___________ No. 95-3835

___________ In re: Jerry Waugh, * * Debtor. * * * --------------------------------* * * Appeal from the United States Jerry Waugh, * District Court for the * Eastern District of Arkansas. Plaintiff - Appellant, * * v. * * Reuben Eldridge; Sandra * Eldridge; * * Defendants - Appellees.* * * James C. Luker, * * Trustee. *

___________ Submitted: April 12, 1996 Filed: September 12, 1996

___________ Before MCMILLIAN, JOHN R. GIBSON, and BOWMAN, Circuit Judges.

___________ JOHN R. GIBSON, Circuit Judge.

### -2- Jerry Waugh appeals the district court's judgment holding that hi s contingent debt to Re uben and Sandra Eldridge was non-dischargeable under section 523(a)(6) of the Bankruptcy Code and rev ersing the decision of the bankruptcy court. Waugh argues that the bankruptcy court was correct in its determination that the debt was dischargeable because Waugh did no t willfully and malicio usly remove assets from Rising Fast Trucking Company in violation of the Eldridges' rights as creditors. We affirm the judgmen t of the district court.

Wau gh and members of the Clem Moore family formed Rising Fas t Trucking in 1979. Waugh was president of the co mpany and a fifty- percent shareholder. The company grew from 5 trucks to approximately 150 trucks by 1985.

On July 14, 1986 a truck owned by Rising Fast Trucking and a Trailways bus driven by Reuben Eldridge collided. The Eldridges brought suit against Rising Fast Trucking. In the liabi lity phase of a bifurcated trial, the jury foundRising Fast Trucking liable for the accident and no negligence on the part of Reuben Eldridge. Befo re the damages phase could begi n, the parties entered into an agreed judgment for $3,000,000 i n compensatory damages. Because of other claims arising from the accident, the Eldridges received only $59,000 from Rising Fast Trucking's $1,000,000 li abilityinsurance policy in partial satisfaction of their judgmen t against the company.
Waugh filed a voluntary Chapter 7 pe tition in bankruptcy in February 1993 and was granted a discharge on July 7, 1993. No objections to hi s discharge or the disc hargeability of any debts were filed within the time frame allowed by the Federal Rules of Bankruptcy Procedure.
In an attempt to obtain satisfaction of their judgment, the Eld ridges filed suit in Arkansas state court to set aside transfers

### Neither of the bankruptcy court's holding s regarding the lack 1 

### of notice or the burden of proof were appealed.
-3- of property and pierce the corporate veil between Waugh and the company. In his answer Waugh raised his bankruptcy discharge as a defense.

Waugh then sought to reopen his bankruptcy case, asking th e bankr uptcycourt to find that any personal liability arising from th e state court action wa s discharged in bankruptcy. The Eldridges responded that the debt was non-dischargeable because they did not receive notice of the bankruptcy proceeding in time to object to t he discharge under section 523( a)(3) of the Bankruptcy Code. See 11 U.S.C. § 523(a)(3) (1994)

. Furthe r, the Eldridges argued that Waugh violated section 523(a)(6) b y willfully and maliciously removing assets from the company, thus preventin g them from obtaining satisfaction of their judgment.

The bankruptcy court ruled that the Eldridges did not receive notice of Waugh's bankruptcy case. See In re Waugh , 172 B.R. 31 (Bankr. E.D. Ark

. 1994). The court als o found that the Eldridges had the burden of proving tha t the debt was non-dischargeable under section 523(a)(6). The cour t concluded that sectio n 523(a)(3)(B) preserves the right of a creditor not receiving notice to litigate the dischargeability of a claim. 1

The bankr uptcy court next addressed the section 523(a)(6) exception to dischargeability and concluded that Waugh did not act willfully an d maliciously toward th e Eldridges. Thus, any debt that Waugh might owe to the Eldridges was discharged in bankruptcy. In drawing this conclusion, the bankruptcy court found that Risin g Fast Trucking was a growth company where, until 1986, past profits an d additional shareholde r capital were invested into the company. The court found that in 1986 "the shareholders authorized

### The bankrup tcy court indicated a salary of $1,000 per month. 2 

### Howev er, the employment agreement introduced at the hearin g specifies a yearly salary of $66,756.
-4- nearly 1.5 million dollars in dividends and loans to the shareholders," al l of which were authorized before the July 14 accident.

