Opinion
Case No. 2:05-CV-01071.
August 28, 2007
OPINION AND ORDER
Plaintiff-Appellant Sanderson Farms, Inc. ("Sanderson Farms") appeals an order and judgment by the United States Bankruptcy Court for the Southern District of Ohio, dated September 28, 2005 (Doc. 2). The Bankruptcy Court, in its order and judgment, ruled in favor of the Defendant-Appellee, Roch T. Gasbarro ("Gasbarro"), and concluded that the exceptions to Gasbarro's discharge claim were inapplicable. Accordingly, the Bankruptcy Court's judgment stated Gasbarro's obligation to Sanderson Farms was discharged. For the reasons that follow, the Bankruptcy Court's decision is AFFIRMED.
I. ISSUES ON APPEAL
The issues raised by this appeal are: (1) whether the bankruptcy court erred in refusing to grant Sanderson Farms' Motion for Summary Judgment; (2) whether the bankruptcy court erred in refusing to grant the Sanderson Farms' Motion for Order of Abstention and Expedited Hearing; (3) whether the bankruptcy court erred in refusing to grant the Motion in Limine filed by Sanderson Farms; (4) whether the findings of fact of the bankruptcy court at the conclusion of trial were clearly erroneous; (5) whether the bankruptcy court erred in finding that Section 523(a)(6) of the United States Bankruptcy Code ("Code") is not applicable; and (6) whether the bankruptcy court erred in finding that Gasbarro's debt to Sanderson Farms is dischargeable.II. JURISDICTION AND STANDARD OF REVIEW
This Court has jurisdiction to hear this appeal by virtue of 28 U.S.C. § 158(a)(1).
This Court, acting as an appellate court, is bound by the bankruptcy court's findings of fact unless the findings are clearly erroneous. See Federal Rules of Bankruptcy Procedure, Rule 8013. The clearly erroneous standard as explained by the Supreme Court is as follows: "a finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948); United States v. Ayen, 997 F.2d 1150, 1152 (6th Cir. 1993).
This Court reviews the bankruptcy court's conclusions of law de novo. De novo review requires the "appellate court [to determine] the law independently of the trial court's determination." In re Ravenswood Apartments, Ltd., 338 B.R. 307, 310 (B.A.P. 6th Cir. 2006) ( quoting Treinish v. Norwest Bank Minn., N.A. ( In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir. 2001)). Essentially, the reviewing court decides the issue as if it had not been heard before. In re Marketing Creative Solutions, Inc., 338 B.R. 300, 302 (B.A.P. 6th Cir. 2006).
Equitable determinations are within the sound discretion of the bankruptcy judge and will not be disturbed absent abuse of discretion. In Re M.J. Waterman Assoc., Inc., 227 F.3d 604, 607 (6th Cir. 2000). A bankruptcy court is considered to have abused its discretion when a reviewing court is "left with the definite and firm conviction that the [bankruptcy] court committed a clear error of judgment in the conclusion it reached upon a weighing of the factors." United States v. Haywood, 280 F.3d 715, 720 (6th Cir. 2002).
III. BACKGROUND
Sanderson Farms is a poultry processor and supplier. In 1993, Sanderson Farms began selling poultry products to Midwest Farms, Inc. ("Midwest"). Midwest was an entity engaged in processing and wholesaling poultry products and was controlled by Gasbarro and family members.
In the Summer 1993, Sanderson Farms first began extending credit to Midwest. Mr. Hill, Sanderson Farms' Credit Manager, testified that Sanderson Farms conducted annual updates on Midwest's account, and reviewed credit reports and references. Until early in 1995, Midwest had established a good credit history with Sanderson Farms with its prompt payments and its oldest invoice generally not exceeding fourteen days.
In 1994 and 1995, two major events affected Midwest's operations. First, in 1994, Midwest lost $115,000 due to the bankruptcy of an unrelated company who owed money to Midwest. Gasbarro stated that this event caused Midwest's 1994 net profits to be $200,000. Second, in April 1995, the Department of Immigration and Naturalization (INS) took approximately 80% of Midwest's workforce. Consequently, Midwest was forced to buy boneless chicken breasts because it did not have a sufficient number of employees to sustain its deboning operation.
