CAGO, Inc. v. Slade

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: Raymond C. Slade,
Case No. 08-10927-j7
Debtor.
CAGO, INC.,
Plaintiff,
v. 	Adversary No. 08-01065-j7
RAYMOND C. SLADE.
Defendant.
MEMORANDUM OPINION
This matter is before the Court on the Complaint Objecting to Discharge1 filed by
CAGO, Inc. (“CAGO” or “Plaintiff”), through its counsel of record, Jason C. Bousliman2 ,
against Raymond Curtis Slade (“Mr. Slade” or “Defendant”). 3 Mr. Slade is a debtor under
Chapter 7 of title 11 of the United States Code. CAGO seeks a non-dischargeable judgment
1 The Plaintiff originally made claims under 11 U.S.C. § 727 “Discharge,” but those claims were not included in the
Consolidated Pretrial Order. The Debtor’s general discharge is therefore not affected by this decision, pursuant to
Fed. R. Civ. P. 16, made applicable in this case by Fed.R.Bankr.P. 7016.
2 Mr. Bousliman, who has been CAGO’s primary counsel throughout this litigation, began his representation as a
member of Modrall, Sperling, Roehl, Harris & Sisk PA, but, while the case was pending, left that firm and joined
Lewis and Roca LLP. Spencer Lewis Edelman (of Modrall, Sperling, Roehl, Harris & Sisk PA) entered his formal
appearance on behalf of the Plaintiff on March 1, 2010, but was not present at the trial.
3 Mr. Slade appeared pro se at the trial, but was represented by attorney Russell C. Lowe until the Court granted Mr.
Lowe’s Motion to Withdrawal as Attorney, which was conditioned on Mr. Lowe’s continued representation of Mr.
Slade through the entry and explanation of a pretrial trial order (see Docket No. 47, entered May 19, 2011). The
pretrial order was entered on September 6, 2011 (Docket No. 63). An Order Authorizing and Allowing Withdrawal
of Counsel Russell C. Lowe as Defendant’s Attorney was entered September 8, 2011 (Docket No. 65).
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against Mr. Slade under §§ 523(a)(2)(A) and (B), 523(a)(4), 523(a)(6), and 523(a)(11) of the
Bankruptcy Code. 4 See Consolidated Pretrial Order (Docket No. 63).
The Court held a trial on the merits on October 17 and 18, 2011. After considering the
evidence, arguments of counsel and applicable statutory and case law, the Court has determined
that CAGO established a claim of a non-dischargeable debt under 11 U.S.C. §§ 523(a)(2)(A),
and will enter a judgment on that claim. The Court denies all other claims of a non-
dischargeable debt.
Jurisdiction and Venue
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§
1334(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(J). Venue is proper
under 28 U.S.C § 1409(a). Pursuant to Rule 52, Fed.R.Civ.P., made applicable by Rule 7052,
Fed.R.Bankr.P., the Court now states its findings of fact and conclusions of law.
FINDINGS OF FACTS
This is a case about a missing trackhoe.
Mr. Slade is the 100% owner of Stoneworks, LLC, a New Mexico limited liability company
(“Stoneworks”). In late 2005, CAGO, on the one hand, and Stoneworks, Mr. Slade, individually,
and Mr. Slade “dba Stoneworks,” on the other, entered into an “Equipment Lease Agreement
with Option to Purchase” (the “Contract”) for a Link Belt model 4300 Quantum Excavator (the
“Trackhoe” or “Equipment”).5 Neither Stoneworks nor Mr. Slade made any of the payments
required under the Contract, and were in default from the day Stoneworks took possession of the
Trackhoe. In mid-2007, the parties entered into a settlement agreement to resolve issues relating
4 All references to “§[]” hereinafter refer to 11 U.S.C. §[§]. Title 11 of the U.S. Code shall also be referred to as the
“Bankruptcy Code” or the “Code”.
5 There is no evidence before the Court that Stoneworks at any material time was a sole proprietorship. Mr. Slade
apparently was added as a lessee under the Contract as an accommodation party.
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this non-performance (the “Settlement Agreement”). Again, no payments – other than those paid
by a third party – were made. Mr. Slade filed a Chapter 7 bankruptcy case on March 28, 2008,
Case No. 08-10927. The Trackhoe disappeared in April 2008; both parties deny knowledge of
its disposition or whereabouts. Each has insinuated that the other took it. CAGO filed the
Complaint in this adversary proceeding on May 15, 2008. In September 2008, a Texas grand
jury indicted Mr. Slade for theft of services in excess of $200,000 in connection with his
obligations under the Contract. In December 2010, Mr. Slade entered into a plea agreement
whereby he agreed to pay CAGO restitution of $125,000, in addition to $75,000 that he paid
immediately after the plea agreement was made. The Court now examines these events in
greater detail.
The Parties Meet and Form the Contract
The parties met at some time in 2003 or 2004, well before they formed the Contract. Robert
F. Bourk (“Mr. Bourk”) is the President of CAGO. He conducted or directed all actions
attributable to CAGO in this case. At the time he met Mr. Slade, Mr. Bourk had been acting as
the President of CAGO for approximately thirty years. Mr. Bourk was a practicing attorney for
approximately twenty-five years in Oklahoma City, Oklahoma. His law practice concentrated in
the areas of collection law and civil litigation. Mr. Bourk was introduced to Mr. Slade by a
friend who was Mr. Slade’s criminal defense attorney in unrelated matters at that time. Amongst
others, Mr. Slade had been charged with bribery of a federal government official, a fact of which
Mr. Bourk was aware and into which he later performed some investigation prior to entering into
the Contract.6
6 Around the time of this introduction, Mr. Slade was operating another company, which was then engaged in a
demolition project at a building located in downtown Albuquerque. Mr. Bourk was interested in acquiring a piece
of property in or around Albuquerque and inspected the building to see if it suited his purposes for a future
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Mr. Slade eventually chartered Stoneworks, which conducted a gravel mining operation. The
gravel mining operation took place on land owned by Ronald E. Douglass and JoAnn C.
Douglass, located in the greater Albuquerque area (the “gravel pit”). Stoneworks operated the
gravel pit property under a mining lease (the “Douglass Mining Lease”).
The channel of communication between Mr. Slade and Mr. Bourk remained open after their
initial introduction. In August 2005, Mr. Slade sought to obtain a trackhoe from Mr. Bourk. Mr.
Slade testified that he “was trying to buy it, more than anything.” Mr. Bourk, being aware of Mr.
Slade’s criminal history, performed due diligence on Mr. Slade. He spoke with Robert Finch, a
Chapter 7 case trustee in an unrelated bankruptcy case in which Mr. Slade was seeking recovery
of construction equipment. Mr. Finch gave Mr. Bourk a favorable recommendation for Mr.
Slade, telling Mr. Bourk that he, the trustee, was familiar with the case in which Mr. Slade was
charged with bribery of a government official, that Mr. Slade had received a “bad deal,” and that
the trustee felt like most of the problems in some of Mr. Slade’s previous business dealings were
not Mr. Slade’s fault. Mr. Bourk also consulted two or three other attorneys who were familiar
with Mr. Slade.
On November 11, 2005, CAGO and Mr. Slade executed the Contract. The Contract provided
for the rental of the Trackhoe by CAGO to Stoneworks for a one-year term commencing on
November 14, 2005. Slade or Stoneworks was to pay CAGO $72,000 in twelve equal monthly
rental payments ($6,000 a month). Any payment more than ten days late was subject to a
$500.00 late fee. A security deposit of $6,000 was required to be paid prior to commencement of
the lease term. As additional security, the Contract provided for a security interest in Slade’s
leasehold interest in the Douglass Mining Lease. The Contract also contained a purchase option
investment vehicle. He determined that it was not. Mr. Slade’s company was at some point stripped of this
demolition job when a worker died by falling from the building’s roof. That company folded.
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for $70,000 less any payments already made, conditioned upon Mr. Slade and/or Stoneworks
being current on the payments. CAGO filed a financing statement on the Trackhoe under the
New Mexico Uniform Commercial Code.
