#2594               signed 2-11-03

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

ORDER STRIKING LATE RESPONSE BUT DENYING SUMMARY JUDGMENT

This proceeding is before the Court on the plaintiff's motion for summary judgment. Plaintiff

Columbian National Title Insurance Company (Columbian) appears by counsel Charles R. Hay and

Carol R. Bonebrake. The defendant-debtor (Debtor), acting pro se, filed a late response to the

motion, which Columbian has moved to strike. The Court has reviewed the relevant pleadings and is

now ready to rule.

FACTS

To support its motion, Columbian has submitted various documents, excerpts from the

Debtor's testimony in a deposition, and an affidavit signed by one of its officers. The Court has drawn

the following facts from these materials.

In 1997, the Debtor created a corporation through which he engaged in the construction

business. He was the sole shareholder, the only officer or director, and the only employee. So far as

he can remember, he supplied $1,000 in initial capital to the corporation, and never paid in any more.

The corporation owned a saw or two and a generator, but no other equipment. Although Columbian

asserts that the corporation never owned any other assets, in the cited supporting testimony, the Debtor

was asked only if the assets had grown by the end of 1998 and responded that they periodically grew

and declined, and grew and declined. In addition, as discussed in more detail below, the corporation

also for a time owned a piece of land on which it built a house. The corporation had one bank account,

and the Debtor took draws from it when he needed money. The Debtor filed annual reports for the

corporation until 2001, and hired an accountant to prepare the corporation's tax returns. His testimony

was unclear about whether any minutes of corporate board meetings exist. Because the corporation

did not file an annual report that was due in April 2001, its corporate status was forfeited in the

following July.

In October 1999, the corporation submitted a proposal that was accepted to build a home for

a couple named Williams. Late in December, the Williamses transferred a lot in a development in

Sedgwick County to the corporation, and the corporation mortgaged the lot to Prairie State Bank

(Prairie State) to secure a construction loan or line of credit. The mortgage was recorded with the

Sedgwick County Register of Deeds. As the home was built on the lot, the corporation drew on that

loan or line of credit to pay the costs of construction. The Williamses planned to obtain a bank loan to

pay for the house, and in March 2000, Columbian issued a commitment for title insurance to protect

them and the proposed lender. The insurance commitment contained requirements to be complied with

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and exceptions to the coverage. Among the requirements was one for Lien Affidavit and Statement

executed by sellers and contractors, if any, stating that all bills are paid for labor and/or material which

might form the basis for a mechanic's lien. The exceptions included one for Any lien, or right to a lien

for services, labor or material heretofore or hereafter furnished, imposed by law and not shown by the

public records.

The home was completed to the Williamses' satisfaction, and the conclusion of the parties'

transaction came on September 1, 2000. The corporation deeded the property back to the Williamses.

In addition, as the corporation's president, the Debtor signed an affidavit and agreement that

contained the following provisions about the house and property that Columbian asserts are pertinent in

this proceeding:

NOTE: Paragraphs No. 6 and 7 apply in addition to the above only if mortgagee title insurance is issued.

6.      The affiants, parties hereto, hereby request the issuance of mortgagee title insurance upon said real estate without exception therein as to any possible unfiled mechanic's or

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materialman's liens and any unreleased improvement loans, security agreements, financing statements, continuation statements or other instruments or documents evidencing a secured interest in said real estate, and in consideration thereof and as an inducement therefor, said affiant [sic] does hereby, jointly and severally, agree to indemnify and hold such title insurance underwriter harmless of and from any and all loss, cost, damage and expense of every kind, including attorney's fees, which such title insurance underwriter may suffer or incur or become liable for under its said policy or policies now to be issued, or any re-issue, renewal or extension thereof, or new policy at any time issued upon said real estate, part thereof or interest therein, arising, directly or indirectly, out of or on account of any such mechanic's or material man's liens or lien or claim or claims and/or such filings under the Uniform Commercial Code, in connection with its enforcement of its rights under this agreement.

