United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

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No. 08-6014

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In re: *

*

Larry Lee Weber, *

*

Debtor. *

*

Darla A. Peterson, *

*

Appellant, * Appeal from the United States

* Bankruptcy Court for the District

v. * of Minnesota

*

Larry Lee Weber, *

*

Debtor-Appellee. *

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Submitted: August 26, 2008

Filed: September 5, 2008

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Before MAHONEY, FEDERMAN, and VENTERS, Bankruptcy Judges.

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VENTERS, Bankruptcy Judge.

In this appeal, Darla A. Peterson seeks the review of two bankruptcy court

orders. The first order denied Peterson’s motion, filed five days before trial, for leave

to amend her complaint against the Debtor. The second order determined that the

Debtor’s debt to Peterson is not excepted from discharge under 11 U.S.C. §
1 Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997);

O'Neal v. Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246,

1250 (8th Cir. 1997) (citing First Nat'l Bank v. Pontow, 111 F.3d 604, 609 (8th

Cir. 1997)). Fed. R. Bankr. P. 8013.

2 Kelly v. Jeter (In re Jeter), 257 B.R. 907, 909 (B.A.P. 8th Cir. 2001).

3 Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447,

2460-61, 110 L.Ed.2d 359 (1990); Mathenia v. Delo, 99 F.3d 1476, 1480 (8th Cir.

1996), cert. denied, 477 U.S. 909, 106 S.Ct. 3286, 91 L.Ed.2d 574 (1986).

4 Beguelin v. Volcano Vision, Inc. (In re Beguelin), 220 B.R. 94, 97 (B.A.P.

9th Cir. 1998).

2

523(a)(2)(A) or (B). For the reasons stated below, we affirm the bankruptcy court’s

decision determining that the debt is not excepted from discharge under §

523(a)(2)(A) or (B), but we reverse the court’s denial of Peterson’s motion to amend

her complaint and remand the case for proceedings consistent with this opinion.

I. STANDARD OF REVIEW

Findings of fact are reviewed for clear error.1

 Conclusions of law are reviewed

de novo.

2

 We review the bankruptcy court’s denial of Peterson’s motion for leave to

amend her complaint under an abuse of discretion standard. An abuse of discretion

will be found only if the judgment is based on clearly erroneous factual findings or

erroneous legal conclusions,3

 or if we have a “definite and firm conviction that the

bankruptcy court committed a clear error of judgment in the conclusion it reached

upon a weighing of the relevant factors.”4

II. BACKGROUND

The Debtor, Larry Lee Weber, filed a voluntary petition for relief under Chapter

7 of the Bankruptcy Code on June 8, 2007. On September 5, 2007, Darla A. Peterson

filed a complaint against the Debtor alleging, inter alia, that in December 2006 the

Debtor had asked Peterson to loan him $90,000 “so that [the Debtor] could pay an
5

 11 U.S.C. § 523(a)(14) excepts from discharge any debt “incurred to pay a

tax to the United States that would be nondischargeable under [11 U.S.C. §

523(a)(1)].”

6

 Peterson has not challenged in this appeal the bankruptcy court’s ruling

that the debt is not excepted from discharge under § 523(a)(2)(B).

3

income tax liability,” that the Debtor misrepresented his financial condition, that

Peterson ultimately loaned the Debtor $170,000 based on those representations, and

that the Debtor never repaid that money. The complaint cited only two legal bases for

its request for a determination that the Debtor’s debt to Peterson was nondischargeable

– 11 U.S.C. § 523(a)(2)(A) and § 523(a)(2)(B). Trial on Peterson’s complaint was

scheduled for, and conducted on, January 28, 2008.

Five days before trial, Peterson filed a motion for leave to amend her complaint

against the Debtor to state a claim under 11 U.S.C. § 523(a)(14).5

 Peterson argued

that she should be allowed to amend the complaint because the newly added claim

related to the same facts alleged in her original complaint and because she had just

that day received copies of the Debtor’s checks to the Internal Revenue Service

confirming that he did, in fact, use funds he borrowed from Peterson to pay a tax debt.

The bankruptcy court denied Peterson’s attorney’s request for an immediate,

emergency hearing on the motion to amend and instead scheduled it to be heard on the

trial date. The court then orally denied the motion at the outset of the trial. 

The trial proceeded, and at the close of Peterson’s case the bankruptcy court

granted the Debtor’s motion under Fed. R. Bank. P. 7052 (applying Fed. R. Civ. P. 52)

for judgment on partial findings on the issue of the Debtor’s fraud under 11 U.S.C. §

523(a)(2)(B), inasmuch as Peterson had failed to offer any evidence that the Debtor

had ever given Peterson a written statement respecting his financial condition.6

 The

bankruptcy court took under advisement the issue of the Debtor’s alleged fraud under

§ 523(a)(2)(A).
7 Beguelin, 220 B.R. at 94.

8

 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).

