UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

LIND-WALDOCK & COMPANY, an 

Illinois corporation,

Plaintiff-Appellant,

v.  No. 00-1114

CATHERINE P. MOREHEAD; RAYMOND

A. MOREHEAD,

Defendants-Appellees. 

Appeal from the United States District Court

for the Northern District of West Virginia, at Clarksburg.

Irene M. Keeley, District Judge.

(CA-98-125-1, BK-97-1103, BK-97-11497)

Argued: November 1, 2000

Decided: January 3, 2001

Before MICHAEL, MOTZ, and KING, Circuit Judges.

Affirmed by unpublished per curiam opinion. 

COUNSEL

ARGUED: Henry Buswell Roberts, Jr., NATHAN & ROBERTS,

Toledo, Ohio, for Appellant. Thomas Herbert Fluharty, Clarksburg,

West Virginia, for Appellees. ON BRIEF: W. David Arnold,

NATHAN & ROBERTS, Toledo, Ohio; Evans L. King, Jr., Donald

Epperly, STEPTOE & JOHNSON, Clarksburg, West Virginia, for

Appellant.
Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c). 

OPINION

PER CURIAM: 

Lind-Waldock & Company brought an adversary proceeding

against Chapter 7 debtors Raymond and Catherine Morehead, seeking

to declare a margin debt nondischargeable under the fraud exceptions

to discharge found in 11 U.S.C. §§ 523(a)(2)(A) & (C). After a bench

trial the bankruptcy court dismissed Lind-Waldock’s § 523(a)(2)(A)

claim on the grounds that the company did not establish the existence

of a representation known to be false when made, an intent to defraud,

or justifiable reliance. In addition, the court dismissed the

§ 523(a)(2)(C) claim because it concluded that the margin debt was

not a "consumer debt." The district court affirmed. We affirm as to

§ 523(a)(2)(A) because the bankruptcy court was not clearly erroneous in finding that the Moreheads did not intend to defraud LindWaldock. We also affirm as to § 523(a)(2)(C) because the debt is not

a "consumer debt." 

I.

Raymond Morehead first opened a trading account with LindWaldock, a futures clearing merchant, in 1989. Raymond used the

account to speculate in the financial futures market by buying and

selling S&P 500 contracts. An S&P 500 contract is an agreement to

buy or to sell the value of the S&P 500 index at an agreed price at

a future settlement date. Speculating in the futures market carries high

risk. 

Raymond opened his account with a deposit of $50,000. Thereafter, he lost between $50,000 and $100,000 and closed the account in

1991. In 1995 Raymond’s wife, Catherine, opened a new account

with Lind-Waldock. Catherine opened the account in her name for

estate tax purposes, and Raymond managed the account. In opening

the new account, the Moreheads completed an account application.

2 LIND-WALDOCK & COMPANY v. MOREHEAD
They stated truthfully on the application that their net worth exclusive

of equity in their home was "more than $1,000,000." The application

also provided that the Moreheads were to inform Lind-Waldock of

any changes to the information provided. 

The Moreheads opened the 1995 account with a $370,000 deposit.

Within a year Raymond had lost the entire $370,000, and the account

balance was zero. Nevertheless, Raymond kept the account open, but

he did not trade. In February 1997 Raymond obtained an unsecured

$50,000 bank loan, which he deposited into the account. By the time

of this deposit, the Moreheads’ net worth was significantly less than

$1,000,000. Indeed, excluding the equity in their home, the Moreheads had only $20,000 in assets. The Moreheads never informed

Lind-Waldock about the drastic reduction in their net worth, and

Lind-Waldock never inquired about the Moreheads’ financial status.

On April 10, 1997, Raymond began trading with the $50,000, and

he made substantial gains. His gains were swift in the short run, and

by April 29 his liquidation position was over $470,000. Raymond

then began to sustain big losses. Within a two-day period he lost

almost $100,000, and on the third day he lost over $230,000. By May

7 his position dropped to $51,000. On May 8 he recovered somewhat,

gaining over $100,000. But on May 9 the roof caved in: Raymond lost

$479,000, and Lind-Waldock made a margin call to the Moreheads in

the amount of $850,000. Raymond immediately agreed to wire the

money and later in the day claimed that he had wired it. In fact, Raymond had not wired the money because the Moreheads could not

cover the call. The account ended up with a negative balance of

approximately $321,000.

The Moreheads promptly filed for Chapter 7 bankruptcy. LindWaldock filed an adversary proceeding against the Moreheads, seeking to have the bankruptcy court declare the $321,000 debt nondischargeable. Lind-Waldock argued that the debt was nondischargeable

under 11 U.S.C. §§ 523(a)(2)(A) & (C). After a bench trial the bankruptcy court dismissed the complaint, concluding (1) that as to

§ 523(a)(2)(A) there was no representation known to be false when

made, no justifiable reliance, and no intent to defraud and (2) that as

to § 523(a)(2)(C) the debt was not a "consumer debt." The district

court affirmed, and Lind-Waldock appeals. 

LIND-WALDOCK & COMPANY v. MOREHEAD 3
II.

In bankruptcy cases we review de novo the decision of the district

court, "effectively standing in its place to review directly the findings

of fact and conclusions of law made by the bankruptcy court." Butler

v. David Shaw, Inc., 72 F.3d 437, 440 (4th Cir. 1996). We may not

set aside findings of fact unless they are "clearly erroneous, and due

regard shall be given to the opportunity of the bankruptcy court to

judge the credibility of the witnesses." Fed. R. Bankr. P. 8013. The

creditor bears the burden of proving that a debt is nondischargeable

by a preponderance of the evidence. See Grogan v. Garner, 498 U.S.

279, 287 (1991). 

A.

Section 523(a)(2)(A) provides that a debt is nondischargeable if it

arose from "false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s . . . financial condition."

