F I L E D

U

. S

. B a n kr u p t c y A p p e l l a t e P a n e l

o f t h e T e n t h C i r c u i t

F e b r u a r y 2 0

, 2 0 1 5

B l a i n e F

. B a t e s C l e r k N O T F O R P U B L I C A T I O N

U N I T E D S T A T E S B A N K R U P T C Y A P P E L L A T E P A N E L

O F T H E T E N T H C I R C U I T

I N R E W I L L I A M P H I L I P W A G N E R

,

D e b t o r

. B A P N o

. C O

- 1 3

- 0 4 3

M A R T I N J

. W A G N E R

,

P l a i n t i f f

– A p p e l l e e

, B a n k r

. N o

. 1 1

- 1 0 8 5 3

A d v

. N o

. 1 1

- 0 1 2 3 3

C h a p t e r 7

v

. O P I N I O N *

W I L L I A M P H I L I P W A G N E R

,

D e f e n d a n t

– A p p e l l a n t

.

A p p e a l f r o m t h e U n i t e d S t a t e s B a n k r u p t c y C o u r t

f o r t h e D i s t r i c t o f

C o l o r a d o

B e f o r e T H U R M A N

, C h i e f J u d g e

, C O R N I S H

, a n d J A C O B V I T Z

, B a n k r u p t c y

J u d g e s

.

C O R N I S H

, B a n k r u p t c y J u d g e

.

T h i s a p p e a l i s a c a u t i o n a r y t a l e a b o u t w h a t s h o u l d b e c o m m o n p r a c t i c e b u t

,

u n f o r t u n a t e l y

, i s n o t

. A n y f i n a n c i a l a g r e e m e n t s h o u l d b e f o r m a l i z e d b y a w r i t t e n

d o c u m e n t p r e p a r e d b y a l a w y e r

, p a r t i c u l a r l y w h e n t h e a g r e e m e n t i n v o l v e s l o a n i n g

m o n e y t o f

a m i l y o r f

r i e n d s

. I n t h i s c a s e

, f

a i l u r e t o d o j u s t t h a t l e d t o a b i t t e r

d i v i d e b e t w e e n a f

a t h e r a n d h i s s o n

.

D e b t o r W i l l i a m W a g n e r

, w h o i s n o w k n o w n a s W i l l i a m M c D o n o u g h

( “ M c D o n o u g h ” )

, a p p e a l s a b a n k r u p t c y c o u r t o r d e r t h a t b o t h d e t e r m i n e d h i s d e b t

T h i s u n p u b l i s h e d o p i n i o n m a y b e c i t e d f o r i t s p e r s u a s i v e v a l u e

, b u t i s n o t *

p r e c e d e n t i a l

, e x c e p t u n d e r t h e d o c t r i n e s o f l a w o f t h e c a s e

, c l a i m p r e c l u s i o n

, a n d

i s s u e p r e c l u s i o n

. 1 0 t h C i r

. B A P L

. R

. 8 0 2 6

- 6

.t o t h e p l a i n t i f f t o b e n o n

- d i s c h a r g e a b l e a n d g e n e r a l l y d e n i e d h i m a d i s c h a r g e i n

b a n k r u p t c y

. T h e a d v e r s a r y p r o c e e d i n g f r o m w h i c h t h i s a p p e a l a r o s e w a s i n i t i a t e d

b y p l a i n t i f

f M a r t i n W a g n e r ( “ W a g n e r ” )

, w h o i s M c D o n o u g h ’ s f a t h e r

. T h e p r e s e n t

i n t r a

- f a m i l i a l d i s p u t e d a t e s b a c k t o 2 0 0 4

, w h e n W a g n e r a n d M c D o n o u g h a g r e e d

t h a t M c D o n o u g h w o u l d o b t a i n a l o a n u s i n g W a g n e r ’ s c a b i n i n M i n n e s o t a a s

c o l l a t e r a l

. M c D o n o u g h o b t a i n e d t h e l o a n

, b u t d e f a u l t e d o n i t i n m i d

- 2 0 0 5

, a n d

t h e p a r t i e s ’ r e l a t i o n s h i p h a s d e t e r i o r a t e d s i g n i f i c a n t l y s i n c e t h a t t i m e

.

