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Debtor Lacked Intent to Harm Lender
John D. MeadNational AgLaw Center Research Fellow
An agricultural lender brought an adversary proceeding seeking to except a debt from discharge when the debtor converted the lender's collateral in violation of the terms of a written agreement between the lender and the debtor. In re Bennett, 293 B.R. 760 (Bankr. C.D.Ill. 2003). The United States Bankruptcy Court for the Central District of Illinois ruled that although the debtor's failure to read or understand the parties' agreement may not have protected the debtor from a breach of contract claim, it did preclude a determination that the debtor acted with intent to harm the lender or deprive the lender of its property rights. See id. at 763-64.
Debtor Steven W. Bennett was a farmer in Menard County, Illinois, who had been involved in a long-standing business relationship with Lincoln Land FS, Inc. ("Lincoln"). See id. at 761. Before 1995, Bennett maintained an open credit account with Lincoln under which he purchased farm supplies that were used in his farming operation. See id. In 1995, Lincoln's finance marketing manager, met with Bennett and informed him about a new agrifinance program. See id. Initially, Bennett stated that he could not participate in the program because National City Bank was his principal farm lender and held a lien on his crops. See id. After assurance that Lincoln would only have a junior lien on the crops and that National City Bank's rights would be unaffected, Bennett applied for the credit offered under the new agrifinance program and entered into an agrifinance agreement. See id. at 761-62. Bennett participated in the program from 1995 through 1999 and received assurances each year that National City Bank's interest would not be affected by the agrifinance agreement. See id.
The agrifinance agreement included a clause that prohibited Bennett from "disposing of collateral anywhere other other than Culver Fancy Prairie Co-op or Lincoln Land FS, Inc. without prior permission from . . . [Lincoln]." Id. at 762. On several occasions, however, Bennett "sold grain and delivered the proceeds of the grain to National City Bank." Id. Bennett claimed that "he doubted that he ever read the Agreement and he was never told of any restriction about where he could or could not sell crops." Id. Further, National City Bank extended line-of-credit loans to Bennett for the 1997 and 1998 crop years under the belief that it maintained a first lien on those crops. See id.
Although Bennett sold his grain and delivered the proceeds in violation of the agrifinance agreement, Lincoln failed to notify Bennett of the breach in an October, 2000 letter. See id. In that letter Lincoln informed Bennett that it "claimed a lien in and to . . . [Bennett's] crops and that the crops must be delivered to specified locations." Id. After receiving this notice, Bennett complied with the parties' agreement by delivering all subsequent crops to the locations specified in the agreement. See id.
On July 19, 2002, Bennett filed a Chapter 7 bankruptcy petition. See id. The case-at-bar arose when Lincoln filed an adversarial complaint contesting the dischargeability of Bennett's debt to Lincoln under 11 U.S.C. § 523(a)(6). Bankruptcy Code § 523(a)(6) provides in pertinent part that "(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt - (6) for willful and malicious injury by the debtor to another entity or to the property of another entity." Id. The court noted that Lincoln had to prove three elements by a preponderance of the evidence to demonstrate that it was entitled to a determination that Bennett's debt was nondischargeable under § 523(a)(6): (1) that Bennett caused an injury to Lincoln, (2) that Bennett's actions were willful, and (3) that Bennett's actions were malicious. See id.
The court explained that the term "willful" meant an intent to cause injury and not the mere commission of an intentional act that leads to an injury. See id. (citing Kawaauhau v. Geiger, 523 U.S. 57 (1998)). It also explained that under Geiger, to prove that the debt was nondischargeable under § 523(a)(6), Lincoln was required to show that Bennett actually intended to harm it and not merely that Bennett acted intentionally and consequently caused harm to it. See id. The court further explained that injuries allegedly suffered by Lincoln that resulted from mere negligence or recklessness on the part of Bennett did not fall within the scope of § 523(a)(6). See id.
The court also explained that to demonstrate malice on Bennett's part, Lincoln was required to show that Bennett's willful and injurious conduct was undertaken without just cause or excuse. See id. at 763. (Citations omitted.) It added that in accordance with In re Kidd, 219 B.R. 278 (Bankr. D.Mont. 1998):
[a] creditor, in order to prevail under § 523(a)(6), must demonstrate by a preponderance of the evidence, that the debtor desired to cause the injury complained of, or that the debtor believes that the consequences were substantially certain to result from the debtors (sic) acts. In other words, in the case of a conversion, a creditor must show that a debtor, when converting collateral, did so with the specific intent of depriving the creditor of its collateral or did so knowing, with substantial certainty, that the creditor would be harmed by the conversion. This subjective test focuses on whether the injury was in fact anticipated by the debtor and thus insulates the innocent collateral conversions from non-dischargeability under § 523(a)(6).
Id. (citing Kidd, 219 B.R. at 285).
The court noted that under the facts of this case, Lincoln "presented a plausible case for breach of contract." Id. It stated that the fact that Bennett admittedly failed to read or understand the agreement he entered into with the plaintiff was not a plausible defense for a breach of contract claim. See id.
The court held, however, that Lincoln failed to prove that Bennett violated 11 U.S.C. § 523(a)(6). See id. The court noted that Bennett believed that National City Bank had a first lien on his crops and acted in a manner that reflected this belief. See id. The court found that Bennett's actions were neither willful nor malicious and that he never intended to harm Lincoln or deprive Lincoln of its property rights. See id. The court found significant Bennett's immediate compliance with the delivery clause in the agreement when he received Lincoln's October, 2000, letter. See id. Finally, the court noted that Lincoln's delay in enforcing the clause that restricted where Bennett could sell and deliver his crops indicated a misapprehension on Lincoln's part as to whether it had a superior lien over National City Bank. See id. The court therefore dismissed Lincoln's complaint and declared that Bennett's debt was dischargeable. See id. at 764.
The case was decided on June 10, 2003; this summary was posted Dec. 10, 2003.