Gasbarro testified that in February 1996, he believed Mr. Bernard, Midwest's Controller, was giving him inaccurate information regarding Midwest's profits and losses. Mr. Bernard told Gasbarro that he had to "move some numbers in the balance sheet" and that Gasbarro needed to make up a hundred thousand dollars. According to Gasbarro, however, there was no indication that Midwest was not making money before that time. Gasbarro terminated Mr. Bernard and hired Mr. Pearson as Controller. On February 14, 1996, Gasbarro sent Mr. Bernard a letter directing him to turn over information regarding Midwest's financial status to Mr. Pearson. A subsequent financial statement prepared by Mr. Pearson showed Midwest suffered a loss of $879,072.43 for 1995. Mr. Pearson, Mr. Bernard, and Gasbarro met to discuss the discrepancies in Midwest's balance sheets. Mr. Pearson testified that when he confronted Mr. Bernard about the discrepancies, Gasbarro appeared dumbfounded. He further testified that he did not believe that Gasbarro knew of Midwest's negative financial position, and that there was no fraud in the transactions that he reviewed. Additionally, Mr. Pearson testified that he did not observe any attempts by Gasbarro and his family to render Midwest insolvent.
According to Gasbarro, after discovering the discrepancies, he immediately called and met with Bank One representatives and all of his suppliers, including Sanderson Farms. Mr. Harr, an Assistant Vice President and business banker for Bank One, confirmed that he was advised of Midwest's negative net worth. On March 6, 1996, Bank One sent a notice of default, and on March 8, Gasbarro agreed to an onsite audit by Bank One to be held on March 11, 1996. Following the audit, Bank One imposed a lockbox, which permitted Bank One to control the disposition of Midwest's receivables. Mr. Harr testified that he did not recall finding irregularities with respect to the Gasbarros or the business.
After Gasbarro notified Sanderson Farms of the discrepancies, Gasbarro and Mr. Hill, on behalf of Sanderson Farms, met to discuss new payment terms. The new terms required that the total amount due on the current order be wire-transferred to Sanderson Farms, including an additional amount of approximately $2,500, to be applied to existing debt. The record indicates that between April 4, 1996, and April 15, 1996, Midwest initiated four wire transfer payments pursuant to the conditions for a total amount of $121,230.95. From wire transfers and payments made between May 1996 and January 1997, a total of $21,250 was applied to arrearage. In July 1996, Midwest became insolvent and went out of business, thus becoming uncollectible. An unpaid balance of $118,214.50 for three truckloads of product remained.
In 1997, Sanderson Farms sued Gasbarro and others in the court of Common Pleas of Franklin County, Ohio, in an action entitled Sanderson Farms, Inc. v. Rocky Gasbarro, et al., Case No. 97CVH-01-75 ("State Court Action"). In this State Court Action, Sanderson Farms sought to pierce the corporate veil and hold Gasbarro and other family members personally liable for unpaid debts. The Court of Common Pleas found in favor of Sanderson Farms. Gasbarro and other family members appealed. Gasbarro subsequently filed a Chapter 7 bankruptcy petition on December 14, 2001. The appellate court stayed the proceedings. Gasbarro filed a motion for relief from stay, which the bankruptcy court subsequently denied.
The appellate court subsequently lifted the stay as to all appellants other than Gasbarro.
On May 17, 2002, Sanderson Farms commenced an adversary proceeding against Gasbarro to determine the dischargeability of the judgment in the State Court Action, pursuant to Code Sections 523(a)(2)(A) and (6). Thereafter, on February 28, 2003, Sanderson Farms filed a motion for summary judgment. On January 16, 2004, the bankruptcy court denied this motion, and Sanderson Farms appeals this denial. On June 25, 2004, Sanderson Farms filed a motion for abstention and expedited hearing. On August 2, 2004, the bankruptcy court denied this motion, and Sanderson Farms appeals this denial. In addition, Sanderson Farms appeals the bankruptcy court's January 26, 2005 denial of its January 7, 2005 Motion in Limine, in which it sought an order from the bankruptcy court precluding Gasbarro from introducing evidence inconsistent with findings made by the trial court in the State Court Action.
On January 12, April 18, and April 19, 2005, the bankuptcy court conducted hearings and testimony was taken in the hearings. On September 28, 2005, the bankruptcy court issued its Judgment and Memorandum Opinion and Order constituting its findings of fact and conclusions of law for the adversary proceeding. The Court granted the discharge of Gasbarro with respect to his indebtedness to Sanderson Farms indicating that § 523(a)(6) does not apply and that Sanderson Farms failed to meet its burden by a preponderance of the evidence under § 523(a)(2).
