Cole et al v. Palmer

1At trial, Ms. Cole stated that she is now married and now known as Bethany Franks. For
the purposes of this memorandum opinion, the court will continue to refer to her as Bethany
Cole, her name at the time of the underlying transaction and State court litigation.
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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
DARRYL EDMOND PALMER,
Debtor.
___________________________________
BETHANY COLE and
BARBARA COCKERILLE,
Plaintiffs,
v.
DARRYL EDMOND PALMER,
Defendant.
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Case No. 09-1476
Adv. Proc. No. 09-84
MEMORANDUM OPINION
Darryl Palmer (the “Debtor”) owes $28,778.66, plus post-judgment interest, to Bethany
Cole1 and her grandmother, Barbara Cockerille, (the “Plaintiffs”) as a result of a final judgment
entered by the Circuit Court of Jefferson County, West Virginia (the “State Court”). The Plaintiffs
seek to except this amount from the Debtor’s anticipated Chapter 11 discharge pursuant to 11 U.S.C.
§§ 523(a)(2)(A) and/or (6).
Dated: Friday, January 14, 2011 3:12:02 PM
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2The oversized tires were subsequently removed by the Debtor and replaced with the
original bald tires, because the oversized tires rubbed against the wheel well when the vehicle’s
steering wheel was turned.
2
I. BACKGROUND
On October 24, 2006, Ms. Cockerille purchased, on credit, a 1994 Mitsubishi 3000 GT from
the Debtor, doing business as Matt’s Auto World. She purchased the vehicle for Ms. Cole because
Ms. Cole was not of legal age, but Ms. Cole was to make payments and drive the vehicle. The sales
price for the vehicle was $3,135.00, payable in weekly installments of $60.00. Within a month after
the sale, the car fell into disrepair, including a dead battery, bald tires, a broken headlamp, and
serious transmission problems. The car was unable to be legally or mechanically driven.
The Plaintiffs, believing that the car was under warranty, took the car to the Debtor for
repairs. 	Rather than attempting to repair the vehicle, the Debtor advised the Plaintiffs to
continuously pour transmission fluid into the car despite the fact that the transmission already
leaked, and told Ms. Cole to jumpstart the car every time she needed to drive. The Debtor replaced
the vehicle’s bald tires, but with tires that were oversized, which increased the danger associated
with driving the vehicle.2 The Debtor also suggested to Ms. Cole that she drive the vehicle into a
tree so that the Plaintiffs and the Debtor could collect the insurance proceeds.
Ms. Cole made payments pursuant to the sales agreement for approximately three months,
but stopped in January 2007, after the problems with the car made it inoperable. After the payments
ceased, the Debtor attempted to repossess the vehicle by approaching Ms. Cole at her place of
employment to inquire about the location of the vehicle. Achieving no success in that regard, the
Debtor used friends of Ms. Cole to locate and repossess the vehicle. Subsequently, the Debtor gave
Ms. Cole an opportunity to retrieve personal belongings from the vehicle; however, much of her
property was damaged, destroyed, or disappeared. The vehicle was eventually sold for $260.00 at
the Mason Dixon Public Auto Auction on March 20, 2007.
The underlying State Court action was filed by the Plaintiffs on October 12, 2007, alleging
causes of action under the Truth in Lending Act (“TILA”), the West Virginia Consumer Credit &
Protection Act (“WVCCPA”), and the Magnuson-Moss Warranty Act. 	The Plaintiffs sought
damages, including actual and statutory damages, and an award of attorney’s fees and litigation
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expenses.
The matter went to trial before the State Court on April 1, 2009. On April 21, 2009, at the
conclusion of a bench trial, the State Court entered an order, including findings of fact and
conclusions of law, that awarded the Plaintiffs $19,097.36 in compensatory and statutory damages
– $1,185.00 for violating TILA, $5,000.00 for violating the Magnuson-Moss Warranty Act, and
$12,912.36 for violating the WVCCPA; $9,000.30 for attorney’s fees; $681.00 for costs expended
in litigation; and post-judgment interest of 7% per annum. The State Court’s relevant findings of
fact for non-dischargeability purposes include:
1. The total price of the car was $3,135.00 and the sale called for payments over time.
2. The Plaintiffs were charged “interest” in the sales agreement.
3. The Debtor did not disclose the interest charged or provide any disclosure regarding the
terms of credit, but, rather, hid the interest charge in the inflated price of the vehicle.