4

The bankruptcy court ultimately rendered a decision in favor of the Debtor on

the § 523(a)(2)(A) claim. That decision rested heavily on the bankruptcy court’s

assessment of the witnesses’ credibility. The only persons who testified were Peterson

and the Debtor. In sum, the bankruptcy court determined that Peterson’s testimony

on the Debtor’s alleged misrepresentations regarding his financial condition was not

credible, but that the Debtor’s testimony – that he honestly believed that the loan he

obtained from Peterson would enable him to get back on track with specific real estate

development projects and that those projects would generate enough income to repay

her – was credible. The bankruptcy court noted inconsistencies and falsities in

Peterson’s testimony to support its assessment of her lack of credibility. This appeal

followed.

II. DISCUSSION

We direct our attention first to the bankruptcy court’s denial of Peterson’s

motion for leave to amend her complaint against the Debtor. 

As noted above, the bankruptcy court’s decision to deny Peterson’s motion for

leave to amend her complaint will not be overturned as an abuse of discretion unless

we have a “definite and firm conviction that the bankruptcy court committed a clear

error of judgment in the conclusion it reached upon a weighing of the relevant

factors.”7

 The factors relevant to a determination whether to grant a party leave to

amend a pleading flow from Fed. R. Civ. P. 15, which applies to bankruptcy adversary

proceedings pursuant to Fed. R. Bank. P. 7015.

Rule 15 instructs courts to “freely give” leave to amend a pleading “when

justice so requires.” The Supreme Court elaborated on this standard in Foman v.

Davis,

8

 stating:
9 Foman, 371 U.S. at 182, 83 S.Ct. at 230. See also Hanson v. Hunt Oil Co.,

398 F.2d 578, 582 (8th Cir. 1969) (“Ordinarily, delay alone is an insufficient basis

for denying leave to amend. Prejudice must be shown.”)

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If the underlying facts or circumstances relied upon by a plaintiff

may be a proper subject of relief, he ought to be afforded an opportunity

to test his claim on the merits. In the absence of any apparent or

declared reason – such as undue delay, bad faith or dilatory motive on

the part of the movant, repeated failure to cure deficiencies by

amendments previously allowed, undue prejudice to the opposing party

by virtue of allowance of the amendment, futility of amendment, etc.–

the leave sought should, as the rules require, be “freely given.”9

In essence, the determination of whether to grant leave to amend a pleading should be

guided by a clear preference for trying matters on the merits, and leave should not be

denied unless the delay in bringing the amendment or prejudice caused thereby rises

beyond the incidental, i.e., it must be “undue.” 

Applying this standard, we believe that the bankruptcy court erred in its

decision to deny Peterson leave to amend her complaint against the Debtor. In the

written order memorializing its oral denial of Peterson’s motion to amend, the

bankruptcy court gave the following reasons for its decision: 

While she claims that the basis for her claim came to light as part of

discovery, clearly that is not true, since she knew from the very

beginning of the transaction and alleges in her complaint, what the main

purpose of her loan was. Neither party directed any discovery towards

the issue nor briefed it in their trial memoranda. Section 523(a)(14)

would require proof of what the defendant did with the money that he

borrowed from the plaintiff and, to the extent it was used to pay taxes,

whether those taxes would be excepted from discharge under §

523(a)(1). None of these factual or legal issues are necessarily obvious

and it would be unfair on the literal verge of trial to require the defendant

to defend that claim. The plaintiff either intentionally or negligently
10 See International Ladies' Garment Workers' Union v. Donnelly Garment

Co., 121 F.2d 561, 563 (8th Cir. 1941). See also United States v. Memphis Cotton

Oil Co., 288 U.S. 62, 68, 53 S.Ct. 278, 77 L.Ed. 619 (1933) (stating that

amendments should be liberally allowed and that a change of the legal theory of an

action is no longer accepted as a test of the propriety of a proposed amendment).

6

failed to plead this cause of action originally or anytime prior to trial and

it would be inequitable to allow her to do [so] (sic) now.

We take exception to several of these points.

First, the fact that the proposed amendment was based in part on an allegation

made in the original complaint weighs in favor of – not against – granting Peterson

leave to amend the complaint. Peterson’s entire complaint was premised on a belief

that the Debtor had misrepresented to her that he intended to use the loan proceeds

to pay a tax debt. Until Peterson obtained confirmation that the Debtor actually had

paid a tax debt with the loan proceeds – confirmation that she apparently obtained

just five days before the trial date – she could not have known for sure that the

Debtor’s representation to her wasn’t false. On the same day she received that

confirmation, Peterson sought leave to amend her complaint to assert the § 523(a)(14)

claim. 

Amendments to state a new legal theory based on allegations known to a

defendant should be liberally allowed when statutes of limitation are not involved,

and they weren’t in this case.10 Ideally, Peterson perhaps should have recognized

earlier that she might have a claim under § 523(a)(14) if the allegation that the Debtor

used the loan proceeds to pay a tax debt proved to be true. However, that possibility

did not become concrete until she received a copy of the check that purported to show

that the Debtor had used at least some of the proceeds to pay a tax debt. 