Columbian issued the title insurance without an exception for the Prairie State mortgage. According to

Columbian's executive vice president, Columbian and other title insurance companies routinely rely on

such affidavits to issue title insurance that does not contain an exception for one or more of the matters

referenced in the affidavit. He further asserts that industry custom is that money required to pay any

liens, mortgages, or other such obligations as referenced in the affidavit will be segregated and

immediately paid to the appropriate party.

As a result of the completion of the transaction, the Debtor's corporation received a check for

the full amount of its contract with the Williamses (Sale Proceeds). The check was made out to the

corporation alone, not jointly with or solely to Prairie State, and the Debtor deposited it in the

corporation's account. Nothing in the documents submitted in support of Columbian's motion mentions

Prairie State or its mortgage, or expressly obligates the Debtor or his corporation to pay the Sale

Proceeds to anyone in particular. Rather than using the Sale Proceeds to pay Prairie State, the Debtor

used them to pay other corporate obligations. The Debtor explained that some modular home dealers

had gone out of business owing him large amounts of money, and that those losses had driven him out

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of business.

Although Columbian asserts that the Debtor has admitted the Sale Proceeds did not belong to

his corporation, it supports this assertion with a reference only to the Debtor's answer filed in this

proceeding. A careful review of the answer reveals no such admission. The Court can find only two

statements in the answer that might conceivably be construed to support Columbian's assertion, but

both can be read just as easily (if not more so) to mean something else. Referring to a paragraph in the

complaint that alleged the Debtor's corporation had transferred the real property to the Williamses, the

Debtor stated that he did not think that the corporation ever owned the property. The Court believes

that the Debtor meant he did not remember that the lot the house was built on had been transferred to

the corporation, not that the corporation was not the owner of the Sale Proceeds paid for the

construction of the house. Responding to the complaint in general, rather than to any specific

paragraph, the Debtor said, Obviously, the check for $71,200.00 should have been made payable to

Prairie State Bank. The Court believes that the Debtor probably meant that the check should have

been made payable to Prairie State because that would have ensured Prairie State got paid, thus

avoiding his problems with Columbian, and did not mean that he thought or admitted that Prairie State

owned the Sale Proceeds.

Because Columbian issued the title insurance policy for the Williamses and their lender without

an exception for Prairie State's recorded mortgage, and neither the Debtor nor his corporation paid

Prairie State, Columbian wound up paying off Prairie State's mortgage on August 13, 2001. The

Debtor filed a chapter 7 bankruptcy petition a week later. Although the Debtor is defending this

proceeding pro se, an attorney represented him in filing for bankruptcy. While this was his personal

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bankruptcy case, he included Columbian and other creditors of his corporation as creditors in his

schedules. Columbian appears to be asking the Court to interpret the Debtor's inclusion of the

corporation's debts in his schedules as evidence that his corporation was a sham that should be

ignored.

DISCUSSION AND CONCLUSIONS

As indicated, the Court drew its statement of the facts involved in this case from Columbian's

motion and supporting materials, ignoring the Debtor's late response to the motion. Based on those

facts, as will be discussed below, the Court concludes that the motion must be denied. Although the

Debtor's late response has had no impact on that conclusion, the Court will grant Columbian's motion

to strike the response.

The Court will now address the merits of Columbian's motion for summary judgment.

Columbian first asserts that the Debtor's corporation is liable to reimburse Columbian for paying off

Prairie State's mortgage, and that the Debtor should be liable for his corporation's debt to Columbian.

Then it asserts that this personal obligation is nondischargeable under three provisions of 11 U.S.C.A.

§523(a). It alleges that: (1) the Debtor caused a willful and malicious injury that is covered by

§523(a)(6); (2) the Debtor breached a fiduciary duty and embezzled money so his obligation is covered

by §523(a)(4); and (3) the Debtor's conduct constituted false pretenses, a false representation, and

actual fraud covered by §523(a)(2)(A).

Federal Rule of Civil Procedure 56, governing summary judgment motions, is made applicable

to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56(c) provides that

the Court must grant summary judgment if the pleadings, depositions, answers to interrogatories, and

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admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of law. In considering a

motion for summary judgment, the Court must examine all the evidence in the light most favorable to the

party against whom summary judgment is sought.1 Summary judgment is inappropriate if an inference

can be drawn from the facts which would allow the nonmovant to prevail at trial.2 Where different

ultimate inferences may properly be drawn, summary judgment should be denied.3

1. Piercing the Corporate Veil

   Columbian offers two theories for holding the Debtor liable for his corporation's debt to

Columbian, either by piercing the corporate veil under Kansas law or by holding him directly liable

personally for allegedly improper actions he took on behalf of the corporation. To support the first

theory, Columbian cites one Kansas bankruptcy court decision, Helena Chemical Co. v. Circle Land

and Cattle Corp. (In re Circle Land and Cattle Corp.),4 and a federal district court decision from

New York, United Orient Bank v. Green.5 In the Circle Land decision, in the course of determining

whether a complaint stated a cause of action for substantive consolidation, Judge Flannagan set out

eight factors that Kansas courts have considered in deciding whether to pierce the veil of a closely held

1White v. General Motors Corp., 908 F.2d 669, 670 (10th Cir. 1990), cert. denied 498 U.S. 1069 (1991).

2See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

3United States v. O'Block, 788 F.2d 1433, 1435 (10th Cir. 1986).

4213 B.R. 870, 874 (Bankr. K. Kan. 1997).

5215 B.R. 916 (S.D.N.Y. 1997).

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corporation:

(1) undercapitalization of a one-man corporation, (2) failure to observe corporate formalities, 
(3) non-payment of dividends, (4) siphoning of corporate funds by the dominant stockholder, 
(5) non-functioning of other officers or directors, (6) absence of corporate records, (7) the use of the corporation as a facade for operation of the dominant stockholder or stockholders, and 
(8) the use of the corporate entity in promoting injustice or fraud.6

Applying these factors to the facts the Court has drawn from Columbian's motion, the Court is

not convinced that Columbian has established that the Debtor's corporation was undercapitalized, that

it failed to observe corporate formalities, that the Debtor siphoned corporate funds, or that no

corporate records ever existed. While the Debtor's testimony indicated that he never paid more than

$1,000 into the corporation, nothing shows that this was insufficient capital for its business. The

documents used in the transaction show that the Debtor always signed them as the president of his

corporation. Until the April 2001 annual report came due, the corporation's annual reports were

apparently filed with the state as required. The Debtor testified that an accountant prepared the

corporation's tax returns. Although the Debtor said he took draws from the corporation when he

needed money personally, nothing presented hints that he ever took unreasonable or excessive

amounts, or that he used any of the Sale Proceeds for his personal benefit. He did not say that no

corporate minutes or other records ever existed, merely that he did not have them with him at the

deposition. These matters all preclude resolving Columbian's effort to disregard the existence of the

Debtor's corporation by summary judgment. The Court would also point out that it does not perceive

the Debtor's listing of the corporation's debts in his bankruptcy schedules to be an admission that the

6213 B.R. at 874 (citing Amoco Chemicals Corp. v. Bach, 222 Kan. 589, 594 (1977); Kvassay v. Murray, 15 Kan.App.2d 426, 437 (1991)).

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corporation should be disregarded, but merely a recognition (likely by the Debtor's lawyer rather than

the Debtor himself) that those creditors could seek (as Columbian is now doing) to hold the Debtor

liable for those debts by piercing the corporate veil.

The Court has also read the United Orient Bank decision, which applied New York law, and

concludes that it does not suggest a different resolution of Columbian's motion. Apparently under New

York law, essentially only the last factor considered under Kansas law—use of the corporate form to

commit fraud or other wrong—is necessary to justify piercing the corporate veil.7 The Court believes

that factor is probably the most important one under Kansas law as well. Discussing the Debtor's

alleged wrongdoing, though, requires discussing the substance of Columbian's arguments under

§523(a)(6), (a)(4), and (a)(2)(A), and the Court will address Columbian's allegations of wrongdoing

along with those arguments.

