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IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA In re LAWRENCE and MONIKA DRAUT,                                                            No. 96-10288
     Debtors. ___________________________/ DRACO TECHNOLOGY,
     Plaintiff,       v.                                                                                                                  A.P. No. 96-1164 LAWRENCE and MONIKA DRAUT,      Defendants. ______________________________/ Memorandum of Decision      Plaintiff Draco Technology is a computer component supplier. Prior to his Chapter 7 bankruptcy filing, defendant Lawrence Draut operated a computer business. During the three years or so prior to the bankruptcy, Draut ordered some $3 million in computer components from Draco. At the time of the filing, Draut had an unpaid balance with Draco of about $200,000.00. This adversary proceeding is Draco's largely meritless attempt to turn this unpaid account into a nondischargeable debt.      Draco and Draut did business together from 1993 through early 1996. At the beginning of their relationship, Draco declined to extend formal credit to Draut but expressly agreed thatits goodswould be sent C.O.D., that Draut could pay with an ordinary check, and that Draco would hold the checks for deposit until Draut saidthat there were funds in the account and the checks could be deposited. Despite Draco's admission and overwhelming, uncontested evidence that this arrangement was mutually agreeable, and continued for a considerable time, Draco argues that the checks which it ended up holding represent fraudulently incurred debt.      The evidence established that the parties reached a business arrangement which was in essence a form of credit transaction. See In re Morken, 182 B.R, 1007, 1015-16 (Bkrtcy.D.Minn.1995), and cases cited therein. The checks Draut gave Draco were nothing more than promissory notes, and both sides understood them as such. It borders on bad faith for Draco to now argue that it was stuck with bad checks fraudulently passed by Draut. The evidence established that Draut operated in good faith and in accordance with mutually-agreed terms, and never had any intent to defraud Draco.      In the fall of 1995, when Draut was experiencing severe financial problems which were known to Draco,¹ Draco asked Draut to sign a note for the balance he owed and Draut agreed. Draco now argues that the signing of this note was somehow more fraud. To the extent the argument is that Draut never intended to pay on the note, there is no evidence of this.² Insofar as it alleges that his financial condition made payment impossible, there was no written financial statement involved so this argument is meritless. Draco attempts to use dicta from consumer credit card cases where new purchases or cash advances were made to justify its position, but ignores holdings from other cases that even where new purchases are made actual fraud must be shown and not just unreasonable hope. The hopeless state of a debtor's finances is never a substitute for ________      1. Among other things, several of Draut's checks to Draco had bounced even though Draut had said it was OK to deposit them, and Drauts's bank had closed his account.      2. Additionally, the court notes a complete lack of evidence regarding any sort of detrimental reliance by Draco on the note.      an actual finding of fraudulent intent. In re Anastas, 94 F.3d 1280, 1286 (9th Cir.1996). The evidence in this case established no fraudulent intent on Draut's part.      As to one incident only does the court agree that a nondischargeable debt resulted. In late 1995, Draco told Draut that any further business would be on a C.O.D. basis paid with a cashier's check, not a personal check. Late in December, Draut ordered $14,358.00 in goods from Draco with this understanding. The shipments arrived in early January with only three of the numerous boxes marked C.O.D. Draut knew that the C.O.D. terms applied to all of the boxes, but returned the three marked boxes and accepted the rest without paying for them. While Draut was struggling to keep his failing business afloat at that point, this was no excuse for his actions. The debt for the $13,505.00 in merchandise kept and not paid for is therefore nondischargeable pursuant to section 523(a)(6) of the Bankruptcy Code.      In conclusion, the court finds most of Draco's case both meritless and disingenuous in light of the payment arrangements to which both parties agreed. Draut never had any intent to defraud Draco, and there can accordingly be no nondischargeable debt pursuant to section 523(a)(2) of the Code. However, Draut converted $13,505.00 worth of Draco's goods when he accepted them without paying cash for them while knowing that they had been sent on a true C.O.D. basis. Accordingly, a nondischargeable judgment in that amount shall be entered in favor of Draco, which shall also recover its costs of suit. As to any allegations not specifically addressed in this memorandum, the court finds insufficient evidence to justify a finding of nondischargeability.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for plaintiff shall submit an appropriate form of judgment forthwith.

Dated: December 13, 1996                                                     _______________________                                                                                               Alan Jaroslovsky                                                                                               U.S. Bankruptcy