Monson Case Analysis: Debtors Who Misuse Collateral May Forfeit Obtaining Discharge of Debt in Bankruptcy

Debtor Bankruptcy Court Case Analysis

Debtor Bankruptcy Court Case Analysis

Borrowers sometimes sell, misuse or misappropriate secured collateral (i.e. equipment, inventory or vehicles) without notification to the lienholder. What remedy does the lienholder have if the Borrower subsequently files a bankruptcy case? What happens if the lienholder’s security interest is not properly perfected? The Eleventh Circuit of Appeals considered both issues in the case of In re Monson, 2016 WL 6833332 (11th Cir. Nov. 21, 2016). In this case, the Court determined that where a debtor had knowledge of a Creditor’s asserted lien on Property and subsequently sold or disposed of the Property without the lienholder’s consent, that act constitutes a willful and malicious injury under Bankruptcy Code § 523(a)(6) with the result that the debt is not discharged in the bankruptcy case. Importantly, this result stands even if the Creditor’s lien is not properly perfected. The analysis is whether the debtor has knowledge of the lienholder’s claim and nevertheless disposes of the collateral without notice to the lienholder. Decisions by the Eleventh Circuit Court of Appeals are binding on the Bankruptcy Courts in Florida, so this case gives Creditor’s a potent weapon in their arsenal in appropriate cases when collateral is sold or otherwise disposed of by the borrower prior to the filing of a bankruptcy case.

The Monson case is very fact-intensive and the Court’s decision seems to be based upon the nefarious activities of the Borrower so it is important to know the facts in order to understand the ruling. Creditor (“Segundo”) loaned an internet café owner (“Monson”) $130,000 for the purpose of equipment to be used in the business in Hillsborough County, Florida. The parties agreed that the loan was to be secured by the equipment but the loan was not property perfected as the UCC-1 lien document filed with the State of Florida was not signed by the Borrower. The equipment was seized by the Hillsborough County Sheriff’s Office and the business shut down as an illegal gambling operation. The Creditor demanded return of the equipment or liquidation of the equipment and repayment of the loan after the equipment was seized and while it was still in possession of law enforcement but received no response from the Borrower who ignored the Creditor’s calls, letters and emails.

The Borrower entered into an agreement with the Hillsborough County Sheriff’s Office so charges were never filed. The agreement allowed the Borrower to recover the equipment provided that he remove the equipment from Hillsborough County and not operate any gambling operations in the County. The equipment was thereafter returned to the Borrower who then moved the equipment to the Jacksonville area and opened up another internet café. The Borrower ignored the Creditor’s repayment demands so the Creditor thereafter filed a state court lawsuit against the Borrower and successfully obtained a judgment for the initial $130,000 loan amount. The Borrower then filed a Chapter 7 bankruptcy case seeking to discharge the debt.

The Borrower returned the remaining equipment to the Creditor while the bankruptcy case was pending and the Creditor thereafter obtained an appraisal which indicated that the remaining equipment had value of only $12,050 upon its return. The Creditor thereafter sought a determination in the Bankruptcy Court that the Debtor Monson’s indebtedness was non-dischargeable on a variety of grounds. The Bankruptcy Court found that the Debtor’s actions constituted a willful and malicious injury to the Creditor under 11 U.S.C. § 523(a) and entered a judgment of nondischargeability in the amount of $117,950 which was the difference between the original loan amount and the appraised value of the equipment returned to the Creditor. The Bankruptcy Court based its decision on its factual findings that the Borrower was aware of the Creditor’s asserted security interest and of the Creditor’s demand for return of the equipment or sale of the equipment and repayment of the debt. The Bankruptcy Court’s decision was also based upon its finding that the Creditor never consented to removal of the equipment to the Jacksonville area and its use in a new internet café.

The crucial issue on appeal was whether the Debtor’s actions were both willful and malicious. As to the willfulness requirement, the Eleventh Circuit concluded that absconding with the equipment and using it to open a new internet center was an intentional act the purpose of which was to cause injury or which was substantially certain to cause injury. In so doing, the Eleventh Circuit specifically noted that a knowing breach of a clear contractual obligation that is certain to cause injury is sufficient to prevent a discharge of the debt regardless of whether such conduct can be classified a tort under the law.

As to the maliciousness requirement, the Eleventh Circuit determined that the Debtor committed a malicious injury in the appropriation of the equipment because the injury was wrongful, without just cause and was excessive. The Eleventh Circuit found that it was proper for the Bankruptcy Court to imply malice as the weight of the evidence in the case was that the Debtor’s actions were wrongful and without just cause. Specifically, the Court found that the collapse of the initial business operation (the internet café in Hillsborough County) did not relieve the Debtor of the contractual obligations which he entered into nor “…gave him carte blanche to make off with equipment that he bought with someone else’s money.” The Court further determined that the Debtor’s behavior fell outside the scope of reckless or unfortunate but non-malicious acts that did not rise to the level of a willful or malicious injury (such as an automobile accident where it was not shown that the driver intended to cause the accident or the injury).

The Borrower argued that the Creditor’s failure to properly perfect the security interest in the equipment barred the Creditor from seeking a determination that the debt was not discharged in the bankruptcy case. The Eleventh Circuit gave short shrift to this argument and held that “…(w)hehter or not a lienholder’s security interest is properly perfected or recorded, where the debtor has knowledge of the lienholder’s claim and subsequently sells or disposes of the property at issue without notice to the lienholder, that act constitutes a willful and malicious injury under §523(a)(6). Specifically in the Monson case, the Eleventh Circuit determined that the Debtor knew that his actions were at least substantially certain to cause injury to the Creditor’s ability to seek repayment of its loan and thus the Debtor was not permitted to obtain a discharge of that debt.


Brad Hissing is a Bankruptcy Attorney with over 26 years of experience in representing creditors, Trustees and other parties in bankruptcy cases. He has extensive experience in Creditors Rights and Insolvency matters in both consumer and Chapter 11 commercial cases. He can be reached at or by phone at (813) 676-9075.

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