On November 29, 2005, Sanderson Farms appealed the bankruptcy court's judgment (Doc. 1). On December 16, 2005, Sanderson farms submitted its Brief in Support of Appeal (Doc. 2); and Gasbarro filed his response on January 9, 2006 (Doc 3). Accordingly, the appeal is ripe for this Court's review.
IV. DISCUSSION
A. Summary Judgment
On February 28, 2003, Sanderson Farms filed a Motion for Summary Judgment on its exception to discharge claim brought under Section 523(a)(6) of the Code. Sanderson Farms argued that it was entitled to summary judgment because Gasbarro is precluded by the doctrine of collateral estoppel from relitigation of issues of fact or law determined in the State Court Action. (Pl's Mot. for Summ. J. at 13). Gasbarro argued summary judgment was inappropriate because the requirements for collateral estoppel to be asserted were not met. (Def's Memo. in Opp. to Pl's Mot. for Summ. J. at 6-7). The bankruptcy court denied Sanderson Farm's motion for summary judgment. Sanderson Farms appeals the bankruptcy court's denial. (Brief of Plaintiff-Appellant at 22).
1. Summary Judgment Standard
Summary Judgment is appropriate when:
the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
Fed.R.Civ.P. 56(c) (made applicable to this proceeding by Fed.R.Bankr.P. 7059). Summary judgment will not lie if the dispute about a material fact is genuine; "that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is appropriate, however, if the opposing party fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); see also Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).
When reviewing a summary judgment motion, the Court must draw all reasonable inferences in favor of the nonmoving party, and must refrain from making credibility determinations or weighing the evidence. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150-51 (2000). The Court disregards all evidence favorable to the moving party that the jury would not be required to believe. Id. Stated otherwise, the Court must credit evidence favoring the nonmoving party as well as evidence favorable to the moving party that is uncontroverted or unimpeached, if it comes from disinterested witnesses. Id.
Reeves involved a motion for judgment as a matter of law made during the course of a trial under Fed.R.Civ.P. 50 rather than a pretrial summary judgment under Fed.R.Civ.P. 56. Nonetheless, standards applied to both kinds of motions are substantially the same. One notable difference, however, is that in ruling on a motion for judgment as a matter of law, the Court, having already heard the evidence admitted in the trial, views the entire record, Reeves, 530 U.S. at 150. In contrast, in ruling on a summary judgment motion, the Court will not have heard all of the evidence, and accordingly the non-moving party has the duty to point out those portions of the paper record upon which it relies in asserting a genuine issue of material fact, and the court need not comb the paper record for the benefit of the nonmoving party. In re Morris, 260 F.3d 654, 665 (6th Cir. 2001). As such, Reeves did not announce a new standard of review for summary judgment motions.
The Sixth Circuit Court of Appeals has recognized that Liberty Lobby, Celotex, and Matsushita have effected "a decided change in summary judgment practice" ushering in a "new era" in summary judgments. Street v. J.C. Bradford Co., 886 F.2d 1472, 1476 (6th Cir. 1989). The court in Street identified a number of important principles applicable in new era summary judgment practice. For example, complex cases and cases involving state of mind issues are not necessarily inappropriate for summary judgment. Id. at 1479.
Additionally, in responding to a summary judgment motion, the nonmoving party "cannot rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact, but must `present affirmative evidence in order to defeat a properly supported motion for summary judgment.'" Id. ( quoting Liberty Lobby, 477 U.S. at 257). The nonmoving party must adduce more than a scintilla of evidence to overcome the summary judgment motion. Id. It is not sufficient for the nonmoving party to merely "`show that there is some metaphysical doubt as to the material facts.'" Id. ( quoting Matsushita, 475 U.S. at 586).
Moreover, "[t]he trial court no longer has a duty to search the entire record to establish that it is bereft of a genuine issue of material fact." Id. at 1479-80. That is, the nonmoving party has an affirmative duty to direct the court's attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact. In re Morris, 260 F.3d 654, 665 (6th Cir. 2001).
2. Analysis
Sanderson Farms, in its Complaint, seeks to have Gasbarro's debt excepted from his discharge based upon 11 U.S.C. §§ 523(a)(2)(A), 523(a)(6), or both. For summary judgment purposes, Sanderson Farms relied on Section 523(a)(6).
