Bankruptcy: Dischargeability Determination: Willful & Malicious Injury v. Embezzlement

In the case of Robbins v. The Chase Manhattan Bank, N.A. the United States District Court at Harrisonburg affirmed a bankruptcy court's ruling that a debt was non-dischargeable under Bankruptcy Code §523(a)(6) as willful and malicious injury. The District Court found that the debtor held a 98 percent interest in a limited partnership which owned a shopping center. The partnership had granted to a bank a second deed of trust on the shopping center and assigned to the bank the rents from the shopping center as security for portions of two loans made by the bank. The debtor, however, under a workout agreement, later began receiving rent distributions from the partnership in his capacity as a limited partner, and he used nearly $71,000 of the distributions for personal expenses. 

The District Court noted from the Bankruptcy Court's finding that the debtor made the determination on his own to take the money without consideration of the workout agreement or of the bank's rights to the rents. The District Court found that the Bankruptcy Court correctly applied the malice standard as established in that circuit.

Although the Bankruptcy Court did not explicitly state that it found malice, malice could be inferred from debtor's actions in receiving the distributions, placing the rents in his own account and making personal expenditures. The debtor took such actions all in disregard of and without benefit to the bank's security interest in the rents and at a time when he was suffering financially.

The District Court ruled that the bank needed only to show that the debtor's conversion was in deliberate and intentional disregard of its rights. Even if the debtor's subjective intent was relevant, the defendant's assertion that the Bankruptcy Court failed to consider his state of mind was without merit considering the debtor's own testimony relating to the receipt of the distributions, deposit of the money into his personal account and subsequent expenditures on personal items.

The District Court ruled that the Bankruptcy Court's finding that debtor's receipt of the rent distributions injured the bank was not clearly erroneous. In receiving the distributions the debtor knowingly disregarded the bank's interest in the rents and breached the workout agreement. The debtor's use of the cash for personal purposes did not benefit but injured the bank to the tune of $297,000. The bank could not exercise control over its collateral at a time when the debtor was experiencing serious financial troubles. Consequently, the District Court found the debt was non-dischargeable as a willful and malicious injury to the bank because the debtor knowingly took the money without concern for the bank's rights.

The bank, in its cross-appeal, argued that the Bankruptcy Court erred in rejecting its claim that the debt was non-dischargeable as an embezzlement under Bankruptcy Code §523(a)(4).

The parties treated the bank's interest in the rents assignment and the deed of trust as security for the debt on two loans. That interest did not defeat the partnership's interest in the rents. As a limited partner in the partnership, the debtor was entitled to cash distributions made to partners. Thus, the rents did not constitute property of another which debtor could appropriate, and debtor's embezzlement claim failed. Further, the District Court ruled that the bank failed to sustain its burden of proving debtor acted with fraudulent intent.

Collections: Fifth Amendment Claim Denied in Civil Action

The Hanover County Circuit Court, in the case of EVB v. Strum, denied a defendant’s motion to quash a summons for debtor’s interrogatories and subpoena duces tecum, in which the debtor asserted his Fifth Amendment right against self-incrimination.

The court ruled that there is no blanket Fifth Amendment right to refuse to answer questions in noncriminal proceedings. The privilege must be specifically claimed on a particular question in the debtor’s interrogatories, and the matter submitted to the court for its determination of the validity of the claim. Further, a defendant must assert his Fifth Amendment right in regard to each specific document in regard to a subpoena duces tecum, and the court must assess the claim as to each individual document.

Foreclosure: Deeds of Trust

It all starts with the deed of trust. The deed of trust is the primary method of acquiring a lien against real estate in Virginia. With a deed of trust, the owner of the real estate conveys legal title to a trustee, in trust, to secure the noteholder’s indebtedness. A deed of trust establishes a lien on the subject real estate upon execution by the grantor and recordation in the land records of the Circuit Court for the jurisdiction (County or City) in which the property is located. While recording the deed of trust is not essential to the validity of the deed of trust between the parties, an unrecorded deed of trust does not establish a lien on the subject real estate as to other creditors and purchasers of the grantor. An unrecorded deed of trust will not provide the beneficiary of the deed of trust with a priority position against other creditors with recorded liens, even if they are subsequent in time.

Real Estate: Using Deeds of Trust to Secure Your First, Second, Equity Line or Refinance Home Loans

In the previous editions of Creditor News we began a discussion of the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of securing your first, second, equity line or refinance home loans with a deed of trust.

Real estate liens provide important security for your debt. Since real estate is the largest investment and asset for most individuals, they will usually make every effort to pay debts secured by their real estate first. However, you need to know the chain of title in order to make an informed decision about your loan. Specifically, in what position will your lien be? Are there any “clouds” on the title? You will not know the answer to these questions without a proper title search and review.

Once you know your position you will need to examine the available equity to cover your loan. What is the value? What are the balances due on the liens ahead of your anticipated position? Beyond the business decision of determining when the equity is sufficient for your risk tolerance, in order to take advantage of the “$1.00 rule” in the bankruptcy code for chapter 13 cases (should your debtor decide to later file bankruptcy), you need to ensure that there is at least $1.00 in equity to cover the loan. You should take into consideration that property values may go down (e.g., 2008 to present).

If the deal is made and the real estate closing occurs, immediate and proper recording of your deed of trust is essential to preserve your position. If the debtor defaults, foreclosure on the property can occur. If the debtor seeks reorganization of his debt in chapter 13, you can seek full payment of the debt.

We have experienced attorneys and staff who can examine title and properly represent your interests in real estate closings.