The debtor had loans with the secured creditor using residential property and restaurant equipment as collateral. After a fire on his property, the debtor conveyed the remaining restaurant equipment to a third party without notifying the secured creditor and obtained the proceeds. The secured creditor sought a determination from the court that a portion of what the debtor owed to it was nondischargeable under 11 U.S.C. § 523(a)(6). In its complaint, the secured creditor pled, in relevant part, that the conveyance or sale of the collateral and the withholding of the proceeds from those transactions constituted a willful and malicious conversion of the secured creditor’s security interest, providing grounds for denying discharge of the debt. The debtor moved to dismiss for failure to state a claim for relief. Specifically, the debtor asserted that the secured creditor did not show the “willful and malicious injury” necessary for entitlement to relief under a § 523(a)(6) claim.
In Blue Sky Bank v. Yates (In re Yates), Case No. 24-10537-JDL, 2024 WL 4481074, 2024 Bankr. LEXIS 2519 (Bankr. W.D. Okla. Oct. 11, 2024) (opinion not yet released for publication), the court denied the debtor’s motion to dismiss. To survive a motion to dismiss, the court explained that the secured creditor’s complaint, once assumed true and viewed most favorably toward the non-movant, must possess facts that support the elements necessary for dischargeability under § 523(a)(6). The court first noted that nondischargeability under § 523(a)(6) requires a showing that the debtor’s actions were both willful and malicious. Meaning that the debtor must have (1) committed an intentional act and intended harm and (2) the act was “intentional, wrongful, and without justification or excuse”. In re Parra, 483 B.R. 752 (Bankr. D. N.M. 2012). Further, the court clarified that § 523(a)(6) requires that an intentional tort be committed. Several courts have held that the tort of conversion, when intentional and not merely reckless or negligent, may be a basis for finding a debt nondischargeable. The secured creditor alleged all elements of § 523(a)(6), alleging conversion as the basis for the nondischargeability and enough facts to support its claim that the debtor’s conversion was willful and malicious. Therefore, the court found the secured creditor’s claim for nondischargeability of the debt sufficient. Further, the court held that the secured creditor properly alleged an injury, as the injury in cases of conversion of collateral is that the proceeds are “used for purposes other than the payment of the obligation that the property secured.” Thus, the court denied the debtor’s motion to dismiss and allowed the case to proceed on the merits.
By Taylor O’Brien: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Hayden Mariott: [email protected]