I

. B A C K G R O U N D 1

W a g n e r

, w h o r e s i d e s i n M i n n e s o t a

, i s t h e f a t h e r o f s i x g r o w n c h i l d r e n

.

M c D o n o u g h i s h i s e l d e s t s o n

. W a g n e r w o r k e d a s a p r o j e c t m a n a g e r / c o n s u l t a n t f o r

N o r t h e r n S t a t e s P o w e r u n t i l 1 9 9 7

. I n 2 0 0 4

, h e w a s e s s e n t i a l l y r e t i r e d a n d l i v i n g 2

i n a h o m e o w n e d b y h i s g i r l f r i e n d

, L i n d a

. Y e a r s e a r l i e r

, W a g n e r h a d i n h e r i t e d a

c a b i n ( t h e “ C a b i n ” ) a d

j a c e n t t o W o m a n L a k e i n M i n n e s o t a f r o m h i s f a t h e r

. T h e 3

C a b i n h a d b e e n r e g u l a r l y u s e d b y W a g n e r a n d h i s c h i l d r e n f o r m a n y y e a r s

, a n d

w a s c o n s i d e r e d “ t h e f

a m i l y ’ s ” c a b i n

. I t w a s e x p e c t e d a n d i n t e n d e d t h a t t h e C a b i n

w o u l d u l t i m a t e l y b e i n h e r i t e d b y W a g n e r ’ s c h i l d r e n

. I n 2 0 0 4

, t h e C a b i n h a d a n

e s t i m a t e d v a l u e o f s o m e w h e r e b e t w e e n $ 6 0 0

, 0 0 0 a n d $ 7 5 0

, 0 0 0

. T h e o n l y l i e n o n

i t a t t h a t t i m e w a s i n t h e a m o u n t o f a p p r o x i m a t e l y $ 9

, 0 0 0

. T h a t l i e n a r o s e f r o m

W a g n e r ’ s a g r e e m e n t i n 2 0 0 2 t o a l l o w h i s d a u g h t e r C h r i s t i n a t o o b t a i n a n $ 1 1

, 0 0 0

l o a n

, i n o r d e r t o p a y o f f c r e d i t c a r d d e b t

, u s i n g t h e C a b i n a s c o l l a t e r a l

. C h r i s t i n a

h a d r e g u l a r l y m a d e t h e p a y m e n t s o n t h a t l o a n

. W a g n e r h a d a l s o p r e v i o u s l y

T h i s d e c i s i o n d o e s n o t a t t e m p t t o d e t a i l t h e m a n y f a c t s t h a t a r e e x t r a n e o u s 1

t o t h o s e r e l i e d u p o n b y t h e f i n d e r o f f

a c t

, a l t h o u g h s o m e o f t h e o m i t t e d f a c t s m a y h a v e f a c t o r e d i n t o t h e b a n k r u p t c y c o u r t ’ s c r e d i b i l i t y d e t e r m i n a t i o n s

.

W a g n e r ’ s o n l y i n c o m e i n 2 0 0 4 w a s f r o m S o c i a l S e c u r i t y a n d h i s 2

p e r f o r m a n c e s o f i n t e r p r e t i v e c h a r a c t e r i z a t i o n s o f M a r k T w a i n a n d A l b e r t E i n s t e i n

a t v a r i o u s l o c a t i o n s a n d e v e n t s

.

W a g n e r ’ s f

a t h e r a c t u a l l y t r a n s f

e r r e d t h e C a b i n t o b o t h W a g n e r a n d h i s 3

s i s t e r s h o r t l y a f

t e r t h e i r m o t h e r d i e d i n 1 9 8 6

, b u t t h e s i s t e r ’ s i n t e r e s t w a s

t r a n s f e r r e d t o W a g n e r a p p r o x i m a t e l y 5 o r 6 y e a r s l a t e r

.

