo Bank. As
milk prices declined, the diary became unprofitable. Defendants ultimately
decided to terminate the dairy operation. On December 2, 2003, with the prior
consent of both Wells Fargo and Mr. Ver Mett, Mr. Lehman had all the animals
remaining on his dairy liquidated through sales conducted at the Emmett Valley
Livestock Auction.
The record contains two sets of records relating to the herd
liquidation. Exhibit 4 is a Seller History Report for the dairy generated by the
Emmett Valley Livestock Auction. This exhibit shows that the dairy sold thirteen
cows during the terms of the two leases, but prior to the liquidation. Plaintiff
contends it owned these thirteen cows, but the Court accepts Mr. Lehman’s
persuasive testimony and other evidence that established these were not Plaintiff’s
cows. This report also shows the dairy sold 187 cows on December 2, 2003. Mr.
Lehman testified that this entry refers to the sale of cows subject to Wells Fargo’s
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MEMORANDUM OF DECISION - 8
lien. A second set of records is also contained in Exhibit 4. These sale records
from the auction show fifty-nine cows sold for Plaintiff. Mr. Lehman explained
that because Plaintiff owned the leased cattle, their sale and records were separate
from those for the cows subject to the Wells Fargo lien.
From the inception of the leases to the liquidation of the herd, Mr.
Ver Mett inspected the cows on five occasions: on July 12, 2002; and on July 21,
September 27, November 3, and December 2, 2003. None of these inspections
gave Mr. Ver Mett cause for concern, although it appears his inspections were
cursory at best.
For this same period of time, Mr. Lehman’s records disclose that
sixty-seven cows died. Ex. H. Mr. Lehman testified to the several and varied
reasons the herd experienced this level of death loss. He also testified that this
level was consistent with industry standards. These figures as to the extent of cow
deaths also generally support a financial statement Mr. Lehman prepared for the
dairy and provided to Plaintiff on October 30, 2003. Ex. 7. In this statement, Mr.
Lehman reports having 260 milking cows, thirty springers, and a total of ninety
heifers in three different age and weight groups. According to his testimony, sixty
of the 260 milking cows belonged to Plaintiff.
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MEMORANDUM OF DECISION - 9
DISPOSITION
A. Plaintiff’s § 727(a)(5) Claim
Plaintiff’s § 727(a)(5) claim, as narrowed by the Court’s disposition
of Defendants’ motion for summary judgment, Docket Nos. 21, 22, is that
Defendants have failed to adequately account for bull calf offspring from the
leased cattle. A debtor may not receive a discharge if “the debtor has failed to
explain satisfactorily, before determination of denial of discharge under this
paragraph, any loss of assets or deficiency of assets to meet the debtor’s
liabilities.” 11 U.S.C. § 727(a)(5). But as noted in the Court’s decision disposing
of Defendants’ motion, only the loss of an asset that would have been available to
satisfy creditors’ claims is actionable. Docket No. 22 at 9–10 (citing Baker v.
Reed (In re Reed), 310 B.R. 363, 369–70 (Bankr. N.D. Ohio 2004); Pyramid Tech.
Corp. v. Cook (In re Cook), 146 B.R. 934, 940–41 (Bankr. E.D. Pa. 1992)).
Plaintiff’s position, as articulated by Mr. Ver Mett, is that under the
leases, it owned all the leased cattle and all offspring, including the bull calves. If
Plaintiff is correct, Defendants’ failure to account for the disposition of the bull
calves will not support a claim under § 727(a)(5). In other words, since the calves,
as Plaintiff’s property, would not be an asset available to satisfy the claims of
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4 To be clear, the Court was not asked to decide if Defendants’ sale of bull calves
and cross-bred heifers was a breach of the lease or would support a claim by Plaintiff
against Defendants’ bankruptcy estate for the value of the calves. Accordingly, the Court
expresses no opinion on those questions.
MEMORANDUM OF DECISION - 10
Defendants’ creditors, Defendant need not account for them under this provision
of the Code. In this respect Plaintiff’s claim fails.