Performance Under the Contract and the 2007 Settlement Agreement
Neither Stoneworks nor Mr. Slade ever made any of the rental payments required under
the Contract, nor was the required security deposit ever made. As such, the Contract was in
default from the day the Trackhoe was delivered. Mr. Slade represented to Mr. Bourk that
Stoneworks was waiting on payment for accounts receivable to raise funds to make the security
deposit, and that, although he had other debts awaiting payment, Mr. Slade held unencumbered
property and thus had alternative avenues through which to make the security deposit. Mr. Slade
further represented to CAGO that Stoneworks would have the means to make the rent payments.
CAGO allowed Stoneworks to take possession of the Trackhoe despite its failure to make the
security deposit at the time of delivery as required by the Contract, because of Mr. Slade’s
representations that he would nevertheless eventually perform under the Contract.
Mr. Bourk engaged in a substantial amount of communication with Mr. Slade and other
Stoneworks employees throughout 2006. Janet Hoshor, 7 who was managing secretary of
Stoneworks during much of its time in operation, was present for the initial delivery of the
Trackhoe. She also helped Mr. Bourk obtain the information needed to file a UCC financing
statement. Ms. Hoshor testified that she spoke with either Mr. Bourk or his wife once or twice a
month by telephone while she was employed at Stoneworks. During their many conversations
regarding Stoneworks’ non-performance under the Contract, she repeatedly offered the Trackhoe
back to Mr. Bourk. Mr. Bourk also spoke with Mr. Slade on the telephone frequently during this
time period. During these conversations, Mr. Slade made continuing representations of his
7 Ms. Hoshor’s name at the time of her employment by Stoneworks was Janet Heirshberg.
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intentions and Stoneworks’ abilities to make the rental payments. Mr. Bourk elected not to
retake possession of the Trackhoe. He testified that he preferred to receive the past due rent
instead of retaking possession of the Trackhoe.8
Mr. Bourk made multiple personal trips to the gravel pit. Mr. Bourk was never denied
access to any information he sought to the extent information was available, nor was Mr. Bourk
ever denied access to the gravel pit. Stonework’s business records were in a state of disarray, a
fact of which Mr. Bourk was aware.
As time went on and while these events built upon one another, Mr. Bourk sought to
work out a deal where he would be paid moneys owed by Mr. Slade. During one of his
numerous visits, on or about September 12, 2006, Stoneworks tendered four post-dated checks to
CAGO, one for $20,000 and three for $15,000 each.9 Mr. Bourk had reason to believe when the
checks were tendered that there were insufficient funds in the bank account where they were
drawn to honor the checks. Mr. Bourk sought to deposit two of the checks; they were returned
for insufficient funds. He did not deposit the other two.
These specific events surrounding the Trackhoe unfolded against a backdrop fraught with
business and legal difficulties. Stoneworks was financially unstable from the beginning, and a
great deal of self-described financial “improv” took place; e.g,. many truckers were paid in
gravel and trading goods for debt was a common practice. Stoneworks’ debts and problems
reached an insurmountable level when the New Mexico Department of Transportation
(“NMDOT”) executed a search warrant on the property via a SWAT team raid in late 2006.
NMDOT Officer Stan Lundy, who directed the raid, testified that he had talked with a number of
8 There was conflicting testimony regarding whether Mr. Bourk refused to retake possession of the Trackhoe
because his true intention was to obtain the gravel pit property, owned by Mr. Douglass, by filing and foreclosing a
materialmen’s lien against the property. CAGO did in fact file such a lien, and an action to foreclose the lien. The
Court need not decide whether that was Mr. Bourk’s true intention.
9 See Plaintiff’s Exh. 15.
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people who had bad business dealings with Mr. Slade. Based on those conversations, Officer
Lundy believed Mr. Slade had stolen vehicles and equipment located at the gravel pit. 10 Mr.
Bourk was aware of the SWAT team raid.
By the end of 2006, following the New Mexico Department of Transportation raid, the
Stoneworks’ gravel pit operation was no longer commercially viable. Mr. Slade began to move
towards ceasing operations within the few months after execution of the search warrant.
On January 26, 2007, CAGO took legal action against Mr. Slade, Stoneworks, Ronald
Douglass and JoAnn Douglass by filing a complaint in state court to collect debts owed, for
replevin, and to foreclose a materialmen’s lien. On July 11, 2007, the parties settled all claims.
Under the Settlement Agreement, 11 the parties agreed that a stipulated judgment would
be entered against Mr. Slade and Stoneworks and in favor of CAGO in the total amount of
$200,000, and that the judgment would bear interest at the rate of 8.75 % per annum. Mr. Slade
or Stoneworks was to tender $30,000 immediately, and then tender to CAGO either the Trackhoe
or $60,000 from the sale or refinance of the Trackhoe within 30 days after entry of the stipulated
judgment. Such payments would be credited to the amount owing under the stipulated judgment.
If the Trackhoe was surrendered to CAGO, the net proceeds realized by CAGO from its sale of
the Trackohe would be credited to the amount owing under the judgment. The Trackhoe was
estimated to yield $60,000 of net proceeds from a sale. The Settlement Agreement further
provided that CAGO would be paid royalties on product produced from the gravel pit. The
10 Other than Officer Lundy’s testimony, CAGO presented no evidence that Mr. Slade had stolen any vehicle or
equipment. Ronald Douglass testified that one of the reportedly stolen pieces of equipment was a broken bulldozer
which the owner had abandoned at the gravel pit site.
11 The Settlement Agreement is contained in a transcript made by a court reporter at what was initially intended to
be a deposition of Mr. Slade in the case, Cago, Inc. v. Ronald Douglass, JoAnn Douglass, Curtis Slade, and
Stoneworks, LLC, in the Second Judicial District Court for Bernalillo Country, New Mexico, No. D-202-CV-2007-
0085.
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royalties paid to CAGO also would be credited to the amount owing under the stipulated
judgment.
Mr. Slade’s aforementioned legal difficulty regarding bribery of a federal official had
resulted in a prison sentence, which he began serving on July 19, 2007, approximately one week
after the date of the Settlement Agreement. All parties were aware of this impending sentence
when making the Settlement Agreement. Mr. Slade ultimately served a 62-day sentence in the
La Tuna Federal Correctional Institution.
Almost three months after the settlement was made, on October 4, 2007, a stipulated
judgment (the “Stipulated Judgment”) was entered in the state court lawsuit. See Exhibit 5. The
Stipulated Judgment simply provided for judgment in favor of CAGO and against Slade in the
amount of $200,000, with interest accruing at the rate of 8.75% per annum from the date of the
judgment (i.e. October 4, 2007) until the judgment was paid in full.
Ram Jaquez, an employee of A.S. Horner, was in charge of operation of the gravel pit in
Mr. Slade’s absence. Mr. Jaquez testified that he believed Mr. Slade was dishonest. Mr. Slade
never instructed him either to sell or return the Trackhoe. However, on Mr. Slade’s instructions,
A.S. Horner paid royalties due under the Settlement Agreement. On October 17, 2007, A.S.
Horner tendered $5,225.50 to CAGO “for aggregate removed from the Douglas Pit and or
Stoneworks LLC facility from July 9, 2007 through October 3, 2007 […] at the rate of $0.70 /
ton.” See Exhibit 45. The evidence before the Court is inconclusive as to whether CAGO
received any further monies from the sale of product mined at the gravel pit.
Neither Mr. Slade nor Stoneworks ever personally made any of the payments required
under the Settlement Agreement, nor did Mr. Slade or Stoneworks ever return the Trackhoe.
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The Trackhoe Disappears and the 2010 Plea Bargain
Mr. Slade commenced a Chapter 7 bankruptcy case on March 28, 2008, around the same
time he was closing out the gravel pit.12 Also at some point around that date, the Trackhoe
disappeared.
