Case ID: br_310/html/0107-02.html
Source: Caselaw Access Project
Author: {"author": "ALAN E. NORRIS, Circuit Judge. COLE, Circuit Judge.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

In re: John HERDEAN, Debtor, Dimmitt & Owens Financial, Inc., Appellant, v. John Herdean, Appellee.
    No. 02-1940.
    United States Court of Appeals, Sixth Circuit.
    Nov. 26, 2003.
    
      Paul J. Randel, Steinberg & Shapiro, Southfield, MI, for Debtor.
    Joseph A. Ahern, James R. Waldvogel, Stark, Reagan & Finnerty, Troy, MI, James E. Bergesen, Munro, Bergesen & Zack, Troy, MI, for Plaintiff-Appellant.
    Paul H. Steinberg, Paul J. Randel, Steinberg & Shapiro, Southfield, MI, for Defendant-Appellee.
    Before NORRIS, BATCHELDER, and COLE, Circuit Judges.
   OPINION

ALAN E. NORRIS, Circuit Judge.

Dimmitt & Owens Financial, Inc. (“Dim-mitt”) appeals from the district court’s af-firmance of a decision by a bankruptcy court dismissing its adversary proceeding. Dimmitt had brought the adversary proceeding against John Herdean, a debtor-in-bankruptcy, claiming that Herdean’s debt to Dimmitt was not dischargeable in bankruptcy because Herdean had committed fraud. The bankruptcy judge found that Dimmitt had failed to prove fraud because it demonstrated no actual reliance on Herdean’s misrepresentations. Dim-mitt appeals from the district court’s affir-mance of the bankruptcy judge’s order. We affirm, but on different grounds than those enunciated by the bankruptcy judge.

I.

The record before us indicates the following facts. Herdean was the president and a 50% shareholder in Herdean Services, Inc., a trucking company that contracted its services out to larger truckers. Among Herdean’s clients was Panther II (“Panther”), a trucking company with which Herdean signed a contract on May 5, 1998. That contract authorized Panther to deduct from its payments to Herdean sums it paid to Herdean’s drivers. Herde-an was aware that Panther could charge him for satellite and insurance fees.

The following month, on June 18, 1998, Herdean entered into a contract with Dim-mitt, which is in the business of purchasing accounts receivable (also known as “factoring”). Dimmitt’s typical customers are creditors who need fast cash and do not wish to wait the usual 30 to 60 days for their accounts to be paid. A customer sells its accounts to Dimmitt, which in turn pays the customer a discounted percentage of the face value of each of its invoices. Dimmitt then stamps each invoice with language stating that payment is owed to Dimmitt and mails each invoice to its customer’s debtor. When paid, Dimmitt retains a fee calculated based upon the length of time it had to wait before being paid, and returns the remainder of the amount owed to the customer. Herdean sold his accounts receivable, including the Panther account, to Dimmitt. In his contract with Dimmitt, Herdean represented that he was aware of no deductions or offsets that could be taken against the payments owed to him.

On July 27, 1998, Panther paid Dimmitt for the amount it owed Herdean minus deductions and set-offs. In September 1998, as subsequent Panther payments revealed similar deficiencies, Mike Biglione, the Dimmitt agent who had dealt with Herdean at the contract signing, called Herdean to discuss how to proceed. During the resulting discussions, Herdean explained to Biglione and the account manager, Tom Barrett, that Panther made many of the deductions to compensate it for cash advances taken from it by many of Herde-an’s drivers. Herdean told them that he had attempted to prevent his drivers from taking these advances, but was unable to do so. Biglione and Barrett agreed to continue factoring with Herdean. They asked him to attempt to lower the deductions, and stated that they would “buy back” future accounts receivable to make up the shortfall. A “buyback” involves Dimmitt retaining a greater percentage of the payments it receives from its customer’s debtor or from advances. Dimmitt commonly resorted to “buying back” accounts receivable from customers who did not abide by their factoring agreements. The first “buyback” took place on September 15,1998.