-2-o b t a i n e d a l o a n o n b e h a l f o f h i s s o n s M a t t a n d C h a r l i e f o r t h e p u r c h a s e a c o n d o i n

C o l o r a d o

, a n d h a d a l s o l o a n e d m o n e y t o h i s d a u g h t e r

, A n n a

, f o r s c h o o l

. T h o s e

l o a n s

, w h i c h w e r e n e v e r s e c u r e d b y t h e C a b i n

, h a d a l s o b e e n r e p a i d

.

S e v e r a l t i m e s i n t h e y e a r s l e a d i n g u p t o 2 0 0 4

, W a g n e r h a d a s k e d h i s

c h i l d r e n t o j o i n t l y p r o p o s e a w a y f o r t h e C a b i n t o s u b s i d i z e W a g n e r ’ s l i v i n g

e x p e n s e s a n d e l i m i n a t e h i s C a b i n

- r e l a t e d o b l i g a t i o n s ( e

. g

. , u t i l i t i e s

, p r o p e r t y t a x

,

a n d m a i n t e n a n c e )

. A m o n g s e v e r a l s u g g e s t i o n s m a d e b y W a g n e r w a s t h a t e a c h

c h i l d c o n t r i b u t e a s e t a m o u n t p e r y e a r

, b a s e d o n f a c t o r s s u c h a s t h e i r a b i l i t y t o

p a y

, t h e i r C a b i n u s a g e

, a n d t h e i r d e s i r e t o i n h e r i t t h e C a b i n

. A l t h o u g h W a g n e r

s o u g h t i n p u t f

r o m h i s c h i l d r e n o n t h i s m a t t e r s e v e r a l t i m e s

, a n d i t w a s p e r i o d i c a l l y

d i s c u s s e d b y a n d b e t w e e n t h e m

. N o “ p l a n ” w a s e v e r p r o p o s e d

.

I n 2 0 0 4

, M c D o n o u g h w a s m a r r i e d t o M i c h e l l e W e i s s

, n o w k n o w n a s

M i c h e l l e K u z n i a ( “ K u z n i a ” )

, a n d l i v e d i n F o r e s t L a k e

, M i n n e s o t a

, w h e r e h e a n d

K u z n i a o w n e d a h o m e ( t h e “ F o r e s t L a k e h o m e ” )

. M c D o n o u g h w o r k e d a s a n I T

p r o j e c t a r c h i t e c t a n d e a r n e d a s a l a r y “ i n s i x f i g u r e s

. ” A t t h a t t i m e

, M c D o n o u g h

a n d K u z n i a o w n e d a F e a t h e r l i t e t r a i l e r

, a 2 0 0 3 F o r d F 3 5 0 t r u c k

, a n d a 1 9 9 9 V W 4

J e t t a

. T h e F o r e s t L a k e h o m e c a r r i e d a f i r s t m o r t g a g e o f a p p r o x i m a t e l y $ 2 5 8

, 0 0 0

,

a n d a s e c o n d m o r t g a g e o f a p p r o x i m a t e l y $ 6 7

, 0 0 0

. T h e a m o u n t o f t h e l o a n

u n d e r l y i n g t h e s e c o n d m o r t g a g e w a s m o r e t h a n $ 1 0 4

, 0 0 0

, b u t i t w a s o n l y p a r t i a l l y

s e c u r e d b y t h e F o r e s t L a k e h o m e

, w i t h t h e r e m a i n d e r s e c u r e d b y M c D o n o u g h ’ s

a n d K u z n i a ’ s v e h i c l e s

.

I n M a r c h 2 0 0 4

, M c D o n o u g h a n d W a g n e r d i s c u s s e d s e v e r a l l i f e i s s u e s

,

i n c l u d i n g t h a t M c D o n o u g h m i g h t l e a v e t h e I T f i e l d a n d b e g i n a h o r s e t r a i n i n g

b u s i n e s s

. T h e y a l s o d i s c u s s e d M c D o n o u g h p o s s i b l y s e l l i n g h i s h o m e a n d m o v i n g

t o t h e C a b i n

, a s w e l l a s t h e p o t e n t i a l t o u s e t h e C a b i n a s a k i n d o f “ r e t r e a t ” t h a t

T h e F e a t h e r l i t e t r a i l e r w a s a c o m b i n a t i o n h o r s e t r a n s p o r t a t i o n d e v i c e a n d 4

c a m p e r

- t y p e l i v i n g q u a r t e r s

. A t v a r i o u s t i m e s b e t w e e n 2 0 0 4 a n d 2 0 1 1

, M c D o n o u g h l i v e d e i t h e r i n t h a t t r a i l e r o r i t s r e p l a c e m e n t f o r e x t e n d e d p e r i o d s

.

