Killgrove

Filing 19

OPINION and ORDER affirming bankruptcy court's opinion and order. Signed by District Judge George Caram Steeh. (MBea)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
IN RE:
TIMOTHY J. KILLGROVE,
Debtor.
/
Bank of America,
Appellant,
Civil No. 14-10781
George Caram Steeh

v.
Timothy J. Killgrove,
Appellee.
/

OPINION AND ORDER
These are the consolidated appeals from rulings of Judge Shapero in the
Chapter 7 bankruptcy case of debtor Timothy Killgrove (“Appellee”). Killgrove
(“Appellee”) filed for Chapter 7 bankruptcy on August 22, 2011. The Bank of America
(“Appellant”) subsequently filed an adversary proceeding, contending that Appellee
should be denied discharge of his debt according to 11 U.S.C. §727 and §523. Some of
the claims were disposed of on Appellee’s motions for summary judgment before the
bankruptcy court. The case then continued to trial, following which the bankruptcy court
ruled against Appellant on its action for denial of discharge and nondischargeability of
debt on December 20, 2013. Appellant also filed a motion to dismiss Appellee’s chapter
7 bankruptcy case, which the court denied shortly after ruling on the claims in the
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adversary proceeding. For the reasons given below, the determinations given by the
bankruptcy court in both of these matters are hereby affirmed.
BACKGROUND
Appellee is a licensed dentist in the state of Michigan. His practice Timothy J.
Killgrove, D.D.S., P.C., Family and Cosmetic Dentistry (“Killgrove PC”) was established
in 1996 when he purchased the practice of a retiring dentist. That purchase included
patient files that are at issue in this case. In May 2007, Killgrove PC took a loan in
excess of $300,000 from Appellant to improve his practice. The finance agreement
included the following terms: (a) a principal loan sum of $367,710.42; (b) Appellee’s
personal guarantee of the loan; (c) giving Appellant a blanket lien on all assets of
Killgrove PC; and (d) a warranty that Appellee would not relocate the collateral without
prior notice to, and consent of, Appellant.
Appellee describes that Killgrove PC began to face financial difficulties, due
largely to the poor economy, beginning in approximately 2009. Appellee states that
Killgrove PC's area of expertise, cosmetic services, constitutes elective procedures that
are rarely covered by insurance, and thus placed his practice in a hard position to
weather the financial downturn. Furthermore, Appellee states that Killgrove PC was tied
up in other litigation with dental laboratories for nonpayment of goods and services.
Appellee made some efforts to reduce his financial burdens, but, nevertheless,
continued to struggle to pay his rent and state and federal taxes, as well as personal
financial obligations like mortgage payments, utilities, and health insurance. Ultimately,
it became difficult for Appellee to make payments to Appellant, and he completely
ceased making payments around April 2011.
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Appellee attempted to sell his practice to Stephen E. Jacobson, D.D.S., P.C.,
principal of the Jacobson Dental Group. However, the Appellee and Jacobson could not
come to terms on a price, and, instead, negotiated a different arrangement whereby
Appellee would become a wage-earning employee of Jacobson Dental Group. The
agreement was two years in length and mutually renewable. Under the agreement,
Appellee was to be compensated with a percentage of the revenue he brought in by
treating patients from Killgrove PC. If Appellee wished to leave the employ of the
Jacobson Dental Group, he would have the right to take the patient files with him. The
agreement provides that Appellee is responsible for his own malpractice and disability
insurance, dental license fee, pharmacy license fee, and DEA license fee.
Upon closing the practice on July 26, 2011, Appellee took with him the medical
records of his 490 patients and receivables of about $18,000, some of which was used
for payroll taxes and fulfilling obligations to employees’ 401(k) plans. Patients received a
phone call or postcard stating that Killgrove PC had joined Jacobson Dental Group and
notifying them that Dr. Killgrove could be found across the street at the practice’s “new
location.” Furthermore, the answering machine at Killgrove PC's former telephone
number was changed to inform callers of the new arrangement and direct them across
the street to the Appellee's new place of business. Finally, the three employees of
Killgrove PC joined the Appellee in his move to Jacobson Dental Group.
Appellant repossessed and sold the physical assets of Killgrove PC, but did not attempt
to foreclose on the intangible assets such as the patient list, patient files, phone
number, and goodwill (“Collateral”). About the same time, Appellee filed for Chapter 7
bankruptcy.
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STANDARD OF REVIEW
Federal district courts have jurisdiction to hear appeals from “final judgments,
orders, and decrees” of the bankruptcy court. 28 U.S.C. §158(a). For findings of fact,
the district court is to review the bankruptcy court’s findings using a clearly erroneous
standard. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629, 631 (6th Cir. 1994).
Reversal based on a finding of fact is only warranted if the reviewing court harbors a
“definite and firm conviction that a mistake has been committed.” Kalamazoo River
Study Group v. Rockwell Intern. Corp., 274 F.3d 1043, 1047 (6th Cir. 2001). The court
reviews the bankruptcy court's conclusions of law de novo. Hamilton v. Herr (In re
Hamilton), 540 F.3d 367, 371 (6th Cir. 2008).
ANALYSIS
The dispute here concerns the dischargeability of Killgrove’s personal guarantee
of the loan taken by Killgrove PC from Appellant (herein referred to as Killgrove’s or
Appellee’s debt). Appellant has asked the court to review six issues relating to
dischargeability: (1) whether Appellee’s actions constitute conversion or fraudulent
transfer of the collateral, therefore exempting the debt from discharge; (2) whether
Appellee intentionally violated the Finance Agreement; (3) whether Appellee’s actions
constitute willful and malicious injury under 11 U.S.C. § 523(a)(6); (4) whether Appellee
made a false oath under 11 U.S.C. § 727(a)(4); (5) whether Appellant is entitled to
attorney fees; and (6) whether Appellee’s Chapter 7 bankruptcy should be dismissed
under 11 U.S.C. §707(a) on the basis of bad faith. Appellant asserts that if any of these
questions are answered in the affirmative, then the bankruptcy court’s holding must be

