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In re: Case No. A93-00055-DMD )
) Chapter 7
RAYMOND B. DRONENBURG, )
)
Debtor. )
_________________________________)
PRESCOTT EQUIPMENT CO., INC., ) Bancap No. 93-3035
) Adv. No. A93-00055-001-DMD
Plaintiff and )
Counterclaim )
Defendant )
)
V. )
)
RAYMOND B. DRONENBURG, )
)
Defendant and )
Counterclaimant. )
_________________________________)
This dischargeability action and counter-claim for return of exempt property duly came before the court for trial on November 1, 1993. Post-trial briefs have been submitted and the case is now ripe for decision. I find for the plaintiff and against the defendant on the issue of exception to discharge for fraud. I find for the defendant on his counterclaim- fox exempt property. This court has jurisdiction over the controversy in accordance with 28 U.S.C. § 157(b)(2)(F),(I),(K), and (0).
Factual Backqround
Jack Hendrickson is president of Prescott Equipment Co., Inc. (Prescott).
Prescott deals in steel and pipes. Hendrickson knew Ron McDonald, a
competitor, who also had an interest in salvaging pipe and steel. In the
course of business, Prescott had occasion to place transformers and
capacitors containing PCBs on its business site. The Environmental
Protection Agency (EPA) brought a proceeding against Prescott and
required it to clean up the site. Also, under the EPA's Consent Agreement
and Final Order, a portion of the EPA's penalty, in the
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sum of $8,577.50,
was to remain due and owing until Prescott completed a cleanup of its
yard in accordance with EPA regulations.
The defendant, Raymond Dronenburg, did business under the name "Environmental Services, Inc. ," (ESI) in June of 1987. He worked as a consultant and subcontractor in the area of hazardous waste disposal for a brief period of time. Dronenburg is now employed with the Alaska Department of Environmental Conservation. He had also worked for the state prior to the ESI venture.
Through Ron McDonald, Dronenburg, in the name of his non-existent corporation, was hired by Prescott to properly remove and dispose of two PCB capacitors, transformers, and contaminated dirt and debris from Prescott's yard in Anchorage. ESI was to ship the hazardous waste to an approved facility outside of Alaska for disposal. Dronenburg was aware of the EPA's proceeding against Prescott. He agreed to complete all paperwork necessary to put Prescott in good standing with the EPA and avoid imposition of a suspended penalty against Prescott.
Dronenburg sent an invoice to Prescott, dated June 22, 1987. In this invoice, he stated:
Services provided: Disposal of 6 drums of hazardous waste (PCB); Two transformers and: two capacitors.
Job includes all necessary paperwork to put Prescott equipment in good standing with EPA.
In a breakdown of costs submitted with the invoice, there was an allocation of $3,800.00 for shipping.
On July 13, 1987, Dronenburg went to the Prescott office and obtained a check in the amount of $7,655.00 from Hendrickson. At the time he accepted the check, he represented to Hendrickson that all that remained to be done was shipping and that the job would then be complete.'
Dronenburg immediately endorsed the check, and took $500.00 cash prior to depositing the balance of $7,155.00 in a checking account for which he was the only signatory. The account was in the name of Environmental Services, Inc. Although Dronenburg was the only signatory, he represented that there were three signatories to the account at his section 341 meeting.
Following this deposit, Dronenburg wrote checks from the
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account for
various personal expenses and business expenses relating to a smelter
venture with Ron McDonald and Dave Peterson. None of the expenses were
related to the Prescott clean-up. Within nine days of the deposit of the
Prescott check, there were insufficient funds left in the account to
cover shipping of the hazardous waste barrels.
The hazardous waste barrels themselves are unaccounted for; Dronenburg claims he does not know what happened to them following the initial clean-up. Dronenburg does recall seeing them on Dave Peterson's property off Hatcher Pass Road, however. Since that time, the containers have mysteriously disappeared, and neither Dave Peterson, Ron McDonald, or Dronenburg have any knowledge as to their whereabouts. The EPA has refused to clear Prescott Equipment Company of the EPA's Consent Agreement and Final Order because there has been no evidence submitted that the goods were shipped and the hazardous waste properly disposed of in accordance with EPA regulations.
Discussion
money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ---
(A) false pretenses, a false representation, or actual fraud other than a statement in writing respecting the debtor's or an insider's financial condition . . . .
In the Ninth Circuit, to state a claim for fraud, the following elements must be established:
(1) [that] the debtor made the representations;
(2) that at the time he knew they were false;
(3) that he made them with the intention and purpose of deceiving the creditor;
(4) that the creditor relied on such representations;
(5) that the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.
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In re Kirsch, 973 F.2d 1454, 1457 (9th Cir. 1992).