The court then found that because Ri sing Fast Trucking was unable to raise additional working capital in the form of accounts receivabl e financing from its ba nk, the formation of a new corporation called Rising Fast Trans port was authorized in June 1986. However, the articles o f incorporation for this new corporation were not filed until August 29 , 1986. Waugh and the Moores each owned fifty percent of the new compan y which together with Rising Fast Trucking operated as a single company , hauling the same carg o, using the same drivers, and being dispatched from a common pool of available trucks.

The bankruptcy court found that because of economic conditions th e companies' operations decreased in 1989. In Nov ember of that year, Rising Fast T rucking and Rising Fast Transport were sold to Allianc e Transportation. Alliance paid $1,000 for the companies' names, trademarks , telephone numbers, goodwill, and customer lists. Alliance also employed Waugh at a yearly salary of $66,756. Waugh also agreed to a four-yea r 2 consulting agreement for $25,000 per year.
The court found that Waugh's "actions with regard to his corpor ations were imprudent and lacking in business judgment, " but were not targeted at the Eldridges. The court believed the Eldridges' expert who testified tha t the dividends and loans made by Rising Fast Trucking to the shareholders plac ed the company in a position where it would not be able to pay it s debt s as they became due. However, relying heavily on the corporat e minutes

### Cole testif ied that Waugh had stated that he had transferred 3 

### assets to his children, to Clem Moore, and to trusts in order t o protect himself from other creditors and that the bank would b e repaid. Waugh later testified that the conversation with Col e concer ned the assets of Rising Fast Rentals, not Rising Fas t Trucking.
-5- introduced at the hearing, the bankruptcy court found that these dividends and loans were authorized before the July 14 accident. The minutes also indica ted that the formation of Rising Fast Transport was authorize d several weeks before the accident. The court found that all available cas h had been extracted from the corporations before the accident, and at the time of t he accident, "there were few, if any, assets for unsecure d creditors to reach."
Finally, the court stated that while it believed that Waugh hadacted imprudentl yand in a self-serving manner, he had been candid with th e court. In particular, the bankruptcy court believed Waugh's explanation of his co mments to Dale Cole, president of Worthen National Bank o f Batesvil le, and his testimony regarding the formation of Rising Fas t 3 Transport. The court concluded that Waugh did not remove assets from the corporation in violation of the Eldridges' right s. Thus, any debt owed to the Eldridges was discharged.

The distr ict court held that the bankruptcy court's factual finding that Waugh's actions were not willful and malicious with respect to th e Eldridges was clearly erroneous. See Eldridge v. Waugh , 198 B.R. 545 (E.D

. Ark. 1 995). The district court held that the entirety of the recor d revealed "an intentional pattern of activity by [Waugh] targeted at harmin g the financial interests of the Eldridges and other creditors and a t improving the financial condition of the [Rising Fast Trucking ] shareholders."

The district court first concluded that even if Waugh's testimon y about the reasons for forming Rising Fast Transport were

### -6-

believed, his later a ctions showed an intent to remove assets from Rising Fast Truc king. The court noted that after the formation of Rising Fas t Tr ansport, a corporation called Rising Fast Leasing purchased truck s financed by Navistar Financial Corporation and leased them to Rising Fast Transport. Due to an interlocking guaranty with Navistar, Rising Fas t Leasing and Rising Fast Trucking each became liable for the other' s obligations to Navistar. Thus, the district court found that while the ne w
ass ets were added to Rising Fast Leasing and leased to Rising Fas t Transport, Rising Fast Trucking incurred liabili ties from the transaction.

The distr ict court next addressed the financial condition of Rising Fast Trucking. The court explained that the certified public accountant responsible for auditing Rising Fast Trucking ha d issued a qualified audit report because "there were related party transactions that were no t disclo sed and because of the uncertainty of [Rising Fast Trucking's ] financial future due to the potential lawsuits from the 1986 wreck."
The district court then turned to the issuance of dividends by Rising Fa st Trucking in 1986. The court noted that the corporation, a n S-corporation, had never paid dividends before 1 986. However, in 1986 the board of directors approved several dividend payments. According to the corporate minutes introduced at the hearing, dividends were declared in th e fol lowing amounts in 1986: $550,000 on April 7; $10,000 on April 28 ; $50,000 on May 12; $6,000 on May 20; $10,000 on June 11; $30,000 on June 23; and $40,000 on June 27. Addressing the Eldridges' argument that the dates in the corporate minutes could not be believed, the district court noted that the certified public accountant respo nsible for auditing Rising Fast Trucking testified that the audit showed no dividend payments until after the July 14 accident, when a total of $800,000 was paid on July 28 and 31. The accountant also testified that from the time the audit work was completed in March 1986 and

### -7-

when the report was published on May 23, 1986, the auditing firm would hav e inquired if the finan cial position of Rising Fast Trucking had materially changed a nd included any such change in the final published audit. Th e
accou ntant stated that the firm did not learn of any dividend payment s during this period of time, or it would likely have included them in the audit report.