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overturned and Appellee’s debt held to be nondischargeable. The court will address
these claims in turn.
A. Conversion or Fraudulent Transfer
The applicable bankruptcy provision addressing conversion/fraudulent transfer in
relation to the dischargeability of debt states in relevant part:
(a) The court shall grant the debtor a discharge, unless-(2) the debtor, with intent to hinder, delay, or defraud a creditor or an
officer of the estate charged with custody of property under this title, has
transferred, removed, destroyed, mutilated, or concealed, or has permitted
to be transferred, removed, destroyed, mutilated, or concealed–
(A) property of the debtor, within one year before the date of the filing of
the petition.
11 U.S.C. § 727(a)(2)(A) (emphasis added). In other words, even if Appellant could
prove that Appellee acted with the intent to "hinder, delay, or defraud” Appellant, and
not, as Appellee claims, to protect the privacy rights of his patients, it would also be
necessary to establish that the collateral was the property of the Appellee.
The bankruptcy court determined that Appellee has no ownership interest in the
collateral, which is the property of Killgrove PC subject to the security interest of
Appellant. Nonetheless, Appellant argues that Appellee’s move of Killgrove PC’s
patient list to the Jacobson Dental Group constituted conversion and is a basis to hold
Appellant’s debt nondischargeable. The bankruptcy court held that Appellee’s use of the
collateral did not affect dischargeability because the patient list is not the property of
Appellee. In re Killgrove, 11-62528, 2013 WL 7018546 at *12 (Bankr. E.D. Mich. Dec.
20, 2013).