Mr. Slade testified that the last time he saw the Trackhoe was when it was at the Laguna
Pueblo in New Mexico. He testified that he moved it there as part of an agreement with the
Laguna Pueblo to remove a railroad spur, which could be sold for scrap. This testimony was
corroborated by Glen Barlow, a close friend and former employee of Mr. Slade and Stoneworks,
respectively. 	Mr. Slade testified that he intended to use his share of the proceeds from this deal
to pay CAGO and that, although he owed many people money, he never owed any money to
anyone in or around the Laguna Pueblo.
Ronald Douglass, the owner of the gravel pit property, last saw the Trackhoe in February
2008, when two individuals identifying themselves as being from the Laguna Pueblo took
control of it. He testified that he thought Mr. Slade’s son, Shea, attempted to halt their removal
of the Trackhoe from the gravel pit, but was unsuccessful. The two individuals explained to Mr.
Douglass that they were taking it because of a “money issue.” Mr. Douglass did not inquire any
further into the matter.
A few days after commencing his Chapter 7 bankruptcy case, on or about April 3, 2008,
Mr. Slade participated in a telephone call between Plaintiff’s counsel, Mr. Bousliman, and Mr.
Slade’s then-counsel, Mr. Lowe. In this conversation, Mr. Slade explained where the Trackhoe
was to Mr. Lowe, who drew directions on a map of the area that he had obtained from the
internet service Mapquest. Mr. Lowe faxed that map to Mr. Bousliman the same day. See
Exhibit 41. No one involved in the litigation before this Court has seen the Trackhoe since. A
12 Bankruptcy Case No. 08-10927-j7.
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private investigator hired by the Plaintiff, David Martin, spent five hours over three days looking
for the Trackhoe in and around the Laguna Pueblo. He used the map drawn by Mr. Lowe at Mr.
Slade’s direction, but was never able to locate the Trackhoe. The Court finds that the evidence
does not establish that Mr. Slade was responsible for the disappearance of the Trackhoe.
At the beginning of May 2008, CAGO made several official demands for Stoneworks to
return the Trackhoe to CAGO. See Exhibits 16, 17, 18. On September 11, 2008, a Texas grand
jury indicted Mr. Slade for theft of services greater than $200,000. In the Statement of Probable
Cause attached thereto, a Texas peace officer swore under oath that Mr. Bourk had represented
to him that the Trackhoe was valued in excess of $125,000 and that Mr. Slade had caused him to
lose rental fees of $250,000 to $300,000. See Exhibit 29. On November 22, 2010, Mr. Slade
made a plea bargain wherein he agreed to pay $125,000 to Mr. Bourk via monthly payments
spread over 10 years. See Exhibit 30a. In addition to this restitution and in connection with the
plea bargain, Mr. Slade paid $75,000 to Mr. Bourk immediately after the plea bargain was made.
Damages Claimed
The present action was filed on May 15, 2008. CAGO claims damages of $632,088.74,13
but stipulated that Mr. Slade should receive credit for moneys already paid and to be paid to
CAGO as restitution or in connection with the plea bargain. CAGO’s claim of damages includes
$200,000 owed under the Settlement Agreement and Stipulated Judgment; loss of use damages
for the period July 11, 2007 (the date of the Settlement Agreement) through October 17, 2011
(the first day of the trial in this adversary proceeding) in the amount of $260,967.74; interest
accrued under the Stipulated Judgment in the amount of $76,121.00; legal fees in the amount of
$85,000; and costs and expenses in the amount of $5,000.
13 See Exhibit 42, a summary exhibit. The $632,088.74 figure exceeds the component damages detailed in Exhibit
42 by $5,000.
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DISCUSSION
CAGO asserts that the debts Mr. Slade owes it are non-dischargeable under §§
523(a)(2)(A), (a)(2)(B), (a)(4), (a)(6), and (a)(11). CAGO requests the Court to find these debts
non-dischargeable due to Mr. Slade’s behavior during three time periods: (1) during the
formation of the initial Contract; (2) during the time that the parties entered into the Settlement
Agreement; and (3) for behavior surrounding the eventual disappearance of the Trackhoe.
Despite submitting numerous claims under subsections of § 523(a), CAGO offered only
one – § 523(a)(2)(A) – which supports nondischargeability of Mr. Slade’s debt under either the
Contract or Settlement Agreement, to CAGO. CAGO’s remaining claims under § 523(a) – §§
523(a)(2)(B), 523(a)(4), 523(a)(6), and § 523(a)(11) – will be denied, either under the facts,
well-established case law, or a plain reading of the statute. The Court will address each of
CAGO’s objections to the discharge of debt.
1. 	Claims under Under 11 U.S.C § 523(a)(2)(A)
CAGO asserts that Mr. Slade made express or implied false representations that induced
it to enter into the Contract. CAGO asserts that Mr. Slade made additional false representations
that induced it to enter into the Settlement Agreement. CAGO thereby claims that debts under
both the Contract and Settlement Agreement are non-dischargeable under 11 U.S.C §
523(a)(2)(A).
The legal standard for establishing non-dischargeability of a debt under 11 U.S.C §
523(a)(2)(A) is:
A creditor seeking a determination of non-dischargeability under 11 U.S.C. §
523(a)(2)(A) bears the burden of proving, by a preponderance of the evidence,
that 	(1) 	the 	debtor 	made 	a 	false 	representation, 	(2) 	the 	debtor 	made 	the
representation with the intent to deceive the creditor; (3) the creditor relied on the
representation; (4) the creditor’s reliance was justifiable; and (5) the debtor’s
representation caused the creditor to sustain a loss.
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Cabrera v. Larranaga (In re Larranaga), 2011 WL 1344562 at *2 (Bankr.D.N.M. J. Jacobvitz),
citing Fowler Bros v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996) (the required
elements under 11 U.S.C. § 523(a)(2)(A) are: “1) [t]he debtor made a false representation; the
debtor made the representation with the intent to deceive the creditor; the creditor relied on the
representation; the creditor's reliance was [justifiable]; and the debtor's representation caused the
creditor to sustain a loss.”); Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d. 351 (1995)
(changing the standard of reliance under 11 U.S.C. § 523(a)(2)(A) from “reasonable” to
“justifiable.”); In re Riebesell, 586 F.3d 782, 789 (10th Cir.2009)(same).
The Court will address first, whether CAGO has established a non-dischargeable claim in
connection with events pertaining to the Contract; and second, whether CAGO has established a
non-dischargeable claim in connection events pertaining to the Settlement Agreement. The
Court will then address damages.
a. 	CAGO has established a non-dischargeable claim under § 523(a)(2)(A) in
connection events pertaining to the Contract.
CAGO asserts that Mr. Slade expressly or impliedly misrepresented his intention to make
payments pursuant to the terms of the Contract, and that CAGO, acting through Mr. Bourk, in
reliance on this misrepresentation, entered into the Contract with Mr. Slade. CAGO maintains
that the debt Mr. Slade owes it under the Contract therefore is non-dischargeable under 11 U.S.C
§ 523(a)(2)(A). The Court concludes that CAGO has established a non-dischargeable claim
under § 523(a)(2)(A) in connection with events pertaining to the Contract, but also finds that,
because the Settlement Agreement constituted a novation, the debt that is non-dischargeable is
the debt Mr. Slade owes under the Settlement Agreement, not the debt he owes under the
Contract.
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False Representation and Intent to Deceive
This Court finds that Mr. Slade made a false representation to Mr. Bourk when Mr. Slade
represented that he would pay CAGO the moneys owed under the Contract. Mr. Slade had no
intention of making the payments required under the Contract, as represented, when he entered
into the Contract.14
“False representations are ‘representations knowingly and fraudulently made that give
rise to the debt.’” Adams County Dept. of Soc. Services v. Sutherland-Minor (In re Sutherland-
Minor), 345 B.R. 348, 354 (Bankr.D.Colo.2006), quoting Cobb v. Lewis (In re Lewis), 271 B.R.
877, 885 (10 th Cir.B.A.P.2002). A promise to pay a debt made with an intent not to pay is a false
representation. See In re Kountry Korner Store, 221 B.R. 265, 272 (Bankr.N.D.Okla.1998)(“The
Court does recognize a species of… fraud in which a promise to perform some act in the future is
made without the present intent to ever perform[].”)