In additi on, the district court highlighted a transaction described by Waugh that appears to contradict the dividend authorization dates in th e minutes. Waugh testified that he received $275,000 from the first $550,00 0 dividend payment. The minutes showed that this dividend was declared on April 7. Waugh testified: "I went to the bank and borrowed $265,000. Th e
same day I wrote Rising Fast a check for $262,000. The next day Risin g Fast Trucking Company paid me a dividend of $275,000 and that same day I went and paid the bank back where I'd borrowed i t, so [it was] just a swap out to get the debt I owed Rising Fast off the books. I paid the debt

. Th ey paid me a dividend actually so I could pay the debt." On cros s examination, Waugh was asked why the March 31, 1986 Rising Fast Trucking balance s heet did not reflect the debt he owed to Rising Fast Trucking

. Waugh re sponded that it was because he had paid off the debts the "da y before that report." The district court recognized that it would have bee n impossible for Waugh to use an April 7 dividend payment to pay off his deb t to Rising Fast Trucking on March 31.

A certified public accountant who testified as an expert for th e Eldridges testified t hat it was uncommon for an S-corporation like Rising Fast Trucking to distribute dividends that did n ot result from the current or immediately previo us year's profits. In addition, the court noted the bankruptcy court's finding that at the time the dividends were pai d reasonable grounds existed to believe that the c orporation would be unable to pay its debts as they became due.

### In a ddition to the factors discussed above, the distric t 4 

### court also mentioned the bankruptcy court's discussion of several facts excluded from evidence a t trial. While the bankruptcy court refuse d to allow Waugh to testify regarding other accidents an d claims against Rising Fast Trucking, the bankruptcy court di scussed this evidence in its decision.
-8- Finall y, the district court focused on the sale of Rising Fas t Trucking to Alliance. The court noted that at t he time of the sale, Waugh
was j ointly and severally liable for the $1.8 million that Rising Fas t Trucking and Rising Fast Leasing owed to Navistar. However, in exchange for assigning the four $25,000 payments from his consulting agreement with Alliance, Waugh and the Moores were released from liability on the debt. Waugh later agreed with Navistar to a $2.9 million consent judgment agains t Rising Fast Trucking and Rising Fast Leasing, a judgment which released hi m individually. The court determined that "[t]hes e actions, taken after the

acc ident, harmed the Eldridges' interests by selling [Rising Fas t Trucking's] assets for a low price."

The district court concluded: "After the accident, Waugh use d [Rising Fast Trucking's] assets to receive debt release for himself, to th e detriment of the Eldridges. . . . [A]fter the ac cident Waugh engaged in an intent ional course of conduct designed to insulate assets from th e Eldridges." Thus, th e district court held that any debt owed by Waugh to the Eldridges was non -dischargeable because it was within the willful and malicious exception to dischargeability, and the bankruptcy court' s findings to the contrary were clearly erroneous. 4

Waugh argues that his conduct was not willful and malicious unde r section 523(a)(6) of the Bankruptcy Code. He contends that the findings of the bankruptcy cou rt were not clearly erroneous and the district court erred in so holding.

When reviewing a bankruptcy court's decision to den y discharge, we apply the same standard of review that the

### -9- district court is suppos ed to apply: we review the bankruptcy court's factual findings for clear error and its co nclusions of law de novo. Although the district court's conclusions about the ba nkruptcy court's decision may carry some persuasiv e weight, our appellate review of the bankruptcy cour t's decision is independent of the district court's opinion.

United States v. Foust (In re Foust) , 52 F.3d 766, 768 (8th Cir. 1995) (pe r curiam) (citations omitted).