-3-w o u l d b e a v a i l a b l e t o b o t h f a m i l y m e m b e r s a n d t h e p u b l i c

. I n J u n e 2 0 0 4

,

M c D o n o u g h a n d W a g n e r s p e c i f i c a l l y d i s c u s s e d u s i n g t h e C a b i n a s c o l l a t e r a l f o r a

$ 1 5 0

, 0 0 0 l o a n ( t h e “ C a b i n L o a n ” ) t o M c D o n o u g h

. T h e p a r t i e s a g r e e d o n s o m e

t e r m s

, a n d M c D o n o u g h o b t a i n e d t h e C a b i n L o a n

, i n t h e p r i n c i p a l a m o u n t o f

$ 1 9 4

, 0 0 0

, s h o r t l y t h e r e a f t e r

.

A t t h i s p o i n t

, t h e p a r t i e s ’ t e s t i m o n i e s d i v e r g e s i g n i f i c a n t l y

. N o n e t h e l e s s

, a t

l e a s t t h e f

o l l o w i n g f

a c t s a p p e a r t o b e u n d i s p u t e d :

• W a g n e r a n d M c D o n o u g h n e v e r p u t t h e i r “ a g r e e m e n t ” i n w r i t i n g ;

• T h e C a b i n L o a n

, w h i c h w a s p a y a b l e o v e r f i v e y e a r s

, c l o s e d o n J u n e

2 5

, 2 0 0 4 ;

• T h e s a l e o f t h e F o r e s t L a k e h o m e f o r $ 3 5 5

, 0 0 0 c l o s e d f

o u r d a y s l a t e r

,

o n J u n e 2 9

, 2 0 0 4

. F r o m b o t h t h e s a l e o f t h e h o m e a n d t h e c l o s i n g o f

t h e C a b i n L o a n

, M c D o n o u g h a n d K u z n i a r e c e i v e d a p p r o x i m a t e l y $ 1 0 7

, 0 0 0 i n c a s h ; 5

• M c D o n o u g h a n d K u z n i a m o v e d t o t h e C a b i n a f t e r t h e F o r e s t L a k e h o m e s o l d

, b u t K u z n i a l e f t b o t h t h e C a b i n a n d M c D o n o u g h i n M a r c h

o r A p r i l 2 0 0 5 ;

• M c D o n o u g h c o n t i n u e d t o l i v e i n t h e C a b i n a f t e r K u z n i a l e f

t

, a n d

m a d e t h e C a b i n L o a n p a y m e n t s t h r o u g h J u n e 2 0 0 5 ;

• M c D o n o u g h ’ s c o n t r a c t I T j o b t e r m i n a t e d i n M a y 2 0 0 5 ;

• W a g n e r

, w h o t y p i c a l l y s p e n t s u m m e r s a t t h e C a b i n

, w e n t t h e r e i n t h e

s u m m e r o f 2 0 0 5

. W h e n h e a r r i v e d a t t h e C a b i n i n J u n e

, W a g n e r

c o n s i d e r e d i t t o b e g e n e r a l l y i n d i s r e p a i r

. D u r i n g t h a t s u m m e r h e a n d

M c D o n o u g h h a d s e v e r a l d i s c u s s i o n s r e g a r d i n g t h e c o n d i t i o n o f t h e C a b i n ;