Intent to deceive is a question of fact which can be inferred based on the totality of the
circumstances. In re Baines, 337 B.R. 392, 399 (Bankr.D.N.M.2006), quoting Young, 91 F.3d at
1375. Since a debtor-defendant will rarely admit an intent to defraud, fraudulent intent may be
inferred from circumstantial evidence. Young, 91 F.3d at 1375. The Court examines intent at the
inception of the debt, not subsequent misrepresentations after the debt’s inception. Matter of
Ethridge, 80 B.R. 581, 587 (Bankr.M.D.Ga. 1987). A debtor generally cannot overcome an
inference of intent to deceive by making an unsupported assertion of honest intent. See Matter of
Van Horne, 823 F.2d 1285, 1287-88 (8th Cir.1987)(citations omitted), abrogated on other
grounds by Grogan v. Garner, 498 U.S. 279 (1991).
14 The misrepresentation at issue was Mr. Slade’s statement about his intention to pay, and not a statement about his
“financial condition”, which would be governed by § 523(a)(2)(B). Mr. Slade’s financial condition provides
circumstantial evidence about his intentions and knowledge in making such statements, but it was not the basis of
his misrepresentation alleged here.
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Under the Contract, Stoneworks or Mr. Slade was required to make a security deposit in
the amount of $6,000 upon execution of the Contract, and to pay $6,000 per month in rent for
twelve months. Mr. Slade represented to Mr. Bourk before the Contract was made that, although
neither Stoneworks nor he could currently make the security deposit, Stoneworks had accounts
receivable and unencumbered properties from which the payments could be made, that
Stoneworks would pay the security deposit in thirty days, and that Stoneworks would have
sufficient funds available to make the monthly rental payments.
In fact, neither Stoneworks nor Mr. Slade ever paid the security deposit due under the
Contract, nor did Stoneworks or Mr. Slade make a single rental payment. As the principal
chartering a new business at the time, Mr. Slade was well aware of the state of his and
Stoneworks’ finances when Stoneworks and he entered into the Contract. Stoneworks paid
various other creditors during the lease term of the Contract, notwithstanding its financial
difficulties. The Court does not find credible Mr. Slade’s testimony that he intended for
Stoneworks and himself to perform their obligations under the Contract. CAGO has satisfied its
burden of proving, by a preponderance of the evidence, that when Mr. Slade represented that
Stoneworks would pay the security deposit within 30 days after the Contract was made, and
would make the rental payments as agreed, Mr. Slade had no intention that Stoneworks or he
actually would make those payments as agreed.
There was no reason for Mr. Slade to falsely represent that payments would be made
under the Contract, as agreed, other than to deceive CAGO. Mr. Slade needed for Stoneworks to
appear “financially reliable” in order to obtain the Trackhoe. Based on these surrounding facts,
the Court finds that Mr. Slade intentionally deceived CAGO.
Justifiable reliance
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As stated earlier, CAGO must have “justifiably relied” on Mr. Slade’s misrepresentation
that he or Stoneworks would pay under the Contract in order for the debt to be non-dischargeable
under § 523(a)(2)(A). The Court finds that CAGO did so justifiably rely.
The Tenth Circuit Court of Appeals has explained the justifiable reliance requirement of
Section § 523(a)(2)(A) as follows:
[T]he inquiry is whether the actual creditor’s reliance was “justifiable” from a
subjective 	standpoint. 	In 	determining 	whether 	a 	creditor’s 	reliance 	was
justifiable, a court should therefore examine “the qualities and characteristics of
the particular plaintiff, and the circumstances of the particular case, rather than
[applying] a community standard of conduct to all cases.” 	Even under the
“justifiable” test, however, the plaintiff must “use his senses” and at least make “a
cursory examination or investigation” of the facts of the transaction before
entering into it.
In re Riebesell, 586 F.3d 782, 791-92 (10th Cir. 2009)(internal citations omitted).
Mr. Bourk was an experienced businessman and former debt collections attorney. At the time of
the misrepresentations, Mr. Slade was under criminal charges for attempting to bribe a federal
official, a fact of which Mr. Bourk was well aware. Given these red flags, any creditor should
have had ample concern, especially one so experienced as Mr. Bourk.
However, Mr. Bourk undertook an investigation that pacified his concerns. He spoke
with a bankruptcy trustee in an unrelated case, who gave Mr. Slade a strong recommendation and
stated that he believed Mr. Slade had received a raw deal when charged criminally. Mr. Bourk
also consulted several other attorneys about Mr. Slade; these attorneys also vouched for Mr.
Slade’s reliability. Mr. Slade has a powerful personality and is very persuasive. It is not difficult
for the Court to believe that Mr. Slade was quite convincing in his representation to Mr. Bourk
that Stoneworks or Mr. Slade could and would pay CAGO moneys owed, even if he could not
make the down payment on the day the Contract was signed.
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Justifiable reliance is a “less demanding” standard than reasonable reliance. Field v.
Mans, 516 U.S. at 61. Mr. Bourk performed a more than adequate investigation in light of the
red flags that were apparent to him, and was satisfied that Mr. Slade was trustworthy and could
be relied upon to fulfill his promises. The Court therefore finds that CAGO justifiably relied on
Mr. Slade’s representations of payment.
Proximate Cause
Mr. Slade’s misrepresentation “must proximately cause the debt for the debt to be excepted
from the discharge under 11 U.S.C. § 523(a)(2)(A).” In re Larranga, at *6, citing Hernandez v.
Musgrave (In re Musgrave), 2011 WL 312883, slip op. at 9 (10th Cir.B.A.P.2011) (unpublished).
To satisfy the proximate cause requirement, CAGO must prove two elements: (1) causation in
fact, and (2) legal causation. In re Larranaga, at *7 (citing authorities). “Causation in fact
requires that a debtor’s misrepresentations be a ‘substantial factor in determining the course of
conduct that results in loss.’ Legal causation requires that a creditor’s loss be reasonably
expected to result from the creditor’s reliance on the debtor’s misrepresentation.” Id., citing,
among other things, Restatement (Second) of Torts §§ 546, 548A.
The Court finds that Mr. Slade’s misrepresentations about his intentions to pay the debt
incurred under the Contract were the proximate cause of the debts owing by Mr. Slade to CAGO
under the Contract and, as the Contract so dictates, under New Mexico law. First, the Court
finds causation in fact. Given Mr. Slade’s persuasive abilities, this Court finds that Mr. Slade’s
representations before the Contract was made concerning his intention that Stoneworks or he
would perform under the Contract and the expected availability of funds to make payments
substantially contributed to Mr. Bourk’s decision to lease the Trackhoe to Stoneworks and to
work with Stoneworks when payments were not made. Given Mr. Slade’s spotty criminal
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history, Mr. Slade’s misrepresentations and reassurances were surely a substantial factor
influencing CAGO’s decision to enter the Contract, and thus were a substantial factor in
CAGO’s resulting damages.
The Court also finds legal causation. CAGO’s loss is of the type that could be reasonably
expected to result from CAGO’s reliance on the debtor’s misrepresentations. Mr. Slade
represented that Stoneworks or he would pay as agreed when he in fact did not intend such
payment would be made. There is no logical leap required to find that CAGO would be
damaged by relying on Mr. Slade’s misrepresentation about intention to pay. Quite simply, it
can reasonably and obviously be expected that damages would result when someone sells
equipment in reliance on a misrepresentation regarding intent to pay. Legal causation is present.
As such, all of the enumerated elements for nondischargeability under § 523(a)(2)(A) are
present with regard to the debts arising under the Contract.
b. 	CAGO did not justifiably rely on any misrepresentations made in connection
with the Settlement Agreement.
