Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-06-06040/USCOURTS-ca8-06-06040-0/pdf.json

Parties Involved:
Blue Skies
Appellee
James Bruce Preece
Appellant
Ken Schoenfelder
Appellee

Document Text:

1

 The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the

District of Minnesota.

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

________________

06-6040/6041MN

________________

In re: JAMES BRUCE PREECE, *

*

Debtor *

*

BLUE SKIES, INC.; *

KEN SCHOENFELDER; *

CENTRAL BOILER, INC., *

*

Plaintiffs - Appellees * Appeal from the United States

* Bankruptcy Court for the 

v. * District of Minnesota

*

JAMES BRUCE PREECE, *

*

Defendant - Appellant. *

_________________

Submitted: February 15, 2007

Filed: March 19, 2007

_________________

SCHERMER, FEDERMAN and VENTERS, Bankruptcy Judges

FEDERMAN, Bankruptcy Judge

Debtor James Bruce Preece appeals from the Bankruptcy Court’s1

 Judgments

that his debts to Ken Schoenfelder, Blue Skies, Inc., and Central Boiler, Inc. are

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 Ken Schoenfelder, also a named plaintiff in the adversary action by Blue

Skies, is the principal of Blue Skies, Inc. Hereafter, they will sometimes be

referred to collectively as “Blue Skies.” 

3

 Dennis Brazier is the principal of Central Boiler, Inc. Hereafter they will

sometimes be referred to collectively as “Central Boiler.”

2

nondischargeable under 11 U.S.C. § 523(a)(2)(A). For the reasons that follow, we

affirm.

FACTUAL BACKGROUND

Introduction

Debtor Bruce Preece was the sole shareholder, director, and CEO of Helicopter

Flight, Inc. (“HFI”), which had sold new and used helicopters, and was an authorized

dealer of Robinson Helicopter Company’s helicopters. Plaintiffs Blue Skies, Inc.,2

and Central Boiler, Inc.3 each gave funds to HFI for the purpose of purchasing

helicopters but, in each instance, HFI did not supply the helicopter. After the Debtor

filed his Chapter 7 bankruptcy petition, Blue Skies and Central Boiler each filed

adversary actions seeking a determination that the Debtor’s debts to them were

nondischargeable. The cases were consolidated for trial.

Blue Skies

In November 2001, one Richard Stanger entered into a listing agreement with

HFI for the sale of his R44 helicopter. Under the listing agreement, HFI was

appointed as sales agent for a period of ninety days to sell Stanger’s helicopter for

$335,000. In exchange, HFI was entitled to a 5% commission on the sales price.

HFI’s appointment as sales agent expired on February 20, 2002. 

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HFI was unable to sell Stanger’s helicopter under the listing agreement. In

March 2002, after the listing agreement with Stanger expired, the Debtor contacted

Ken Schoenfelder, the principal of Blue Skies, about a transaction involving Stanger’s

helicopter. The Debtor drafted a letter agreement dated March 21, 2002, which he and

Schoenfelder both signed. Pursuant to this letter agreement, Blue Skies made a

$260,000 loan to HFI for the express purpose of acquiring Stanger’s helicopter for

resale. The plan was for the Debtor to buy the helicopter from Stanger, and then try

to re-sell it for a higher price, with Blue Skies and HFI sharing the profit. 

Under this deal with Blue Skies, on or before May 21, 2002 (which was sixty

days after they entered into the agreement), HFI was supposed to either (i) repay Blue

Skies the $260,000 plus $10,000 and 50% of the profit on sale of the Stanger

helicopter if it sold for more than $304,000, or, (ii) in the event HFI did not sell the

helicopter within sixty days, HFI was to deliver an FAA Aircraft Bill of Sale on the

Stanger helicopter to Blue Skies. In other words, by May 21, 2002, Blue Skies was

to receive either a minimum of $270,000 or ownership of the Stanger helicopter. As

further collateral for the $260,000 loan, the Debtor signed a UCC Security Agreement

granting Schoenfelder a security interest in HFI’s leasehold premises at the Crystal

Airport. However, those premises were already subject to a security interest held by

the Debtor’s mother and, in addition, Blue Skies could not have executed on the

security agreement and taken possession of the premises because of restrictions

concerning ownership and operation of airport property. Hence, this security interest

was probably worthless. Schoenfelder failed to perfect it in any event. 

In accordance with the letter agreement, Blue Skies wire transferred $260,000

to HFI on March 22, 2002. However, the Debtor did not use the funds to acquire title

to Stanger’s helicopter, or any helicopter for that matter. Rather, the Debtor testified

that he put the money into HFI’s general operating account and used it for other

purposes. He offered no evidence as to how any of the money was actually spent,

however. 

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The May 21 deadline passed without the Debtor selling the Stanger helicopter

or paying Blue Skies the $270,000. Then, on May 30, 2002, the Debtor made out an

FAA Aircraft Bill of Sale purporting to transfer ownership of the Stanger helicopter

from HFI to Blue Skies. This Bill of Sale had a transposed serial number. Moreover,

because HFI did not own the Stanger helicopter, the Bill of Sale was meaningless. As

a result, when Schoenfelder attempted to have it registered in Blue Skies’ name, he

was unable to do so. A state court later held that Stanger, and not Blue Skies, owned

the R44 helicopter. Blue Skies ended up with neither the helicopter nor the $270,000.

Central Boiler

Central Boiler had previously purchased a Robinson R22 helicopter through

HFI in 1993. In early 2002, Central Boiler’s president, Dennis Brazier, contacted HFI

about purchasing a new Robinson helicopter, an R44. The parties agreed upon a total

purchase price of $303,414, less an “early payment discount” of $7,000, for a final

price of $296,414. The expected delivery date was April 15, 2002. On February 8,

2002, Central Boiler made a $25,000 deposit and traded in the old R22 for a credit of

$90,000 towards the purchase of the new R44. The Debtor memorialized the

agreement by letter dated February 11, 2002. Central Boiler paid the balance of the

sale price, $181,414, by wire transfer to HFI’s account that same day. The parties

agreed that when the old R22 was sold to a third party, $90,000 of the proceeds from

that sale would be earmarked to go to Robinson toward Central Boiler’s purchase of

the R44. 

Meanwhile, unbeknownst to Central Boiler, at the end of 2001, Robinson had

informed HFI that, effective December 31, 2001, HFI was no longer a registered

dealer or authorized to sell Robinson helicopters. Central Boiler found out about this

when, on February 19, 2002, Robinson copied Central Boiler on a letter to HFI,

expressly reminding HFI that the dealership agreement had expired on December 31,

and that HFI was no longer authorized to represent itself as a Robinson dealer. The

February 19 letter was written after Robinson became aware that HFI had purported

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to sell a Robinson R44 helicopter to another person, James Bult, even though HFI was

no longer authorized to sell Robinson helicopters. The letter indicated that Bult had

paid HFI in full for an R44 helicopter, but Robinson had not received any of the funds,

and Bult had not received his helicopter. The letter demanded that any payments HFI

had received for Robinson helicopters be forwarded immediately to Robinson and,

further, that any future payments made by HFI customers be paid directly by the

customer to Robinson. Five parties, including James Bult, Central Boiler, and Dennis

Brazier, were copied on the letter, apparently because Robinson had become aware

that they all had paid HFI for Robinson helicopters.

By the time Central Boiler received this letter, it had already paid HFI in full

for its helicopter. After the February 19, 2002 letter, the Debtor continued to assure

Brazier that, despite the letter, HFI did not have a problem with Robinson, that the

money Central Boiler had paid for its helicopter would go to Robinson, and that

Central Boiler would get its helicopter. That did not happen. 

All of the money Central Boiler paid to HFI went into HFI’s general accounts,

and, except for the initial $25,000 deposit, none of it went to Robinson for the

purchase of the R44. In addition, HFI sold the traded-in R22 in April 2002 for

$90,000 and deposited those proceeds into its general account. Fifty thousand dollars

of that deposit was immediately set off by the bank while it was in HFI’s account.

Other than that $50,000, the Debtor did not account for any of the rest of the money

Central Boiler paid, other than to say that it went into HFI’s general operating fund

and was used in the business. We note that James Bult was not listed as a creditor in

the bankruptcy case, though there is nothing in the record as to whether any of Central

Boiler’s funds were used to take care of his claim. 

The Debtor’s Insolvency and Bankruptcy Case

According to the Debtor, HFI suffered dramatically from the September 11,

2001 terrorist attacks. HFI was insolvent at the time of all of the above transactions,

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 Fed. R. Bankr. P. 8001(a).

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but, the Debtor says, he and his family continued to infuse large amounts of personal

funds into HFI, in an attempt to “resurrect” the company. The Debtor estimates that

these contributions from his family totaled over $600,000. Again, he offered no

evidence as to how these funds were used. In any event, these contributions are not

relevant to the question of whether he intended to defraud the Plaintiffs.

On June 12, 2002, Security Bank obtained an Order for Seizure against HFI for

all of HFI’s inventory, accounts, equipment, and certain helicopters in HFI’s fleet.

The Debtor filed a voluntary Chapter 7 petition on July 11, 2003. Blue Skies and

Central Boiler filed adversary actions seeking determinations of nondischargeability

under § 523(a)(2), (4), and (6). The court entered Judgments in favor of each of the

Plaintiffs, finding the Debtor to be personally responsible for HFI’s debts to them, and

finding the debts to be nondischargeable under (a)(2); therefore, it did not need to

decide the (a)(4) and (a)(6) questions. The Debtor appeals.

DISCUSSION

Procedural Issue on Appeal

Blue Skies points out that the Debtor’s brief was untimely and requests that we

disregard it. Federal Rule of Bankruptcy Procedure 8001(a) provides that “[a]n

appellant’s failure to take any step other than timely filing a notice of appeal does not

affect the validity of the appeal, but is ground only for such action as the district court

or bankruptcy appellate panel deems appropriate, which may include dismissal of the

appeal.”4

 While “[f]iling deadlines serve an important judicial function and tardiness

shall not be taken lightly,” if the appellee’s prejudice is not of such a degree that the

reviewing court should not reach the merits, the reviewing court can consider the 

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5

 See Frank Seitzinger Farms, Inc. of Iowa v. Waller, 67 B.R. 869, 871 (D.

S.D. 1986).

6

 First Nat’l Bank of Olathe v. Pontow (In re Pontow), 111 F.3d 604, 609

(8th Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir.

1997); Fed. R. Bankr. P. 8013.

7

 In re Jones, 31 F.3d 659, 662 (8th Cir. 1994).

8

 Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84

L.Ed.2d 518 (1985).

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untimely brief.5 In this particular instance, we find that any prejudice to Blue Skies

and Central Boiler in considering the Debtor’s brief is minimal. Blue Skies’ request

that we disregard the Debtor’s brief is, therefore, DENIED.

Standard of Review

The BAP reviews findings of fact for clear error, and legal conclusions de

novo.6

 “A bankruptcy court’s finding concerning intent is a factual finding subject

to the clearly erroneous rule.”7

 A finding is clearly erroneous when the reviewing

court is “left with the definite and firm conviction that a mistake has been

committed.”8

The Debtor’s Personal Liability for HFI’s Debts

The Debtor does not appeal the bankruptcy court’s finding of personal liability

for HFI’s corporate debts, under piercing the corporate veil or any theory.

Accordingly, we do not address it here.

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 11 U.S.C. § 523(a)(2)(A).

10 516 U.S. 59, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995).

11 Id. 516 U.S. at 70-72, 116 S. Ct. at 443-44.

12 In re Ophaug, 827 F.2d 340 (8th Cir. 1987), as supplemented by Field v.

Mans, 516 U.S. 59, 116 S.Ct. 437(1995); In re Moen, 238 B.R. 785, 790 (B.A.P.

8th Cir. 1999).

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Nondischargeability Under § 523(a)(2)(A)

Section 523(a)(2)(A) provides an exception from discharge for any debt “for

money, property, services, or an extension, renewal, or refinancing of credit, to the

extent obtained by . . . false pretenses, a false representation, or actual fraud, other

than a statement respecting the debtor’s or an insider’s financial condition.”9

 

In Field v. Mans,

10 the United States Supreme Court held that § 523(a)(2)(A)

encompasses common law misrepresentation or actual fraud.11 To prove actual or

common law fraud, a creditor must prove, by a preponderance of the evidence, the

following:

(1) the debtor made a false representation;

(2) at the time the representation was made the debtor knew it was false;

(3) the debtor subjectively intended to deceive the creditor at the time he made

the representation;

(4) the creditor justifiably relied upon the representation; 

and

(5) the creditor was damaged.12

In his brief, the Debtor argues only that the bankruptcy court erred with regard

to the third element - intent to defraud. “As a general rule, an appellate court may

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13 United States v. Simmons, 964 F.2d 763, 777 (8th Cir. 1992) (citing

United States v. Olano, 934 F.2d 1425, 1439 (9th Cir. 1991)). The Debtor did raise

justifiable reliance and proximate cause in his “Statement of Issues” but did not

discuss how the court erred in so finding. In any event, the Plaintiffs justifiably

relied on the Debtor’s misrepresentations.

14 In re Moen, 238 B.R. at 792.

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review only the issues specifically raised and argued in an appellant's brief.”13

Therefore, we will only consider whether the Plaintiffs established the Debtor’s intent

to defraud. Since a debtor’s mental state is difficult to prove, fraudulent intent may

be proved by direct or circumstantial evidence.14 The Debtor asserts that this case is

nothing more than a typical business failure or breach of contract case. He says he

was merely attempting to keep his failing business afloat, and the bankruptcy court

erred in concluding otherwise. 

As shown, the Debtor had been advised in December 2001 that Robinson was

terminating his dealership. Nevertheless, he continued to represent himself as

authorized to sell Robinson helicopters. Further, even after receiving the February 19,

2002 letter, he told Dennis Brazier that the letter was simply due to Robinson’s policy

changes brought on by its quick growth. He said the relationship between HFI and

Robinson was fine, and the letter was, in effect, meaningless. He assured Brazier that

Central Boiler was going to receive its new Robinson helicopter, even though HFI was

no longer authorized to sell them and HFI had not paid Robinson for it. 

Indeed, the Debtor expressly told each of the Plaintiffs that he was using their

respective funds to purchase a specific helicopter, but failed to do so. With Blue

Skies, the Debtor represented to Schoenfelder that HFI was buying the Stanger

helicopter. With Central Boiler, the Debtor represented to Brazier that he was

acquiring the particular Robinson R44 that Central Boiler had ordered, and that even

the proceeds from the sale of the trade-in R22 would be “earmarked” for that

purchase. 

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The Debtor argues that he was not able to use these funds to purchase those

helicopters because he had to pay others to keep the business open. But the record

contains ample evidence to support the bankruptcy court’s finding that these

transactions involved more than merely keeping the business afloat. As the

bankruptcy court found, the Debtor had to have obtained these funds knowing that

they would not be available to purchase the helicopters he promised the Plaintiffs to

purchase. 

For example, as to Blue Skies, during the three-month period that HFI had held

the Stanger helicopter on the consignment-type listing agreement, the best offer HFI

received was $245,000. Despite that, the Debtor then entered into the transaction with

Blue Skies whereby, in order to merely break even, HFI would have to sell the Stanger

helicopter for at least $270,000. Although the Debtor had been in the helicopter

business for many years, he represented to Schoenfelder that he could sell it for that

amount, and perhaps significantly more than that. Further, despite his representations

to Schoenfelder that he was going to use Blue Skies’ funds to purchase the Stanger

helicopter, the Debtor took no steps whatsoever to actually make the purchase from

Stanger. He even took steps to hide the situation after the money was gone by

tendering the fake Bill of Sale to Blue Skies. The bankruptcy court did not err in

concluding that the Debtor intended to defraud Blue Skies through this transaction.

Similarly, with regard to Central Boiler, the Debtor made express

representations that he was going to purchase a specific helicopter on Central Boiler’s

behalf, but then used the money for other purposes. Other than the $50,000 that was

set off by the bank, the Debtor had no explanation whatsoever as to where Blue Skies’

money went, nor did he present any evidence that he had taken any steps to actually

acquire Central Boiler’s helicopter, other than placing the initial order for it. HFI even

sold Central Boiler’s trade-in but did not use those funds to buy Central Boiler’s new

helicopter, despite the Debtor’s admission that he had agreed to earmark those funds

for that purpose. And, again, the Debtor took proactive steps to hide the fraud by

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reassuring Brazier that everything was fine after he received Robinson’s February 19

letter stating that HFI was no longer authorized to sell Robinson helicopters.

CONCLUSION

In sum, the record supports the bankruptcy court’s conclusion that the Debtor

entered into agreements with the Plaintiffs knowing that he would not be able to

comply and with the intent to defraud. Accordingly, the bankruptcy court’s

Judgments in favor of Blue Skies, Inc., Ken Schoenfelder, and Central Boiler are

AFFIRMED.

______________________________

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