• I n A u g u s t 2 0 0 5

, W a g n e r l e a r n e d t h a t M c D o n o u g h h a d d e f a u l t e d o n

t h e C a b i n L o a n

. M c D o n o u g h a n d W a g n e r m e t a t t h e C a b i n a n d

d i s c u s s e d t h e d e f

a u l t

. T h e i r c o n v e r s a t i o n t u r n e d i n t o a h e a t e d

e x c h a n g e t h a t c u l m i n a t e d i n M c D o n o u g h ’ s r e m o v a l f r o m t h e C a b i n

p r o p e r t y b y S h e r i f

f ’ s d e p u t i e s

, a t W a g n e r ’ s r e q u e s t ;

• M c D o n o u g h a n d K u z n i a w e r e d i v o r c e d i n O c t o b e r 2 0 0 5 ;

• M c D o n o u g h l i v e d i n h i s F e a t h e r l i t e t r a i l e r f r o m A u g u s t 2 0 0 5 u n t i l h e

m o v e d t o C o l o r a d o i n e a r l y 2 0 0 6 t o t a k e o n a n o t h e r I T j o b c o n t r a c t

,

w h i c h w a s o n l y a t h r e e

- m o n t h j o b ;

A p p r o x i m a t e l y $ 1 8

, 5 0 0 w a s p r o c e e d s f r o m t h e s a l e o f t h e F o r e s t L a k e 5

h o m e

, a n d a p p r o x i m a t e l y $ 8 9

, 0 0 0 c a m e f r o m t h e C a b i n L o a n

.

-4-• I n J u n e 2 0 0 6

, W a g n e r f i l e d a c i v i l l a w s u i t a g a i n s t M c D o n o u g h i n

M i n n e s o t a s t a t e c o u r t a s s e r t i n g b r e a c h o f t h e C a b i n L o a n b y d e f a u l t ; 6

• S h o r t l y a f

t e r m o v i n g t o C o l o r a d o

, M c D o n o u g h m e t M a u r e e n

M c D o n o u g h ( “ M a u r e e n ” )

. M c D o n o u g h

, w h o h a d b e e n l i v i n g w i t h h i s b r o t h e r

, m o v e d i n t o M a u r e e n ’ s h o u s e i n l a t e 2 0 0 6 ;

• I n A u g u s t 2 0 0 7

, W a g n e r a n d M c D o n o u g h e x e c u t e d a s e t t l e m e n t

a g r e e m e n t t o r e s o l v e t h e M i n n e s o t a l a w s u i t

, u n d e r w h i c h M c D o n o u g h

a g r e e d t o r e f

i n a n c e t h e C a b i n L o a n ;

• M c D o n o u g h d i d n o t r e f i n a n c e t h e C a b i n L o a n a n d i n A p r i l 2 0 0 8

, p u r s u a n t t o t h e t e r m s o f t h e i r s e t t l e m e n t a g r e e m e n t

, W a g n e r o b t a i n e d

a $ 2 6 1

, 0 0 0 j u d g m e n t b y c o n f e s s i o n a g a i n s t M c D o n o u g h i n t h e

M i n n e s o t a l a w s u i t ;

• S t i l l i n C o l o r a d o

, M c D o n o u g h o b t a i n e d a j o b w i t h a c o m p a n y c a l l e d

C A C I i n M a r c h o f 2 0 0 9

, e a r n i n g g r o s s w a g e s o f o v e r $ 1 0

, 0 0 0 p e r

m o n t h

. T h a t c o n t r a c t j o b d i d n o t t e r m i n a t e u n t i l t h e e n d o f M a r c h

2 0 1 1 ;

• I n F e b r u a r y 2 0 1 0

, M a u r e e n a d d e d M c D o n o u g h t o a n a c c o u n t s h e

o w n e d a t P r e m i e r F e d e r a l C r e d i t U n i o n ( t h e “ P r e m i e r A c c o u n t ” )

. H e

r e m a i n e d a c o

- o w n e r o f t h a t a c c o u n t u n t i l h e v o l u n t a r i l y r e l i n q u i s h e d

o w n e r s h i p a p p r o x i m a t e l y f i v e m o n t h s l a t e r ;