4. The Debtor violated TILA because he failed to fully disclose interest costs. 15 U.S.C.A.
§§ 1631 and 1638.
5. The Debtor represented to the Plaintiffs that the car was “good” when, in fact, the car was
uninspected in West Virginia and unable to pass a state inspection.
6. The Debtor breached the warranty of merchantability and the warranty of fitness for a
particular purpose because the car was essentially unable to be legally or mechanically driven, and,
thus, was unmerchantable and unfit for a person to drive. 15 U.S.C.A. § 2304(a)(4).
7. To the extent that there was an express warranty, the Plaintiffs took the car to the Debtor
for repair of the vehicle’s multiple mechanical problems, but the Debtor failed to meet the terms of
the warranty and put the financial responsibility on the Plaintiffs to avoid incurring the cost himself.
15 U.S.C.A. § 2304(b)(1).
8. The Debtor failed to provide the Plaintiffs with notice of the right to cure before the
Debtor repossessed the vehicle. W. Va. Code § 46A-2-106.
9. 	The Debtor entered Bethany Cole’s workplace, confronted her using profanity and
disclosing her debts, and then enlisted her friends in what was essentially a carjacking. W. Va. Code
§§ 46A-2-125 and 126.
10. The contents of the vehicle were damaged, destroyed, or disappeared.
The parties were in front of the State Court again on June 1, 2009, to resolve the Debtor’s
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motion for a new trial filed on April 27, 2009. After appearing before the State Court on the record,
the Debtor withdrew his motion for a new trial and notified the court that he would be filing an
appeal. The Debtor filed a petition for appeal with the West Virginia Supreme Court of Appeals in
October 2009, but the petition was denied. The Debtor filed his Chapter 11 Voluntary Petition on
June 30, 2009.
II. DISCUSSION
The Plaintiffs contend that the State court judgment was a result of the Debtor obtaining
money from them by fraud, and the Debtor’s willful and malicious injury to Bethany Cole and/or
her property. 11 U.S.C. §§ 523(a)(2)(A), (6).
As the party asserting causes of action arising under § 523(a), the Plaintiffs bear the burden
of proof by a preponderance of the evidence. Fed. R. Bankr. P. 4005; Grogan v. Garner, 498 U.S.
279 (1991). When considering the applicability of an exception to discharge under § 523(a), the
court is to construe the statute narrowly in favor of the debtor to protect the primary purpose of the
Bankruptcy Code, which is to provide a debtor with a financial fresh start. Foley & Lardner v.
Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir. 1999).
A. Section 523(a)(2)(A): False Pretenses, False Representations, Actual Fraud
The Plaintiffs assert that the Debtor made fraudulent misrepresentations regarding the
condition and merchantability of the vehicle while negotiating the sales agreement with the
Plaintiffs. Also, they contend that the Debtor failed to disclose the interest charged, or provide any
disclosure regarding the terms of credit, by hiding the interest charge in the inflated price of the
vehicle in violation of TILA. 	15 U.S.C.A. §§ 1631 and 1638. 	The Plaintiffs seek to have the
damages resulting from these fraudulent acts excepted from the Debtor’s expected discharge
pursuant to § 523(a)(2)(A).
Section 523(a)(2)(A) excepts from discharge any debt “for money . . . to the extent obtained,
by -- (A) false pretenses, a false representation, or actual fraud . . . .” Not all debts incurred as a
result of fraud fall within this exception to discharge; rather, this exception only includes those
“debts in which the debtor used fraudulent means to obtain money . . . .” Nunnery v. Rountree (In
re Rountree), 478 F.3d 215, 219 (4th Cir. 2007). However, “[o]nce it is established that specific
money or property has been obtained by fraud . . . ‘any debt’ arising therefrom is excepted from
discharge,” id. at 222 (citing Cohen v. De La Cruz, 523 U.S. 213, 218 (1998)), “including . . .
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attorney’s fees, and other relief that may exceed the value obtained by the debtor.” Cohen, 523 U.S.
at 223. The intent of § 523(a)(2) is “to protect creditors who were tricked by debtors into loaning
them money or giving them property, services, or credit through fraudulent means.” Rountree, 478
F.3d at 219-20.
For purposes of making a non-dischargeability determination, the terms “false pretenses,”
“false representation,” and “actual fraud” are to be interpreted according to the common
understanding of those terms at the time § 523(a)(2)(A) was enacted. E.g., Field v. Mans, 516 U.S.