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Appellant cites to In re Stephen Grosse P.C., but the case does not assist the
court in determining this issue and, moreover, does not address 11 U.S.C. § 727. 44
B.R. 200, 202 (Bankr. E.D. PA 1984). Appellant also cites, among other caselaw,
Warshall v. Price, 629 S.2d 903, 905 (Fla.App. 4 Dist. 1993). However, the Price case
also differs from the instant case, because again 11 U.S.C. § 727 is not at issue, and
the plaintiff was the actual owner of the patient list. Appellant’s citations do not assist it
in showing that the collateral is the property of Appellee, which is not established by his
ownership of Killgrove PC. Shareholders of a corporation have no interest in the
property or assets of the corporation, as noted by the bankruptcy court, citing In re
Hopkins, 2012 WL 423916, n.2 (Bankr. W.D. Mich 2012). This proposition is not
disputed by Appellant.
Although evidence was presented in support of the Appellant’s argument, the
bankruptcy court weighed that evidence as well as conflicting evidence, such as the
need for Appellee to preserve the files of his practice’s patients, the likelihood that his
patients would follow him, as well as the lack of a non-compete agreement with
Appellant. The bankruptcy court came to the conclusion that Killgrove had not
transferred the assets, but had “cease[d] operating Killgrove PC at its then location,
become an employee of Jacobson Dental Group, and hope[d] that his former patients
might follow him there.” Bankruptcy Court’s Opinion at 12. As Killgrove quotes in his
brief, the bankruptcy court specifically determined that
[t]he ultimately achieved result of Defendant becoming an employee of
Jacobson Dental Group and bringing the Collateral with him does not, in
the Court’s view, sustain Plaintiff’s burden of proving there was a sale,
exchange, lease, or other disposition of an interest in the Collateral, nor
any attachment to it of any lien, security interest, or encumbrance. By its
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nature, the Collateral remains the property of Killgrove PC, subject to
Plaintiff’s security interest, and simply followed Defendant to Jacobson
Dental Group, where he resumed his practice.
Bankruptcy Court’s Opinion at 15. In this situation, Killgrove took patient files with him
and continued treating former patients, and was violating a covenant not to compete,
which the bankruptcy court weighed in making its determination that Killgrove did not
convert or fraudulently transfer collateral. The court finds no error in the bankruptcy
court’s determination.1
B. Intentional Violation and Willful and Malicious Injury
Because Appellant’s second and third claim are substantially similar and derive
from the same statute, they are addressed together. In these claims, the Appellant
asserts that Appellee’s actions amount to an intentional breach of contract and that
those acts alone constitute willful and malicious injury to an extent necessary to exempt
Appellee from discharge. The bankruptcy court made a finding of fact that Appellee may
have potentially breached the contract intentionally but, even so, such actions did not
constitute willful and malicious behavior. In re Killgrove, 11-62528, 2013 WL 7018546 at
*12 (Bankr. E.D. Mich. Dec. 20, 2013). This finding is likewise not clearly erroneous.
The portion of the bankruptcy code that Appellant relies on for these claims
states in part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of
this title does not discharge an individual debtor from any debt(6) for willful and malicious injury by the debtor to another entity or to the
property of another entity;