• I n M a y 2 0 1 0

, W a g n e r r e g i s t e r e d h i s M i n n e s o t a J u d g m e n t i n C o l o r a d o

a n d

, t h e r e a f

t e r

, a t t e m p t e d t o g a r n i s h a b a n k a c c o u n t M c D o n o u g h h a d

a t G r e a t W e s t e r n B a n k

. O n J u n e 1

, 2 0 1 0

, w h e n t h e g a r n i s h m e n t t o o k

p l a c e

, t h e b a l a n c e i n t h a t a c c o u n t w a s a p p r o x i m a t e l y $ 6

, s i n c e

M c D o n o u g h h a d p r e v i o u s l y b e g u n d e p o s i t i n g a l l o f h i s f u n d s i n t o t h e

P r e m i e r A c c o u n t ;

• O n J u n e 9

, 2 0 1 0

, M c D o n o u g h r e m o v e d h i s n a m e f r o m t h e P r e m i e r

A c c o u n t a n d w a s t h u s n o l o n g e r a c o

- o w n e r o f i t

. H o w e v e r

, M c D o n o u g h c o n t i n u e d t o h a v e h i s w a g e s d e p o s i t e d i n t o t h e P r e m i e r

A c c o u n t f

o r s e v e r a l m o n t h s a f

t e r h i s n a m e w a s r e m o v e d ;

• O n J a n u a r y 1 8

, 2 0 1 1

, M c D o n o u g h f i l e d a C h a p t e r 7 b a n k r u p t c y

p e t i t i o n a n d a S t a t e m e n t o f F i n a n c i a l A f f a i r s ( “ S O F A ” ) w i t h o u t

r e v e a l i n g t h e P r e m i e r A c c o u n t i n e i t h e r

.

S i n c e W a g n e r ’ s s t a t e c o u r t l a w s u i t w a s b a s e d o n b r e a c h o f c o n t r a c t

, 6

M c D o n o u g h c o n t e n d s t h a t t h e b a n k r u p t c y c o u r t f r a u d c l a i m w a s a f

i c t i o n

. H o w e v e r

, M c D o n o u g h c i t e s n o a u t h o r i t y f o r t h e p r o p o s i t i o n t h a t a c r e d i t o r w h o

o b t a i n s a b r e a c h o f c o n t r a c t j u d g m e n t i n s t a t e c o u r t i s t h e r e a f t e r p r e c l u d e d f

r o m

a s s e r t i n g i n b a n k r u p t c y t h a t i t s j u d g m e n t a g a i n s t t h e d e b t o r i s n o n

- d i s c h a r g e a b l e

u n d e r b a n k r u p t c y l a w

. I n f a c t

, o t h e r b a n k r u p t c y c o u r t s h a v e a l l o w e d c r e d i t o r s t o

a s s e r t t h a t t h e i r s t a t e c o u r t b r e a c h o f c o n t r a c t j u d g m e n t s a r e n o n

- d i s c h a r g e a b l e i n b a n k r u p t c y

. S e e

, e

. g

. , P a l m F i n

. C o r p

. v

. E b e r t s (

I n r e E b e r t s

)

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. S e r v s

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I n r e A y e s h )

, 4 6 5 B

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, 4 4 6 ( B a n k r

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. D

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.

-5-A

. W a g n e r ’ s V e r s i o n o f E v e n t s

A c c o r d i n g t o W a g n e r

, M c D o n o u g h t o l d h i m i n M a r c h 2 0 0 4 t h a t h e a n d

K u z n i a w a n t e d t o m o v e f r o m t h e i r F o r e s t L a k e H o m e t o t h e C a b i n

, t e l l i n g h i m

h e ’ d r a t h e r p a y w h a t h e p a i d o n h i s m o r t g a g e t o W a g n e r

. W a g n e r ’ s u n d e r s t a n d i n g

w a s t h a t h i s s o n w a n t e d t o u s e t h e C a b i n a s a r e n t a l p r o p e r t y w h i l e h e a l s o b u i l t u p

a h o r s e t r a i n i n g b u s i n e s s

. I n J u n e 2 0 0 4

, M c D o n o u g h a s k e d W a g n e r i f h e c o u l d

u s e t h e C a b i n a s s e c u r i t y i n o r d e r t o o b t a i n a $ 1 5 0