The Court next will address CAGO’s contention that the Settlement Agreement was
induced by fraud. CAGO asserts that Mr. Slade expressly or impliedly misrepresented his
intention to make payments pursuant to the terms of the Settlement Agreement, and that CAGO,
acting through Mr. Bourk and in his reliance on this misrepresentation, entered into the
Settlement Agreement with Mr. Slade. The fourth element of the prima facie case under 11
U.S.C § 523(a)(2)(A) is that the creditor’s reliance on the debtor’s false representation must be
justifiable.15 Because the Court finds that CAGO did not justifiably rely on any false
representations by Mr. Slade when entering into the Settlement Agreement, the Court need not
15 See Field v. Mans, 516 U.S. 59, 61, 116 S.Ct. 437, 439 (1995) (determining that, to satisfy the requirements of 11
U.S.C § 523(a)(2)(A), reliance must be “justifiable”).
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address the other requirements of 11 U.S.C § 523(a)(2)(A) in connection with CAGO’s claim of
fraud in connection with the Settlement Agreement.
The Settlement Agreement resolved disputes among CAGO, Stoneworks, and Mr. Slade
relating to past due payments owing by Stoneworks and Mr. Slade under the Contract. The
parties entered into the Settlement Agreement after Mr. Slade had failed, for more than a year
and a half, to make a single monthly payment due under the Contract despite Mr. Slade’s
repeated promises of payment and Mr. Bourk’s repeated demands. The only payments
Stoneworks or Mr. Slade tendered under the Contract were by checks returned for insufficient
funds. Stoneworks did not even pay the security deposit due on execution of the Contract.
Mr. Bourk is a sophisticated businessman and a former debt collections attorney. Before
CAGO entered into the Settlement Agreement, Mr. Bourk had investigated the Stonework’s
financial condition, and was aware of Stonework’s financial difficulties and of its history of not
paying numerous creditors. Mr. Bourk was also full aware of Stonework’s and Mr. Slade’s
failure to make a single payment to CAGO for a year and a half, dispute repeated demands and
repeated promises of payment. Under the Settlement Agreement, which settled CAGO’s claims
under the Contract, Mr. Slade agreed to pay CAGO $200,000. CAGO entered into the
Settlement Agreement knowing full well of the risk that Stoneworks and Mr. Slade would not
perform their obligations under the Agreement. This risk was particularly acute, given that Mr.
Slade was set to begin a prison sentence approximately one week after the Settlement Agreement
was made, a fact of which CAGO was aware.
Under these circumstances, the Court finds that CAGO did not justifiably rely on any
express or implied representations by Mr. Slade that he intended to perform his obligations under
the Settlement Agreement.
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c. 	Only The Debt Owing Under the Settlement Agreement is Non-Dischargeable.
Although execution of the Settlement Agreement was not induced by fraud, the debt
owing by Mr. Slade to CAGO under the Settlement Agreement and Stipulated Judgment, not the
debt incurred under the Contract, is the non-dischargeable debt.
The Court finds that the Settlement Agreement and Stipulated Judgment constituted a
novation that replaced the rights and obligations of the parties under the Contract. A novation
occurs when 1) there is an existing and valid contract; 2) there is an agreement to a new contract
by all the parties to the original contract, 3) the new contract is a valid contract; and 4) the new
contract extinguishes the old one. Maulsby v. Magnuson, 107 N.M. 223, 755 P.2d 67, 70 (1988).
In other words, a novation occurs when the parties intend a new contract to replace the original
contract. Hilburn v. Brodhead, 79 N.M. 460, 444 P.2d 971, 974 (N.M. 1968). The Settlement
Agreement provided that a stipulated judgment would be entered against the Stoneworks and Mr.
Slade in the amount of $200,000 to resolve all of CAGO’s claims under or relating to the
Contract. Such settled claims included CAGO’s claim of fraud. The Settlement Agreement and
Stipulated Judgment replaced the rights and obligations of the parties under the Contract.
As such, since the Settlement Agreement novated the Contract, and the Contract itself
was a product of fraud, the debts arising from the Settlement Agreement and the Stipulated
Judgment entered pursuant to the settlement are themselves products of the underlying fraud.
Thus, even though the settlement agreement itself was not induced by fraud, the fact that it
novated a contract predicated on fraud nevertheless renders the settlement debt nondischargeable
under 11 U.S.C. § 523(a)(1)(A). See Archer v. Warner, 538 U.S. 314, 123 S.Ct. 1462 (2003). In
Archer, 538 U.S. 314, 123 S.Ct. 1462 (2003), the parties settled a lawsuit under which the
Warners would pay the Archers $300,000 and the Archers would release their claims against the
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Warners except for claims arising under the settlement agreement. Pursuant to the terms of the
settlement agreement, the Warners paid the Archers $200,000 and executed a promissory note in
the amount of $100,000. The Archers executed the release. The lawsuit was dismissed with
prejudice. The Warners failed to make any payments under the note, and filed a bankruptcy
case. 538 U.S. at 317-18, 123 S.Ct. at 1465. The Archers objected under 11 U.S.C. §
523(a)(2)(A) to the dischargeability of their claim for $100,000 on the ground that the debt the
parties had settled was procured by fraud. The Supreme Court determined: “[t]he
dischargeability provision applies to all debts that ‘aris[e] out of’ fraud. A debt embodied in the
settlement of a fraud case ‘arises’ ... ‘out of’ the underlying fraud....” 538 U.S. at 321, 123 S.Ct.
at 1466. The Court concluded “that the Archers' settlement agreement and releases may have
worked a kind of novation, but that fact does not bar the Archers from showing that the
settlement debt arose out of ‘false pretenses, a false representation, or actual fraud,’ and
consequently is nondischargeable [under] 11 U.S.C. § 523(a)(2)(A).” Id. Likewise, the debt
owing by Mr. Slade to CAGO under the Settlement Agreement and Stipulated Judgment arose
out of the fraudulent representations he made that induced CAGO to enter into the Contract.
Thus, even though the Settlement Agreement itself was not induced by fraud, the debt
represented by the Settlement Agreement constitutes the nondischargeable debt.
d. 	Damages
CAGO asserts it is entitled to damages in the amount of $632,088.74,16 consisting of
$200,000 owing under the Settlement Agreement and Stipulated Judgment; $76,121.00 of
interest accrued under the Stipulated Judgment; $260,967.74 for loss of use of the Trackhoe after
the date of the settlement until the date of trial in this adversary proceeding; $85,000 of legal
fees; and $5,000 for costs and expenses. See Exhibit 42. In the Pretrial Order, CAGO stipulated
16 $632,088.74 exceeds the total of the asserted component damages listed in Exhibit 42 by $5,000.
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that Mr. Slade should receive a credit against the non-dischargeable debt for the $75,000 he paid
when the plea bargain was made, and for additional monies he is paid or pays in restitution.
The Court concludes that that amount still owing by Mr. Slade to CAGO under the
Stipulated Judgment is non-dischargeable. Mr. Slade is entitled to credits against the amount
owing under the Stipulated Judgment, as of the dates of payment, for the $75,000 that Mr. Slade
paid to CAGO in November 2010, for all amounts Mr. Slade has paid or pays to CAGO in
connection with the $125,000 restitution award, and for all royalties or other monies paid to
CAGO on product produced from the gravel pit pursuant to the Settlement Agreement. The non-
dischargeable debt includes interest accruing on the unpaid amount owing under the Stipulated
Judgment from October 5, 2007 until the judgment is paid in full.
CAGO is not entitled to damages for loss of use of the Trackhoe after the date of the
settlement in addition to the amounts awarded by the Stipulated Judgment. As discussed above,
because the Settlement Agreement and Stipulated Judgment novated the Contract, CAGO is
entitled to non-dischargeable damages measured by the amount owing under the Settlement
Agreement, not the Contract. The Stipulated Judgment superseded CAGO’s claims under the
Contract. The parties valued the Trackhoe at $60,000 under their settlement. The amount of the
Stipulated Judgment includes damages resulting from Mr. Slade’s obligation to CAGO resulting
from his failure to return the Trackhoe to CAGO. Therefore, CAGO is not entitled to damages
for loss of use of the Trackhoe after the settlement was reached.