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Accordingly, the court declines to address the issue of the collateral’s value.
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11 U.S.C. § 523(a)(6). The bankruptcy court determined that the evidence
demonstrated that Appellee was acting out of self-preservation and a belief that he was
complying with the law in protecting patient files. In re Killgrove, 11-62528, 2013 WL
7018546 at *12 (Bankr. E.D. Mich. Dec. 20, 2013). It was the bankruptcy court’s
determination that Appellee’s actions were driven by his personal and professional
financial situation. Moreover, Appellee notified Appellant of his actions in moving the
patient list. Finally, as the bankruptcy court noted, the lack of a non-compete allowed for
Appellee’s contact with the patients of Killgrove PC. This fact caused the bankruptcy
court to question even whether actual injury was caused to Appellant by Appellee’s
actions.
The court is in agreement with the bankruptcy court that even if Appellee
intentionally breached a contract and put his financial future ahead of Appellant’s, this
behavior is not “so reprehensible as to warrant denial of a fresh start.” In re Stollman,
404 B.R. 244, 266 quoting Novartis Corp. v. Luppino (In re Luppino), 221 B.R. 693, 700
(Bankr. S.D.N.Y. 1998). “Debts remain dischargeable even if there is an intentional
breach of contract that is substantially certain to cause injury, unless the conduct would
be deemed a tort under state law.” Lockerby v. Sierra, 535 F.3d 1038, 1043 (9th Cir.
2008). Therefore, “a party may intentionally breach a contract with the knowledge that
an injury may result, but the nature of the injury is in large part foreseeable and
assumed as a part of the risk of doing business." Matter of Haynes, 19 B.R. 849, 852
(Bankr. E.D. Mich. 1982).
Appellant’s principal argument for Appellee’s violation of § 523(a)(6) is that any
act of conversion inflicts wilful and malicious injury. As the bankruptcy court determined,
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however, and as is reiterated above, Appellee’s use of the patient list did not amount to
conversion. Even if conversion had been established, “nondischargeability takes a
deliberate or intentional injury, not merely a deliberate or intentional act that leads to
injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). The bankruptcy court
highlighted the situation giving rise to Killgrove’s actions:
(a) both Defendant and Killgrove PC were suffering extreme financial
difficulties; (b) Defendant made numerous good-faith efforts to seek relief
prior to resorting to any breach of his contractual obligations; (c) the Court
finds that Defendant’s conduct was directed toward self-preservation and
not toward inflicting injury on Plaintiff; (d) the financial injuries that Plaintiff
sustained were in the nature of breach of contract, rather than tort; and (e)
Plaintiff still has a valid security interest in the Collateral, although its value
may have been affected by what occurred and by the essentially inherent
nature of the Collateral.
Bankruptcy Court Opinion at 19. The bankruptcy court, accordingly, determined that
nondischargeability was not supported under the circumstances.
Ultimately, the remainder of Appellant’s arguments and authorities are
unpersuasive; even if there had been an unauthorized conversion that led to injury, and
not just a “relocation,” as the bankruptcy court found, a willful and malicious act would
be required. The court finds no error in the bankruptcy court’s evaluation of the
evidence or its application of the law on this claim.
C. False Oath by Failing to Disclose Revenue Stream
Appellant next claims that Appellee failed to disclose revenue and assets from
his “defacto practice” and is therefore exempt from discharge on this basis. Appellee
points to the bankruptcy court’s finding of fact that Appellee made no false statements
of fact in the bankruptcy schedules, argues that Appellant failed to make such an
allegation in the second amended complaint, and also asserts that, as a W-2 employee,
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he was not required to make any such disclosure. Appellee’s Brief at 7. The bankruptcy
court found that the Appellant had no cause of action under 11 U.S.C. § 727(a)(4)
because Appellant had no personal ownership over the collateral. In re Killgrove, 1162528, 2013 WL 7018546 at *13 (Bankr. E.D. Mich. Dec. 20, 2013).
Even though Appellant failed to allege this specific provision in the Second
Amended Complaint, the court will address the issue because Appellant has generally
presented an argument for an exemption from discharge under 11 U.S.C. § 727(a)(4) in
the pleadings. However, the court agrees with the Appellee and the bankruptcy court
that Appellant has no claim under § 727(a)(4) because Appellee was merely acting as a
W-2 employee of the Jacobson Dental Group.
The statute that Appellant points to for this claim states, in part, that:
(a) The court shall grant the debtor a discharge, unless—
(4) the debtor knowingly and fraudulently, in or in connection with the
case-(A) made a false oath or account;
(B) presented or used a false claim;
(C) gave, offered, received, or attempted to obtain money, property, or
advantage, or a promise of money, property, or advantage, for acting or
forbearing to act; or
(D) withheld from an officer of the estate entitled to possession under this
title, any recorded information, including books, documents, records, and
papers, relating to the debtor's property or financial affairs;
11 U.S.C. § 727(a)(4).
The bankruptcy court determined that the Appellee had no duty to disclose specific
assets of Killgrove PC because "a shareholder in a Corporation has no personal
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ownership interest in its property or assets." In re Killgrove, 11-62528, 2013 WL
7018546 at *13 (Bankr. E.D. Mich. Dec. 20, 2013). Further, Appellee is not operating a
practice out of the Jacobson Dental Group, but is acting as a W-2 employee.
Appellant’s allegation that Killgrove PC patients generated $539,498 in revenue during
the period July 1, 2011 through December 31, 2012 does not affect the court’s
determination, as that is the revenue of the Jacobson Dental Group. The Jacobson
Dental Group, in turn, compensated Appellee with a 30% commission, and Appellee
designated this income in Schedule I. Appellant’s Ex. 12. Although it appears
uncontested by Appellee that he began to make substantially more per month than the
$13,866.54 that he reported in his Schedule I, he was only required to give an estimate
of his average or projected monthly income at the time the case was filed. At that time
Appellee had only been working the Jacobson Dental Group for one month, and there is
nothing to suggest that Appellee’s estimate provided at that point in time represented a
false statement for purposes of 11 U.S.C. § 727(a)(4). The bankruptcy court did not err
here.
D. Attorney Fees and Treble Damages
The statute cited by Appellee in making an argument for attorney fees and treble
damages states in part:
(1) A person damaged as a result of either or both of the following may
recover 3 times the amount of actual damages sustained, plus costs and
reasonable attorney fees;
(a) Another person's stealing or embezzling property or converting
property to the other person's own use.