However, even assuming Plaintiff did not acquire ownership of bull
calves produced by the leased cows under the leases, the Court concludes
discharge should not be denied because the Court considers Mr. Lehman’s
explanation of the disposition of the calves to be a satisfactory one. See Leimbach
v. Lane (In re Lane), 03.4 I.B.C.R. 213, 215–16 (Bankr. D. Idaho 2003) (finding
for debtor on a § 727(a)(5) claim because the debtor’s explanation of the
disposition of an asset was satisfactory). Mr. Lehman testified that, because he
felt he owned them, he sold bull calves born on the dairy to third party purchasers
within a few of days of each calf’s birth. These sales, and the dairy’s consumption
of any resulting sale proceeds during its slide into unprofitability, is credible and
largely undisputed by Plaintiff.4
Under either approach, the Court concludes judgment should be
entered in Defendants’ favor on Plaintiff’s § 727 claim.
B. Plaintiff’s § 523(a)(4) Claim
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MEMORANDUM OF DECISION - 11
Plaintiff’s remaining claim under § 523(a)(4) is for embezzlement.
To prevail under § 523(a)(4) based on the debtor’s embezzlement, a creditor must
show (1) that property was rightfully in the possession of the nonowner-debtor, (2)
that the debtor appropriated the property for a use other than the one for which it
was entrusted, and (3) circumstances indicating fraud. See First Delaware Life
Ins. Co. v. Wada (In re Wada), 210 B.R. 572, 576 (B.A.P. 9 th Cir. 1997); U-Save
Auto Rental of Am. v. Mickens (In re Mickens), 312 B.R. 666, 680 (Bankr. N.D.
Cal. 2004); Kiss Enters., Inc. v. Mirth (In re Mirth), 99.4 I.B.C.R. 148, 151
(Bankr. D. Idaho 1999). In this action, there are two areas requiring the Court’s
attention. The first involves Defendants’ use of Plaintiff’s funds; the second
focuses on Defendants’ disposition of the leased cattle.
1. Defendants’ use of Plaintiff’s funds
Regarding the funds advanced by Plaintiff to purchase cows, there is
no dispute that Plaintiff provided Defendants and the dairy with $60,000 to buy
cattle under the July lease. And Mr. Lehman admitted that $3,000 of these funds
was not used to buy cows, but instead was diverted to fund dairy operations. It
therefore appears clear, then, that the first two elements of Plaintiff’s claim have
been established. Thus, whether Mr. Lehman embezzled these funds turns on
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MEMORANDUM OF DECISION - 12
whether there are circumstances indicating fraud. The Court will address Mr. and
Mrs. Lehman’s conduct separately.
As to Mr. Lehman, one key consideration in the Court’s analysis is
whether he acted with fraudulent intent. Transamerica Commercial Fin. Corp. v.
Littleton (In re Littleton), 942 F.2d 551, 555–556 (9 th Cir. 1991) (noting intent of
debtor is an issue in § 523(a)(4) embezzlement analysis). A debtor’s intent may
be proved by circumstantial evidence. Johnson v. Davis (In re Davis), 262 B.R.
663, 671–72 (Bankr. E.D. Va. 2001); Teamsters Local 533 v. Schultz (In re
Schultz), 46 B.R. 880, 890–91 (Bankr. D. Nev. 1985) (acknowledging
circumstantial evidence may show fraudulent conduct).
Mr. Lehman accepted $60,000 from Plaintiff for the purpose of
buying the cattle that the dairy would lease from Plaintiff. With this
understanding in mind, Mr. Lehman spent less than the full amount, purchased
fewer than the fifty cows specified in the lease and supporting documents, and
retained the balance for his dairy’s benefit. In his testimony, Mr. Lehman
explained that he planned to use the remaining money to buy additional cows once
prices dropped. But at some point, Mr. Lehman obviously decided to use
Plaintiff’s money for unauthorized purposes. Whatever his intent before making
that decision, at that instant he decided to take another’s property for his own use
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MEMORANDUM OF DECISION - 13
under circumstances that were misleading; his conduct and lack of candor caused
these deceptive conditions. This constitutes fraudulent circumstances for purposes
of this exception to discharge. For these reasons, the Court will enter a judgment
in favor of Plaintiff and declare that Mr. Lehman owes Plaintiff a debt in the
amount of $3,000 that is excepted from discharge under § 523(a)(4).