59, 69 (1995) (“The operative terms in § 523(a)(2)(A) . . . carry the acquired meaning of terms of
art. They are common-law terms, and . . . they imply elements that the common law has defined
them to include.”). What Congress meant when it used the terms can be derived from the generally
shared common law, as set forth in Restatement (Second) of Torts (1976), which was published
shortly before Congress passed the 1978 Bankruptcy Code. Field, 516 U.S. at 70-73. See also
Biondo, 180 F.3d at 134 (“[W]e will follow the Supreme Court’s lead and look to the Restatement
to determine the elements required to prove that claim.”). To define “actual fraud” the Supreme
Court looked to the definition of “fraudulent misrepresentation” under the Restatement, which
defines the tort as:
One who fraudulently makes a misrepresentation of fact, opinion, intention, or law
for the purpose of inducing another to act or to refrain from action in reliance upon
it, subject to liability to the other in deceit for pecuniary loss caused to him by his
justifiable reliance upon the misrepresentation.
Restatement (Second) of Torts § 525 (1976).
Thus, under the Restatement, “a plaintiff must prove four elements: (1) a fraudulent
misrepresentation; (2) that induces another to act or refrain from acting; (3) causing harm to the
plaintiff; and (4) the plaintiff’s justifiable reliance on the misrepresentation.” Biondo, 180 F.3d at
134.
Here, the Plaintiffs satisfied every element necessary to succeed on their § 523(a)(2)(A)
action: (1) the Debtor misrepresented that the car was worth $2,850.00, that there was little or no
interest charged on the transaction, that the car was in “good” condition and under warranty, and the
Debtor failed to disclose the terms of credit; (2) the misrepresentations induced the Plaintiffs to
purchase the vehicle; (3) the Plaintiffs’ reliance on the Debtor’s misrepresentation caused injury to
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3On summary judgment, the fourth element necessary to succeed on a § 523(a)(2)(A)
action – justifiable reliance – was not in the record before the court. However, at trial, the
Plaintiffs presented credible testimony regarding the reasonableness of their reliance.
Particularly, the Plaintiffs had purchased another vehicle from the Debtor and did not have any
problems; based on their past experience, they thought the Debtor to be a reliable and honest
businessperson.
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the Plaintiffs; and (4) the Plaintiffs’ reliance was justifiable.3
i. TILA Violations
The Plaintiffs assert that the Debtor’s fraudulent misrepresentation is evident from the State
Court’s determination that the Debtor violated TILA by hiding the interest charged on the sale in
the inflated price of the vehicle and did not provide any disclosure of the terms of credit.
Regarding the misrepresentation of interest, the State Court ordered that the contract be
rescinded and awarded out of pocket expenses incurred by the Plaintiffs, the $185 licensing and
registration fee, statutory damages of $1,000.00, and attorney fees and costs for the TILA violation.
Although the State Court allowed out of pocket expenses incurred by the Plaintiffs to be awarded,
no such damages were included in the State Court judgment award, and are therefore not excepted
from the Debtor’s anticipated bankruptcy discharge.
Consequently, the $185 licensing and registration fee, the $1,000.00 award, along with
corresponding attorney fees and costs, will be excepted pursuant to § 523(a)(2)(A) because the
award is a debt arising from the Debtor’s fraudulent acquisition of money.
ii. Magnuson-Moss Warranty Act
The Plaintiffs assert that the Debtor’s misrepresentations of the vehicle’s condition during
the sale negotiations results in debt arising from those misrepresentations being excepted from
discharge pursuant to § 523(a)(2)(A), on the grounds that the Debtor obtained the Plaintiffs’ money
as a result of his misrepresentations.
The State court awarded $5,000.00 to the Plaintiffs for annoyance and inconvenience
stemming from the Debtor’s breach of warranties after he misrepresented the condition and
merchantability of the vehicle. 	The State Court also awarded attorney fees and costs for the
Debtor’s violation of the Magnuson-Moss Warranty Act. The State Court did not, however, award
actual damages incurred as a result of the Debtor’s misrepresentations of the vehicle condition.
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Consequently, the $5,000.00 award, along with the corresponding attorney fees and costs,
will be excepted pursuant to § 523(a)(2)(A) because the award is a debt arising from the Debtor’s
fraudulent obtainment of money.
