Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-06-06042/USCOURTS-ca8-06-06042-0/pdf.json

Parties Involved:
Jack Lindau
Appellee
David P. Nelson
Appellant

Document Text:

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 06-6042 MN

 

In re: *

*

David P. Nelson, *

*

Debtor. *

*

Jack Lindau, * Appeal from the United States

* Bankruptcy Court for the

Plaintiff - Appellee, * District of Minnesota

*

v. *

*

David P. Nelson, *

*

Defendant - Appellant. *

 

Submitted: November 2, 2006

 Filed: November 24, 2006 

 

Before SCHERMER, FEDERMAN, and MCDONALD, Bankruptcy Judges

SCHERMER, Bankruptcy Judge

David P. Nelson (“Debtor”) appeals the bankruptcy court’s order and judgment

excepting from discharge his obligation to Jack Lindau (“Creditor”) pursuant to

11 U.S.C. § 523(a)(2)(A). We have jurisdiction over this appeal from the final order

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 The Debtor also complains that his trial counsel did not call a particular

witness nor offer certain evidence at trial. This is not a proper issue on appeal of a

civil judgment of non-dischargeability.

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of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we

reverse.

ISSUE

The issue on appeal is whether the court erred in finding that the Creditor

established by a preponderance of evidence all elements necessary to except from

discharge as fraudulent under Section 532(a)(2)(A) of the Bankruptcy Code a debt

arising from a failed sale of a business. We conclude that the bankruptcy court erred

in finding fraud.1

MOTION TO STRIKE CERTAIN EVIDENCE ON APPEAL

As a preliminary matter, we must address the Creditor’s motion to strike certain

new evidence presented by the Debtor on appeal. The Debtor attached to his brief on

appeal his own affidavit as well as a copy of a post-trial letter from his trial attorney

to the Debtor. The record on appeal is limited to items which were presented to the

trial court. See Fed. R. Bankr. P. 8006. Items included in an appendix to a brief are

likewise limited to items from the trial court’s docket as well as any transcripts from

the court below. See Fed. R. Bankr. P. 8009. An appellate court sits in review of a

trial court. As such, it can only consider the evidence presented to the trial court.

Otherwise, the appellate court exceeds its role as a reviewer of the proceedings below.

Accordingly, the Creditor’s motion to strike is granted. The affidavit and letter

attached to the Debtor’s brief will not be and have not been considered. 

BACKGROUND

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In 2004, the Creditor was interested in operating his own business. The

Creditor had known the Debtor for several years and was aware that he owned and

operated a retail business known as Mr. Nice Guy which sold tobacco, novelties, and

drug paraphernalia. The Creditor approached the Debtor to discuss his desire to

operate his own business. The Debtor told the Creditor that he was interested in

getting out of the retail business. The Debtor offered to sell the business to the

Creditor for $40,000. The Creditor agreed to purchase the store for $40,000 and

attempted to obtain the necessary financing. The Creditor was unable to obtain

financing to purchase the store and informed the Debtor he could not purchase the

store for $40,000.

The parties entered into a new agreement whereby the Creditor agreed to

purchase the business from the Debtor for $70,000 payable with a $15,000 down

payment, followed by fifteen monthly payments of $3,000, and a final balloon

payment of $10,000. The Debtor spent a week and a half conducting an inventory of

the store. After completing the inventory, the Creditor gave the Debtor $7,000 cash

toward the down payment. This transaction was documented with a statement written

by the Creditor stating, “[Debtor], here is $7,000 as earnest money toward the

purchase of Mr. Nice Guy. I hope this shows you how serious I am.” The document

was signed by the Creditor and the Debtor and dated May 11, 2004. The Creditor also

gave the Debtor two certified checks each in the amount of $4,000 which were dated

May 14, 2004.

After receiving the $15,000 down payment, the Debtor turned over the day-today operations of the business to the Creditor and eventually left town. While the

Creditor operated the store, he rearranged the inventory and changed the displays.

At some point during May, 2004, the Creditor and the Debtor met with a lawyer

selected by the Debtor to draft the paperwork associated with the sale of the business.

The parties agreed to a closing date of June 1, 2004.

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While the Creditor was operating the store, but before a sale agreement was

signed or a closing occurred, the Debtor called the Creditor from another county

within the state and asked the Creditor to take $1,200 out of the business because the

Debtor was in jail and needed bail money. The Creditor complied with the request

and gave $1,200 cash to a friend of the Debtor’s to deliver to the jail.

The parties never returned to the lawyer’s office, never signed a purchase

agreement, and never closed the deal. Instead, the Debtor refused to complete the sale.

In June, 2004, the Creditor returned the operation of the store to the Debtor at the

Debtor’s request. The Creditor wrote a statement that said, “I, [Creditor], gave

[Debtor] 15,000 for earnest money in purchasing Mr. Nice Guy smoke shop. We did

not sell the shop, so this is for the return of payment of $15,000.” The document was

signed by the Creditor and the Debtor and dated June 24, 2004. The parties agreed the

Debtor would repay the $15,000 at the rate of $1,000 per week. The Debtor never

made any payments to the Creditor.

The Debtor eventually filed a petition for bankruptcy relief. The Creditor filed

a complaint seeking to have the $15,000 debt excepted from discharge as a debt for

money obtained by fraud under Section 523(a)(2)(A) of the Bankruptcy Code. The

matter was tried and, at the conclusion of the evidence, the judge stated that the matter

came down to a question of credibility and that he believed the Debtor was not

credible and never intended to sell the business to the Creditor. The court ruled orally

in favor of the Creditor excepting the $15,000 debt from discharge as having been

incurred through fraudulent inducement. The court thereafter entered an order and a

judgment in favor of the Creditor excepting the $15,000 debt from discharge.

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 The Debtor filed the post-trial motion within ten days after entry of the

judgment excepting the debt from discharge. The order denying the post-trial motion

was entered on June 8, 2006. The Debtor filed the notice of appeal on June 19, 2006,

June 18 having fallen on a Sunday. The notice of appeal was file-stamped as received

on June 19, 2006; however the notice of appeal was not docketed until June 20, 2006.

The Creditor has not challenged the timeliness of the appeal. Nonetheless, we feel the

need to point these facts out due to the apparent tardiness of the appeal upon a quick

review of the docket. We note that the appeal is timely because the notice was filestamped as received on a timely basis, regardless of the docket entry.

The court’s docket entry also indicates that the appeal relates only to the order

denying the post-trial motion. However, the notice of appeal is broadly drafted and

both parties have treated the appeal as relating to the merits of the judgment and not

limited to the denial of the post-trial motion. Accordingly, we deem the appeal to

relate to the merits of the exception of the debt from discharge and not limited to the

denial of the post-trial motion as indicated on the trial court’s docket sheet entry.

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The Debtor filed a motion to amend, to make additional findings of fact and

alter and amend the judgment, or for a new trial. The court denied the post-trial

motion and the Debtor filed this appeal.2

STANDARD OF REVIEW

We review the bankruptcy court’s findings of fact for clear error and its

conclusions of law de novo. First Nat’l Bank of Olathe, Kansas v. Pontow, 111 F.3d

604, 609 (8th Cir. 1997); The Merchs. Nat’l Bank of Winona v. Moen (In re Moen),

238 B.R. 785, 790 (B.A.P. 8th Cir. 1999); Tri-County Credit Union v. Leuang (In re

Leuang), 211 B.R. 908, 909 (8th Cir. B.A.P. 1997). The determination of whether a

requisite element of a claim under Section 523(a)(2)(A) is present is a factual

determination which is reviewed for clear error. Pontow, 111 F.3d at 609; Moen, 238

B.R. at 790. A finding is clearly erroneous when although there is evidence to support

the finding, on review of the entire evidence the appellate court is left with the definite

and firm conviction that a mistake has been made. Moen, 238 B.R. at 790; Leuang,

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211 B.R. at 909. Due regard is given to the trial judge’s opportunity to evaluate the

credibility of the witnesses. Fed. R. Bankr. P. 8013; Moen, 238 B.R. at 790.

DISCUSSION

Pursuant to Section 523(a)(2)(A) of the Bankruptcy Code, a discharge does not

discharge an individual debtor from 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. To prevail in a non-dischargeability action under

Section 523(a)(2)(A), a creditor must prove by a preponderance of evidence that:

(1) the debtor made a false representation; (2) at the time the debtor knew the

representation was false; (3) the debtor made the representation deliberately and

intentionally with the intention and purpose of deceiving the creditor; (4) the creditor

justifiably relied on the representation; and (5) the creditor sustained loss and damage

as a proximate result of the representation having been made. Field v. Mans, 516 U.S.

59 (1995)(justifiable reliance); Grogan v. Garner, 498 U.S. 279 (1991)(burden of

proof); Moen, 238 B.R. at 790(elements of proof under §523(a)(2)(A)).

 The court did not make express findings of fact detailing each element of fraud.

We therefore review the record as a whole to determine if each element was

established by the Creditor at trial. We defer to the trial court’s assessment of

credibility. The trial court found the Debtor to be lacking credibility. Accordingly,

we accept the Creditor’s version of the events surrounding the failed sale and, where

the Debtor’s version is inconsistent, we disregard it.

The representation at issue is the Debtor’s statement that he would sell the

business to the Creditor for $70,000. The court found this to be a false statement. We

disagree. After agreeing to the sale, the Debtor turned over the operation of the

business to the Creditor. In addition he met with a lawyer and requested the lawyer

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to draft appropriate sale documents. The Debtor’s actions after agreeing to the sale

are consistent with an intention to sell and do not evidence a lack of intention to

follow through with the sale. Without a false statement, no fraud exists.

Even if a false statement is made, no fraud exists unless the maker knows the

statement is false at the time the statement is made. Again, the Debtor’s actions in

turning over the keys to the Creditor and meeting with an attorney to draft a sale

agreement after agreeing to the sale do not support a finding that the Debtor knew he

had no intention of selling the business at the time he agreed to do so for $70,000.

To amount to fraud, a statement must be made deliberately and intentionally

with the intention and purpose of deceiving. Here, the record is void of any evidence

that the Debtor intended to deceive the Creditor.

Additionally, the Creditor must have justifiably relied on the representation for

fraud to exist. Justification is a matter of the qualities and characteristics of the

particular plaintiff and the circumstances of the particular case. Field v. Mans, 516

U.S. at 71(citing Restatement (Second) of Torts, §540 (1976)). The record is void of

any evidence of justifiable reliance on the part of the Creditor. Yes, the Creditor took

over the operation of the business and ran the store on a daily basis. He clearly

believed he would be buying the store. However, he knew no sale agreement had

been drafted or signed at that time and did not expect the sale to close until some time

after he had assumed the responsibilities associated with operating the store. He could

not have justifiably relied that the sale was certain at the time he delivered the funds

to the Debtor.

The final element is loss. The Creditor clearly suffered damages of $15,000.

However, the damages are not the proximate result of fraud. Rather, they are the

result of a sloppy transaction which was never consummated. The Creditor gave the

Debtor $15,000 without the benefit of a written sale agreement. He also accepted the

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responsibility of operating the store without any ownership interest therein. By his

own documentation, the Creditor acknowledged that the funds delivered were merely

a down payment. After the sale fell apart, the Creditor further documented that the

sale was never consummated and that he was entitled to the return of funds. Nowhere

in his document does he mention anything related to fraud. Rather, he merely states

that earnest money was delivered, the sale was not consummated, and that he is

entitled to the repayment of the earnest money. The Creditor’s own documentation

establishes the breach of a contract to sell a business. It does not establish fraud.

Debts arising out of contract breaches are not excepted from discharge in bankruptcy.

CONCLUSION

The court erred in finding fraud in connection with this breach of contract case.

Accordingly, we REVERSE the judgment and conclude that the Debtor’s obligation

to the Creditor is not excepted from discharge.

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