Genta et al v. Leiper et al

1 Unless otherwise indicated, all chapter and section references are to the unamended
Bankruptcy Code, 11 U.S.C. §§ 101-1330, in effect when this case was filed, and prior to the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119
Stat. 23 (2005) (“BAPCPA”).
MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
IN RE 	)
)
STEPHEN JOSEPH LEIPER AND 	)
LOREE ANNE LEIPER, 	) 	Case No. 04-02052-TLM
)
Debtors. 	)
________________________________ 	)
) 	MEMORANDUM OF DECISION
)
THOMAS E. GENTA & GENTA 	)
MANAGEMENT, INC., 	)
)
Plaintiffs, 	)
) 	Adv. Case No. 04-6193-TLM
v. 	)
)
STEPHEN JOSEPH LEIPER AND 	)
LOREE ANNE LEIPER, 	)
)
Defendants. 	)
________________________________ 	)
INTRODUCTION
Plaintiffs Thomas E. Genta (“Genta”) and Genta Management, Inc.
(“GMI”) brought this adversary proceeding against chapter 7 debtors Stephen J.
Leiper and LoRee Anne Leiper (“Debtors”). The Court is asked to determine (1)
whether Plaintiffs have a secured claim pursuant to §§ 506(a) and 552(b); 1 (2) that
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2 The third cause of action is already gone. Debtors’ discharge was entered in Case No.
04-02052-TLM on September 9, 2004. When this adversary proceeding first came on for trial on
May 19, 2005, the Court concluded that Plaintiffs’ errors in completing and filing the required
adversary case cover sheet resulted in the discharge being entered notwithstanding the third cause
of action set forth in the complaint, and that Plaintiffs’ failure to raise any objection or question
concerning the discharge once it was entered estopped them from contesting it eight months after
the fact. The Court advised that the adversary would proceed on the remaining questions of
existence of secured claim and nondischargeability of debt under § 523(a)(6). An oral settlement
was thereafter announced on the record. When that settlement could not be consummated, the
matter was re-set for trial.
3 Before a court can consider whether a debt should be excepted from discharge under
one of the subdivisions of § 523(a), the plaintiff must prove that the debtor is indebted to it.
Banks v. Gill Distribution Ctrs., Inc. (In re Banks), 263 F.3d 862, 868 (9th Cir. 2001) (holding
that “there are two distinct issues to consider in the dischargeability analysis: first, the
establishment of the debt itself” and, second, the nature of the debt); see also Purviance v. Region
1 Self Reliance Program (In re Purviance), 05.3 I.B.C.R. 68, 70 (Bankr. D. Idaho 2005).
MEMORANDUM OF DECISION - 2
Debtors willfully and maliciously converted Plaintiffs’ collateral in violation of
§ 523(a)(6) and, consequently, Plaintiffs’ claim is not dischargeable; and (3) that
Debtors failed to keep adequate business records thus barring their discharge
generally under § 727(a)(3). See Adv. Doc. No. 1 at 3.2
The action arises out of a sale of a business, as explained in greater detail
later in this Decision. However, the Court must note at the outset that all the
relevant documents in evidence, discussed further below, are solely in the name of
“Genta Management, Inc., an Idaho corporation,” of which Genta is the president.
Though Genta signed the documents in that capacity, there is absolutely nothing in
the evidence that establishes that Genta, personally, has any claim or cause of
action against Debtors. Given this failure of proof, a judgment can be summarily
entered denying relief to Genta and dismissing his complaint against Debtors. 3
However, given the ultimate outcome of this litigation in favor of Debtors, the
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4 Debtor represented themselves pro se. Plaintiffs were represented by counsel.
5 The equipment list attached to the financing statement and bill of sale listed the
following items: (1) Hobart P660 dough mixer bowl, hook, shredder, (2) Garland Air Deck pizza
oven, (3) Delfield 66" pizza prep table, (4) Scottsman ice machine, (5) 4-door refrigerator, (6)
hood, (7) chest freezer, (8) window air conditioner, (9) 2 Metro shelves, (10) 3 stainless steel
tables, (11) a three-compartment sink, (12) hand sink, (13) 6 dining tables, (14) 24 chairs, and
(15) miscellaneous small wares. Exs. A, B.
MEMORANDUM OF DECISION - 3
Court will simply refer to “Plaintiffs” in the plural, as the parties have throughout
the matter, where such a reference eases reading. In most situations, it will refer to
the claims advanced by GMI as Plaintiff.