Further, CAGO is not entitled to a damages award to reimburse it for attorneys’ fees or
expenses. Neither the Contract nor the Settlement Agreement provide for payment of attorneys’
fees or expenses. In the absence of some statutory or contractual basis for assessment of
attorney’s fees arising out of litigation, the American Rule dictates that each party is responsible
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for paying its own attorneys’ fees, including the prevailing party. See Alyeska Pipeline Service
Co. v. Wilderness Society et al., 421 U.S. 240, 95 S.Ct. 1612 (1975) for a discussion of the
American Rule. CAGO is not entitled to attorneys’ fees or expenses.
The Contract Alone Would Have Resulted in a Smaller Nondischargeable Judgment
The Court notes that if it had awarded CAGO non-dischargeable damages based on
breach of the Contract instead damages under the Settlement Agreement, the damage award
would have been lower. The Contract provides that it “shall be governed by and construed in
accordance with the laws of the State of New Mexico.”17 Under New Mexico law, an agreement
styled a lease may be recast as a sale subject to a security interest pursuant to Section 1-203(a) of
the Uniform Commercial Code as adopted in New Mexico. N.M. Stat. § 55-1-203(a) (2011).
Section 55-1-203(a) provides that “[a] transaction in the form of a lease creates a security interest
where: 1) “the consideration that the lessee is to pay the lessor for the right to possession and use
of the goods is an obligation for the term of the lease and is not subject to termination by the
lessee,” and 2) “the lessee has an option to renew the lease for the remaining economic life of the
goods for no additional consideration or for nominal additional consideration upon compliance
with the lease agreement.” Both of these requirements are satisfied here. Mr. Slade and
Stoneworks were absolutely obligated to pay CAGO $6,000 monthly for a period of twelve
months. There were no provisions allowing for early termination of the Contract. Further, under
the Contract the “lessee” has an option to become the owner ofthe Trackhoe for no additional
consideration upon compliance with the agreement.18 As such, the option to purchase in the
Contract per se created a security interest in favor of the CAGO. 19
17 See Exhibit 1.
18 Paragraph 27 of the Contract so provides:
OPTION TO PURCHASE: At anytime prior to the end of his lease the Lessee has the option to purchase
the equipment if the Lessee has complied with the terms of the lease. This option may be exercised by the
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If the Court had awarded non-dischargeable damages under the Contract, instead of the
Settlement Agreement, damages would have been determined pursuant to Section 2-709(1)(a) of
the Uniform Commercial Code, as adopted in New Mexico, based on the unpaid balance of the
$70,000 purchase price specified in the Contract. N.M. Stat. § 55-2-709(1)(a).20 Consequently,
had damages been awarded based on the Contract, CAGO would be entitled to significantly less
than the $200,000 represented by the Settlement Agreement.
2. 	Section 523(a)(2)(B) Does Not Support Any Claims for Debts Owed Under the
Contract or Settlement Agreement
CAGO asserts that Mr. Slade owes debts that are non-dischargeable under § 523(a)(2)(B).
The section provides that certain debts incurred by use of a false writing relating to the debtor’s
financial condition upon which the creditor “reasonably relied” are non-dischargeable. 11
U.S.C. § 523(a)(2)(B). Because the Court finds that CAGO has not satisfied the “statement in
writing” requirement for establishing a claim under § 523(a)(2)(B), the Court need not consider
the other elements of the claim.
Mr. Slade Never Made of a Statement in Writing Respecting his Financial Condition
Lessee by giving notice to Lessor in writing that it is exercising this option and paying to the Lessor the
sum of $70,000.00 less the total of lease payments made up to the date the purchase price is paid. Lessor
shall own the equipment until Lessee exercises the option in writing and pays Lessor the purchase price.
(emphasis added).
19 See In re Grubbs Const. Co., 319 B.R. 698, 714 (Bankr.M.D.Fla.2005) (when both tests are met, “the agreement
is per se always a security agreement); Kentuckiana Medical Center v. The Leasing Group Pool, II, LLC, 455 B.R
694, 698-702 (Bankr.S.D.Ind. 2011) (“a transaction is a per se security agreement if” both tests are met).
20 N.M. Stat. § 55-2-709(1)(a) provides:
When the buyer fails to pay the price as it becomes due the seller may recover, together with any
incidental damages under the next section [N.M. Stat. § 55-2-710], the price[] of goods accepted or of
conforming goods lost or damaged within a commercially reasonable time after risk of their loss has
passed to the buyer[].
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The phrase “statement respecting the debtor’s or an insider’s financial condition” is used
in both sub-sections (A) and (B) of § 523(a)(2) and thus has the same meaning.21 The Tenth
Circuit Court of Appeals has adopted the “emerging, strict interpretation” of the phrase. As
such, for a debt to be held non-dischargeable under § 523(a)(2)(B) in the Tenth Circuit, it must
be predicated upon a false statement in writing that comports with the following definition:
[S]uch false statements are those that purport to present a picture of the debtor's
overall financial health. Statements that present a picture of a debtor's overall
financial health include those analogous to balance sheets, income statements,
statements of changes in overall financial position, or income and debt statements
that present the debtor or insider's net worth, overall financial health, or equation
of assets and liabilities. However, such statements need not carry the formality of
a balance sheet, income statement, statement of changes in financial position, or
income and debt statement. What is important is not the formality of the
statement, but the information contained within it — information as to the debtor's
or insider's overall net worth or overall income flow.
Cadwell v. Joelson, 427 F.3d at 714.
21 See Cadwell v. Joelson, 427 F.3d 700, 704 (10th Cir. 2005). The Tenth Circuit explains the relevance of this
phrase to the interplay of sub-sections (A) and (B) succinctly :
Specifically, 11 U.S.C. § 523(a)(2)(A) states that a debt obtained by "false pretenses, a false
representation, or actual fraud" is not dischargeable. However, § 523(a)(2)(A) contains an
exception: If a debt is obtained by a false oral "statement respecting the debtor's ... financial
condition," the debt is dischargeable. By contrast, 11 U.S.C. § 523(a)(2)(B) states that a debt
obtained by a false written statement "respecting the debtor's ... financial condition" is not
dischargeable, provided certain conditions are met.
Id. 	The Tenth Circuit further explained how any interpretation of the phrase will necessarily have the
opposite effect on the scope of each sub-section:
because § 523(a)(2)(A) provides that a debt obtained by a false oral statement "respecting the
debtor's ... financial condition" is dischargeable, and § 523(a)(2)(B) provides that a debt obtained
by a false written version of such a statement is not dischargeable, any interpretation of the phrase
"respecting the debtor's ... financial condition" will have opposing effects depending on whether
the statement was oral or written. If the phrase is broadly construed so that more false oral
statements qualify as "respecting the debtor's ... financial condition," more debts will be
dischargeable under § 523(a)(2)(A) because that provision allows debts obtained by oral versions
of such statements to be discharged — even though debts obtained by other false pretenses, false
representations, or actual fraud may not be discharged. By contrast, a broad construction of the
phrase "respecting the debtor's ... financial condition," will result in fewer debts obtained based on
written versions of such statements to be dischargeable under § 523(a)(2)(B) because that
provision bars the discharge of only those false statements that "respect[ ] the debtor's ... financial
condition."
Id. at 704-05.
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CAGO presented no evidence of any written statements made by Mr. Slade or
Stoneworks, prior to the entry of the Contract, regarding overall financial health. Any claim
under § 523(a)(2)(B) regarding debts arising from the Contract therefore fails. Likewise, CAGO
also presented no such evidence in connection with the Settlement Agreement. There was
testimony regarding a list of property Mr. Slade allegedly gave to Mr. Bourk before the
settlement was reached, but the list was not admitted into evidence. Even if the list had been
admitted, such a written statement does not rise to the level of a “statement respecting the
debtor’s financial condition.” Similarly to the case at hand, the debtor in Cadwell v. Joelson also
presented the creditor with a list of antique cars she supposedly owned. The Tenth Circuit held
that this list did not qualify as a statement respecting her financial decision. Mr. Bourk attempted
to obtain financial data from the Stoneworks’ computer, but the data was encrypted and
unusable. Based on the foregoing, the Court concludes that CAGO is not entitled to any relief
under § 523(a)(2)(B) in this case.