2. Willful and Malicious Injury

   Section 523(a)(6) of the Bankruptcy Code excepts from discharge any debt for willful and

malicious injury by the debtor to another entity or to the property of another entity. In 1998, the

Supreme Court ruled in Kawaauhau v. Geiger that this provision applies only to a deliberate or

intentional injury, not merely a deliberate or intentional act that leads to injury.8 The Court explained

that this meant the debtor must have intended the consequences of the act he or she performed, not

simply the act itself.9 While the materials presented might support an inference that the Debtor intended

to injure Columbian, in order to grant summary judgment on this point, the Court would have to be

convinced that no reasonable fact finder could conclude that he had acted with no such intent.

Questions of a person's intent or other state of mind require consideration of intangible factors such as

witness credibility and can rarely be resolved on a summary judgment motion.10 The fact the Debtor

used the Sale Proceeds to pay corporate debts other than the Prairie State mortgage could support a

finding that he intended to injure Columbian, but its does not require such a finding to be made.11

Columbian cites several cases, all decided before Geiger, in support of its argument that the

Debtor intended to injure it. In one of the cases, it was established that money the debtor had allegedly

converted belonged to the complaining creditor.12 In another, the debtor had unquestionably agreed to

forward the money in question to the creditor when he received it.13 In the last case, the debtor had

conceded that he used the proceeds of accounts receivable in ways that violated the creditor's security

agreement.14 The Debtor's situation is distinguishable from these cases because the summary judgment

materials do not establish that the Sale Proceeds belonged to anyone other than the Debtor's

corporation, that the Debtor agreed to forward any of the Sale Proceeds to any particular creditor, or

10Prochaska v. Marcoux, 632 F.2d 848, 851 (10th Cir. 1980), cert. denied 451 U.S. 984 (1981); see also 10B Wright, Miller & Kane, Fed. Prac. & Pro. Civil 3d, §2730 (1998) (indicating actions involving state of mind can rarely be determined by summary judgment).

11See Mitsubishi Motors Credit of America, Inc., v. Longley (In re Longley), 235 B.R. 651, 656-57 (10th Cir. BAP 1999) (discussing evidence that can show intent to injure after Geiger).

12See First National Bank v. Stanley (In re Stanley), 66 F.3d 664, 667-68 (4th Cir. 1995).

13 St. Paul Fire & Marine Insurance Co. v. Vaughn, 779 F.2d 1003, 1006 (4th Cir. 1985).

14Barclays Am./Bus. Credit, Inc., v. Long (In re Long), 774 F.2d 875, 881-82 (8th Cir.

1985).

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that the Debtor has conceded that he or his corporation used the Sale Proceeds in a way that violated

any agreement. So, even assuming the legal reasoning of each of these cases survived Geiger, they do

not convince the Court that Columbian has established the Debtor's intent for summary judgment

purposes.

Columbian also suggests that it may be viewed as being subrogated to the Williamses' rights

against the Debtor, and that the Williamses would have a claim against him for conversion. According

to a leading legal dictionary, in tort and criminal law, conversion means: The wrongful possession or

disposition of another's property as if it were one's own; an act or series of acts of willful interference,

without lawful justification, with any chattel in a manner inconsistent with another's right, whereby that

other person is deprived of the use and possession of the chattel.15 In support of this conversion

argument, Columbian relies on the Supreme Court's decision in McIntyre v. Kavanaugh.16 In that

case, a person had pledged stock to a partnership to secure a debt that was only a small fraction of the

stock's value, and some members of the partnership immediately sold the stock and used the proceeds

for their own benefit.17 After the partnership and its members were adjudged bankrupts, the person

sued one of the partners, who defended on the ground of his bankruptcy discharge, among other

things.18 The Supreme Court ruled the partner was liable for the conversion of the stock, a willful and

15Conversion, Black's Law Dictionary (7th ed. 1999) (Bryan A. Garner, Editor in Chief) (obtained from Westlaw Feb. 4, 2003).

