Summary of a Recent
Judicial Development in
Bankruptcy

Farmer's Selling of Secured Collateral
Not Malicious

Gaby R. Jabbour
National AgLaw Center Research Assistant

Summary of Decision

In In re Logue, 294 B.R. 59 (B.A.P. 8th Cir. 2003) the Bankruptcy Appellate Panel (BAP) for the Eight Circuit held that a debtor did not act with malice when he sold cattle not in accordance with the security agreement he executed in favor of a bank, used sales proceeds to feed and maintain the cattle rather than delivering those proceeds to the creditor, and allegedly failed to diligently pursue other financing options.

Background

On March 21, 2001, Loy Logue, debtor, executed a promissory note in favor of McIlroy Bank and Trust (Bank) for $38,085.51. See id. at 61-62. Jerome Johnson co-signed the promissory note. See id. at 62. The debt was secured by 100 head of cattle and two cattle trailers and "[t]he security agreement contained a sales restriction which required the [d]ebtor to use the Washington County Livestock Auction . . . if he desired to sell any of the secured cattle." Id. Nine days after he executed the promissory note in favor of the Bank, Logue began selling cattle at places other than the Washington County Livestock Auction. See id.

On May 21, 2001, the note and security agreement were renewed. See id. On July 21, 2001, Logue defaulted on the note, and the Bank demanded that Logue turn over the remaining cattle. See id. After Logue failed to turn over any cattle, the Bank demanded that Johnson pay off the note. See id. On July 28, 2001, Johnson paid off the note, and the Bank assigned the note and the security agreement to Johnson. See id. On September 20, 2001, Logue and his wife filed a Chapter 13 bankruptcy petition that was later converted to Chapter 7. See id.

Johnson filed a complaint in the United States Bankruptcy Court for the Western District of Arkansas "seeking a determination that the [d]ebtor's indebtedness to him as assignee of the Bank constitute[d] a debt for willful and malicious injury which should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(6)." Id. The bankruptcy court determined that "Johnson satisfied the willful prong of the test but failed to establish malice." Id. Johnson appealed the bankruptcy court's decision to the Eighth Circuit BAP. See id.

Analysis and Holdings

Noting that the sole issue on appeal was whether Logue's indebtedness to Johnson constituted a malicious injury, the BAP explained that "[m]alice requires conduct which is targeted at the creditor, at least in the sense that the conduct is certain or almost certain to cause financial harm." Id. It also explained that "[t]he [d]ebtor's knowledge that he or she is violating the creditor's legal rights is insufficient to establish malice absent some additional aggravated circumstances." Id. (citations omitted).

The BAP noted that "[i]n the context of the breach of a security agreement, a willful breach is not enough to establish malice." Id. (citations omitted). It also noted that "the Bankruptcy Court acknowledged that the [d]ebtor sold collateral other than in accordance with the security agreement" and that "[t]he [d]ebtor testified that he used the sale proceeds to feed and maintain the remaining herd rather than delivering the proceeds to the Bank." Id. at *3.

The BAP stated that "[t]he use of some proceeds of another's collateral to directly benefit oneself while also benefitting the business as a whole is not necessarily enough to render the actions malicious." Id. (citations omitted). It also stated that "a debtor's inability to account for every penny of the proceeds does not necessarily equate to malice" and that "[h]ere the [d]ebtor explained the use of the proceeds and accounted for most of the money with documentary evidence." Id. It added that Logue's "pattern of selling the cattle in batches bolster[ed] the [d]ebtor's assertions that he was attempting to maximize proceeds and was using the proceeds as needed to maintain the remaining herd." Id.

The BAP also examined Johnson's argument that Logue failed to pursue other financing options and stated that "[a] lack of diligent efforts to obtain alternate financing is not necessarily evidence of malice nor was that the situation here." Id. at 64. It added that "[a]n ill-fated reorganization effort which quickly collapses is not necessarily a 'sham or hopeless from the beginning' and can be evidence of an intent, albeit unfulfilled, to benefit the creditor." Id. (citation omitted).

The BAP held that "[t]he Bankruptcy Court properly weighed the evidence as a whole and concluded that Johnson failed to meet his burden of establishing malice on the part of the [d]ebtor" and that "the [d]ebtor's indebtedness to Johnson should not be excepted from discharge pursuant to 11 U.S.C. § 523(a)(6)." Id.

The case was decided on April 29, 2003; this summary was posted Apr. 30, 2004.