3. 	Section 523(a)(4) Does Not Apply Because Mr. Slade Was Not Acting in a Fiduciary
Capacity and Did Not Commit Embezzlement or Larceny
CAGO next alleges that its claim against Mr. Slade is non-dischargeable under §
523(a)(4). Under that section, a debt is non-dischargeable if it is a debt for: (1) fraud or
defalcation while acting in a fiduciary capacity, (2) embezzlement, or (3) larceny. See 11 U.S.C.
§ 523(a)(4).22 The Court concludes that CAGO does not have a valid claim under any of these
three independent grounds for non-dischargeability of debts under Section 523(a)(4).
No Fiduciary Relationship Existed Between the Parties
22 In closing argument, Plaintiff’s counsel argued that § 523(a)(4) should be interpreted to include a situation where
a defendant committed fraud without acting in a fiduciary capacity. This Court directed Plaintiff’s counsel to submit
a post-trial brief in support of this argument if it wanted the Court to consider it. Plaintiff’s counsel did not do so.
Therefore, the Court will not consider this argument.
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First, there was no fiduciary relationship between Mr. Slade and CAGO of the type that is
within the scope of 11 U.S.C. § 523(a)(4). “[A]n express or technical trust must be present for a
fiduciary relationship to exist under § 523(a)(4).” In re Regan, 477 F.3d 1209, 1211 (10 th
Cir.2007)(internal quotations and citations omitted). Fiduciary relationships are not created
solely by virtue of two parties entering into a “mere contractual relationship.” In re Qin, 285
B.R. 292, 297 (Bankr.N.D.Iowa.2002), citing Werner v. Hofman, 5 F.3d 1170, 1172 (8th Cir.
1993). See also In re Seeberger, 2011 WL 6749049, at *17-18; In re Mullin, 88 B.R. 454, 456
(Bankr.S.D.Fla.1988).
An express trust is created when parties expressly create one.23 Neither party presented
any evidence of any written or oral statements evincing an intention to create a trust, and neither
CAGO nor Mr. Slade ever asserted that they sought to create any sort of relationship that would
impress heightened duties. “Neither a general fiduciary duty of confidence, trust, loyalty, and
good faith, [], nor an inequality between the parties’ knowledge or bargaining power, [], is
sufficient to establish a fiduciary relationship for the purposes of dischargeability.” Young, 91
F.3d at 1371-72 (citations omitted). “Further the fiduciary relationship must be shown to exist
prior to the creation of the debt in controversy.” Id., quoting In re Romero, 535 F.2d 618, 621
(10th Cir. 1976). This Court has been presented with no evidence to support the imposition of
23 New Mexico law on the creation of “express trusts” is long-established. In 1916, the Supreme Court of New
Mexico stated that “[e]xpress trusts are those which are created by the direct and positive acts of the parties, by some
writing or deed, or will, or by words either expressly or impliedly evincing a desire to create a trustee.” See Ward v.
Buchanan, 22 N.M. 267 (1916). This statement, as a basic principle, has withstood the test of time. See Tartaglia v.
Hodges, 129 N.M. 497, 509 (N.M.App.2000) (“An express trust is one that is created by the manifest intention of
the settlor to create it.”); Black’s Law Dictionary, trust, (9th ed. 2009) (an express trust is a “trust created with the
settlers express intent, usu. Declared in writing; an ordinary trust as opposed to a resulting trust or a constructive
trust.”). The Tenth Circuit Bankruptcy Appellate Panel has recently enumerated substantially similar requirements:
“Express trusts are those trust relationships which are intentionally entered into by the parties. An express trust may
involve a formal declaration of trust or a situation where the intention of the parties to form a trust relationship may
be inferred by the surrounding facts and circumstances.” In re Sawaged, 2011 WL 880464, slip op. at *3 (10 th
Cir.B.A.P.2011).
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any heightened duties upon Mr. Slade, and there was no provision for such in the Contract. See
Exhibit 1. There is no express trust.
The Tenth Circuit has explained when a technical trust exists:
“A technical trust is distinguished from an express trust in that the intention of the
parties is not relevant. In a technical trust, the trust obligations are imposed on the
parties. 	Thus, a technical trust may be determined to exist by virtue of a
statutorily imposed duty. 	However, for a state statute to create a[ …] technical
trust for nondischargeability purposes, the statute must define the trust res,
establish trustee duties, and impose the trust prior to any wrongdoing creating the
obligation.
In re Sawaged, slip op. at 3 (internal quotations and citations omitted).
There is no technical trust here. CAGO has not pointed out any statute that would
impose upon Mr. Slade the duties of a trustee. Any claim by CAGO that relies on the existence
of a fiduciary relationship therefore fails.
Mr. Slade Did Not Embezzle the Trackhoe
CAGO has not proved that Mr. Slade embezzled the Trackhoe. This Court recently
addressed what constitutes embezzlement under Section 523(a)(4) in a case involving an alleged
embezzlement of funds:
For purposes of establishing nondischargeability under section 523(a)(4),
embezzlement is defined under federal common law as the fraudulent
appropriation of property by a person to whom such property has been entrusted
or into whose hands it has lawfully come. To establish that the debtor fraudulently
appropriated property, the plaintiff must establish that the debtor appropriated the
property for a use other than that for which it was entrusted or that the debtor was
not lawfully entitled to use the funds for the purposes for which they were in fact
used, and the circumstances indicate fraud.
In re Larranaga, 2010 WL 3521732, at *6 (Bankr.D.N.M. J. Jacobvitz) (citations
omitted). The evidence does not support a finding that Mr. Slade to have fraudulently
appropriated any funds realized from a disposition of the Trackhoe.
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CAGO has contended or insinuated that Mr. Slade wrongfully sold the Trackhoe and
pocketed the proceeds. During closing argument, CAGO’S counsel conceded that the evidence
did not support a finding that Mr. Slade had stolen the Trackhoe. The Trackhoe disappeared.
The evidence does not establish that Mr. Slade still has the Trackhoe, that the Trackhoe was sold,
or that Mr. Slade benefited or profited in connection with the disappearance of the Trackhoe.
CAGO has not proven any claim of embezzlement.
Mr. Slade Did Not Commit Larceny
“Larceny is the ‘felonious taking of another’s personal property with intent to convert it
or deprive the owner of the same. ‘” In re Hentges, 373 B.R. 709, 723 (Bankr.N.D.Okla. 2007),
quoting Bryan v. Lynch (In re Lynch), 315 B.R. 173, 179 (Bankr.D.Colo.2004). A “felonious
taking” of property requires that such property be taken without the owner’s consent. Id. “As
distinguished from embezzlement, the original taking of the property must be unlawful. For the
purposes of section 523(a)(4), a bankruptcy court is not bound by [any] state law definition of
larceny but, rather, may follow federal common law[].” In re Hauck, 2012 WL 115397, slip op.
at 9 (Bankr.D.Colo. 2012). “Larceny requires that the [property] originally come into the
Debtor’s hands unlawfully.” In re Larranaga, slip op. at 6 (citations omitted).
Mr. Slade took possession of the Trackhoe from CAGO with its express consent, as
evidenced by the Contract. See Exhibit 1. Thus CAGO has not proven any claim of larceny.
Based on the foregoing, the Court concludes that CAGO claim of non-dischargeability
under 11 U.S.C § 523(a)(4) must be denied.
4. 	The Defendant Did Not Willfully and Maliciously Injure CAGO’s Property
CAGO also asserts a claim under 11 U.S.C. § 523(a)(6). That section provides that a
debt “for willful and malicious injury by the debtor to another entity or to the property of another
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entity” is non-dischargeable. The “willful” and “malicious” prongs are analyzed separately; both
are required.24 In a unanimous opinion, the United States Supreme Court explained the meaing
of the “willful and malicious” language contained in Section 523(a)(6), as follows:
[t]he 	word 	“willful” 	in 	(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. […] 	Moreover, [] the (a)(6)
formulation triggers in the lawyer's mind the category “intentional torts,” as
distinguished from negligent or reckless torts. Intentional torts generally require
that the actor intend “the consequences of an act,” not simply “the act itself.”