A creditor must establish five elements under this section: (1) that the

debtor made a representation; (2) that at the time the representation

was made, the debtor knew it was false; (3) that the debtor made the

false representation with the intention of defrauding the creditor; (4)

that the creditor justifiably relied upon the representation; and (5) that

the creditor was damaged as the proximate result of the false representation. See Foley & Lardner v. Biondo (In re Biondo), 180 F.3d

126, 134 (4th Cir. 1999); MBNA Am. v. Simos (In re Simos), 120 B.R.

188, 191 (Bankr. M.D.N.C. 1997). 

In reviewing the bankruptcy court’s dismissal of Lind-Waldock’s

§ 523(a)(2)(A) claim, we look first at the court’s finding that the

Moreheads did not intend to defraud Lind-Waldock. As we have

already indicated, we review this finding under the clearly erroneous

standard. See Candland v. Ins. Co. of N. Am. (In re Candland), 90

F.3d 1466, 1469 (9th Cir. 1996); cf. Ford v. Poston (In re Ford), 773

F.2d 52, 55 (4th Cir. 1985) (holding that clearly erroneous standard

applies to whether there was fraudulent intent under the Bankruptcy

Code’s fraudulent transfer provision). In determining whether a

debtor possessed fraudulent intent, the question is whether the debtor

subjectively intended to defraud the creditor. See Rembert v. AT&T

Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th

4 LIND-WALDOCK & COMPANY v. MOREHEAD
Cir. 1998), cert. denied, 525 U.S. 978 (1998); Citibank (S.D.), N.A.

v. Eashai (In re Eashai), 87 F.3d 1082, 1090 (9th Cir. 1996); see also

Field v. Mans, 516 U.S. 59, 69 (1995) (concluding that elements of

§ 523(a)(2) incorporate the general common law of torts). A debtor

subjectively intends to defraud a creditor when he in bad faith incurs

a debt with the knowledge that the debt is unlikely to be repaid. See

Rembert, 141 F.3d at 281. A debtor does not subjectively intend to

defraud a creditor simply because he should know that he lacks the

ability to repay a debt when it is incurred. See id. While the debtor’s

inability to repay a debt when it is incurred may be a factor in proving

subjective intent, "the hopeless state of a debtor’s financial condition

should never become a substitute for an actual finding of bad faith."

Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d 1280, 1286 (9th

Cir. 1996). 

Lind-Waldock argues that the Moreheads intended to commit fraud

by trading when they knew that their net worth was insufficient to

cover their position. The bankruptcy court disagreed. At trial Raymond repeatedly testified that he never considered the prospect that

his account balance might drop below zero. He stated that he never

had a negative balance before and that he "felt like [he] had a pretty

good idea where the market was going." The bankruptcy court credited Raymond’s testimony, and we must give that court deference

because it had the "unique ability" to assess his credibility. Biondo,

180 F.3d at 134. There was evidence in addition to Raymond’s testimony that supports the bankruptcy court’s finding that the Moreheads

did not intend to commit fraud. Specifically, the time period between

when the Moreheads had a positive account balance and when they

went under with the $321,000 deficit was extremely short — a matter

of hours. At the close of the market on May 8 the Moreheads’ account

had a liquidation value of over $158,000. By 10:00 a.m. the next day

the liquidation value was negative $321,000. The very short time that

the Moreheads had to consider how to handle the growing deficit is

evidence that the Moreheads did not formulate an intent to defraud

Lind-Waldock. This is a close case to be sure, but we must conclude

that the bankruptcy court was not clearly erroneous in finding that the

Moreheads did not intend to defraud Lind-Waldock. Because LindWaldock did not prove intent to defraud as required under

§ 523(a)(2)(a), we can affirm the dismissal on that basis alone. As a

LIND-WALDOCK & COMPANY v. MOREHEAD 5
result, we need not consider the bankruptcy court’s determinations

with respect to other elements of the § 523(a)(2)(A) claim.*

B.

Section § 523(a)(2)(C) provides that "consumer debts . . . for luxury goods or services" incurred within 60 days of filing for bankruptcy are presumed to have been obtained through fraud. LindWaldock argues that this section applies to the Moreheads’ debt. It

does not. A consumer debt is one incurred "by an individual primarily

for a personal, family, or household purpose." 11 U.S.C. § 101(8). A

debt incurred with a profit motive is not incurred "primarily for a personal, family, or household purpose" and therefore is not a consumer

debt. See Runski v. Cypher Chiropractic Ctr. (In re Runski), 102 F.3d

744, 747 (4th Cir. 1996) ("[C]ourts have concluded uniformly that

debt incurred for a business venture or with a profit motive does not

fall into the category of debt incurred for ‘personal, family, or household purposes.’"). The Moreheads incurred the debt while speculating

in the futures market. The debt is therefore not a consumer debt. See

Burns v. Citizens Nat’l Bank (In re Burns), 894 F.2d 361, 363 (10th

Cir. 1990) (holding that a loan to invest in the stock market is not a

consumer debt). 

III.

In conclusion, we affirm as to § 523(a)(2)(A) because the bankruptcy court was not clearly erroneous in concluding that the Moreheads did not intend to defraud Lind-Waldock. Moreover, we affirm

as to § 523(a)(2)(C) because the debt is not a consumer debt. The

judgment is affirmed.

AFFIRMED

*Lind-Waldock also argues that the Moreheads intended to commit

fraud when Raymond lied about wiring the money in response to the

margin call. However, Lind-Waldock does not challenge the bankruptcy

court’s conclusion that it suffered no additional damage after Raymond

lied. Therefore, even if the lie constituted fraud, Lind-Waldock could not

recover. 

6 LIND-WALDOCK & COMPANY v. MOREHEAD