Memorandum of Decision Re: Conversion of Collateral

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re RAYMOND and LOUISE McKENZIE,                                       No. 1-88-00918      Debtors. ___________________________/ LARRY KAYES,      Plaintiff,    v.                                                                                                  A.P. No. 1-88-0149 RAYMOND and LOUISE McKENZIE,      Defendants. ______________________________/
Memorandum of Decision
     The facts in this matter, as the Court finds them, are not complicated. In 1981, plaintiff Larry Kayes owed defendant Raymond McKenzie $26,500.00 secured by a deed of trust to Kayes' home. In June, 1981, Kayes sold his home, taking back a note from the buyers for $63,540.78 secured by a second deed of trust to the property. In lieu of paying McKenzie off, he and Kayes agreed that the note would be assigned to McKenzie, who would collect the payments and pay Kayes his share of the payment over and above the interest attributable to his debt to McKenzie.      Kayes and his wife retained possession of the note, even though it had been assigned to McKenzie and his wife. In early 1982, McKenzie asked for possession of the note, saying he needed it due to an IRS audit. Kayes complied with the request and gave the note to McKenzie.      In March or April of 1982, the McKenzies sold the note for $39,000.00, without telling the Kayes; they continued to pay the Kayes their share of the interest as if they were still receiving payments from the makers of the note.      The McKenzies stopped making payments to the Kayes in late 1985; not until 1986 did the Kayes learn that the note had been sold some four years earlier.      At some time after June of 1981, the Kayes purchased a truck worth $8,000.00 from the McKenzies. They agreed that the source of payment would be the note in question. Thus, the total amount the Kayes owed to the McKenzies was $34,500.00.      It is always difficult to divine the legal ramifications of home-grown oral agreements. While Kayes argues that he and the McKenzies agreed to hold the note as a joint venture and the McKenzies were therefore his partners in the note, the Court finds insufficient evidence to support this. Rather, the Court finds that the McKenzies held the note as collateral for the debt they were owed by Kayes, and that they knowingly and wrongfully converted the collateral by selling the note when the debt it secured was not in default. Liability for a nondischargeable debt is therefore established pursuant to section 523(a)(6) of the Bankruptcy Code.      Although the note had a face value of $63,000.00, it was a nonrecourse note secured by a junior deed of trust. There was no testimony presented as to the actual value of the note other than the sale price itself, so the Court must assume that Kayes' actual damages due to the conversion were $39,000.00. Since Kayes owed McKenzie $34,500.00, Kayes is entitled a judgment for the difference, or $4,500.00. The Court will add the amount of $4,000.00 in punitive damages, together with interest on the total judgment amount of $8,500.00 since December 1, 1985. As further punitive damages, the Mckenzies shall not be entitled to set off the monthly payments they made to Kayes from 1982 through 1985. Kayes shall also recover his costs of suit.      Because Louise McKenzie participated in the selling of the note, and benefitted in the proceeds, the debt will be nondischargeable to her as well as her husband. In re Lansford (9th Cir.1987) 822 F.2d 902.      Counsel for Kayes shall submit an appropriate form of judgment. This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: March 7, 1989                                                                               _________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy