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No. 95-3835

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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. *

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 Submitted: April 12, 1996

 Filed: September 12, 1996

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

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JOHN R. GIBSON, Circuit Judge.
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Jerry Waugh appeals the district court's judgment holding that his

contingent debt to Reuben and Sandra Eldridge was non-dischargeable under

section 523(a)(6) of the Bankruptcy Code and reversing 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 not

willfully and maliciously remove assets from Rising Fast Trucking Company

in violation of the Eldridges' rights as creditors. We affirm the judgment

of the district court.

Waugh and members of the Clem Moore family formed Rising Fast

Trucking in 1979. Waugh was president of the company 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 liability phase of a bifurcated

trial, the jury found Rising Fast Trucking liable for the accident and no

negligence on the part of Reuben Eldridge. Before the damages phase could

begin, the parties entered into an agreed judgment for $3,000,000 in

compensatory damages. Because of other claims arising from the accident,

the Eldridges received only $59,000 from Rising Fast Trucking's $1,000,000

liability insurance policy in partial satisfaction of their judgment

against the company.

Waugh filed a voluntary Chapter 7 petition in bankruptcy in February

1993 and was granted a discharge on July 7, 1993. No objections to his

discharge or the dischargeability 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 Eldridges

filed suit in Arkansas state court to set aside transfers
 Neither of the bankruptcy court's holdings regarding the lack 1

of notice or the burden of proof were appealed.

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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 the

bankruptcy court to find that any personal liability arising from the

state court action was 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 the discharge under section

523(a)(3) of the Bankruptcy Code. See 11 U.S.C. § 523(a)(3) (1994).

Further, the Eldridges argued that Waugh violated section 523(a)(6) by

willfully and maliciously removing assets from the company, thus preventing

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 also found that the Eldridges had the burden of proving

that the debt was non-dischargeable under section 523(a)(6). The court

concluded that section 523(a)(3)(B) preserves the right of a creditor not

receiving notice to litigate the dischargeability of a claim.1

The bankruptcy court next addressed the section 523(a)(6) exception

to dischargeability and concluded that Waugh did not act willfully and

maliciously toward the Eldridges. Thus, any debt that Waugh might owe to

the Eldridges was discharged in bankruptcy. 

In drawing this conclusion, the bankruptcy court found that Rising

Fast Trucking was a growth company where, until 1986, past profits and

additional shareholder capital were invested into the company. The court

found that in 1986 "the shareholders authorized
 The bankruptcy court indicated a salary of $1,000 per month. 2

However, the employment agreement introduced at the hearing

specifies a yearly salary of $66,756.

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nearly 1.5 million dollars in dividends and loans to the shareholders," all

of which were authorized before the July 14 accident.

The court then found that because Rising Fast Trucking was unable to

raise additional working capital in the form of accounts receivable

financing from its bank, the formation of a new corporation called Rising

Fast Transport was authorized in June 1986. However, the articles of

incorporation for this new corporation were not filed until August 29,

1986. Waugh and the Moores each owned fifty percent of the new company

which together with Rising Fast Trucking operated as a single company,

hauling the same cargo, using the same drivers, and being dispatched from

a common pool of available trucks.

The bankruptcy court found that because of economic conditions the

companies' operations decreased in 1989. In November of that year, Rising

Fast Trucking and Rising Fast Transport were sold to Alliance

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-year

2

consulting agreement for $25,000 per year.

The court found that Waugh's "actions with regard to his corporations

were imprudent and lacking in business judgment," but were not targeted at

the Eldridges. The court believed the Eldridges' expert who testified that

the dividends and loans made by Rising Fast Trucking to the shareholders

placed the company in a position where it would not be able to pay its

debts as they became due. However, relying heavily on the corporate

minutes
 Cole testified that Waugh had stated that he had transferred 3

assets to his children, to Clem Moore, and to trusts in order to

protect himself from other creditors and that the bank would be

repaid. Waugh later testified that the conversation with Cole

concerned the assets of Rising Fast Rentals, not Rising Fast

Trucking.