16242 U.S. 138 (1916).

17242 U.S. at 138-39.

18242 U.S. at 139.

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malicious injury to the property of another that was excepted from the bankruptcy discharge.19

The reason McIntyre does not support Columbian's conversion claim is that nothing in the

materials Columbian has presented establishes that the parties involved in the transaction ever agreed

that the Sale Proceeds actually belonged to anyone other than the Debtor's corporation, or that the

Debtor or his corporation promised to apply them to pay Prairie State's mortgage. This fact must be

proven before the Court can find that the Debtor or his corporation converted the money. While the

Debtor's statement that the check should have been made out to Prairie State can be interpreted as an

admission that the Sale Proceeds belonged to Prairie State, it can also be interpreted to express only

the Debtor's recognition that his present dispute with Columbian could have been avoided if the check

had been prepared that way. In ruling on summary judgment, the Court must read the statement in the

light most favorable to the Debtor.

3. Breach of Fiduciary Duty or Embezzlement

   Next, Columbian contends that the Debtor breached a fiduciary duty or embezzled the money

by not paying it to Prairie State, so his debt to Columbian is covered by §523(a)(4). That provision

excepts from discharge any debt for fraud or defalcation while acting in a fiduciary capacity,

embezzlement, or larceny. Columbian argues that the Debtor's fiduciary duty arose from his status as

an officer and director of the corporation, and that he breached that duty by using the Sale Proceeds to

pay other corporate bills instead of the one owed to Prairie State. It also contends that because the

circumstances indicate that the Debtor's corporation was not to be the owner of the Sale Proceeds, he

19242 U.S. at 141-42.

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embezzled them by using them to pay other corporate debts.

The Tenth Circuit has construed §523(a)(4) more narrowly than Columbian would like the

Court to do here. In Fowler Brothers v. Young (In re Young),20 the Circuit said:

The existence of a fiduciary relationship under § 523(a)(4) is determined under federal law. However, state law is relevant to this inquiry. Under this circuit's federal bankruptcy case law, to find that a fiduciary relationship existed under § 523(a)(4), the court must find that the money or property on which the debt at issue was based was entrusted to the debtor. Thus, an express or technical trust must be present for a fiduciary relationship to exist under § 523(a)(4). Neither a general fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality between the parties' knowledge or bargaining power, is sufficient to establish a fiduciary relationship for purposes of dischargeability. Further, the fiduciary relationship must be shown to exist prior to the creation of the debt in controversy.21

The Court believes that the ordinary fiduciary duties that a corporate officer of a Kansas corporation

may owe to the corporation or its creditors are the kind of general fiduciary duty of confidence, trust,

loyalty, and good faith that the Tenth Circuit meant was not sufficient to constitute a fiduciary

relationship covered by §523(a)(4).22 Columbian has presented no document or other evidence

purporting to require the Debtor or his corporation to hold in trust any of the proceeds of the sale to the

Williamses, and his status as an officer and director of the corporation, by itself, is insufficient to

establish a fiduciary duty covered by §523(a)(4).

Embezzlement does not require a fiduciary relationship. The Tenth Circuit has said for

purposes of §523(a)(4), [E]mbezzlement is defined under federal common law as 'the fraudulent

2091 F.3d 1367, 1371-72 (10th Cir. 1996).

2191 F.3d at 1371-1372 (citations and internal quotation marks omitted).

22Cf. Holaday v. Seay (In re Seay), 215 B.R. 780, 785-87 (10th Cir. BAP 1997) (fiduciary

duty Oklahoma law imposed on members of partnership or joint venture did not constitute fiduciary relationship covered by §523(a)(4)).

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appropriation of property by a person to whom such property has been entrusted or into whose hands

it has lawfully come.'23 Columbian's summary judgment motion fails to establish that the Debtor

embezzled any money. Its evidence indicates only that the Debtor deposited the Sale Proceeds into his

corporation's bank account and paid corporate debts with them. Nothing before the Court indicates

that the corporation had any obligation to apply the proceeds to its debt to Prairie State (or to any other

debt). Without such an obligation, the Debtor could not fraudulently appropriate the Sale Proceeds by

causing the corporation to use them to pay other corporate debts.