Second, Peterson’s proposed amendment did not raise a particularly complex

new issue under §523(a)(1). Most (but concededly not all) §523(a)(1) claims turn on
11 See 11 U.S.C. §§ 523(a)(1) and 507(a)(8).

12 In Answers to Plaintiff’s Interrogatories signed on December 5, 2007, the

Debtor stated that he had used approximately $114,000 of the loan proceeds to pay

the I.R.S. However, the Debtor did not provide Plaintiff’s counsel with copies of

the checks to the I.R.S. until January 23, 2008. One of those checks indicated that

it was used to pay the Debtor’s 2004 taxes, which would appear to have been

nondischargeable in the bankruptcy proceedings. (App. AA-143, 150-51)

7

a simple determination of whether the tax debt paid arose from a tax year for which

a return was due after three years before the date of the filing of a debtor’s

bankruptcy petition.11 Such was the issue to be presented in the amended complaint.

Third, allowing the amendment would not have resulted in unfairness and

inequity to the Debtor, particularly if the court continued the trial date for a short time

to allow the Debtor to prepare his defense to the new claim. The Debtor had ample

notice of the factual allegation implicated by Peterson’s proposed amendment, since

the issue of the payment of taxes had been in the case from the beginning. Also, the

Debtor was partially responsible for Peterson’s delay in filing her motion to amend;

he didn’t produce the check to the I.R.S. confirming that he had used the loan

proceeds to pay a tax debt until January 23, 2008.12 Peterson filed her motion to

amend that same day. 

Finally, from a practical standpoint, it would have been a simple (and fair)

matter to continue the trial to permit the Debtor to adequately prepare a defense to the

§ 523(a)(14) claim in light of the facts that this matter proceeded to trial less than five

months after the complaint was filed, no previous continuances had been sought, and

the only witnesses called to testify at the trial were Peterson and the Debtor. The

situation might have been different if the Debtor had planned to call one or more nonparty witnesses to testify.
13 Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84

L.Ed.2d 518 (1985).

14 Id.; Handeen v. LeMaire (In re Le Maire), 898 F.2d 1346, 1349 (8th Cir.

1990)(en banc).

15 Anderson, 470 U.S. at 573, 105 S.Ct. at 1511.

16 Anderson, 470 U.S. at 574, 105 S.Ct. at 1511.

8

For these reasons, we find that the bankruptcy court abused its discretion in

denying Peterson leave to amend her complaint to add a claim under 11 U.S.C. §

523(a)(14).

Next, we turn to Peterson’s contention that the bankruptcy court erred in its

determination that the debt owed to Peterson is not excepted from discharge under

§ 523(a)(2)(A). 

Peterson has not pointed to any particular factual finding or legal conclusion

(other than the ultimate determination of dischargeability) that the bankruptcy court

arguably made in error. We will presume that she assigns error to the bankruptcy

court’s factual findings, inasmuch as her arguments on appeal consist almost entirely

of a restatement of the factual allegations she made before the bankruptcy court.

As noted above, findings of fact will not be set aside unless they are clearly

erroneous. A finding is clearly erroneous when, although there is evidence to support

it, the reviewing court is left with the definite and firm conviction that a mistake has

been committed.13 A reviewing court cannot reverse the trial court's findings simply

because it might have decided the case differently.14 An appellate court oversteps its

bounds if it decides factual issues de novo.

15 If the trial court's account of the

evidence is plausible in light of the record viewed in its entirety, the appellate court

may not reverse even though it would have weighed the evidence differently.16
17 Fed. R. Civ. P. 52(a); Lanear v. Safeway Grocery, 843 F.2d 298, 301 (8th

Cir. 1988).

9

Furthermore, deference must be given to the bankruptcy court’s evaluation of the

credibility of witnesses.17

Based on our review of the record before us, we are not left with the definite

and firm conviction that a mistake has been committed. The dispute between the

Debtor and Peterson was essentially a “she-said-he-said” dispute. Peterson says that

the Debtor made false and misleading statements about his financial condition and

that she justifiably relied on those statements. The Debtor denies that he made any

misleading statements about his financial condition. The bankruptcy court decided

that what the Debtor said was more credible, and we will defer to the bankruptcy

court’s evaluation of the credibility of witnesses. Therefore, we find that the

bankruptcy court’s factual findings in this matter are not clearly erroneous.

IV. CONCLUSION

For the reasons stated above, we affirm the bankruptcy court’s order

determining that the debt owed to her by the Debtor is not excepted from the

discharge under 11 U.S.C. § 523(a)(2)(A) or (B), but we reverse the order denying

Peterson’s motion for leave to amend the underlying complaint against the Debtor

and remand the case to the bankruptcy court for further proceedings consistent with

this opinion.