, 0 0 0 l o a n t h a t h e n e e d e d t o

c o n s o l i d a t e d e b t s

. M c D o n o u g h t o l d W a g n e r h e i n t e n d e d t o s e l l h i s F o r e s t L a k e

H o m e a n d h e w o u l d u s e t h e e q u i t y h e r e c e i v e d f r o m t h a t s a l e t o p a y d o w n t h e

C a b i n L o a n b y $ 1 0 0

, 0 0 0

. M c D o n o u g h a l s o t o l d W a g n e r h i s s i x

- f i g u r e i n c o m e

w o u l d a l l o w h i m t o e a s i l y p a y o f f t h e C a b i n L o a n w i t h i n t w o y e a r s

. W a g n e r

a g r e e d

, p a r t l y b e c a u s e h e h a d l o a n e d m o n e y t o h i s c h i l d r e n

, i n c l u d i n g

M c D o n o u g h

, o n v a r i o u s o c c a s i o n s i n t h e p a s t a n d h a d a l s o p r e v i o u s l y a l l o w e d o n e

o f h i s c h i l d r e n t o u s e t h e C a b i n a s s e c u r i t y f o r a s m a l l p e r s o n a l l o a n

. A l l o f t h e

l o a n s t o W a g n e r ’ s c h i l d r e n h a d b e e n

, o r w e r e b e i n g

, r e p a i d s a t i s f a c t o r i l y

. 7

A s p a r t o f h i s a g r e e m e n t t o a l l o w M c D o n o u g h t o u s e t h e C a b i n a s

c o l l a t e r a l

, W a g n e r r e q u i r e d t h a t t h e n e w l o a n b e u s e d t o p a y o f f t h e b a l a n c e o f h i s

d a u g h t e r ’ s s e c u r e d l o a n

, i n t h e a m o u n t o f a p p r o x i m a t e l y $ 9

, 0 0 0

, w h i c h w a s t h e

o n l y l i e n o n t h e C a b i n a t t h a t t i m e

. A f e w d a y s a f

t e r W a g n e r h a d a g r e e d t o

M c D o n o u g h ’ s p r o p o s e d u s e o f t h e C a b i n

, h e r e c e i v e d l o a n p a p e r w o r k i n t h e m a i l

,

w h i c h h e w a s i n s t r u c t e d t o s i g n b e f o r e a n o t a r y a n d r e t u r n t o t h e l e n d e r b y

o v e r n i g h t m a i l

. W a g n e r d i d n o t r e a d t h e d o c u m e n t s

, s i m p l y s i g n e d a n d r e t u r n e d

t h e m

. T h e l o a n d o c u m e n t s r e f l e c t e d a l o a n i n t h e a m o u n t o f $ 1 9 4

, 0 0 0

, r a t h e r t h a n

t h e $ 1 5 0

, 0 0 0 a m o u n t W a g n e r a n d M c D o n o u g h p r e v i o u s l y d i s c u s s e d

. H o w e v e r

,

W a g n e r h a d p r e v i o u s l y l o a n e d m o n e y t o M c D o n o u g h t h a t h a d n o t b e e n 7

r e p a i d

, b u t t h e r e w a s n o e v i d e n c e t h a t i t w a s a n i s s u e b e t w e e n t h e m

. N o n e o f t h e

a g r e e m e n t s W a g n e r m a d e w i t h a n y o f h i s c h i l d r e n h a d e v e r b e e n r e d u c e d t o

w r i t i n g

.

-6-W a g n e r w o u l d h a v e a g r e e d t o t h e r e v i s e d l o a n a m o u n t b a s e d o n M c D o n o u g h ’ s

p r o m i s e t o p a y t h e C a b i n L o a n d o w n b y $ 1 0 0

, 0 0 0 w i t h e q u i t y f r o m h i s F o r e s t

L a k e H o m e

. W h e n h e s i g n e d t h e l o a n d o c u m e n t s

, W a g n e r w a s u n a w a r e e i t h e r t h a t

a s a l e o f M c D o n o u g h ’ s F o r e s t L a k e H o m e w a s a l r e a d y p e n d i n g

, o r t h a t i t w o u l d

c l o s e o n l y f

o u r d a y s a f

t e r t h e C a b i n L o a n d i d

.