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introduced at the hearing, the bankruptcy court found that these dividends

and loans were authorized before the July 14 accident. The minutes also

indicated that the formation of Rising Fast Transport was authorized

several weeks before the accident. The court found that all available cash

had been extracted from the corporations before the accident, and at the

time of the accident, "there were few, if any, assets for unsecured

creditors to reach."

Finally, the court stated that while it believed that Waugh had acted

imprudently and in a self-serving manner, he had been candid with the

court. In particular, the bankruptcy court believed Waugh's explanation

of his comments to Dale Cole, president of Worthen National Bank of

Batesville, and his testimony regarding the formation of Rising Fast

3

Transport. The court concluded that Waugh did not remove assets from the

corporation in violation of the Eldridges' rights. Thus, any debt owed to

the Eldridges was discharged.

The district court held that the bankruptcy court's factual finding

that Waugh's actions were not willful and malicious with respect to the

Eldridges was clearly erroneous. See Eldridge v. Waugh, 198 B.R. 545 (E.D.

Ark. 1995). The district court held that the entirety of the record

revealed "an intentional pattern of activity by [Waugh] targeted at harming

the financial interests of the Eldridges and other creditors and at

improving the financial condition of the [Rising Fast Trucking]

shareholders."

The district court first concluded that even if Waugh's testimony

about the reasons for forming Rising Fast Transport were
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believed, his later actions showed an intent to remove assets from Rising

Fast Trucking. The court noted that after the formation of Rising Fast

Transport, a corporation called Rising Fast Leasing purchased trucks

financed by Navistar Financial Corporation and leased them to Rising Fast

Transport. Due to an interlocking guaranty with Navistar, Rising Fast

Leasing and Rising Fast Trucking each became liable for the other's

obligations to Navistar. Thus, the district court found that while the new

assets were added to Rising Fast Leasing and leased to Rising Fast

Transport, Rising Fast Trucking incurred liabilities from the transaction.

The district court next addressed the financial condition of Rising

Fast Trucking. The court explained that the certified public accountant

responsible for auditing Rising Fast Trucking had issued a qualified audit

report because "there were related party transactions that were not

disclosed 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

Fast Trucking in 1986. The court noted that the corporation, an

S-corporation, had never paid dividends before 1986. However, in 1986 the

board of directors approved several dividend payments. According to the

corporate minutes introduced at the hearing, dividends were declared in the

following 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 responsible 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
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when the report was published on May 23, 1986, the auditing firm would have

inquired if the financial position of Rising Fast Trucking had materially

changed and included any such change in the final published audit. The

accountant stated that the firm did not learn of any dividend payments

during this period of time, or it would likely have included them in the

audit report.

In addition, the district court highlighted a transaction described

by Waugh that appears to contradict the dividend authorization dates in the

minutes. Waugh testified that he received $275,000 from the first $550,000

dividend payment. The minutes showed that this dividend was declared on

April 7. Waugh testified: "I went to the bank and borrowed $265,000. The

same day I wrote Rising Fast a check for $262,000. The next day Rising

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 it, so [it was] just a swap

out to get the debt I owed Rising Fast off the books. I paid the debt.

They paid me a dividend actually so I could pay the debt." On cross

examination, Waugh was asked why the March 31, 1986 Rising Fast Trucking

balance sheet did not reflect the debt he owed to Rising Fast Trucking.

Waugh responded that it was because he had paid off the debts the "day

before that report." The district court recognized that it would have been

impossible for Waugh to use an April 7 dividend payment to pay off his debt

to Rising Fast Trucking on March 31.

A certified public accountant who testified as an expert for the

Eldridges testified that it was uncommon for an S-corporation like Rising

Fast Trucking to distribute dividends that did not result from the current

or immediately previous year's profits. In addition, the court noted the

bankruptcy court's finding that at the time the dividends were paid

reasonable grounds existed to believe that the corporation would be unable

to pay its debts as they became due.
 In addition to the factors discussed above, the district

4

court also mentioned the bankruptcy court's discussion of several

facts excluded from evidence at trial. While the bankruptcy court

refused to allow Waugh to testify regarding other accidents and

claims against Rising Fast Trucking, the bankruptcy court discussed

this evidence in its decision.

