Gerst v. Fry (In re Fry)

OPINION AND ORDER ON COMPLAINT TO DETERMINE NONDISCHARGE-ABILITY OF A DEBT ROBERT G. MOOREMAN, Bankruptcy Judge. This adversary complaint, filed March 10, 1981, arises from the debtors’ voluntary petition filed under 11 U.S.C. Chapter 7, on December 10, 1980. Plaintiffs by their pleadings seek a determination of nondis-ehargeability of a debt pursuant to certain provisions of 11 U.S.C. § 523(a)(2)(A), and (a)(4) and (a)(6), the applicable provisions of which are set forth hereinafter. (a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt— [[Image here]] — 865 — (2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by— (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition; [[Image here]] (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; [[Image here]] (6) for willful and malicious injury by the debtor to another entity or to the property of another entity; .... (Emphasis supplied) A trial was held on August 31, 1981, and the matter was submitted to the court on the evidence and subsequent legal memo-randa by the parties from which the court finds and concludes as follows: The debtors dba Arts Management Associates, an unincorporated association, were engaged in the business of promoting concerts and shows featuring various well known performers and celebrities such as George Burns, Helen Reddy, Red Skelton and the popular Country Western singer, Loretta Lynn. After some preliminary negotiations, the debtor, Brad L. Fry, entered into a first contract on April 16, 1980 with the plaintiffs, under which he agreed to procure the performance of Loretta Lynn on September 10, 1980, at Grady Gammage Auditorium for which the plaintiffs paid the sum of $15,000. Under the contract, the plaintiffs were to receive 50% of the net profits derived from the performance and the debtors the remaining 50% of said venture. (A copy of the contract (Ex. 1) is appended and made a part of this opinion.) Approximately two weeks later, on April 30, 1980, the debtor entered into a second contract with the American Diabetes Association Arizona Chapter (ADA) in which it was promised the promotion of the same concert featuring the same performer, Loretta Lynn, at the same time, September 10, 1980 (a copy of which is also appended as Exhibit 2). Under this second contract, the debtor received a $7,500 cash promotional fee and a $2,500 retainer from the ADA who received the profits from the performance which ultimately took place at Rawhide, Arizona on the scheduled performance date. On April 18, 1980, between the two contracts in question, the debtor negotiated an agreement with United Talent, Inc., agents of Loretta Lynn, to secure the September 10, 1980 performance. Under this agreement, the debtor promised to pay $25,000 for Loretta Lynn to perform with the sum of $12,500 to be paid at that time and the balance to be paid on the day of the performance. Facts presented at trial indicate that the debtor utilized the $15,000 procured from the plaintiffs towards the $12,-500 payment to United Talent. Subsequent to the above described contracts, the plaintiffs learned of the ADA performance by hearing a radio announcement advertising the Rawhide concert, and on August 7,1980, the debtor sent notification to plaintiffs by mailgram of his desire to discontinue the venture, and offering to return the $15,000 investment plus interest. However, this was not accomplished. On August 13, 1980, the debtor, Brad L. Fry, met personally with the plaintiff, Stephen Gerst, and as a result of this meeting, an affidavit was prepared and signed by the debtor in which he stated that he contracted with the ADA without the knowledge or consent of the plaintiffs and that he used the funds provided by them to secure the performance of Loretta Lynn. In addition, the debtor stated that he would provide security for the obligation which security later proved to be upon the debtors’ homestead and heavily encumbered and subject to forfeiture. At no time prior to the double contracts time frame were the plaintiffs told by the debtor of his dealings with the ADA or his use of the $15,000 for procuring the performance contemplated under the first contract with the plaintiffs. In the complaint, two separate grounds were asserted as a basis for nondischargeability and later a — 866 — third ground based on section 523(a)(6) was argued to the court upon the memoranda submitted and in conformance with the evidence of the trial. First, the plaintiffs have argued that the money was obtained by false pretenses, or actual fraud. This allegation was presumably based on 11 U.S.C. § 523(a)(2)(A). Second, the plaintiffs alternatively argue that the debtors committed fraud, or defalcation while acting in a fiduciary capacity, or alternatively, embezzlement or larceny. This allegation was presumably based on section 523(a)(4). The court finds that these first two grounds are inapplicable to this case and not supported by the evidence presented, and therefore, take up the third ground — that is, section 523(a)(6), supra. The plaintiffs argue, based on the evidence, that the debtors’ acts constituted a “willful and malicious injury to property.” This allegation presumably follows from section 523(a)(6) of the Bankruptcy Code which prohibits a discharge for willful and malicious injury by the debtor to another entity or to the property of another entity. This section replaces section 17(a)(8) of the former Bankruptcy Act which also excepted from discharge debts of that nature. While willful and malicious conversion is not expressly specified under section 523(a)(6), it has been held that “willful and malicious injury” encompasses “willful and malicious conversion.” See 3 Collier on Bankruptcy, ¶ 523.16 (15th Ed. 1979), Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), In Re Meyer, 7 B.R. 932 (Bkrtcy.N.D.Ill.1981). Therefore, the issue before the court is whether the specified acts of the debtors constitute a willful and malicious injury or conversion to the plaintiffs or to the property and are clearly proven by the evidence of the plaintiffs. This