United States Court of Appeals,
Eleventh Circuit.
No. 94-2814.
In re Stephen P. WOLFSON, Debtor.
Stephen P. WOLFSON, Plaintiff-Appellant,
v.
EQUINE CAPITAL CORPORATION, a Delaware Corporation, Defendant-
Appellee.
June 27, 1995.
Appeal from the United States District Court for the Middle
District of Florida. (No. 93-944-Civ-Orl-06(22), George C. Young,
Judge.
Before CARNES and BARKETT, Circuit Judges, and GIBSON*, Senior
Circuit Judge.
BARKETT, Circuit Judge:
Appellant Stephen P. Wolfson ("Wolfson") appeals from a
district court judgment affirming a bankruptcy court's decision
excepting $1,815,805 of Wolfson's debt from discharge. Because we
conclude that the debt was excepted in error, we reverse.
From 1971 to 1990, Wolfson and his brother, Gary, were
partners in a horse farm known as the Happy Valley Farm (the
"Farm"). In 1987, Equine Capital Corporation ("ECC") replaced
Citibank, N.A., as the Farm's primary lender, making ten loans to
the Farm between 1987 and 1989. For most of these loans, the Farm
pledged various interests in horses as collateral. Subsequently,
five of the loans went into foreclosure.1 During this period, the
*
Honorable Floyd R. Gibson, Senior U.S. Circuit Judge for
the Eighth Circuit, sitting by designation.
1
Wolfson entered into each of the loan transactions as
general partner of the Farm, and as an individual co-maker.
Farm routinely deposited its income, including proceeds from the
sale of collateralized horses, into its general business account;
it paid to ECC whatever it could of amounts due on a monthly basis,
while adding amounts it could not pay to its total indebtedness.
The bankruptcy court found that ECC knew of and at no time objected
to these practices. Indeed, even though it was well aware of the
practices, ECC continued to renew and extend additional credit to
the Farm, hoping that such cash infusions would eventually return
it to profitability. Ultimately, however, ECC declared the Farm
loans to be in default due to nonpayment of interest and principal,
and the Farm terminated its business operations surrendering its
remaining horses and other collateral to ECC. While nine months
earlier ECC had valued these assets at $7,810,000, it received only
$1,300,000 when it eventually sold them.
Subsequently, Wolfson filed a voluntary petition under
Chapter Seven of the Bankruptcy Code in the U.S. Bankruptcy Court
in Jacksonville, Florida. In hopes of avoiding discharge of
Wolfson's $5,120,058 debt, ECC commenced an adversary proceeding in
the bankruptcy court filing a twelve-count complaint under 11
U.S.C. § 523, based upon various allegations of misconduct by
Wolfson. According to 11 U.S.C. § 523(a)(6):
(a) A discharge under ... 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.
Willful and malicious injury includes willful and malicious
conversion, which is the unauthorized exercise of ownership over
goods belonging to another to the exclusion of the owner's rights.
In count VI, ECC specifically alleged that Wolfson had "converted
to his own use or the use of Happy Valley Farm" various horses "or
the proceeds thereof" which he had pledged as collateral in
security agreements with ECC, and that "his transfer of collateral
previously pledged to ECC, or the diversion of proceeds of said
collateral was willful, malicious, and done with intent to harm
ECC." The bankruptcy court entered a final judgment favoring ECC
on count VI, finding that Wolfson's "retention of proceeds which
should have been remitted to Plaintiff was done deliberately and
without justification" and that "[a]ccordingly, the Defendant
committed a willful and malicious act that caused injury to
Plaintiff." As a result, the court excepted $1,815,805 of
Wolfson's debt from discharge. Wolfson appealed from the judgment
on count VI to the district court, but the district court affirmed
the bankruptcy court.
We conclude that the district court erred in finding that
Wolfson's retention of proceeds and failure to make payments of
debt entitled ECC to an exception to discharge. While under 11
U.S.C. § 523(a)(6), discharge is not permitted where there has been
"willful and malicious injury by the debtor to another entity or to
the property of another entity," the U.S. Supreme Court has
observed that such an injury "does not follow as of course from
every act of conversion, without reference to the circumstances,"
Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151,
153, 79 L.Ed. 393 (1934). In some circumstances, found the Court,
"[t]here may be an honest, but mistaken belief, engendered by a
course of dealing, that powers have been enlarged or incapacities
removed. In these and like cases, what is done is a tort, but not
a wilful and malicious one." Id. (emphasis added);2 see also In
re Billy F. McGinnis, 586 F.2d 162, 163 (10th Cir.1978).
Here, the course of dealing clearly indicates that Wolfson had
a reasonable belief that his business practices were known to his
secured creditor. More importantly, it indicates that the secured
creditor knowingly acquiesced in Wolfson's business practices, and
took no steps to protect its collateral. The Farm kept standard
business records, accounting for all of the income received from
operations and sales, including purse money earned at horse races
and proceeds from the sale of horses. The Farm's bookkeeper
provided ECC with all of the financial information ECC requested,
including an accounting of all sale proceeds, on a monthly basis.
In fact, at the end of each month, the bookkeeper would meet with
an ECC representative and determine the amounts due ECC. On this
basis, ECC knew that the Farm placed its proceeds into a general
account out of which it paid ordinary business expenses, and knew
also which of the loan collateral the Farm had sold during the
month. Wolfson's belief, engendered by a course of dealing, was
thus reasonable, and under Davis could support the conclusion that
if Wolfson committed the tort of conversion, it was not a willful
or malicious one.
However, it is not necessary to reach the question of whether
2
. For linguists, we note that English lexicographers regard
"wilful" and "willful" as acceptable variants. THE AMERICAN
HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 1465-1466 (1976).
The Supreme Court used "wilful" in Davis.
Wolfson's actions were willful and malicious, nor the question of
whether Wolfson's sale of collateral and failure to remit the
proceeds amounted to conversion. As the bankruptcy court
recognized, ECC not only knew of and failed to object to the Farm's
sales of collateral and its business practice of depositing all
proceeds into a general business account, but ECC also continued to
renew and extend additional credit to the Farm. For example, ECC
loaned the Farm $600,000 on June 29, 1988; $2,400,000 on February
21, 1989; $1,800,000 on February 21, 1989; $900,000 on February
21, 1989; $500,000 on February 21, 1989; and $150,000 on October
6, 1989. We find that since ECC failed to enforce whatever rights
it may have had regarding the disposition of its collateral, it
waived its right to assert under 11 U.S.C. § 523(a)(6) that its
claim is non-dischargeable and that it suffered "willful and
malicious" injury by Wolfson. If ECC "acquired knowledge" of
Wolfson's alleged conversion and did so when "it could have
asserted its security interest in the property and failed to take
reasonable steps to protect its security, the indebtedness should
be discharged." Bennett v. W.T. Grant, Co., 481 F.2d 664, 666 (4th
Cir.1973). Put another way, ECC's "failure to take reasonable
steps to protect its collateral ... prevented application of the
exception." McGinnis, 586 F.2d at 163.
Therefore, under the facts of this case, we conclude that the
district court erred in finding that ECC was entitled to an
exception to discharge, and, accordingly, we REVERSE the district
court's judgment as to count VI and REMAND for further proceedings
consistent with this opinion.
REVERSED and REMANDED.