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Finally, the district court focused on the sale of Rising Fast

Trucking to Alliance. The court noted that at the time of the sale, Waugh

was jointly and severally liable for the $1.8 million that Rising Fast

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 against

Rising Fast Trucking and Rising Fast Leasing, a judgment which released him

individually. The court determined that "[t]hese actions, taken after the

accident, harmed the Eldridges' interests by selling [Rising Fast

Trucking's] assets for a low price."

The district court concluded: "After the accident, Waugh used

[Rising Fast Trucking's] assets to receive debt release for himself, to the

detriment of the Eldridges. . . . [A]fter the accident Waugh engaged in an

intentional course of conduct designed to insulate assets from the

Eldridges." Thus, the 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 under

section 523(a)(6) of the Bankruptcy Code. He contends that the findings

of the bankruptcy court were not clearly erroneous and the district court

erred in so holding.

When reviewing a bankruptcy court's decision to deny

discharge, we apply the same standard of review that the
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district court is supposed to apply: we review the bankruptcy

court's factual findings for clear error and its conclusions of

law de novo. Although the district court's conclusions about

the bankruptcy court's decision may carry some persuasive

weight, our appellate review of the bankruptcy court'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) (per

curiam) (citations omitted). 

The bankruptcy court's determination of whether a party acted

willfully and maliciously 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

bankruptcy court's factual findings unless after reviewing the record we

are left with the "definite and firm conviction that a mistake has been

committed." Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)

(quoting United States v. United States Gypsum Co., 333 U.S. 364, 395

(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). "Where

physical, documentary or other forms of objective evidence contradict a

witness's story, or that story is so internally inconsistent or implausible

that a reasonable factfinder would not credit it, a reviewing court may

find clear error even `in a finding purportedly based on a credibility

determination.'" Id. (quoting Anderson, 470 U.S. at 575).

Section 523(a)(6) of the Bankruptcy Code provides that a debt may not

be discharged when the debtor has willfully and maliciously injured another

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 "conduct `targeted at the creditor at least in the sense that the

conduct is certain or almost certain to cause harm.'" Johnson v. Miera (In

re Miera),
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926 F.2d 741, 743-44 (8th Cir. 1991) (quoting Barclays Am./ Business

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 harm in an objective sense may be considered in evaluating intent."

Long, 774 F.2d at 881 (footnote omitted).

After carefully studying the record before us, we hold that the

bankruptcy court's findings regarding Waugh's conduct under section

523(a)(6) of the Bankruptcy Code were clearly erroneous. As illustrated

by the district court's opinion, the record is replete with documentary

evidence and inconsistencies that contradict Waugh's testimony and the

findings of the bankruptcy court. See Anderson, 470 U.S. at 575; Griffin,

785 F.2d at 626.

When viewed in its entirety, the record reveals that Waugh, as

president and fifty-percent shareholder of Rising Fast Trucking, repeatedly

engaged in transactions to the benefit of himself and the other

shareholders and to the detriment of Rising Fast Trucking creditors.

There are two statements in the district court's opinion that are

troublesome. The court stated it believed that the evidence as a whole

revealed "an intentional pattern of activity by the debtor targeted at

harming the financial interests of the Eldridges and other creditors and

at improving the financial condition of the [Rising Fast Trucking]

shareholders." The court concluded by saying that it believed "that after

the accident Waugh engaged in an intentional course 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 analysis

under the clearly erroneous test. This court has held on several occasions

that the district court reviews an order of the bankruptcy court as an

appellate court, and may not make its own
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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 bankruptcy court order under the

clearly erroneous analysis. It analyzed the bankruptcy court order in

light of the entire record, demonstrating numerous internal inconsistencies

and the implausibility of the testimony. We are satisfied that the two

statements using the word "believe," statements which have caused us some

concern, do not constitute factual findings and do not nullify the district

court's detailed analysis determining whether the factual findings are

clearly erroneous. In any event, this court has the ultimate

responsibility of making an independent determination as to whether the

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

testimony credible. The Eldridges argue that these findings are

inconsistent and cannot be reconciled.