Because the successful § 523(a)(2)(A) action is based on misrepresentations that resulted in
liability under the TILA and the Magnuson-Moss Warranty Act, all debts arising from those
misrepresentations will be excepted from the Debtor’s anticipated bankruptcy discharge.
B. Section 523(a)(6): Willful and Malicious Injury
In the underlying State Court litigation, the Debtor was found to have committed multiple
violations of the WVCCPA, including: (1) a failure to provide the Plaintiffs with notice of the right
to cure before repossession; (2) entering Bethany Cole’s workplace, confronting her using profanity
and disclosing her debts, and then enlisting her friends in what was essentially a carjacking; and (3)
damaging her property during the repossession. The Plaintiffs seek to except the award of damages
pursuant to the WVCCPA from the Debtor’s anticipated bankruptcy discharge pursuant to §
523(a)(6).
Section 523(a)(6) of the Bankruptcy Code provides that a discharge in bankruptcy does not
apply to any debts that arise from the “willful and malicious injury by the debtor to another entity
or to the property of another entity.” 11 U.S.C. § 523(a)(6). The test is conjunctive; thus, a willful
injury by itself is insufficient to support a cause of action unless the act was also done maliciously.
In re Miera, 926 F.2d 741, 743 (8th Cir. 1991). Section 523(a)(6)’s exception from discharge is
associated with the law of intentional torts, and conduct that is negligent or reckless remains
dischargeable. Kawaauhau v. Geiger, 523 U.S. 57, 60 (1998). As stated by the Court of Appeals
for the Fourth Circuit:
[Section] 523(a)(6) applies only to “acts done with actual intent to cause injury.”
Section 523(a)(6) is not satisfied by negligent, grossly negligent, or reckless conduct.
Moreover, the mere fact that a debtor engaged in an intentional act does not
necessarily mean that he acted willfully and maliciously for purposes of § 523(a)(6).
“Nondischargeability takes a deliberate or intentional injury, not merely a deliberate
or intentional act that leads to injury.”
Duncan v. Duncan (In re Duncan), 448 F.3d 725, 728 (4th Cir. 2006).
Thus, for an injury to be “willful,” the debtor must have intended the consequences of the
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debtor’s act. 	More specifically, intentional conduct occurs when a debtor knows that the
consequences flowing from the complained of acts are certain, or are substantially certain to occur.
Barclays American/Business Credit., Inc. v. Long (In re Long), 774 F.2d 875, 881 (8th Cir. 1985)
(adopting the definition of “intentional” as stated in Restatement (Second) of Torts § 8A, comment
b (1965)). For an act to be “malicious,” the act must be targeted at the plaintiff, at “least in the sense
that the conduct is certain or almost certain to cause financial harm.” Id. at 881. A “malicious act”
is “[a]n intentional, wrongful act performed against another without legal justification or excuse.”
Black’s Law Dictionary 977 (8th ed. 2004). Because a debtor will rarely, if ever, admit to acting
in a willful and malicious manner, those requirements may be inferred from the circumstances
surrounding the injury at issue. St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1010
(4th Cir. 1985).
In sum, for a debt to be excepted from a debtor’s discharge pursuant to § 523(a)(6), the
plaintiff must prove three elements by a preponderance of the evidence: (1) that the defendant’s
actions caused an injury to the plaintiff’s person or property, (2) that the defendant’s actions were
willful, and (3) that the defendant’s actions were malicious.
Here, the record – including evidence adduced at trial – falls short of establishing
maliciousness for purposes of § 523(a)(6). The State court made multiple factual findings regarding
the wrongful conduct of the Debtor: The Debtor failed to provide the Plaintiffs with a notice of right
to cure before repossession; the Debtor entered Ms. Cole’s workplace, confronted her using
profanity, and disclosed her debt; and then the Debtor enlisted her friends to aid in a repossession
of the vehicle that was tantamount to a carjacking. Here, as in Duncan, a finding of maliciousness
was not essential to establishing liability in the underlying State Court litigation. The State Court
made no finding regarding maliciousness, and, in addition, the Plaintiffs failed to prove
maliciousness at their § 523(a)(6) trial. More specifically, there was no indication that the Debtor
was acting in a manner inconsistent with his believed right of repossession, and although his
methods were unlawful, no evidence was presented showing that the Debtor undertook the
repossession or related acts with an intent to injure Ms. Cole. Rather, he only sought to repossess
the collateral upon which he held a lien and sell it to recoup his loss on the transaction.