The bankruptcy court's determination of whether a party acte d willfully and malicio usly inherently involves inquiry into and finding of intent, which is a question of fact. See First Nat'l Bank v. Phillips (In
re Phillips) , 882 F.2d 302, 305 (8th Cir. 1989). We may not reverse the bankruptcycourt's factual findings unless after reviewing the record we
are left with the "definite and firm conviction that a mistake has bee n committed." Anderson v. City of Bessemer City , 470 U.S. 564, 573 (1985) (quoting U nited States v. United States Gypsum Co. , 333 U.S. 364, 39 5 (1948)). Even when based on witness credibility, the bankruptcy court's factual findings are not completely insulated from appellate review. See Griffin v. City of Omaha , 785 F.2d 620, 626 (8th Cir. 1986). "Wher e physic al, documentary or other forms of objective evidence contradict a witness's story, or that story is so internally inconsistent or implausibl e that a reasonable factfinder would not credit it, a reviewing court ma y find clear error even `in a finding purportedly based on a credibilit y determination.'" Id. (quoting Anderson , 470 U.S. at 575).
Section 523(a)(6) of the Bankruptcy Code provides that a debt m ay not be discharged when the debtor has willfully and maliciously injured anothe r entity or the property of another entity. 11 U.S.C. § 523(a)(6) (1994). Willful is defined as "`headstrong and knowing' conduct," while malicious is "co nduct `targeted at the creditor at least in the sense that th e conduct is certain or almost certain to cause harm.'" Johnson v. Miera (I n re Miera) ,

### -10-

926 F.2d 741, 743-44 (8th Cir. 1991) (quoting Barclays Am./ Busines s Credit, Inc. v. Long (In re Long) , 774 F.2d 875, 881 (8th Cir. 1985))

. "While intentional harm may be very difficult to establish, the likelihood of ha rm in an objective sense may be considered in evaluating intent. " Long , 774 F.2d at 881 (footnote omitted).

After car efully studying the record before us, we hold that th e bankruptcy court's findings regarding Waugh's conduct under sectio n 523(a)(6) of the Bankruptcy Code were clearly erroneous. As illustrated by the district court's opinion, the record is replete with documentar y evid ence and inconsistencies that contradict Waugh's testimony and th e findings of the bankruptcy court. See Anderson , 470 U.S. at 575; Griffin , 785 F.2d at 626.

When v iewed in its entirety, the record reveals that Waugh, a s president and fifty-percent shareholder of Rising Fast Trucking, repeatedl y engaged i n transactions to the benefit of himself and the othe r shareholders and to the detriment of Rising Fast Trucking creditors.

There are two statements in the district court's opinion that ar e troubleso me. The court stated it believed that the evidence as a whol e revealed "an intentional pattern of activity by the debtor targeted a t harming the financial interests of the Eldridges and other creditors and at imp roving the financial condition of the [Rising Fast Trucking ] shareholders." The court concluded by saying th at it believed "that after the accident Waugh engaged in an intentional cou rse of conduct designed to insulate assets from the Eldridges." When these statements are considered closely, however, we do not see them as evidencing factual findings, but rather as being introductory or conclusory statements in a careful analysi s under the clearly erroneous test. This court has held on several occasion s that the district court reviews an order of the bankruptcy court as a n appellate court, and may not make its own

### -11-

independent factual findings or take additional evidence to support such findings. Wagner v. Grunewaldt , 821 F.2d 1317, 1320 (8th Cir. 1987) ; Foust , 52 F.3d at 768. We conclude that the district court scrupulously followed its responsibility to review the bankru ptcy court order under the clearlyerroneous analysis. It analyzed the bankruptcy court order i n light of the entire record, demonstrating numerous internal inconsistencie s and the i mplausibility of the testimony. We are satisfied that the tw o statements using the word "believe," statements which have caused us some concern, do not constitute factual findings and do not nullify the distric t
cour t's detailed analysis determining whether the factual findings ar e cle arlyerroneous. In any event, this court has the ultimat e respon sibilityof making an independent determination as to whether th e findings of the bankruptcy court were clearly erroneous.
Without elaboration, the bankruptcy court accepted as true the dates shown on the Rising Fast Trucking minutes. The court also found Waugh's testim onycredible. The Eldridges argue that these findings ar e inconsistent and cannot be reconciled.

The minut es show that the $550,000 dividend was authorized on April 7, 1986. Waugh testified that he received $275,000 of this dividend and used it to repay a bank loan whose proceeds he had used to repay loans fro m Rising Fast Trucking. When asked why the Rising Fast Trucking loans did not appea r on the March 31, 1986 balance sheet, Waugh testified that h e repaid the Rising Fas t Trucking loan the day before the balance sheet was issued. He also testified that the day after he repaid the Rising Fas t Trucking loan, he received the dividend payment and repaid the bank. Thus , Waugh stated he repaid a bank loan with a divide nd that was not authorized by the board of directors until about a week lat er. As the district court recognized, it would have been impossible for Wa ugh to have used the April 7 dividend to repay a loan he testified was paidoff several days earlier. This is the type of internal inconsistency discu ssed in Anderson , 470 U.S. at 575, a

### While we must not second guess the availability of certai n 5 

### items of evidence, or the reason for not introducing a particular itemof evidence at trial, we find it interesting that neithe r party introduced bank records or cancelled checks showing when the divide nds were actually paid and cleared through Rising Fas t Trucking's bank.