Sanderson Farms seeks application of the doctrine of collateral estoppel to preclude relitigation of issues of fact and law litigated in the State Court Action. Sanderson Farms correctly points out that the doctrine of collateral estoppel can preclude relitigation in dischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 284 n. 11 (1991). In the instant case, a state court judgment is entitled to preclusive effect if Ohio law would give collateral estoppel effect to the judgment. See e.g., S.L. Pierce Agency, Inc. v. Painter ( In re Painter), 285 B.R. 669, 674 (Bankr. S.D. Ohio 2002) ( citing Bay Area Factors v. Calvert ( In re Calvert), 105 F.3d 315 (6th Cir. 1997).
For a party to successfully assert collateral estoppel under Ohio law, the party must plead and prove the following:
(1) the party against whom collateral estoppel is sought was a party or in privity with a party to the prior action;
(2) there was a final judgment entered on the merits in the previous action, after full and fair opportunity to relitigate the issue;
(3) the issue must have been admitted and actually tried and decided and must be necessary to the judgment; and
(4) the issue must have been identical to the issue involved in the prior suit.Henson v. Henderson ( In re Henderson), 277 B.R. 899, 892 (Bankr. S.D. Ohio 2002) ( citing inter alia, Sill v. Sweeney, 276 B.R. 186 (Bankr. 6th Cir. 2002)); Buckeye Union Ins. Co. v. New England Ins. Co., 87 Ohio St.3d 280, 287 (1999).
In the present case, requirements (1) and (2) are not in dispute as Gasbarro concedes they have been met. (Def's Memo. in Opp. to Pl's Mot. for Summ. J. at 6). Instead, Gasbarro argues that the requirements of Section 523(a)(6) were not litigated in state court. (Brief of Defendant-Appellee at 21). This Court, like the bankruptcy court, agrees with Gasbarro.
Discharge exceptions, such as Section 523(a)(6), are to be narrowly construed in favor of the debtor. Meyers v. I.R.S. ( In re Meyers), 196 F.3d 622 (6th Cir. 1999). Sanderson Farms bears the burden of proof by a preponderance of the evidence as to the exception's applicability. In re Brady, 101 F.3d 1165 (1172 (6th Cir. 1996). Under Section 523(a)(6), debts arising from a "willful and malicious injury by the debtor to another entity or to the property of another entity," may be excepted from the discharge. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Reckless or negligently inflicted injuries are insufficient. Instead, it must be demonstrated that the actor intended the harm or that the harm was substantially certain to result. Id. at 61-64; Markowitz v. Campbell ( In re Markowitz), 190 F.3d 455, 463-466 (6th Cir. 1999).
In the State Court Action, the issue before the Franklin County Common Pleas Court was whether Sanderson Farms could "pierce the corporate veil" to hold Gasbarro and other family members personally liable for unpaid debts of various companies owned by Gasbarro and family.
On March 6, 2001, the trial court issued its Decision. The trial court found: (1) defendants had complete control of Midwest and OVP, corporate formalities were not observed, and Midwest was under-capitalized, and therefore, the corporate veils are pierced as to Midwest and OVP; (2) defendants violated their duty to Sanderson Farms by ordering product from them when defendants knew or should have known that Midwest would be unable to pay and by transferring assets to others; and (3) Sanderson farms suffered a loss in the amount of $118,214.50 because of the domination, control, and fraudulent acts of defendants. (State Court Action, Decision at 4). The trial court awarded Sanderson Farms $118,214.50, plus statutory interest, and punitive damages in the amount of $118,214.50. (State Court Action, Decision at 4-5). The trial court, in reaching its holding, stated:
This Court is not convinced that any of the Defendants intentionally defrauded the Plaintiff at the time the product was ordered, however, Alio, Rocky, and Vincent Gasbarro knew or should have known that Midwest was in serious financial straits at the time of the orders and that payment to the Plaintiff was highly unlikely.
(State Court Action, Decision at 3) (emphasis added). In addition, the trial court made the following finding in its April 27, 2001 Judgment Entry:
Defendants Alio, Rocky and Vincent Gasbarro violated their duty to Plaintiff by ordering product from Plaintiff under circumstances in which Defendants knew or should have known that Midwest would be unable to pay Plaintiff for such product and by transferring corporate and individual assets to others to the detriment of Plaintiff;. . . .