Despite the new factoring agreement, deficiencies continued to appear. Dimmitt eventually ended its “factoring” relationship with Herdean. Herdean filed for personal bankruptcy under Chapter 7 of the bankruptcy code on January 19, 1999, and was granted a discharge on April 23. Dimmitt, having received no notice of the bankruptcy proceedings, sued Herdean for fraud on October 12, 1999, in state court. The damages Dimmitt sought, the same damages Dimmitt seeks in federal court, are debts that accrued starting in October 1998, after Herdean and Dimmitt had reached their “buyback” agreement. On March 20, 2000, the bankruptcy court reopened the bankruptcy proceeding to allow Herdean to amend his schedule of creditors. The state proceeding was stayed pending a determination of the discharge-ability of Herdean’s debt to Dimmitt. Dimmitt filed this adversary proceeding in bankruptcy court on May 2, 2000, seeking a ruling that the debt was not dischargea-ble in bankruptcy under 11 U.S.C. § 523(a)(2)(A) because it was fraudulently obtained. On December 11, 2002, the bankruptcy judge held a hearing and ruled that Dimmitt had established sufficient evidence to pierce the corporate veil and attribute Herdean Services, Inc.’s debts to Herdean. However, the bankruptcy judge found that the debt to Dimmitt had not been fraudulently obtained because Dim-mitt never relied upon Herdean’s misrepresentations:

But the reliance issue is a serious one in this case, it specifically, the Plaintiff has the burden of showing that the Defendant rely upon that there are misrepresentation [sic], or no offenses, offsets or counter claims and so forth. And what they do when they found out that there were offsets and discounts and so forth, well, they set down, they talked to the debtor, and they worked out an arrangement. In addition, Mr. Gillespie testified about a red — some techniques for dealing with a justice [sic] situation. And that being the case I just can’t conclude, in fact, notwithstanding his testimony that the Plaintiff relied upon these representations, in fact, they didn’t. When these representations occurred they didn’t complain, they agreed to work with them, they wanted to continue and did continue working with the Defendant.

(Tr. at 121-22). As a result, the bankruptcy judge dismissed the adversary proceeding. The district court affirmed, finding that the bankruptcy judge committed no clear error. This appeal followed. This court has jurisdiction under 28 U.S.C. § 158(d).

II.

This court reviews the bankruptcy court’s ruling that Dimmitt did not rely on Herdean’s misrepresentations for clear error. We review the bankruptcy court’s determination directly, without deference to the district court. Barlow v. M.J. Waterman and Associates, Inc. (In re M.J. Waterman and Associates, Inc.), 227 F.3d 604, 607 (6th Cir.2000).

Herdean argued before the bankruptcy court that he was unaware of the requirement in his contract with Dimmitt that no deductions or set-offs exist. This argument was only hinted at on appeal. Nevertheless, the bankruptcy judge did not commit clear error in finding that Herdean committed fraud because he was reckless: he failed to read the contract and did not tell Dimmitt about the known possibility of deductions for satellite and insurance fees.

Dimmitt argues that the bankruptcy judge erred in finding that its willingness to come to a new agreement with Herdean to mitigate its damages evidences a lack of reliance on Herdean’s misrepresentations when signing the original contract. The bankruptcy judge relied upon the later agreement and upon testimony indicating that Dimmitt had previously used “buybacks” in similar situations to conclude that Dimmitt had never relied upon Herdean’s misrepresentations to begin with. However, Dimmitt convincingly argues that its willingness to mitigate, along with the fact that it maintained a policy of using “buybacks” when the need to mitigate arose, did not indicate that Dimmitt would have signed the original contract had its agents known that Herdean’s accounts were subject to deductions. Rather, the mitigation only shows business judgment, and its policy of using “buybacks” to mitigate only demonstrates that Dimmitt had dealt with misrepresentations before. Indeed, a party to a contract may have a duty to mitigate its damages before it can seek redress in court. The bankruptcy judge’s finding of no reliance is clearly erroneous.

Despite the bankruptcy’s judge’s commission of clear error, we affirm his ruling under an alternate reasoning. Damages are an essential element of fraud under 11 U.S.C. § 523(a)(2)(A), and the fraudster is only liable if those damages are caused by its victim’s reliance. Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir.1993). The damages Dimmitt seeks all accrued after Herdean and Dim-mitt agreed that Dimmitt would engage in buybacks to pay for Herdean’s earlier deficiencies, while Herdean would attempt to reduce future deductions. Herdean told Dimmitt that he had been unable to stop his drivers from seeking advances in the past; therefore, Dimmitt was on notice that Herdean may not have been able to stop deductions from being taken in the future. Dimmitt’s damages result from its new contract; the old debt caused by Her-dean’s misrepresentations has been paid, and Dimmitt assumed the risk that Herde-an may not be able to prevent future deductions under the new contract. Therefore, no damages resulted from Herdean’s misrepresentations, and Herdean’s debt to Dimmitt was dischargeable in bankruptcy.

