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Westlake Flooring Co., LLC v. Staggs

United States District Court, N.D. Alabama, Northeastern Division

August 8, 2018




         Creditor-Appellant Westlake Flooring Co. appeals the Bankruptcy Court's Final Order and Judgment finding that Westlake failed to prove that Debtor-Appellee Michelle Staggs's $152, 480.95 debt to it is non-dischargeable. On appeal, Westlake asserts, as it did in its adversary proceeding before the Bankruptcy Court, that 11 U.S.C. § 523(a)(6) excludes Ms. Staggs's debt from dischargeability because it arose from her infliction of a “willful and malicious injury.” Westlake Flooring contends that Ms. Staggs, using her status as an officer of her automobile dealership, Alabama Direct, converted or assisted Alabama Direct in converting Westlake's security interest in the proceeds of sold vehicles for her and Alabama Direct's benefit.

         The Bankruptcy Court found that Westlake failed to show that Ms. Staggs inflicted the injury about which Westlake complains because Ms. Staggs had insufficient involvement with Alabama Direct's operations to have “actively participated” in the conversion. As a result, the Bankruptcy Court concluded, Ms. Staggs's debt to Westlake did not arise from her infliction of a willful and malicious injury and, therefore, did not trigger the exception to discharge under § 523(a)(6).

         This court, having considered the parties' arguments, the record on appeal, and the applicable law, concludes that the Bankruptcy Court did not clearly err in finding that Westlake failed to prove by a preponderance of the evidence that Ms. Staggs's $152, 480.95 debt arose from her infliction of a willful and malicious injury. Accordingly, this court will AFFIRM the Bankruptcy Court's Final Order and Judgment.


         Ms. Staggs filed a Chapter 7 bankruptcy petition on December 21, 2015, in the Bankruptcy Court for the Northern District of Alabama. On May 27, 2016, Westlake Flooring began the instant adversary proceeding seeking denial of discharge under 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). The Bankruptcy Court tried the matter on May 24 and 25, 2017, and entered a Memorandum Opinion and Judgment in Ms. Staggs's favor on September 22, 2017. Westlake Flooring timely filed its appeal to this court.


         This court has appellate jurisdiction over the Bankruptcy Court's Final Judgment under 28 U.S.C. § 158(a). On appeal, this court reviews de novo legal conclusions. In re Cox, 493 F.3d 1336, 1340 n.9 (11th Cir. 2007). This court reviews the Bankruptcy Court's findings of fact for clear error. Fed.R.Bankr.P. 8013. A finding of fact is not clearly erroneous unless “after reviewing all of the evidence” the court is “left with the definite and firm conviction that a mistake has been committed.” In re Int'l Admin. Servs., Inc., 408 F.3d 689, 698 (11th Cir. 2005).

         Furthermore, the court must narrowly construe all exceptions to Chapter 7 bankruptcy discharge. See Gleason v. Thaw, 236 U.S. 558 (1915); Local Loan Co. v. Hunt, 292 U.S. 234, 244-45 (1934). As the Supreme Court explained in Hunt, “[o]ne of the primary purposes of the Bankruptcy Act is to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes . . . The various provisions of the Bankruptcy Act were adopted in light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act.” Hunt, 292 U.S. at 244-45 (internal quotation marks and citations omitted).


         A. Westlake & Alabama Direct

         Appellant-Creditor Westlake, a “floor-plan financier, ” advances money to automobile dealerships.[1] Auto dealers use this money to purchase cars at auction or by trade-in. A “floor-planned” vehicle is a vehicle bought with a floor-plan lender's advance funds. A dealer sells a floor-planned vehicle “out of trust” when it sells the vehicle but fails to repay the floor-plan lender's advance.

         Appellee-Debtor Michelle Staggs owned an auto dealer incorporated as Alabama Direct Auto, LLC. Alabama Direct operated much like a typical auto dealer, and it engaged Westlake as well as several other financiers to provide floor-plan advances. Westlake provided Alabama Direct with a $500, 000 line of credit, and Alabama Direct authorized Westlake to automatically debit any necessary payments on that line of credit from Alabama Direct's checking account. Ms. Staggs personally guaranteed the line of credit with Westlake.

         In exchange for granting the line of credit, Westlake took security interests in its floor-planned vehicles, earned interest, and charged certain fees to Alabama Direct while the floor- planned vehicles sat on Alabama Direct's lot unsold. Westlake also kept titles to the floor-planned vehicles until their pay off.

         Westlake required Alabama Direct to pay off Westlake's title lien within seven days of a vehicle's sale, or within 24 hours of Alabama Direct's receipt of sale proceeds, whichever event occurred first. Finally, Westlake required Alabama Direct to attach a $100 “reserve” to each floor-planned vehicle, with that $100 held in trust for Westlake in the event Alabama Direct defaulted on the line of credit.

         Westlake Financial Services, a parent or affiliate of Westlake Flooring, ran a similar operation for consumer financing. Alabama Direct maintained a relationship with Westlake Financial for consumer financing to purchasers of its floor-planned vehicles. Alabama Direct's agreement with Westlake Financial required it to repurchase a consumer-financing contract if the consumer failed to make his or her first payment on the contract.

         B. Alabama Direct's Sales Operations

         In this appeal, the most critical facts are those involving Ms. Staggs's involvement in Alabama Direct's sales operations, and, more specifically, in Alabama Direct's relationship with Westlake. Ms. Staggs delegated virtually all of the responsibility for running Alabama Direct to other employees. Most notably, she retained Wes Staggs, her husband, as general manager. Indeed, Ms. Staggs appears to have purchased Alabama Direct for the sole purpose of ensuring her husband's continued employment. Wes Staggs had been Alabama Direct's general manager under the company's previous owner. As general manager, Wes Staggs ...

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