Whether a nondischargeable judgment should be entered against
Mrs. Lehman is a separate question. Because many exceptions to discharge under
§ 523(a) are founded upon bad conduct, the creditor must establish its claim
against each debtor-defendant. Wells Fargo Bank Northwest, N.A. v. Covino (In
re Covino), 04.3 I.B.C.R. 98, 105 (Bankr. D. Idaho 2004) (discussing a §
523(a)(2) claim). And “[e]xceptions to discharge are strictly construed against
plaintiff creditors and liberally in favor of debtors.” Id. at 103.
Plaintiff did not present any convincing evidence that Mrs. Lehman
participated in the embezzlement of the $3,000. While Mrs. Lehman did not
testify, Mr. Ver Mett’s and Mr. Lehman’s testimony indicated that Mr. Lehman
was the primary manager and decision-maker for the dairy. The evidence showed
that Mrs. Lehman occupied a limited role in running the business, and no
information was offered to prove that she was involved in, or even knew about,
Mr. Lehman’s decision to divert Plaintiff’s funds to pay the dairy’s expenses. See
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MEMORANDUM OF DECISION - 14
La Trattoria, Inc. v. Lansford (In re Lansford), 822 F.2d 902, 904–05 (9 th Cir.
1987) (holding that evidence of a spouse’s independent conduct supported a
judgment against her under § 523(a)(2)(B)). Furthermore, Plaintiff has neither
argued, nor is there any evidence to prove, that Mr. Lehman’s bad conduct should
be imputed to Mrs. Lehman. See Tsurukawa v. Nikon Precision, Inc. (In re
Tsurukawa), 287 B.R. 515, 525 (B.A.P. 9 th Cir. 2002) (holding that a debt may be
excepted from discharge either when the debtor’s conduct is actionable or when
another’s actionable conduct is imputed under agency/partnership principles).
Absent more proof, the Court declines to order that the $3,000
embezzled from Plaintiff by Mr. Lehman should be excepted from her discharge.
2. Defendants’ disposition of Plaintiff’s cattle
The trial record establishes that Defendants purchased and leased
eighty-eight cows from Plaintiff, and later liquidated fifty-nine of those cattle. It
is undisputed that the proceeds of that liquidation were received by Plaintiff.
Thus, Defendants arguably failed to return twenty-nine cows at the termination of
the leases.
As noted above, the Court accepts that these twenty-nine “missing”
cows died on the dairy. There appears to be no dispute that Defendants owe
Plaintiff the value of these cows; the contest involves whether Defendants’
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5 As Mr. Lehman explained without contradiction at trial, there is no “market”
for a dead cow. Obviously, dead animals can not be sold for human consumption. And
while at some past time the carcass (and hide) could be sold for a minimal amount, those
days are gone. The dairy bears the burden of disposing of a dead animal, either by
burying it or by hiring another to cart it away.
MEMORANDUM OF DECISION - 15
obligation should be excepted from discharge because of Defendants’
embezzlement.
In this regard, the record does not support either the second or third
element required for the embezzlement claim. In particular, it is clear that
Defendants did not divert these twenty-nine cows to a use other than the one for
which they were entrusted.5 The animals simply died, a sad but sometimes
inevitable event in the dairy business, and one contemplated by the leases. Exs. A,
B.
Moreover, there is no indication of fraud. Mr. Ver Mett argues that
his periodic inspections of the herd and the financial statement Mr. Lehman
submitted for the dairy one month before the liquidation prove all the leased cows
were on the dairy just prior to liquidation, and therefore, their absence from the
auction sale suggests Defendants disposed of them improperly. But Mr. Ver
Mett’s inspections were so superficial as to have little probative value. And Mr.
Lehman’s testimony explaining the cattle numbers in the financial statement was
persuasive on the point that sixty of the 260 dairy cows disclosed were Plaintiffs.
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MEMORANDUM OF DECISION - 16
Admittedly, Mr. Lehman did not maintain detailed death loss
records concerning the herd, and what little information he did record was not
produced to Plaintiff until this litigation was underway. But to the Court, while
this may show Defendants’ books were haphazard and deficient, it does not show
fraud. Defendants did keep crude death loss records that support their explanation
and nothing presented to the Court suggests Defendants acted in the shadows of
fraudulent circumstances with respect to the cattle shortage of twenty-nine head.