The minutes 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 from

Rising Fast Trucking. When asked why the Rising Fast Trucking loans did

not appear on the March 31, 1986 balance sheet, Waugh testified that he

repaid the Rising Fast Trucking loan the day before the balance sheet was

issued. He also testified that the day after he repaid the Rising Fast

Trucking loan, he received the dividend payment and repaid the bank. Thus,

Waugh stated he repaid a bank loan with a dividend that was not authorized

by the board of directors until about a week later. As the district court

recognized, it would have been impossible for Waugh to have used the April

7 dividend to repay a loan he testified was paid off several days earlier.

This is the type of internal inconsistency discussed in Anderson, 470 U.S.

at 575, a
 While we must not second guess the availability of certain

5

items of evidence, or the reason for not introducing a particular

item of evidence at trial, we find it interesting that neither

party introduced bank records or cancelled checks showing when the

dividends were actually paid and cleared through Rising Fast

Trucking's bank.

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contradiction of Waugh's testimony by objective evidence, that undermines

the underpinnings of the bankruptcy court's finding and causes us to

conclude it is clearly erroneous.

Furthermore, Waugh's testimony fails to mesh with the testimony of

Rising Fast Trucking's auditor. The auditor testified that no dividend

payments were reported or discovered between the time when the audit was

completed in March and when it was published in May. We are well aware

that "[w]here there are two permissible views of the evidence, the

factfinder's choice between them cannot be clearly erroneous." Anderson,

470 U.S. at 574. This is not, however, a question of two permissible

views. Instead, it involves a situation where the testimony of the

principle witness is contradicted by other parts of his testimony, by

documentary evidence, and by the testimony of other witnesses. If Waugh's

testimony was internally consistent, the auditor's testimony would have

verified the payment of dividends during the time frame shown in the

minutes. Simply put, the unbiased independent evidence in the record does

not confirm that the dividends were declared or paid before the July 14

accident, and Waugh's own testimony contradicts the dates shown in the

minutes upon which he relies.5

The record also demonstrates that Waugh's actions with regard to

Rising Fast Trucking were knowing and certain to harm the Eldridges. See

Miera, 926 F.2d at 743-44.

The Eldridges' expert, whom the bankruptcy court found to be well

qualified and credible, testified that it would be unusual for
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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 be

unable to pay creditors as debts became due." This 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 conclude that the bankruptcy

court's finding was clearly erroneous.

As the district court pointed out, these practices continued after

the accident and harmed the Eldridges' interest as contingent creditors,

while continuing to benefit Waugh and the other shareholders. The

corporation received only $1,000 for the sale of Rising Fast Trucking.

Waugh, however, received an employment contract for $66,756 and a four-year

consulting contract for $25,000 per year. On December 4, 1989, Waugh

assigned the proceeds from the consulting contract to Navistar in exchange

for the release of Waugh and the Moores from personal liability on the

debts owed to Navistar. Waugh testified that Rising Fast Trucking was also

released from liability, but the record fails to support this testimony.

The assignment releases only Waugh and the Moores. Further, the consent

judgment executed on December 14, 1989, not discussed by the bankruptcy

court, dismissed Waugh and the Moores, but continued to hold Rising Fast

Trucking and Rising Fast Leasing jointly and severally liable for debts

owed to Navistar. Again, this illustrates the internal inconsistencies in

Waugh's testimony that are contradicted by objective evidence in the

remainder of the record. Moreover, it demonstrates an ongoing pattern of

intentional conduct continuing well after the accident--a pattern certain

to harm the Eldridges' financial interests, while benefiting Waugh and the

other shareholders.
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We realize that the bankruptcy court found that Waugh had been candid

with it, and that Waugh did not remove assets from the corporation in

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 when

"the story itself [is] so internally inconsistent or implausible on its

face that a reasonable factfinder would not credit it." We conclude that

the bankruptcy court's findings, even though based on credibility

determinations, were clearly erroneous under the scope of review outlined

in Anderson.

In sum, we are left with the "definite and firm conviction that a

mistake has been committed." Id. at 573. We hold that the bankruptcy

court's finding that Waugh did not act willfully and maliciously with

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.