4. False Pretenses, False Representation, or Actual Fraud

   Finally, Columbian contends the Debtor's obligation to it is nondischargeable under

§523(a)(2)(A). That provision excepts from discharge any debt for money, [or] property, . . . to the

extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement

respecting the debtor's or an insider's financial condition. The terms 'false pretenses,' 'false

representation,' and 'actual fraud' in § 523(a)(2)(A) are interpreted according to their definitions

developed under common law.24 In order to succeed under this provision, Columbian

must prove the following elements by a preponderance of the evidence: 1) the debtor knowingly committed actual fraud or false pretenses, or made a false representation or willful misrepresentation; 2) the debtor had the intent to deceive the creditor; and 3) the creditor relied on the debtor's representation. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996). The creditor's reliance must have been justifiable, Field v. Mans, 516 U.S. 59, 74-75 (1995), and the creditor must have been damaged as a result, Young, 91 F.3d at

23Klemens v. Wallace (In re Wallace), 840 F.2d 762, 765 (10th Cir. 1988) (quoting Great

American Ins. Co. v. Graziano (In re Graziano), 35 B.R. 589, 594 (Bankr.E.D.N.Y. 1983), which was quoting Gribble v. Carlton (In re Carlton), 26 B.R. 202, 205 (Bankr.M.D.Tenn. 1982)).

24Chevy Chase Bank v. Kukuk (In re Kukuk), 225 B.R. 778, 782 (10th Cir. BAP 1998) (citing Field v. Mans, 516 U.S. 59, 69 & n. 9 (1995).

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1373.25

The Court is uncertain just what Columbian claims the Debtor did that is covered by this

exception to discharge. It may be saying that the affidavit the Debtor signed at the sale closing includes

a false representation that Prairie State's mortgage did not exist, or that the Debtor and Columbian had

an understanding, apparently based on custom in the title insurance industry, that the Debtor and his

corporation would use the Sale Proceeds to pay off Prairie State's mortgage.

To support its claim, Columbian cites a case where application of §523(a)(2)(A) was

straightforward, Lawyers Title Insurance Corp. v. Dallam (In re Dallam).26 There, the debtor had

signed an affidavit stating that everyone who had supplied services, labor, or materials in the

construction of a home had been paid in full when, as she knew, many such creditors had not been

paid, and the title insurance company issued a policy with no exception for such claims.27 At the close

of the insurance company's evidence, the bankruptcy court ruled that the company's claim against the

debtor was dischargeable because the company had failed to prove that the unpaid creditors had

enforceable liens, the only contingency the court felt the company had relied on the debtor's affidavit to

resolve; the district court affirmed the ruling.28 The Eighth Circuit reversed and remanded for a new

trial, declaring that the insurance company had produced evidence establishing fraud and a

25State of Missouri ex rel. Nixon v. Audley (In re Audley), 275 B.R. 383, 388 (10th Cir. BAP 2002).

26850 F.2d 446 (8th Cir. 1988).

27850 F.2d at 447.

28850 F.2d at 448.

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nondischargeable debt under [§523(a)(2)].29 The Court cannot tell whether the opinion means that the

insurance company had produced sufficient evidence to support a finding in its favor (as the remand for

new trial seems to suggest), or instead, sufficient evidence that the trial court must find in the company's

favor (as the quoted language seems to suggest).

In any event, this case is different from Dallam. First, it is not clear that the affidavit the Debtor

signed includes any representation that there were no recorded mortgages on the property. Columbian

quoted four paragraphs from the affidavit in its motion, indicating that those were the ones it believed to

be relevant here. The first of them, labeled as number 3 in the affidavit, states that there are no

outstanding bills for services, labor, or materials used in the construction, and that the owners (the

Williamses) had accepted the construction. The paragraph labeled number 5 states that the affidavit is

made for the benefit of everyone relying on it. Paragraph number 6 asks Columbian to issue title

insurance for the Williamses' mortgagee without exception for possible unfiled mechanic's or

materialman's liens or unreleased secured interests in the real estate, and promises to indemnify

Columbian for any loss it might suffer as a result of such claims. None of these paragraphs even

arguably includes a representation that there is no outstanding mortgage like the one held by Prairie

State.