Plaintiff has not shown that Defendants’ obligation for the twenty-
nine “missing” (or as the Court prefers, “dead”) cows should be excepted from
discharge under § 523(a)(4).
C. Plaintiff’s § 523(a)(6) Claim
Plaintiff’s theory under § 523(a)(6) is that Defendants improperly
disposed of the missing cattle and have failed to account for their disposition. The
Bankruptcy Code provides that “[a] discharge under section 727 . . . of this title
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
. . . .” 11 U.S.C. § 523(a)(6). To prove a debtor acted willfully, the creditor must
demonstrate the debtor “deliberately or intentionally injured the creditor, and that
in doing so, the debtor intended the consequences of his act, not just the act itself.”
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MEMORANDUM OF DECISION - 17
Dominguez v. Elias (In re Elias), 03.4 I.B.C.R. 243, 246 (Bankr. D. Idaho 2003).
To prove a debtor acted maliciously, the creditor must show the debtor’s conduct
involved a wrongful act, done intentionally, which necessarily causes injury, and
that is done without just cause or excuse. Id. As noted in the Court’s earlier
disposition of Defendants’ motion for summary judgment, damage to leased
property by a debtor may support a § 523(a)(6) claim. Docket No. 22; Itule v.
Metlease, Inc. (In re Itule), 114 B.R. 206, 210 (B.A.P. 9 th Cir. 1990) (holding that
the debtor’s tortious damage to leased property was willful and malicious under §
523(a)(6)).
Plaintiff argues that the cattle leases should be treated, as a matter of
Idaho law, as bailments. Pl.’s Pretrial Mem. at 3–4, Docket No. 26 (citing
Mahoney v. Citizens’ Nat’l Bank of Salmon, 271 P. 935 (Idaho 1928)). Under
Idaho bailment law, Plaintiff contends, the burden of proof lies with the bailee,
Defendants in this case, to explain the loss of property entrusted to them. Id.
(citing Low v. Park Price Co., 503 P.2d 291 (Idaho 1972)).
As discussed above, Defendants presented evidence that the twenty-
nine cows not sold at the December liquidation sale died. The Court accepts this
explanation. And notwithstanding Plaintiff’s position regarding the burden of
proof under Idaho bailment law, Plaintiff bears the burden of proving that
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MEMORANDUM OF DECISION - 18
Defendants willfully and maliciously harmed its property. See Dominguez, 03.4
I.B.C.R. at 245–46. As noted in the Court’s decision on Defendants’ motion for
summary judgment, a critical issue in this context is Defendants’ subjective intent
in handling the cattle.
The record in this case does not establish that Defendants intended
to deprive Plaintiff of its cows. While the dairy’s financial trouble prompted
Defendants to cut back on important professional veterinary services, fall behind
on their breeding schedule and curtail normal dairy operations, none of these facts
are sufficient to show Defendants intended to kill Plaintiff’s cows or to otherwise
deprive Plaintiff of its ownership interest. Indeed, Mr. Ver Mett testified that on
his drive-by inspections, the dairy operation appeared as he expected it should.
This tends to negate any inference that Defendants were managing the dairy with
any design to intentionally damage the leased animals. Indeed, both Defendants’
and Plaintiff’s interests were best served by Defendant’s employment of good
husbandry practices: the more cows alive and producing milk, the more likely
Defendants would profit and Plaintiff would be paid under the leases.
In short, Plaintiff failed to show that either of the Defendants acted
with the intent necessary to support its § 523(a)(6) claim for willful and malicious
injury.
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MEMORANDUM OF DECISION - 19
CONCLUSION
Plaintiff failed to prove Defendants’ discharge should be denied
under § 727(a)(5), or that any debt owed by Defendants to Plaintiff arising from
“missing cows” should be excepted from discharge under § 523(a)(4) or (a)(6).
However, Plaintiff did adequately establish that Defendant Tracy
Lehman embezzled $3,000 of Plaintiff’s funds he accepted for the purpose of
buying cows by diverting those funds to pay dairy expenses. This debt is
nondischargeable under § 523(a)(4).
A separate judgment will be entered.
Dated: May 3, 2005
Honorable Jim D. Pappas
United States Bankruptcy Judge
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