Kawaauhau v. Geiger, 523 U.S. 57, 61-62 (1998) (citations omitted, emphasis in original).
The evidence does not establish that Mr. Slade willfully or maliciously injured CAGO’s
interest in the Trackhoe. As discussed above, although the Trackhoe has disappeared, CAGO has
not established that Mr. Slade sold or is responsible for a sale of the Trackhoe, or that Mr. Slade
benefited or profited in connection with the disappearance of the Trackhoe.
CAGO’s claim of non-dischargeability under 11 U.S.C § 523(a)(6) must be denied.
5. 	CAGO’s Claim of Non-Dischargeability under 11 U.S.C. § 523(a)(11) is
Meritless
Finally, CAGO asserts that the debt Mr. Slade owes to CAGO is non-dischargeable under
§ 523(a)(11). Section 523(a)(11) is plainly inapplicable to this case.
24 The Tenth Circuit Court of Appeals has counseled against “overlook[ing] the criticality of the terms
“willful” act and “malicious injury” in § 523(a)(6). Without proof of both, an objection to the discharge of
a debt under that section must fail. For example, in Mitsubishi Motors Credit of America, Inc. v. Longley
(In re Longley), 235 B.R. 651, 657 (10th Cir. BAP 1999), the court held, to constitute a willful act under §
523(a)(6), the debtor must ‘desire ... [to cause] the consequences of his act or ... believe [that] the
consequences are substantially certain to result from it.’ Id. at 657 (quoting Restatement (Second) of Torts,
§ 8A (1965)). Also, in Hope v. Walker (In re Walker), 48 F.3d 1161, 1164 (11th Cir.1995), the court
concluded the term “malicious” requires proof “that the debtor either intend the resulting injury or
intentionally take action that is substantially certain to cause the injury.” See also Markowitz v. Campbell
(In re Markowitz), 190 F.3d 455, 462-63 (6th Cir.1999) (nondischargeability under § 523(a)(6) requires
proof of an intent to do harm, not just an intentional act). 	In re Moore, 357 F.3d 1125, 1129 (10 th
Cir.2004).
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Section 523(a)(11) provides:
(a) A discharge under section 727… of this title does not discharge an individual
debtor from any debt - (11) provided in any final judgment, unreviewable order,
or consent order or decree entered in any court of the United States or of any
State, issued by a Federal depository institutions [sic] regulatory agency, or
contained in any settlement agreement entered into by the debtor, arising from
any act of fraud or defalcation while acting in a fiduciary capacity committed with
respect to any depository institution or insured credit union.
11 U.S.C. § 523(a)(11) (emphasis added).
It is a cardinal canon of statutory interpretation that a court must begin with the statutory
language. “[C]ourts must presume that a legislature says in a statute what it means and means in
a statute what is says there. When the words of a statute are unambiguous, then this first canon
is also the last: judicial inquiry is complete.” 25 The language of § 523(a)(11) is not reasonably
open to more than one interpretation, at least insofar as it applies to this case, and therefore, it is
statutorily impossible to find a nondischargeable debt under this section.
There are many commas and coordinating grammatical conjunctions (“or”) contained in
sub-section 523(a)(11). Absent a careful reading, § 523(a)(11) could be misconstrued to mean
that any settlement agreement entered by a court would be nondischargeable. However, this
construction is incorrect.
This first part of § 523(a)(11) states that a discharge provided by § 727 does not apply to
any debt “provided in a final judgment, unreviewable order, or consent order or decree entered in
25 Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146 (1992), citing United States v. Ron Pair
Enterprises, Inc., 489 U. S. 235, 241-242 (1989); United States v. Goldenberg, 168 U. S. 95, 102-103 (1897);
Oneale v. Thornton, 6 Cranch 53, 68 (1810), Rubin v. United States, 449 U. S. 424, 430 (1981) (when a statute is
unambiguous, this first canon is also the last as “judicial inquiry is complete”). There are limited exceptions to this
canon of statutory construction. See, e.g. Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575 (1982) (“It is true
that interpretations of a statute which would produce absurd results are to be avoided if alternative interpretations
consistent with the legislative purpose are available.”); In re Kane, 336 B.R. 477, 485-489 (discusses the courts’
ability to correct a “scrivener’s error,” i.e. rewrite what it believes to be an incorrectly written law). However, such
exceptions do not apply here.
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any court of the United States or of any State, issued by a Federal depository institutions
regulatory agency, or contained in any settlement agreement entered into by the debtor, arising
from any act of fraud or defalcation….” The second part of the sub-section modifies the first
part. The word “while” introduces a mandatory condition to the first part: The debtor must have
committed the fraud or defalcation “while acting in a fiduciary capacity committed with respect
to any depository institution or insured credit union.” (emphasis added). This condition is not
satisfied under the facts present in this case. Even if the first part were satisfied here, and the
Court does not make that finding, CAGO has not presented evidence that would satisfy the
second part.
“Depository institution” and “insured credit union” are terms of art under the Bankruptcy
Code. Although the Code does not provide “depository institution” its own definitional
subsection in 11 U.S.C. § 101 “Definitions” (“§ 101”), § 101(12A)(D) does define the term by
reference to section 3 of the Federal Deposit Insurance Act (the “FDIA”). The FDIA defines a
depository institution as “any bank or savings association”. See 12 U.S.C. § 1813(c)(1). CAGO
is not a bank or savings association; it is a privately held corporation that, among other things,
sells and leases heavy equipment to others.
Bankruptcy Code § 101(34) states that the term “insured credit union’ has the meaning
given it in section 101(7) of the Federal Credit Union Act (the “FCUA”). The FCUA states that
‘the term ‘insured credit union’ means any credit union the member accounts of which are
insured in accordance with the provisions of subchapter II of this chapter….” See 12 U.S.C. §
1752(7). CAGO does not claim to be chartered as a credit union under state or federal law.
Because CAGO is neither a “depository institution” nor an “insured credit union”, §
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523(a)(11) is inapplicable.26 Consequently, CAGO’s claim of non-dischargeability under that
section must be denied.
CONCLUSION
Mr. Slade made a false representation to CAGO in connection with the Contract that
supports a claim for nondischargeability under 11 U.S.C. § 523(a)(2)(A). The amount of the
nondischargeable debt is measured by the debt Mr. Slade owes under the Settlement Agreement
and Stipulated Judgment, after crediting the $75,000 that Mr. Slade paid to CAGO in November
2010, all amounts Mr. Slade has paid or pays to CAGO in connection with the $125,000
restitution award, and all royalties or other monies paid to CAGO on product produced from the
gravel pit pursuant to the Settlement Agreement. The non-dischargeable debt includes interest
accruing on the unpaid amount owing under the Stipulated Judgment from October 5, 2007 until
the judgment is paid in full. All other claims for nondischargeability of debt fail. A judgment
consistent with this Memorandum Opinion will be entered.
____________________________________
Robert H. Jacobvitz
UNITED STATES BANKRUPTCY JUDGE
Date entered on docket: 	3/15/12
COPY TO:
Jason C Bousliman
Attorney for Plaintiff
PO Box 2168
Albuquerque, NM 87103-2168
26 Such a plain and straightforward reading comports with the legislative history of § 523(a)(11), which was enacted
along with 11 U.S.C. § 523(a)(12) as part of the banking law enforcement provisions in the Crime Control Act of
1990, Pub. L. 101-647, 104 Stat. 4789. These sub-sections were narrowly drafted to affect insiders within bank and
thrift institutions who were involved in wrongful acts that jeopardized the financial health of their institutions. See 3
William L. Norton, Jr., Norton Bankr. L. & Prac. 3d § 57:59 (October 2011).
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Raymond Curtis Slade
Pro se
7225 Gun Club SW
Albuquerque, NM 87121
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