Trial was held on February 8, 2006. 4 The Court has considered the
testimony and other evidence presented, and the arguments of the parties. The
Court determines Plaintiffs have failed to establish a right to relief, and judgment
shall be entered for Debtors. This Decision constitutes the Court’s findings of fact
and conclusions of law. Fed. R. Bankr. P. 7052.
BACKGROUND AND FACTS
On February 7, 2000, GMI entered into an agreement to sell a business
known as Garbonzo’s Pizza to Debtors for $50,000.00. See Ex. C. This sale
contract allocated the purchase price to equipment 5 ($20,000.00), inventory
($500.00), a covenant of seller not to compete ($5,000.00), and goodwill
($24,500.00). Id. at 2. The contract further provided that:
Buyer agrees as security for the deferred balance of the purchase
price to provide seller with a UCC-1 financing statement covering
all equipment and fixtures being sold and transferred to Buyer, the
same to be recorded with the Secretary of State or the Ada County
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6 Plaintiffs filed the financing statement February 8, 2000, perfecting GMI’s interest in
the equipment. See Ex. A; see also Idaho Code § 28-9-310(a).
MEMORANDUM OF DECISION - 4
Recorder. 	Buyer further agrees not to transfer, sell, or dispose of
any 	equipment 	or 	fixtures 	covered 	by 	the 	UCC-1 	financing
statement as long as any unpaid installment of the purchase price
exists without first securing the written consent of Seller.
Id.6
Debtors paid $10,000.00 down, leaving a $40,000.00 balance to be paid in
24 monthly installments of $1,872.71. Ex. C at 1-2. Despite the above-quoted
language of the sale contract, Debtors contend Plaintiffs orally agreed that once
Debtors paid a total of $20,000.00 toward the purchase price, Debtors would own
the equipment free and clear of GMI’s security interest and that the remaining
$30,000.00 of the purchase price obligation would be unsecured. At trial, Genta
did not directly or unequivocally contradict the existence of such an agreement,
but did indicate it would have been unwise, and that GMI would certainly never
have allowed Debtors the right to sell the collateralized equipment while a balance
on the sale contract was still owing.
Debtors made monthly payments through September 2000, but then ran
into cash flow problems. On September 11, 2000, Debtors and Plaintiffs entered
into an addendum that doubled the total number of installments and cut the
monthly payment amounts in half to $882.98. Ex. D. Despite the lower
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7 The sale included GMI’s assignment of its rights as tenant under a real property lease
with ESCO, Inc. See Ex. F at internal Ex. 2. Debtors claim that Plaintiffs’ failures in dealing
with the business premises’ lessor, ESCO, resulted in Debtors’ inability to perform the agreement
and the shuttering of the business. The Court need not resolve this contention.
8 See Case No. 00-03156-TLM. The Court takes judicial notice of its files and records in
that case as well as in Case No. 04-02052-TLM. Fed. R. Evid. 201.
9 Mr. Leiper testified he had made around $24,000.00 in payments, though Debtors’
answer to Plaintiffs’ complaint states a total of $21,775.69 in payments were made. See Adv.
Doc No. 2 at 4. Genta testified he had received something closer to $20,000.00.
10 Since schedule F has no address for GMI, it might be assumed that the mailing matrix,
required under Fed. R. Bankr. P. 1007(a) and Local Bankruptcy Rule 1007.1, did not have one
either. But the matrix is not among the electronically imaged documents readily available to the
Court. In lieu of retrieving the file in this case from archives, and given the tangential nature of
this issue, the Court relies on the later BNC notice of dismissal of the case, which is in the
electronic record. According to the BNC certificate of service on the dismissal, Genta
Management, Inc. was listed as a “Bypassed Recipient” reflecting that no address was provided
on the matrix. See Case No. 00-03156-TLM at Doc. No. 24.
MEMORANDUM OF DECISION - 5
payments, Debtors still could not keep up.7
When Debtors filed a voluntary chapter 13 petition on December 13, 2000,8
they had paid Plaintiffs at least $20,000.00.9 Debtors listed most of the equipment
as personal property on their 2000 bankruptcy schedules. They also listed “Genta
Management, Inc.” on their schedules as a creditor holding a disputed $32,000.00
nonpriority unsecured claim. But this listing included no address for the creditor.
Case No. 00-03156-TLM at Doc. No. 1, schedule F.10
Debtors’ chapter 13 plan ran into numerous problems. See Case No. 00-
03156-TLM at Doc. Nos. 12, 15, 17. Unable to confirm a plan, Debtors converted
to chapter 7 on April 5, 2001. Id. at Doc. No. 18. But Debtors failed to appear at
the post-conversion meeting of creditors, and the case was dismissed May 23,
2001. Id. at Doc. Nos. 21, 23, 24.
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11 Mr. Leiper could not remember at trial exactly when he sold the equipment, or to
whom. He said he thought he sold it between September 2000 and April 2001. Given the fact
that Debtor listed the bulk of the equipment as personal property on his 2000 bankruptcy petition,
he likely sold it sometime after December 13, 2000. And, in Debtors’ answer to Plaintiffs’
complaint in this adversary proceeding, they state the equipment was sold for $2,850.00 to “a Mr.
Jacobsen.” See Adv. Doc. No. 2 at 5.
12 The circumstances surrounding GMI’s state court lawsuit raise several interesting
issues. For example, the filing of the lawsuit appears to have violated the § 362(a) stay in Case
No. 00-03156-TLM and, accordingly, the judgment would be void. Schwartz v. United States (In
re Schwartz), 954 F.2d 569, 571 (9th Cir. 1992). As noted, it appears the mailing matrix of
Debtors in that case never set out a mailing address for GMI. Therefore, it appears GMI may
never have received notice of Debtors’ bankruptcy. While lack of notice would not alter the void
nature of the judgment, it likely protects Plaintiffs from any § 362(h) consequences. In addition
to these issues, Mr. Leiper claims he was never served with the state court lawsuit, and much
testimony was offered concerning the asserted proof of service and its effectiveness. Another set
of issues surround the misspelling of the Leipers’ name on the state court complaint and
summons as “Leaper” and yet another set of issues flow from the fact the lawsuit was filed in
Canyon County though Debtors resided in Ada County, thus raising questions under Idaho Code
§ 5-404 (“[T]he action must be tried in the county in which the defendants. . . reside, at the
commencement of the action[.]”). Fortunately, the Court finds it possible to resolve the causes of
action presented in this adversary proceeding without reaching these several issues.
MEMORANDUM OF DECISION - 6
Sometime in late 2000 or early 2001, Debtors sold the pizza business
equipment, admittedly without Plaintiffs’ consent, for something less than
$3,000.00. 11
Plaintiffs never filed a claim in Debtors’ 2000 bankruptcy case (though, as
noted, it is not clear Plaintiffs were ever advised of that bankruptcy). But GMI did
file a lawsuit in Canyon County against Debtors on February 26, 2001, based on
the default on the sale contract.12 See Ex. F. Oddly, no mention is made of the
equipment in the complaint as, for example, in a count for claim and delivery of
the collateral. Furthermore, there is no evidence GMI ever attempted to repossess
the equipment under UCC Article 9 prior to or after the lawsuit. GMI received a
default judgment January 4, 2002. Ex. G.
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13 Section 101(5) states:
The term “claim” means -
(A) right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise
to a right to payment, whether or not such right to an equitable remedy is reduced
to judgment, fixed, contingent, matured, unmatured, disputed, secured, or unsecured.
14 Section 101(51) states:
The term “security interest” means lien created by an agreement.
MEMORANDUM OF DECISION - 7
Debtors filed another bankruptcy petition June 8, 2004, commencing the
instant chapter 7 case. Debtors listed “Genta Mgmt., Inc.” on schedule F as a
disputed creditor with a $46,139.50 nonpriority unsecured claim, and provided
notice of the filing in care of GMI’s state court counsel. Plaintiffs indicate they
discovered Debtors had sold the equipment at the § 341(a) creditors’ meeting held
in July, 2004.
DISCUSSION AND DISPOSITION
A. 	Does GMI have a secured claim under § 506(a)?
A “claim” is broadly defined by the Code to include virtually any “right to
payment,” including certain equitable remedies. See § 101(5). 13 A “security
interest’ is a consensual secured claim created by agreement between the debtor
and the creditor.14 United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240
(1989). A bankruptcy “estate” is created upon the commencement of a case, and
includes all “legal or equitable interests of the debtor” and “all interests of the
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MEMORANDUM OF DECISION - 8
debtor and the debtor’s spouse in community property.” See § 541(a)(1), (2).