(State Court Action, Judgment Entry at 2-3) (emphasis added).
The bankruptcy court, based upon the aforementioned language utilized by the trial court, concluded that "it is unclear whether there was any finding that Defendant intended to cause harm or that harm was substantially certain to follow," and "it is not clear at exactly what point in the relationship any willful and malicious injury occurred." (Order Denying Motion of Plaintiff for Summary Judgment at 4). This Court agrees with the bankruptcy court. There was no specific findings by the trial court as to any willful or malicious acts committed by Gasbarro or intent to cause injury as required by Kawaauhau for the purposes of Section 523(a)(6). 523 U.S. at 63-64. Therefore, like the bankruptcy court, and for the same reasons, this Court concludes that collateral estoppel is inapplicable. Thus, the Court holds that the bankruptcy court properly denied Sanderson Farms' Motion for Summary Judgment.
B. Abstention and Expedited Hearing
On June 25, 2004, Sanderson Farms filed a Motion for Order of Abstention and Expedited Hearing. Sanderson Farms argued that abstention was proper because "the Franklin County Court of Appeals has remanded the State Court Action to the Trial Court for the purpose of making the same determination that would be necessary for this Court to make in connection with this adversary proceeding." (Pl's Mot. for Order of Abst. at 5). On August 2, 2001, the bankruptcy court denied Sanderson Farms's motion, referencing prior orders in which the court had denied Gasbarro's motion for relief from the automatic stay imposed by 11 U.S.C. § 362(a)(1), but stated that the automatic stay was not applicable to the other state court defendants. (Order Denying Pl's Mot. for Order of Abst. at 1). The bankruptcy court further noted that "to the extent that the Court of Common Pleas sought to adjudicate the interest of the Debtor, its ruling is void as violative of the automatic stay." (Order Denying Pl's Mot. for Order of Abst. at 1-2).
This Court finds that the bankruptcy court did not abuse its discretion in denying Sanderson Farms' motion for abstention and expedited hearing. Bankruptcy courts have discretionary authority to abstain from hearing a particular proceeding pursuant to 28 U.S.C. § 1334(c)(1), which provides:
Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
In Mann v. Waste Management of Ohio, Inc., 253 B.R. 211, 214 (N.D. Ohio 2000), the court set forth factors that should be considered by a court in deciding whether or not to abstain from federal jurisdiction. They are:
1) the effect or lack of effect on the efficient administration of the estate if a court abstains;
2) the extent to which state law issues predominate over bankruptcy issues;
3) the difficulty or unsettled nature of the applicable state law;
4) the presence of a related proceeding commenced in state court or other non-bankruptcy court;
5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334;
6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
7) the substance rather than form of an asserted "core" proceeding;
8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
9) the burden of this court's docket;
10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties;
11) the existence of a right to a jury trial;
12) the presence in the proceeding of nondebtor parties; and
13) any unusual or other significant factors.Id. at 214 ( citing In re Continental Holdings, 158 B.R. 442, 446 (Bankr.N.D.Ohio 1993)).
In the present case, application of the foregoing factors does not lead this Court to conclude that the bankruptcy court abused its discretion. State law issues do not predominate the bankuptcy law issues; bankruptcy courts have exclusive jurisdiction to decide the nondischargeability of an individual's debt under Code §§ 523(a)(2) and 523(a)(6). Further, the bankruptcy court had already properly ruled that the doctrine of collateral estoppel was not applicable to the rulings issued in the State Court Action prior to the stay. ( See Order Denying Pl's Mot. for Summ. J.). And, the automatic stay was never lifted as to Gasbarro. (Order Denying Gasbarro's Mot. for Relief From Stay (stating "the subject litigation is the property of the estate . . . [t]he trustee is the proper party to pursue and to make any other decisions with reference to the litigation as contemplated by section 704 of the United States Bankruptcy Code.")). Consequently, any remand by the appellate court with respect to Gasbarro, would be violative of the automatic stay. This was not lost on the appellate court, which noted in a footnote that although Gasbarro was listed under the appellants' notice of appeal, after Gasbarro filed his bankruptcy petition, the stay was lifted only for "appellants other than Rocky Gasbarro." Sanderson Farms, Inc. v. Rocky Gasbarro et al., 2004 WL 583849 *1, (Ohio App. 10 Dist.). Therefore, contrary to Sanderson Farm's assertions, the Franklin County Court of Appeals did not remand the State Court Action to the trial court for the purpose of making any determinations with respect to Gasbarro.