Here, the debtor made representations that the goods would be shipped to an EPA approved facility for prompt disposal. On that basis, an invoice was submitted to Prescott. Dronenburg then came to Prescott's office and spoke with Mr. Hendrickson at the time he obtained payment. He again represented that all paperwork had been completed and that the goods were simply waiting for shipment. I do not believe that Dronenburg intended to ship the goods at the time of the submittal of the invoice or the issuance of the check. I base this on the fact that as soon as the funds were received, they were promptly dissipated. Within nine days of receipt, the funds were spent on personal items and invested in a proposed joint business venture Dronenburg had with McDonald and Peterson. In spite of Dronenburg's oral and written representations to the contrary, none of the funds went to shipping the hazardous waste barrels. I do not find Dronenburg's testimony credible in regard to his intentions. Nor do I view the fact that $10,572.00 was later deposited in the account, on September 18, 1987, as being determinative of his good faith. Those funds were also promptly disbursed after deposit with none retained by Dronenburg for shipping.
Dronenburg alleges that the only reason the waste was not shipped was due to the failure of a waste disposal company to present a manifest number. He failed to present any realistic evidence corroborating his story. It is my view that Dronenburg deliberately dropped the ball and wrongfully misused the funds, thereby defrauding Prescott. Dronenburg made these representations with the intention and purpose of deceiving Prescott and its president, Jack Hendrickson. Jack Hendrickson relied on the representations. Mr. Hendrickson sustained loss and damage as a result of the representations because the EPA has never fully relieved him of the obligations required in the Consent Agreement and Final Order it entered with the debtor. In accordance with the liberal damage requirements set forth in In re Norman, 3 ABR 8 (D. Alaska 1992) with regard to causation, a creditor must only prove cause in fact. Here, that means that, but for the debtor's fraud, the creditor would not have made a payment of $7,655.00 to him. Prescott sustained damages in the sum of $7,655.00.
The plaintiff's state court default judgment is not res
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judicata on the issue of damages. The case against Dronenburg was
not "actually
litigated and determined in the prior action." Grogan v, Garner,
498 U.S. 279, 111 S.Ct. 654, 658 (1991). In the case of a default
judgment, "none of the issues is actually litigated." In re Daly,
776 F.2d 834, 838 (9th Cir. 1985) [citing Comment e to § 27 of the
Restatement (2d) of Judgments], cert. denied, 476 U.S. 1159 (1986).
It would be fundamentally unfair to deprive Prescott of interest on its 1987 damages. Without prejudgment interest, Prescott would not be adequately compensated for the loss. Prejudgment interest is, therefore, appropriate. In re Der, 113 B.R. 218, 232 (Bankr. D. Md. 1989); Norte & Co. v. Huffines, 416 F.2d 1189, 1191 (2d Cir. 1969), cert. denied, 397 U.S. 989 (1970); American Timber & Trading v. First Nat'l Bank of Ore., 690 F.2d 781, 784 (9th Cir. 1982).
The rate of prejudgment interest will be determined by state law; post-judgment interest will be at the federal rate. In re Johnson, 120 B.R. 461, 474 (Bankr. N.D. Ind. 1990). In 1987, when Prescott's claim arose, interest was allowable under AS 45.45.101(a) at 10.5% from the date the payment was made, on July 13, 1987. Interest from July 13, 1987, to the date judgment is entered herein shall be awarded to the plaintiff for a total judgment of $12,922.08.
11 U.S.C. § 523(a)(4)
The plaintiff also seeks damages under 11 U.S.C. § 523(a)(4) for "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." The plaintiff cannot prevail on this count for two reasons: First, the plaintiff is entitled to only one remedy under the circumstances of this case. There can be no double recovery. Secondly, there has been no establishment of a preexisting trust relationship such as is required for an exception to discharge under § 523(a)(4). Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986).
Counterclaim
3 Collier on Bankruptcy ¶ 522.30 (15th ed. 1993) states:11 U.S.C. § 522(h) provides:
The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
In this case, while the debtor's counterclaim appears based on a writ of garnishment outside the 90-day period before the petition was filed, the transfers made pursuant to the writ occurred within the preference period. These transfers total approximately $2,700.00 and were made between October 16, 1992, the date of the garnishment, through the date of the petition, January 22, 1993. Assuming that all the wage transfers actually occurred after October 24, 1992 (within 90 days of the petition), the wages garnished prepetition by Prescott are exempt property. Prescott's lien is subject to invalidation under 11 U.S.C. § 522 (f).If the trustee could have avoided a transfer under section 544 (Trustee as lien creditor), section 545 ( Statutory liens), section 547 (Preferences), section 548 (Fraudulent transfers) or section 549 (Post-petition transactions), or pursuant to the trustee's powers to recover a set off under section 553, and the trustee does not attempt to avoid the transfer or recover the setoff, the debtor may do so. However, the debtor's right to avoid the transfer or recover the setoff, is only to the extent that the debtor could have exempted the property if the trustee had avoided the transfer.
Conclusion and Order
The plaintiff's claim against Raymond Dronenburg is excepted from discharge on the grounds of fraud. The defendant's counterclaim is granted and the defendant is entitled to his exempt property.
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Dronenburg, which sum
is nondischargeable in accordance with 11 U.S.C. § 523(a) (2).BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge