Where debtor diverted proceeds that should have been paid to creditor, debt cannot be discharged under Bankruptcy Code

Law Reporter, Dec 2003

Remington Tech. Corp. v. Mlsna (In re Mlsna), No. 01 B 03732, 2003 WL 21785648 (Bankr. N.D. Ill. July 31, 2003).

A bankruptcy court held that a debt is non-dischargeable under the Bankruptcy Code, 11 U.S.C. § 523(a)(6), where a debtor caused receivable proceeds that should have been paid to the creditor to be diverted to a third party.

Here, Mlsna was the vice president and an employee of Teleresources, Inc. Teleresources entered into an agreement with Remington Technology Corporation (Remington) whereby Remington agreed to lend money to Teleresources in return for an assignment of Teleresources' eligible receivables. Teleresources agreed that Remington would collect on Teleresources' accounts, and that if accounts were paid to Teleresources, it would promptly notify Remington and would transfer the funds to Remington.

Teleresources did not disclose in the agreement that the receivables from one of its major accounts could not be assigned under the terms of Teleresources' agreement with the third party. Teleresources received substantial payments directly from the third party, and did not disclose these to Remington.

Remington terminated the agreement, tendered all receivables to Teleresources, and demanded payment of the loan. Teleresources defaulted, and Remington filed suit in state court against Mlsna, Teleresources, and its president. The court awarded a default judgment of about $285,200. Mlsna then filed for bankruptcy protection under Chapter 7 of the code. Remington filed an adversary proceeding in bankruptcy court against Mlsna, seeking to have the debt held non-dischargeable.

The bankruptcy court noted § 523(a)(6) of the code provides that an otherwise dischargeable debt shall not be dischargeable where the debt arises from willful and malicious injury by the debtor to the creditor's property interest. The creditor must prove by a preponderance of the evidence that the debtor intended to and did cause an injury to the creditor's property interest, and that the debtor's actions were both willful and malicious. Without an admission by the debtor of acting willfully and maliciously, these elements must be inferred from the circumstances surrounding the injury.

Here, the court found that Mlsna had injured Remington's property interest by diverting to Teleresources proceeds that should have been paid to it as a creditor. Mlsna also caused Teleresources to convert funds that belonged to Remington. Among other things, he wrote to Teleresources' account debtors and asked them to send funds directly to Teleresources and not to Remington. He acted willfully and intentionally, the court found.

Accordingly, the court ruled that the debt was nondischargeable and awarded Remington approximately $312,900, plus reasonable attorney fees and costs.

Remington's Counsel

*Brian J. Wanca, Rolling Meadows, Ill.