The last paragraph that Columbian quoted, number 4 in the affidavit, is the only one that might

contain such a representation, so it requires a closer examination. It reads:

There are no outstanding unpaid and /or unreleased Title I or Title II house or improvement loans, chattel mortgages, conditional sales contracts, security agreements, financing statements,

29850 F.2d at 449.

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continuation statements or other documents or instruments evidencing a secured interest in any chattel or fixture located in or upon said premises described above.

The first type of interest listed in the provision could possibly cover Prairie State's recorded mortgage

since Prairie State's loan to the Debtor's corporation might be referred to as a house or improvement

loan, although the Court does not know what the words Title I or Title II mean here. A conditional

sales contract could also conceivably be used to refer to a transaction in real property. The other four

specific types of interest listed, however, refer not to direct interests in real property, but only to

interests in personal property, although given the context, the personal property would in some way be

related to real property. Furthermore, the catch-all phrase at the end of the list refers to interests that at

most cover personal property that has been sufficiently attached to real property to be considered to

have become a part of it as a fixture; again, the interests are not interests directly in real property.

Especially because the affidavit is Columbian's form so ambiguities should be construed against

Columbian, the Court would be inclined to read the entire provision to be referring only to interests in

personal property that have somehow become related to the real property, and not to a direct interest

in the real property like Prairie State's mortgage. In short, the Court is not convinced that the materials

submitted demonstrate that no reasonable fact finder could conclude that the Debtor did not

misrepresent anything by signing this affidavit despite the existence of the Prairie State mortgage.

The affidavit of Columbian's officer that was submitted to support its motion does not carry

Columbian over this hurdle, either. While the officer states that in issuing title insurance policies for

newly-built homes, Columbian and other title insurance companies routinely rely on affidavits like the

one the Debtor signed, he indicates they rely on the affidavits and issue policies without exceptions only

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for the matters referenced in the affidavit. If the affidavit the Debtor signed does not refer to a

recorded mortgage like Prairie State's, as the Court has concluded above is at least possible, then the

statement about Columbian's reliance on the affidavit is irrelevant to this proceeding.

Columbian's other possible theory would seem to be based on its officer's assertions about

industry custom, and not on any express representation in the Debtor's affidavit. Columbian's officer

makes the following statement in his affidavit:

In addition, the understanding and custom in the industry is that funds required to pay any liens, mortgages, or other such obligations as referenced in the affidavit will be immediately segregated by the recipient such as [the Debtor] or an individual or entity in an equivalent position as [the Debtor] and paid over immediately to the appropriate obligee or claimant.

With mechanic's and materialmen's liens, the Court understands that a title insurance company might

have little ability to learn of such claims except to the extent the general contractor discloses them, or

the potential lienholder files a claim of record. But Prairie State's mortgage was recorded and

Columbian could have discovered it by investigating the record title to the real property. In effect, the

officer is saying that the custom in the title insurance industry is to expect a contractor to lie on the

affidavit by swearing that no claims against the property are outstanding and then to rely on the

contractor to use the sale proceeds to pay off claims that he has sworn do not exist. The Court finds

this assertion particularly astonishing as applied to a recorded mortgage. Title insurance companies are

in the business of insuring the quality of title to real property and, at least as the Court understands it,

they investigate the record title to the real property before they insure it, and rely on their findings to

determine what exceptions to include in their policies. It appears that Columbian simply overlooked

Prairie State's mortgage when it made its title search. If it had found the mortgage, the Court expects

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that it would either have excepted the mortgage from the title policy or have required that the Sale

Proceeds be used first to pay off the mortgage before any excess was paid to the Debtor's corporation.

Conclusion

Columbian's motion to strike the Debtor's late response to its motion for summary judgment is

granted. However, Columbian's motion for summary judgment must be, and it is hereby, denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of February, 2003.

__________________________________

JAMES A. PUSATERI

BANKRUPTCY JUDGE

19