-12- contradiction of Waug h's testimony by objective evidence, that undermines the underp innings of the bankruptcy court's finding and causes us t o conclude it is clearly erroneous.

Furthermore, Waugh's testimony fails to mesh with the testimony o f Ris ing Fast Trucking's auditor. The auditor testified that no dividen d payments were reported or discovered between the time when the audit was compl eted in March and when it was published in May. We are well awar e that "[w ]here there are two permissible views of the evidence, th e factfinder's choice b etween them cannot be clearly erroneous." Anderson , 470 U.S. at 574. This is not, however, a question of two permissibl e views. I nstead, it involves a situation where the testimony of th e princip le witness is contradicted by other parts of his testimony, b y documentary evidence, and by the testimony of ot her witnesses. If Waugh's testimony was internally consistent, the auditor's testimony would hav e veri fied the payment of dividends during the time frame shown in th e minutes. Simply put, the unbiased independent e vidence in the record does not confi rm that the dividends were declared or paid before the July 1 4 accident, and Waugh's own testimony contradicts the dates shown in th e minutes upon which he relies. 5

The record also demonstrates that Waugh's actions with regard t o Rising Fast Trucking were knowing and certain to harm the Eldridges. See Miera , 926 F.2d at 743-44.

The E ldridges' expert, whom the bankruptcy court found to be wel l qualified and credible, testified that it would be unusual for

### -13-

an S-corporation such as Rising Fast Trucking to pay dividends like it did in 1986. Further, the bankruptcy court also accepted the expert' s testimony that at the time "when the dividends were authorized in 1986 , there were reasonable grounds to believe that the corporation would b e unable to pay creditors as debts became due." T his testimony, accepted by the court, is objective evidence contradicting Waugh's testimony and the bankruptcy court's finding that Waugh's actions were not directed at the Eldridges and other creditors. Thus, we must co nclude that the bankruptcy court's finding was clearly erroneous.

As the district court pointed out, these practices continued afte r the accident and harmed the Eldridges' interest as contingent creditors, while co ntinuing to benefit Waugh and the other shareholders. Th e corporation received only $1,000 for the sale of Rising Fast Trucking

. Waugh, however, received an employment contract for $66,756 and a four-yea r consulting contract for $25,000 per year. On December 4, 1989, Waug h assigned the proceeds from the consulting contra ct to Navistar in exchange for the release of Waugh and the Moores from personal liability on th e debts owed to Navistar. Waugh testified that Rising Fast Trucking was als o released from liability, but the record fails to support this testimony. The assignment releases only Waugh and the Moores. Further, the consent jud gment executed on December 14, 1989, not discussed by the bankruptc y court, dismissed Waugh and the Moores, but continued to hold Rising Fast Tru cking and Rising Fast Leasing jointly and severally liable for debt s owed to Navistar. Again, this illustrates the i nternal inconsistencies in Waugh' s testimony that are contradicted by objective evidence in th e remainder of the reco rd. Moreover, it demonstrates an ongoing pattern of intentional conduct c ontinuing well after the accident--a pattern certain to harm the Eldridges' financial interests, whil e benefiting Waugh and the other shareholders.

### -14- We realize that the bankruptcy court found that Waugh had been candid wit h it, and that Waugh did not remove assets from the corporation i n violation of the Eldridges' rights. While Anderson , 470 U.S. at 575 , underscores the great deference that is given to credibility findings such
as these, it also demonstrates that there is a limit to that deference whe n "th e story itself [is] so internally inconsistent or implausible on it s face that a reasonabl e factfinder would not credit it." We conclude that the bankruptcy court's findings, even though based on credibilit y determinations, were clearly erroneous under the scope of review outlined in Anderson

.

In sum, w e are left with the "definite and firm conviction that a mistake has been committed." Id. at 573. We hold that the bankruptc y court's finding that Waugh did not act willfully and maliciously wit h respect to the Eldridges was clearly erroneous, and we affirm the district court's judgment holding that Waugh's contingent debt to the Eldridges was not discharged in bankruptcy.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.