Section 506(a)(1) provides that a creditor’s claim is deemed an allowed
secured claim “to the extent of the value of such creditor’s interest in the estate’s
interest in such property[.]” (emphasis added). The balance of the creditor’s claim
that is not an allowed secured claim is an unsecured claim. § 506(a)(1); In re
Stallings, 290 B.R. 777, 784, 03.1 I.B.C.R. 77, 80 (Bankr. D. Idaho 2003).
In this case, the equipment collateral was sold in late 2000 or early 2001.
Accordingly, it is awfully difficult to see how Debtors’ bankruptcy estate has an
interest in the equipment at the date of filing in June, 2004. As stated in 4 Collier
on Bankruptcy ¶ 506.05[5][a] at 506-34 (Alan N. Resnick & Henry J. Sommer,
eds. Rev. 15th ed. 2005):
If . . . the collateral was transferred by the debtor prior to the
commencement of the bankruptcy case, and the debtor retained no
interest in the property or the transfer cannot be set aside, the estate
will have no interest in the collateral and, hence, the creditor’s
interest in the estate’s interest in the collateral will be nothing (even
though the creditor’s interest may continue in the property itself,
albeit in someone else’s hands).
Id. (citations omitted). Since a creditor’s secured claim is dependent on and
measured by the estate’s interest in such property, GMI does not have a secured
claim as to the equipment in this case. GMI has made no cogent argument to the
contrary. Nor has GMI indicated any other collateral exists to secure its claim as
of the petition date.
It is true that, under Idaho law, once a security interest has attached to
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15 Section 552(b) states:
(1) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this
title, if the debtor and an entity entered into a security agreement before the
commencement of the case and if the security interest created by such security
agreement extends to property of the debtor acquired before the commencement of
the case and to proceeds, product, offspring, or profits of such property, then such
security interest extends to proceeds, product, offspring, or profits acquired by the
estate after the commencement of the case to the extent provided by such security
agreement and by applicable nonbankruptcy law, except to any extent that the court,
after notice and a hearing and based on the equities of the case, orders otherwise.
MEMORANDUM OF DECISION - 9
collateral, the secured party has rights to any “identifiable” proceeds of the sale of
the collateral. See Idaho Code §§ 28-9-203(f); 28-9-315(a)(1), (2). Accordingly,
GMI’s security interest would have attached to the $2,850.00 cash proceeds of the
equipment sale in late 2000 or early 2001. Idaho Code § 28-9-315(a)(2).
However, based on the record before the Court and the testimony of the parties,
those proceeds have long since ceased to be “identifiable.”
Therefore, GMI has not established the existence of a secured claim under
§ 506(a) as alleged in their complaint.
B. 	Does GMI have a secured claim under § 552(b)?
GMI also urges the Court to determine it has a secured claim pursuant to
§ 552(b).15 However, that provision indicates only that a security interest created
by a security agreement prior to the commencement of the case will “extend to
proceeds. . . acquired by the estate after the commencement of the case to the
extent provided by such security agreement and. . . applicable nonbankruptcy
law.” Section 552(b)(1) (emphasis added). Debtors sold the equipment prior to
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16 Section 523(a)(6) states:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does
not discharge an individual debtor from any debt– (6) for willful and malicious
injury by the debtor to another entity or to the property of another entity[.]
MEMORANDUM OF DECISION - 10
filing the instant bankruptcy petition, and the estate did not acquire any property
or proceeds post-petition. Simply put, § 552(b)(1) is not applicable, and GMI has
not shown that it has a secured claim under this section, just as it failed to show a
secured claim under § 506(a), supra.
C. 	Is GMI’s claim excepted from discharge under § 523(a)(6)?
GMI asks the Court to declare its claim nondischargeable pursuant to
§ 523(a)(6),16 claiming Debtors willfully and maliciously converted its collateral.
A creditor bringing a § 523(a)(6) action must prove all requisite elements
for nondischargeability by a preponderance of the evidence. Grogan v. Garner,
498 U.S. 279, 291 (1991); Spokane Ry. Credit Union v. Endicott (In re Endicott),
254 B.R. 471, 475, 00.4 I.B.C.R. 199, 200 (Bankr. D. Idaho 2000). In order to
effectuate the policies underlying the Code, objections to discharge are strictly
construed against creditors and liberally in favor of debtors. Palmer v. Downey
(In re Downey), 242 B.R. 5, 12, 99.4 I.B.C.R. 165, 168 (Bankr. D. Idaho 1999);
McVay & Corrigan, A.P.C. v. Barnetche (In re Barnetche), 98.2 I.B.C.R. 37
(Bankr. D. Idaho 1998).
