Bankruptcy Court Takes Compassionate View of Default

Posted by NCBRC - August 6, 2014

The evidence showed that the debtors’ breach of contract and conversion of collateral was not willful and malicious for purposes of nondischargeability under section 523(a)(6). Mountain Am. Credit Union v. Trujillo (In re Trujillo), No. 13-12434, Adv. No. 13-1095 (Bankr. D. N.M. July 3, 2014). Mr. Trujillo purchased an RV giving a security interest to Mountain America Credit Union as a successor in interest to the original lender. The loan agreement placed restrictions on the buyer with respect to permitting use of the RV by others, and prohibiting the sale or lease of the vehicle. When Mr. Trujillo became ill, he loaned the vehicle to a friend who promised to pay the monthly loan payments. The friend, however, absconded with the vehicle and disappeared. The loan went into default and communication between Mr. and Mrs. Trujillo and Mountain America, were sporadic and unproductive. The Trujillos filed for bankruptcy. Mountain America argued that the debtor “willfully and maliciously converted its collateral by their transfer of the collateral to a third party and its subsequent disappearance” and that this rendered the debt nondischargeable under section 523(a)(6).

Citing Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998), the bankruptcy court found that “the ‘willful’ element [of section 523(a)(6)] requires both an intentional act and an intended harm; an intentional act that leads to an unintended harm is not sufficient.” For a debtor’s actions to be malicious, they have to be “intentional, wrongful, and done without justification or excuse. Fletcher v. Deerman (In re Deerman), 482 B.R. 344, 369 (Bankr. D. N.M. 2012).” The test is subjective, requiring the court to inquire into the state of mind and motives of the debtor. While conversion may meet the test of “willful and malicious” it does not necessarily. The court found that there was sufficient evidence to support a finding that the debtors breached the terms of the contract and converted the property. As a factual matter, however, the court found that when he lent the RV to his friend, Mr. Trujillo genuinely expected the friend to make the payments and return the vehicle as agreed. Mr. Trujillo also attempted to find his friend and recover the vehicle. Although the debtors should have contacted the lender when the vehicle disappeared, the court found that they were preoccupied with Mr. Trujillo’s severe illness and the failure of his business, and were not cognizant of the harm caused to the lender, nor did they intentionally conceal the loss of the vehicle. Their attempts to contact Mountain America, while perhaps not as persistent as they should have been, were thwarted to some extent by Mountain America’s own erratic accessibility. The court concluded that “[b]ased on Mr. Trujillo’s severe health and financial problems, the Court cannot conclude that the Defendants’ actions were ‘intentional, wrongful, [or] done without justification or excuse.’”

Trujillo Bankr. N.M. opinion



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