question must be answered in the affirmative upon the facts and law presented at the trial. This conclusion is reached by an analysis of the following case law which presents factual patterns analogous to the instant case. In the case of In Re Prenzi, 3 B.R. 165 (Bkrtcy.D.Ariz.1980) (Judge William A. Scanland), the debtors failed to comply with the terms of a written agreement which required them to execute a $3,000 promissory note and post it as a bond in the Superior Court as part of a settlement in a pending lis pendens action. The debtor failed to do this and later sought to have the debt discharged in bankruptcy. The bankruptcy court held the debt to be non-dischargeable finding that the debtors’ failure to execute the note was a willful and intentional act. While this case was decided under the former Bankruptcy Act § 17(a)(8), the same principles apply under the new Bankruptcy Code. In the instant case, the debtors herein as in Prenzi, knowingly failed to abide by an express agreement with the plaintiffs and in direct contravention of the agreement used funds obtained from the plaintiffs for the purpose of securing the performance of Loretta Lynn on behalf of the ADA. By this action the debtor caused direct injury to the plaintiffs by depriving them of their investment and selling the same performance to another party and after the plaintiffs’ funds had been used in procuring the artist’s performance for the benefit of another. Also pertinent on the issue of discharge-ability is the case of In Re McCloud, 7 B.R. 819 (Bkrtcy.M.D.Tenn.1980). There the debtor, in direct violation of a written security agreement made with a bank, sold certain livestock that was pledged as security. The court found that this act constituted a willful and malicious conversion under section 523(a)(6). This decision was based on the fact that such a sale of collateral was unauthorized, that the bank had rights in the collateral, and that the bank was unaware of any likelihood that the collateral would be sold. These same factors are present in the instant case. No authorization was given to the debtors to seek an alternative and competing sponsor for the September 10, concert. Pursuant to the original contract between the parties, the plaintiffs had a vested interest in the performance. Finally, no evidence was presented indicating that the plaintiffs — 867 — were timely notified by the debtor, Brad L. Fry, of his prior and subsequent negotiations and ultimate contract with the ADA. In fact, the first notice the plaintiffs received of the debtors’ dealings was by hearing a radio announcement advertising the September 10th concert on behalf of the ADA which was heard by the plaintiff Gerst on his car radio. In summary, the court finds and concludes that the debtors’ acts fall within the definition of “willful and malicious injury” as applied in section 523(a)(6). As the court in the McCloud decision stated, If an act of conversion is done deliberately and intentionally in knowing disregard of the rights of another, it falls within the statutory exclusion even though there may be an absence of special malice. See McIntyre v. Kavanaugh, 242 U.S. 138, 37 S.Ct. 38, 61 L.Ed. 205 (1916); Bennett v. W. T. Grant Co., 481 F.2d 664 (4th Cir. 1973). Therefore, while the debtors may have entered into the agreement with the plaintiffs in good faith, the subsequent intentional conduct under the circumstances acted to deprive the plaintiffs of all property rights and profits connected to the September 10, 1980 performance of Loretta Lynn. This being the case, the court holds that the resultant debt is nondischargeable as to the debtors herein. Pursuant to F.R.C.P. 52, this opinion and order shall constitute Findings of Fact and Conclusions of Law herein. APPENDIX EXHIBIT 1 AGREEMENT OF ASSOCIATION The parties to this AGREEMENT are ARTS MANAGEMENT ASSOCIATES, INC., and STEPHEN A. GERST, MICHAEL J. COHEN and DAVID A. GRO-SECLOSE. WHEREAS, Arts Management Associates, Inc., desires to accept an investor, and Stephen A. Gerst, Michael J. Cohen and David A. Groseclose desire to invest in an upcoming production promoted by Arts Management Associates, Inc., per proposal for the Loretta Lynn Show attached hereto and made a part of this Agreement; THEREFORE, the parties have entered into the following Agreement: 1, In consideration of the promises contained herein, investors agree to invest the sum of $15,000.00 with Arts Management Associates, Inc. 2. In consideration for this investment capital, Arts Management Associates, Inc., agrees to pay to Stephen A. Gerst, Michael J. Cohen and David A. Groseclose fifty percent (50%) of the NET PROFITS from the Loretta Lynn concerts to be held on September 10, 1980, or return $15,000.00 with interest at eighteen percent (18%) per an-num from the date of this Agreement, whichever is greater. (a) If the above concert is postponed for any reason, the parties agree that this Agreement may be cancelled at the option of the investors and the $15,000.00 together with interest at eighteen percent (18%) per annum, shall be refunded to them within thirty (30) days. (b) The term NET PROFITS as used herein shall mean the sums remaining from Gross Income after payment of the expenses set forth in the attachment hereto and after reimbursement hereto investors of their initial $15,000.00 investment. (c)Repayment to occur within thirty (30) days of settlement of concert proceeds with the Box Office. Investors are to receive a full accounting of all ticket sales, receipts and expenditures. IN WITNESS OF THIS AGREEMENT, the parties have signed it below this 16 day of April, 1980. ARTS MANAGEMENT ASSOCIATES, INC. Michael J. Cohen Michael J. Cohen, Investor By Brad L. Fry BRAD L. FRY, President Stephen A. Gerst Stephen A. Gerst, Investor By Brad L. Fry_ BRAD L. FRY, Guarantor David A. Groseclose_ David A. Groseclose, Investor By Elizabeth Fry ELIZABETH FRY, Guarantor Received From Stephen A. Gerst the sum of $16,000 on 4-16-80 Beverly F. Jewell (AMA, Inc.) — 868 — [[Image here]] — 869 — [[Image here]] — 870 — [[Image here]]