The Court in Dominguez v. Elias (In re Elias), 302 B.R. 900, 03.4 I.B.C.R.
243 (Bankr. D. Idaho 2003) set out the relevant burdens faced by a creditor
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MEMORANDUM OF DECISION - 11
alleging a § 523(a)(6) cause:
To satisfy the willfulness prong, the creditor must prove that 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. See Kawaauhau v. Geiger, 523 U.S. 57, 61-62 (1998).
Elaborating on the debtor’s state of mind required by this statute, the
Ninth Circuit has explained that a debtor must possess a subjective
motive to inflict injury, or believe that injury is substantially certain
to result from his conduct. [Carrillo v. Su (In re Su), 290 F.3d 1140,
1145-46 (9th Cir. 2002)]. 	Thus, a creditor cannot prevail in an
action brought under § 523(a)(6) unless it is shown that the debtor
had actual knowledge that harm to the creditor was substantially
certain to occur from the debtor’s acts. 	Id. at 1145-46. 	However,
actual knowledge may be shown through circumstantial evidence of
“what the debtor must have actually known when taking the injury-
producing action. . .” Id. at 1146 n.6. 	To satisfy the malicious
prong, the creditor must prove that the debtor’s conduct involved:
(1) a wrongful act; (2) done intentionally; (3) which necessarily
causes injury; and (4) is done without just cause and excuse. 	Id. at
1146-47.
302 B.R. at 907.
Although this Court issued its decision in Endicott prior to Elias and Su, its
articulation of the standard for proving a § 523(a)(6) claim is consistent with those
later cases. And Endicott directly addressed such a claim advanced on the basis of
an alleged conversion:
[A] creditor must show that a debtor, when converting collateral, did
so with the specific intent of depriving the creditor of its collateral or
did so knowing, with substantial certainty, that the creditor would be
harmed by the conversion. 	This subjective test focuses on whether
the injury was in fact anticipated by the debtor and thus insulates the
innocent 	collateral 	conversions 	from 	non-dischargeability 	under
§ 523(a)(6).
Endicott, 254 B.R. at 478. Or, as stated from the debtor’s point of view:
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MEMORANDUM OF DECISION - 12
Essentially, for a conversion to be dischargeable it must be done
innocently in the honest but mistaken belief that authority to sell or
use the collateral exists (“technical” conversion).
Thiara v. Spycher Bros. (In re Thiara), 285 B.R. 420, 430 (9th Cir. BAP 2002)
(citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 332 (1934)).
Deciding whether a debtor has engaged in an “innocent collateral
conversion” must be done on a case-by-case basis. Endicott, 254 B.R. at 478
(citing AVCO Financial Servs. v. Kidd (In re Kidd), 219 B.R. 278, 284 (Bankr. D.
Mont. 1998)).
Endicott involved debtors who bought a boat and trailer in which the
plaintiff retained a security interest. The debtors defaulted and attempted to
surrender the collateral. The plaintiff refused to take it saying, due to a paperwork
error, the loan was unsecured. Based on this assertion and related comments, the
debtors sold the collateral, realizing less than half the original purchase price. The
Court found the debt owed plaintiff dischargeable because:
The Defendants had a basis upon which to believe that Plaintiff,
through its own review of the documents and its own informed and
conscious decision, had elected to forgo the collateral and pursue the
debt. 	The actions of plaintiff in responding to the Defendants’
entreaties to surrender the boat and trailer were unlike the conduct of
several other secured creditors, all of whom accepted tender of
collateral 	or 	repossessed 	their 	collateral. 	Even 	if 	Plaintiff’s
employee used the term “unperfected” rather than “unsecured” when
talking 	with 	the 	Defendants, 	the 	tenor 	of 	the 	communications
between the parties. . . supports the Defendant’s conclusion, though
mistaken, 	that 	normal 	impediments 	to 	liquidation 	or 	property
standing as collateral for a debt had been removed.
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MEMORANDUM OF DECISION - 13
Endicott, 254 B.R. at 479-80.
