## 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 th e 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 jurisdic tion over this appeal from the final order1 The Debtor also compla ins 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.

2 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 c ourt erred in finding that the Creditor established by a pre ponderance of evidence all elements n ecessary 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 addre ss 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 we re presented to the trial court. See Fed. R. Bankr. P. 8006. Items incl uded 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 appe llate court sits in review of a trial court. As such, it can only considerthe 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 notbe and have not been considered.

BACKGROUND3 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. Ni ce Guy which sold tobacco, novelties, and drug paraphernalia. The Creditor approached the Debtor to discuss his desire to operate his own business. Th e Debtor told the Creditor that he was interested in getting out of the retail business. The De btor offered to sell the business to the Creditor for $40,000. The Cr editor agreed to purchase the store for $40,000 and attempted to obtain the nece ssary financing. The Creditor was unable to obtain financing to purchase the store and inform ed the Debtor he could not purchase the store for $40,000.

The parties entered into a new agr eement whereby the Creditor agreed to purchase the business from the Debtorfor $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 w eek and a half conducting an inventory of the store. After completing the inventor y, the Creditor gave the Debtor $7,000 cash toward the down payment. This transac tion 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 s hows 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 Credito r 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 Cred itor 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, 2004.4 While the Creditor was operating the stor e, but before a sale agreement was signed or a closing occurred, the Debtorcalled 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 la wyer’s office, never signed a purchase agreement, and never closed th e deal. Instead, the Debtor re fused to complete the sale. In June, 2004, the Creditor returned the opera tion of the store to the Debtor at the Debtor’s request. The Creditor wrote a st atement that said, “I, [Creditor], gave [Debtor] 15,000 for earnest money in purch asing Mr. Nice Guy smoke shop. We did not sell the shop, so this is for the retu rn of payment of $15,000.” The document was signed by the Creditor and the De btor 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 fo r 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 c onclusion of the evidence, the judge stated that the matter came down to a question of credibility a nd that he believed the Debtor was not credible and never intended to sell the business to the Cred itor. 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 ente red an order and a judgment in favor of the Creditor excepting the $15,000 debt from discharge.2The 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 basi s, regardless of the docket entry. The court’s docket entry also indicates th at 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 re lating to the merits of the judgment and not limited to the denial of the post-trial moti on. Accordingly, we deem the appeal to relate to the merits of the exception of th e debt from discharge and not limited to the denial of the post-trial motion as indicated on the trial court’s docket sheet entry.

5 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 findi ngs 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 (8 thCir. 1997); The Merchs. Nat’l Bank of Winona v. Moen (In re Moen) , 238 B.R. 785, 790 (B.A.P. 8 thCir. 1999); Tri-County Credit Union v. Leuang (In re Leuang) , 211 B.R. 908, 909 (8 thCir. 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 revi ewed 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 th e appellate court is le ft with the definite and firm conviction that a mistake has been made. Moen , 238 B.R. at 790; Leuang ,6 211 B.R. at 909. Due regard is given to th e 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 th e Bankruptcy Code, a discharge does not discharge an individual debtor from any de bt for money, property, services, or an extension, renewal, or refinancing of cred it to the extent obtained by false pretenses, a false representation, or actual fraud, othe r 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 pr ove by a preponderance of evidence that: (1) the debtor made a false representatio n; (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 credito r; (4) the creditor justifiably relied on the representation; a nd (5) the creditor sustained loss and damage as a proximate result of the re presentation 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 Debtorto be lacking credibility. Accordingly, we accept the Creditor’s version of the even ts surrounding the faile d sale and, where the Debtor’s version is inconsistent, we disregard it.

The representation at issue is the Debt or’s statement that he would sell the business to the Creditor for $70,000. The cour t found this to be a false statement. We disagree. After agreeing to the sale, th e Debtor turned over the operation of the business to the Creditor. In addition he met with a lawyer and requested the lawyer7 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 l ack 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 m eeting 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 jus tifiably relied on the representation for fraud to exist. Justification is a matte r of the qualities and characteristics of the particular plaintiff and the circum stances of the particular case. Field v. Mans , 516 U.S. at 71(citing Restatement (Second) of To rts, §540 (1976)). The record is void of any evidence of justifiable reliance on the partof 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 associ ated with operating the store. He could not have justifiably relied that the sale wa s 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. Rat her, they are the result of a sloppy transaction which was never consummated. The Creditor gave the Debtor $15,000 without the benefit of a writte n sale agreement. He also accepted the8 responsibility of operating the store without a ny 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 a nd that he was entitled to the return of funds. Nowhere in his document does he menti on 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 c ontract to sell a business. It does not establish fraud. Debts arising out of contract breaches ar e not excepted from discharge in bankruptcy.

CONCLUSION

The court erred in finding fraud in connec tion 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.