In Duncan, a mother was found liable pursuant to a state wrongful death claim that required
“willful and wanton conduct” after her child drowned in a bathtub. The Duncan court distinguished
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4The Plaintiffs prevailed on all causes of action in the State Court. However, only those
debts arising from the Debtor’s fraudulent obtainment of money are excepted from his
anticipated bankruptcy discharge. Therefore, only the attorney fees and costs associated with the
TILA and Magnuson-Moss violations may be likewise excepted from discharge.
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“willful and wanton conduct” from “willful and wanton” injury, finding the resulting judgment
dischargeable in bankruptcy. In re Gallagher, 2007 WL 782183 at *3 (W.D.N.C. 2007) (relying on
Duncan to distinguish between wrongful and malicious acts of a defendant as an element
establishing liability in the underlying state court litigation and willful and malicious intent for §
523(a)(6) purposes). 	By analogy, although the Debtor’s conduct was wrongful – and in many
respects reprehensible – the record falls short of establishing his intent to cause injury to Ms. Cole
or her property.
C. Attorney Fees and Costs
The Plaintiffs assert that the attorney fees and costs awarded in the State Court litigation are
also excepted from discharge as debts arising from the Debtor’s fraudulent obtainment of money
pursuant to § 523(a)(2)(A).
It is clear that attorney fees and costs awarded in conjunction with an award of damages,
pursuant to a State Court proceeding, that is deemed to be non-dischargeable, are likewise non-
dischargeable. Cohen, 523 U.S. at 223. It is less clear what the amount of attorney fees and costs
to be excepted from discharge should be when the Plaintiffs only partially prevail. 4 In West
Virginia, trial court’s are not permitted to apply a pro rata reduction of fees based on the ratio of
claims prevailed upon, Heldreth v. Rahimian, 219 W.Va. 462, 469 (2006), but courts “may attempt
to identify specific hours that should be eliminated, or . . . simply reduce the award to account for
the limited success.” Id. (citing Hensley v. Eckerhart, 461 U.S. 424, 436-37 (1983)).
Here, the State Court awarded attorney fees and costs in conjunction with its judgment in
favor of the Plaintiffs. As outlined above, the Debtor violated three consumer protection statutes
– TILA, the Magnuson-Moss Warranty Act, and the WVCCPA. 	Of the three causes of action
pursued in the State Court, the Debts arising from the TILA and Magnuson-Moss Warranty Act
violations are non-dischargeable. Because only the debts arising from the TILA and Magnuson-
Moss Warranty Act violations are non-dischargeable, a reduction in the amount of attorney fees and
costs is appropriate for non-dischargeability purposes so as to account for partial success in this
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5The damage award of $12,912.36 under the WVCCPA is dischargeable if the Debtor
receives his anticipated bankruptcy discharge.
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court.
It appears to the court that the three individual causes of action arise out of a common
nucleus of operative facts. It also appears that Plaintiffs’ counsel would have spent a modest amount
of time developing the WVCCPA cause of action over and above the time spent developing the
factual bases for recovery common to all three causes of action. The facts specific to the WVCCPA
are that the Debtor failed to provide the Plaintiffs with notice of the right to cure before
repossession, entered Ms. Cole’s workplace, confronted her using profanity and disclosed her debts,
and then enlisted her friends in what was essentially a carjacking, and damaged her property during
the repossession. 	Thus, this court finds that it is proper to only modestly reduce the award to
account for the limited success. The State Court found that 30.1 hours was a reasonable amount of
time and the hourly fee of $300 was a reasonable fee, for a total fee award of $9,000.30 and costs
of $681.00. 	This court finds that a 25% reduction is appropriate in this case to account for the
Plaintiffs’ limited success in this court. Therefore, $6,750.23 of the attorney fees and $510.75 of
the costs awarded by the State Court are excepted from the Debtor’s anticipated bankruptcy
discharge.
III. CONCLUSION
For the above-stated reasons, $6,185.005 of the debt owed to the Plaintiffs, plus $6,750.23
in attorney fees and $510.75 of the costs awarded, and post-judgment interest at the statutory rate
of 7%, will be excepted from the Debtor’s anticipated discharge pursuant to 11 U.S.C. §
523(a)(2)(A) and/or (6). The court will enter a separate order consistent with this memorandum
opinion.
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