Endicott relied, in part, on the analysis set forth in E. Idaho Fed. Credit
Union v. Thomason (In re Thomason), 225 B.R. 751, 98.3 I.B.C.R. 77 (Bankr. D.
Idaho 1998). That case involved a lender that mistakenly took its lien off the title
to the debtor’s truck before the loan was paid off. The debtor subsequently
disposed of the truck, thinking it was now free of plaintiff’s security interest. The
Court ruled the debt dischargeable:
Based upon [the debtor’s] past experiences in purchasing vehicles
and in his relationship with Plaintiff, the Court finds Defendant
genuinely believed that Plaintiff had released its lien. 	He did not
dispose of the truck with the intent to injure Plaintiff; he traded in
the pickup because he thought, mistakenly as it turns out, that he was
free to do so. Prudence should have dictated that Defendant inquire
with Plaintiff about his receipt of the title under these circumstances.
His failure to do so, while perhaps negligent, does not rise to the
level of intentional misconduct.
Id. at 753. See also Peklar v. Ikerd (In re Peklar), 260 F.3d 1035 (9th Cir. 2001)
(finding debt arising from a “negligent” or “technical” conversion dischargeable,
where debtor relied on advice of attorney to remove property from leased space.).
Endicott, Kidd, Thomason, Thiara and Peklar all support the basic premise
that intent matters. Given Geiger’s articulation of the § 523(a)(6) standard and
focus on intent to cause injury, this is not surprising. In short, if the conversion of
collateral is done through mistake or negligence, even unreasonably or recklessly,
the resultant liability to the secured creditor is dischargeable under § 523(a)(6)
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17 The Court acknowledges that Harry Ritchie’s Jeweler’s, Inc. v. Chlebowski (In re
Chlebowski), 246 B.R. 639 (Bankr. D. Or. 2000) came to an opposite result. The Court obviously
is not bound by a sister court’s decision, and it further concludes that Chlebowski is not
persuasive when applied to the facts of the instant case. In short, in the area of conversions under
§ 523(a)(6), the facts are vitally important, and the trial court must evaluate all evidence that
might arguably relate to the intent of the debtor when acting in violation of a security agreement.
MEMORANDUM OF DECISION - 14
because the requisite wrongful intent is lacking.17
1. Were Debtors’ actions here “willful and malicious”?
Su instructs that all evidence indicating the nature of the debtor’s subjective
intent to injure should be closely examined. Endicott and Thomason also note the
need for the court to consider direct and circumstantial evidence regarding the
debtor’s conduct and, particularly, his or her intent. Additionally, a plaintiff’s
actions or inactions may be relevant in determining whether the plaintiff
contributed to the debtor’s “honest, but mistaken” belief that disposition of
secured collateral was authorized. Endicott, 254 B.R. at 479-80; Thomason, 225
B.R. at 753.
There was no preponderating proof of an oral agreement, contravening the
express language of the sale contract, that would terminate GMI’s security interest
in the equipment once Debtors made payments totaling $20,000.00. But the
existence or enforceability of such an agreement is not key; Debtors’ intent is.
The evidence on that intent is conflicting.
Mr. Leiper admits to reading and reviewing the sale and security
documents, and he acknowledges that they contain no such provision. Still, he
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18 When GMI filed its state court lawsuit, it did not know the equipment had been sold.
Mr. Genta testified he found out for the first time about the equipment sale at the meeting of
creditors in the 2004 bankruptcy case.
MEMORANDUM OF DECISION - 15
was adamant that the “side deal” existed. There was no effective examination
establishing that his professed belief was false or manufactured. Plaintiffs’
reliance on the terms of the written agreement may well be sufficient if the contest
were over the enforcement of the alleged oral agreement. However, that reliance
on contract language does not carry as much weight when evaluating testimonial
credibility.
Once Debtors hit the $20,000.00 mark, there is no evidence that Debtors
demanded release of the UCC financing statement or proof the lien was
extinguished. Debtors have not explained why, if the oral agreement existed, they
did not pursue clarification at this juncture.
On the other hand, once default of the payment obligations occurred, it
does not appear that Plaintiffs ever attempted to repossess the equipment. Even
the later state court lawsuit concerned only Debtors’ default on the sale contract
and related lease agreement, and it did not mention the equipment or seek to
enforce the security agreement. See Ex. F. 18 GMI’s failure to attempt to repossess
the equipment or otherwise enforce the security interest does not necessarily prove
that Debtors’ assertion regarding the agreed release of that collateral is correct.
