Bankruptcy Court Excepts from Discharge a $64,325.35 Debt owed FSA Due to “Willful and Malicious Injury.”

The debtor operated a small dairy farm in New York. In an attempt to keep the struggling farm operational, the debtor obtained three loans from the Farm Service Agency (FSA), granting the FSA a security interest in the debtor's real and personal property, including cattle. During a period in which FSA held first lienholder position and had an outstanding loan valued at $160,530.52, the debtor (without informing FSA) sold cattle and distributed the proceeds to other creditors.  He also purchased $40,000 in cattle and gave the seller a lien on the cattle. When the debtor sought to obtain another loan from FSA, the agency discovered that over a two-year period, the debtor had sold 113 cattle, resulting in total sale proceeds of $84,605.66. FSA alleged that the debtor’s conduct constituted a conversion that was “willful and malicious.” It thus sought to have $64,325.35 of the debtor’s debt excepted from discharge pursuant to 11 U.S.C. § 523(a)(6). The debtor argued that the FSA had impliedly consented to the sales because of the nature of the supervised credit relationship between the debtor and FSA. The court sustained FSA’s request, finding that the debtor’s actions were deliberate and intentional. The court also found that the injurious acts were done "in knowing disregard" of FSA's rights because the loan documents were clear. The court held that although the debtor did not use the proceeds to reap a personal financial gain, he did use the proceeds to favor certain creditors and elevated such creditors' rights above those of FSA. This conduct led the court to infer malice. In re Shelmidine, No. 13-60354, 2014 Bankr. LEXIS 4154 (Bankr. N.D.N.Y. Sept. 30, 2014).

 

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