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M.C.L.A. 600.2919a. “Trebling isn't automatic; it is within the Court's discretion based on
what is fair under the circumstances.” In re Stewart, 499 B.R. 557 (Bankr. E.D. Mich.
2013). Given its finding of neither conversion, nor willful or malicious injury, nor false
oath or misrepresentation, it was not unreasonable for the bankruptcy court to conclude
that an award of attorney fees and treble damages were not warranted. The court finds
that the bankruptcy court properly took into account the totality of circumstances in this
matter and did not abuse its discretion here.
E. Dismissal of Chapter 7 Filing for Lack of Good Faith
Appellant also appeals the bankruptcy court’s order denying Appellant’s motion
to dismiss Appellee’s chapter 7 bankruptcy case. Appellant argues that Appellee has
failed to demonstrate that he acted in good faith pursuant to 11 U.S.C. § 707a. The
bankruptcy court and Appellee principally cite the reasoning outlined in the sections
above to argue that Appellee’s actions were not in bad faith.
The applicable provision states in relevant part:
(a) The court may dismiss a case under this chapter only after notice and
a hearing and only for cause, including-(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees or charges required under chapter 123 of title
28; and
(3) failure of the debtor in a voluntary case to file, within fifteen days or
such additional time as the court may allow after the filing of the petition
commencing such case, the information required by paragraph (1) of
section 521(a), but only on a motion by the United States trustee….
(3) In considering under paragraph (1) whether the granting of relief would
be an abuse of the provisions of this chapter in a case in which the
presumption in paragraph (2)(A)(I) does not arise or is rebutted, the court
shall consider--12-

(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the debtor seeks to
reject a personal services contract and the financial need for such
rejection as sought by the debtor) of the debtor's financial situation
demonstrates abuse.
11 U.S.C.A. § 707a.
Appellant asserts that a chapter 7 bankruptcy may be dismissed on the ground of
lack of good faith and that the debtor has the burden of establishing good faith, citing
Industrial Insurance Services v. Zick, 931 F.2d 1124, 1127 (6th Cir. 2000). Appellant
reiterates many of its arguments addressed in the sections above in making this
argument, asserting that (a) Killgrove converted and fraudulently transferred the
collateral; (b) it would be unfair for Killgrove to keep the assets of the practice; (c)
devaluation of the collateral; (d) Killgrove has the present ability to repay his creditors;
and (e) false statements/misrepresentations in the bankruptcy filing.
Chapter 7 filings have been dismissed for bad faith when debtors did not face
financial loss or calamity, when debtor’s filling was motivated by nonfinancial reasons
such as causing trouble for a divorced spouse, or “generally in those egregious cases
that entail concealed or misrepresented assets and/or sources of income, and
excessive and continued expenditures, lavish life-style, and intention to avoid a large
single debt based on conduct akin to fraud, misconduct, or gross negligence.” In re
Tamecki, 229 F.3d 205, 207 (3d Cir. 2000); see also In re Huckfeldt, 39 F.3d 829, 830
(8th Cir. 1994).
The court agrees with the bankruptcy court that the circumstances in which
Appellee found himself do not rise to a failure of the “smell test” addressed in the case
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of Merritt v. Franklin Bank, 211 F.3d 1269, 1270 (6th Cir. 2000), cited by Appellant.
Appellee faced an unreasonably high rent payment, mounting personal financial
troubles, and a substantial decrease in income due to the failing economy and the
nature of his business. Furthermore, Appellee notified Appellant of his closing of
Killgrove PC and, as discussed above, made no false statements in his bankruptcy
filing. Thus, the court agrees with the bankruptcy court that there is no basis for
dismissal of Appellee’s chapter 7 filing under 11 U.S.C.A. § 707a.
CONCLUSION
For the reasons given above, the bankruptcy court’s December 20, 2013 Opinion
Regarding Plaintiff’s Action for Denial of Discharge and Nondischargeability of Debt, as
well as its January 16, 2014 Order Denying Motion to Dismiss, are hereby AFFIRMED.
IT IS SO ORDERED.
Dated: August 22, 2014
s/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE
CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
August 22, 2014, by electronic and/or ordinary mail and also
on Karen E. Evangelista, 439 South Main, Suite 250,
Rochester, MI 48307.
s/Barbara Radke
Deputy Clerk

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