But it does add support to the idea that Debtors had an honest, though mistaken,
belief as to their right to sell the collateral once they had paid $20,000.00.
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19 Debtors scheduling Plaintiffs as unsecured in their 2004 filing has no similar
implication as to Debtors’ understanding or intent, as the equipment was long gone by then.
20 A copy of a financing statement for the bank was marked as Exhibit “H” but was not
offered. See Adv. Doc. No. 28. However, Mr. Leiper’s testimony at trial is consistent with the
valuation given on the loan documents.
MEMORANDUM OF DECISION - 16
That Debtors scheduled GMI’s claim as unsecured in their 2000 filing,
while at the same time listing the equipment on schedule B, is consistent with their
testimony as to the understanding of the parties. While a mutual understanding
was lacking, the scheduling in this fashion does corroborate the testimony as to
Debtors’ intent.19
The Court has considered carefully the question of Mr. Leiper’s credibility.
He is a man of somewhat selective memory. For example, although he remembers
the alleged oral agreement with Plaintiffs quite clearly, he does not remember who
he sold the equipment to, or when.
In addition, he seems to have assigned no less than five different valuations
to the equipment. The sale contract gives it an agreed value of $20,000.00. Ex. C
at 2. Mr. Leiper valued the same equipment at over $57,000.00 in a loan
application with Farmers & Merchants State Bank.20 In his 2000 bankruptcy, he
listed the value of the equipment at nearly $26,000.00. See Case No. 00-03156-
TLM, Doc. No. 1. He ultimately sold the equipment for $2,850.00. Adv. Doc.
No. 2 at 5. Finally, at trial, Mr. Leiper estimated the equipment, at the time he
bought it from Plaintiffs, was worth $14,500.00. Inconsistency on material facts
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21 This Decision’s text has concerned Mr. Leiper, and nothing has been said of LoRee
Anne Leiper. Plaintiffs were required to prove their § 523(a) cause of action separately as to Mrs.
Leiper. Tsurukawa v. Nikon Precision, Inc., (In re Tsurukawa), 258 B.R. 192, 198 (9th Cir.
B.A.P. 2001); In re Covino, 04.3 I.B.C.R. 98, 105 (Bankr. D. Idaho 2004). They presented no
evidence in regard to her conduct or intent. Regardless of the resolution of the issues addressed
in this Decision as to Mr. Leiper, judgment would have to be entered for Mrs. Leiper based on
Plaintiffs’ failure to prove a prima facie case as to her.
MEMORANDUM OF DECISION - 17
does not bolster credibility.
While Mr. Leiper’s credibility is certainly not without problem, the Court’s
careful consideration of all testimony and witness demeanor leads it to conclude
that Mr. Leiper held an honest, though legally and factually erroneous, belief that
he was authorized to sell the equipment having had paid at least $20,000.00 to
GMI under the sale contract. This negates the level and quality of intent to cause
injury that is required under Geiger and its progeny. However imprudent, naive,
negligent or perhaps even reckless Debtors’ actions may have been, Plaintiffs have
not proven by a preponderance of the evidence that Debtors willfully and
maliciously converted GMI’s equipment.21
CONCLUSION
Plaintiffs have failed to establish the existence of a secured claim under
either § 506(a) or § 552(b). Plaintiffs have also failed to show by a preponderance
of the evidence that Debtors willfully and maliciously converted the subject
equipment to their own use under § 523(a)(6). Judgment will be entered for
Debtors, discharging Plaintiffs’ unsecured claims.
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MEMORANDUM OF DECISION - 18
DATED: February 24, 2006
TERRY L. MYERS
CHIEF U. S. BANKRUPTCY JUDGE
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MEMORANDUM OF DECISION - 19
CERTIFICATE RE: SERVICE
A “notice of entry” of this Decision, Order and/or Judgment has been
served on Registered Participants as reflected by the Notice of Electronic Filing.
A copy of the Decision, Order and/or Judgment has also been provided to non-
registered participants by first class mail addressed to:
Steven Joseph Leiper &
LoRee Anne Leiper
4900 N Paynton Way
Boise, ID 83703
Case No. 04-06193-TLM
Dated: February 24, 2006
/s/
Suzanne Hickok
Law Clerk to Chief Judge Myers
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