III.

For the foregoing reasons, the dismissal of Dimmitt’s adversary proceeding is affirmed.

R. GUY COLE, Jr., Circuit Judge, concurring in the judgment.

COLE, Circuit Judge.

I concur in the judgment affirming the bankruptcy court’s dismissal of Dimmitt’s adversary proceeding. However, I disagree with the majority insofar as it concludes that the bankruptcy judge’s finding of no reliance by Dimmitt was clearly erroneous.

The majority opinion fails to give due regard to the fact-findings of the bankruptcy judge and his opportunity to assess the credibility of the witnesses with respect to the reliance issue. “A factual finding will only be clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. Ayen, 997 F.2d 1150, 1152 (6th Cir.1993) (citations and quotations omitted). The majority argues that Dimmitt’s willingness to engage in buybacks and to continue a factoring relationship with Herdean after discovering Herdean’s breach of the Factoring Agreement “only shows business judgment” and “only demonstrates that Dimmitt had dealt with misrepresentations before.” I disagree that these are the only inferences that can be drawn from Dimmitt’s behavior — particularly Dimmitt’s continued relationship with Herdean even after the buybacks. Dimmitt’s extensive business relationship with Herdean after the breach can also be reasonably interpreted to suggest that Dimmitt never relied on the Factoring Agreement in the first instance. And where there are two reasonable alternative explanations, the district court’s adoption of one rather than the other does not meet the high standard of clear error.

Moreover, the majority’s conclusion on the reliance issue is based less on facts in the record than on arguments advanced for the first time on appeal. At no point during the proceedings before the bankruptcy judge or in any of Dimmitt’s pretrial submissions did Dimmitt argue that its actions beyond the buybacks were motivated by a desire to mitigate damages after Herdean breached the Factoring Agreement. If the only logical motivation for Dimmitt’s behavior was mitigation, as the majority insists, then we would expect Dimmitt to have terminated the business relationship' after recovering its losses through the buybacks. Yet that did not happen and the relationship continued, with Dimmitt bringing suit for damages incurred after it entered into yet another agreement with Herdean.

The only evidence in the record Dimmitt points to in arguing that it relied on the Factoring Agreement with Herdean was the testimony of James Gillespie, Dim-mitt’s corporate credit manager. Gillespie testified in relevant part as follows:

Q: All right, Mr. Gillespie, we talked earlier about some contractual language in the factoring agreement called representations and warranties.... Did Dimmit & Owens rely on those representations and warranties as contained in that document?
A: We rely on those with everybody that we use as a client.
Q: Let me put it this way, if those paragraphs were removed from the factoring agreement, for instance Mr. Her-dean struck those with a black pen and crossed out those paragraph [sic] ... would Dimmit & Owens had [sic] entered into a factoring relationship with Herdean Services?
A: No.

Dimmitt contends that this exchange unequivocally proves that Dimmitt relied on Herdean’s misrepresentations. But given that this was the only evidence in the record directed toward the reliance issue, it was not clearly erroneous for the district court to reject Gillespie’s testimony, which consisted only of a bald assertion concerning reliance in general, and retrospective speculation concerning reliance in this particular case. Given the extensive evidence heard by the bankruptcy judge about Dim-mitt’s post-breach relationship with Herde-an — evidence that, in its entirety, was not linked to a theory of mitigation — it was not clear error for the district judge to find that Dimmitt did not meet its burden of proving that it relied on the Factoring Agreement.

I disagree with the majority’s faulting the bankruptcy judge for failing to credit a portrait of the evidence that was not compellingly painted below and for instead finding an alternative, reasonable explanation for Dimmitt’s post-breach behavior. Because I do not find that the bankruptcy judge committed clear error in finding that Dimmitt failed to prove reliance, I concur in the judgment affirming the bankruptcy-court’s dismissal of the adversary proceeding.