Accordingly, the bankruptcy court did not abuse its discretion in denying Sanderson Farms' motion for abstention and expedited hearing.
C. Motion in Limine
Sanderson Farms argues that the bankruptcy court erred and abused its discretion by refusing to grant its January 7, 2005 Motion in Limine. (Brief of Plaintiff-Appellant at 31). Essentially, Sanderson Farms, relying on the doctrines of collateral estoppel and issue preclusion, sought an order from the bankruptcy court precluding Gasbarro from introducing evidence inconsistent with the findings made by the trial court in the State Court Action after the remand. On January 25, 2005, the Bankruptcy Court denied the Motion in Limine, indicating that it had already addressed the issues raised by Sanderson Farms in its prior orders. (Order Denying Motion in Limine at 1).
The bankruptcy court, in denying Sanderson Farms' motion for summary judgment, had already determined that the doctrine of collateral estoppel was inapplicable to the initial findings of the trial court, a determination which this Court has affirmed. ( See discussion supra at IV.A).
This Court finds that the bankruptcy court did not abuse its discretion by refusing to grant Sanderson Farms' Motion in Limine. As the bankruptcy court indicated, it had already ruled that the doctrine of collateral estoppel was not applicable to the initial rulings of the trial court in the State Court Action. In addition, the automatic stay had never been lifted as to Gasbarro, and the bankruptcy court had previously denied Sanderson Farms' Motion for Abstention and Expedited Hearing. Hence, the June 23, 2004 Judgment Entry entered by the trial court in the State Court Action had no effect on Gasbarro, and consequently, Sanderson Farms' Motion in Limine is essentially a renewed motion for summary judgment. Thus, for all of the reasons this Court affirmed the bankruptcy court's denial of Sanderson Farms' Motion for Summary Judgment ( see supra, at IV.A), this Court also affirms the bankruptcy court's denial of Sanderson Farms' Motion in Limine.
D. Trial
The bankruptcy court conducted hearings and testimony was taken on January 12, April 18, and April 19, 2005. On September 28, 2005, the bankruptcy court issued its Judgment and Memorandum Opinion and Order constituting its findings of fact and conclusions of law for the adversary proceeding. The Court granted the discharge of Gasbarro with respect to his indebtedness to Sanderson Farms finding that § 523(a)(6) does not apply, and that Sanderson Farms failed to meet its burden by a preponderance of the evidence under § 523(a)(2). Sanderson Farms appeals these rulings and argues that the bankruptcy court's findings of fact were clearly erroneous and contrary to the evidence.
Sanderson Farms seeks to have its debt declared nondischargeable pursuant to § 523(a)(6).
As set forth supra, discharge exceptions, such as Section 523(a)(6), are to be narrowly construed in favor of the debtor. Meyers v. I.R.S. ( In re Meyers), 196 F.3d 622 (6th Cir. 1999). Sanderson Farms bears the burden of proof by a preponderance of the evidence as to the exception's applicability. In re Brady, 101 F.3d 1165 (1172 (6th Cir. 1996). Under Section 523(a)(6), debts arising from a "willful and malicious injury by the debtor to another entity or to the property of another entity," may be excepted from the discharge. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Reckless or negligently inflicted injuries are insufficient. Instead, it must be demonstrated that the actor intended the harm or that the harm was substantially certain to result. Id. at 61-64; Markowitz v. Campbell ( In re Markowitz), 190 F.3d 455, 463-466 (6th Cir. 1999).
Sanderson Farms contends that "the facts of this case . . . clearly evidences an intent on the part of Gasbarro to harm Sanderson Farms." (Brief of Plaintiff-Appellant at 41). To support its contention, Sanderson Farms again requests that the Court rely on the findings in the State Court Action. This Court, like the bankruptcy court, finds that the state court litigation is not relevant to the determination of dischargeability for the three purchase orders at issue. The bankruptcy court found that there is no indication that Gasbarro intended to harm Sanderson Farms. This Court has reviewed the record and finds no clear error in this finding. Accordingly, this Court, like the bankruptcy court, finds that § 523(a)(6) is not applicable.
2. § 523(a)(2)(A)
Sanderson Farms also seeks to have its debt declared nondischargeable pursuant to § 523(a)(2). To except the discharge of a particular debt under § 523(a)(2)(A), the complainant must prove the following:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth;
(2) the debtor intended to deceive the creditor;
(3) the creditor justifiably relied on the false representation; and
(4) its reliance was the proximate cause of the loss."Rembert v. AT T Univ'l Card Svcs., Inc. ( In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998) (footnote omitted). It is Sanderson Farms burden to prove each of these elements by a preponderance of the evidence. Id. at 281 ( citing Grogan v. Garner, 498 U.S. 279, 291 (1991)). As noted above, exceptions to discharge are to be narrowly construed against the creditor. In re Rembert, 141 F.3d at 281.
The Bankruptcy Court found that Sanderson Farms had failed to meet its burden of proof with respect to each of these four elements. Consequently, the Bankruptcy Court found that Gasbarro's debt was dischargeable, a finding which Sanderson Farms asserts is clearly erroneous. (Brief of Plaintiff-Appellant at 41). To support its contention that the Bankruptcy Court erred in finding Gasbarro's debt is not dischargeable pursuant to Section 523(a)(2)(A), Sanderson Farms first asserts that the Bankruptcy Court erred in finding that there was insufficient evidence to establish false pretenses or fraud. (Brief of Plaintiff-Appellant at 35). Next, Sanderson Farms asserts that the Bankruptcy Court's finding that Gasbarro did not seek to render Midwest insolvent and resume operations under OVP was clearly erroneous. (Brief of Plaintiff-Appellant at 38). Sanderson Farms also asserts that the Bankruptcy Court erred in finding that there was insufficient evidence of intent to deceive. (Brief of Plaintiff-Appellant at 39). Finally, Sanderson Farms asserts that it was clear error for the Bankruptcy Court to find that the loss suffered by Sanderson Farms was not due to fraud, but rather due to a business that failed based on a combination of random events. (Brief of Plaintiff-Appellant at 40).
Significantly, Sanderson Farms has not challenged the Bankruptcy Court's finding that Plaintiff has failed to prove the third element necessary to finding an exception to discharge under § 523(a)(2)(A), that is, that the creditor justifiably relied on the false representation. The Bankruptcy Court, in concluding that "even assuming that Plaintiff established fraud, it has failed to establish that it justifiably relied," explained, "[a]fter receiving notice of Midwest's negative financial position, the Plaintiff could have imposed more stringent conditions or discontinued all new shipments to the Defendant until the outstanding debt was paid." (Memorandum Opinion and Order at 9). The evidence shows that Mr. Gasbarro was not silent about any material information known to him. Once Mr. Pearson made Gasbarro aware of Midwest's financial difficulties, Gasbarro informed Sanderson Farms of those difficulties. Despite this information, Sanderson Farms agreed to continue doing business with Plaintiff on a COD basis. Therefore, this Court finds that there is no error in the Bankruptcy Court's finding that Sanderson Farms failed to prove justifiable reliance. Because Sanderson Farms failed to prove justifiable reliance, Gasbarro's debt cannot be declared nondischargeable under § 523(a)(2)(A). See Rembert, 141 F.3d at 280-81. Thus, even if this Court were to set aide as erroneous the other challenged factual findings, it will not alter the result in this case.
Even so, this Court has reviewed the Bankruptcy Court's findings with respect to the other three elements required to obtain an exception pursuant to § 523(a)(2)(A), all of which have been challenged by Sanderson Farms. ( See Brief of Plaintiff-Appellant at 35-40). This Court has reviewed the record, and finds that the Bankruptcy Court likewise did not err in finding that Sanderson Farms failed to prove each of these elements. The Bankruptcy Court adequately set forth the evidence underpinning its factual findings ( See Memorandum Opinion and Order at 5-10), evidence which Sanderson Farms ignores in its briefing.
For the foregoing reasons, the judgment of the Bankruptcy Court is affirmed.
V. CONCLUSION
The judgment of the Bankruptcy Court, that Gasbarro's obligation to Sanderson Farms is dischargeable, is AFFIRMED. Therefore, Gasbarro's obligation is discharged.
The Clerk shall remove this case from this Court's pending cases list.
The Clerk shall remove Doc. 2 from this Court's pending motions list.
IT IS SO ORDERED.