D u r i n g t h e s u m m e r o f 2 0 0 4

, M c D o n o u g h a n d K u z n i a m o v e d f r o m F o r e s t

L a k e t o t h e C a b i n

. A l s o d u r i n g t h a t s u m m e r

, t h e y g a v e W a g n e r t w o c h e c k s

w i t h o u t e x p l a n a t i o n

. F i r s t

, h e r e c e i v e d a c h e c k i n t h e a m o u n t o f $ 2 5

, 0 0 0

, w h i c h

h a d b e e n d r a f

t e d b y K u z n i a

. S h o r t l y t h e r e a f t e r

, W a g n e r r e c e i v e d a n o t h e r c h e c k

,

t h i s o n e i n t h e a m o u n t o f $ 2 0

, 0 0 0

, d r a f t e d b y M c D o n o u g h

. W a g n e r a s s u m e d t h e

$ 2 0

, 0 0 0 p a y m e n t w a s f

o r r e p a y m e n t o f a p p r o x i m a t e l y $ 2 0

, 0 0 0 h e h a d l o a n e d t o

M c D o n o u g h i n 2 0 0 2

- 0 3

, d u r i n g a p e r i o d w h e n M c D o n o u g h w a s u n e m p l o y e d

, i n

o r d e r t o k e e p t h e F o r e s t L a k e H o m e o u t o f f o r e c l o s u r e

. W a g n e r c o n s i d e r e d t h e

$ 2 5

, 0 0 0 t o b e a d v a n c e r e n t o n t h e C a b i n

. T h e r e w a s n o t h i n g c o n n e c t e d w i t h t h e

c h e c k s t h a t s p e c i f

i e d t h e i r p u r p o s e

, a n d W a g n e r d i d n o t d i s c u s s t h e m w i t h

M c D o n o u g h o r K u z n i a

.

I n J u n e 2 0 0 5

, W a g n e r a r r i v e d a t t h e C a b i n

, i n t e n d i n g t o s t a y t h e r e f o r t h e

s u m m e r

, a s w a s h i s h a b i t

. H e w a s u n h a p p y w i t h t h e c o n d i t i o n i n w h i c h h e f o u n d

t h e C a b i n

, a n d M c D o n o u g h w a s n o t l i v i n g t h e r e a t t h e t i m e

. H e d i s c u s s e d h i s

c o n c e r n s w i t h M c D o n o u g h

, w h o u l t i m a t e l y t o l d h i m i n A u g u s t t h a t h e h a d

d e f a u l t e d o n t h e C a b i n L o a n

. M c D o n o u g h a n d W a g n e r m e t i n p e r s o n a f t e r t h i s

n e w s

, a n d t h e i r d i s c u s s i o n t u r n e d i n t o a n a n g r y e x c h a n g e

. W a g n e r t e s t i f i e d t h a t

M c D o n o u g h c a m e t o t h e C a b i n

, s a t d o w n o n a b e n c h n e x t t o h i m a n d a s k e d h i m

,

“ I f I c o n t i n u e m a k i n g p a y m e n t s o n t h e l o a n

, w h a t d o I g e t ? ” W a g n e r t o l d

M c D o n o u g h t o “ g e t t h e m o r t g a g e o f f t h e C a b i n ” f

i r s t

, a n d t h e n t h e y c o u l d t a l k

a b o u t i t

. T o t h i s M c D o n o u g h r e s p o n d e d

, “ I g o t y o u o v e r a b a r r e l

. Y o u d o n ’ t g o t

a n y n e g o t i a t i n g p o w e r

. ” W a g n e r u n d e r s t o o d t h a t M c D o n o u g h “ k n e w w h a t m y

f i n a n c e s w e r e

, ” i n c l u d i n g t h a t h e w a s u n a b l e t o f i n a n c e t h e C a b i n L o a n h i m s e l f

,

-7-a n d b e l i e v e d t h a t M c D o n o u g h “ e x p e c t e d m e t o t u r n t h e p r o p e r t y o v e r t o h i m

. ”

M c D o n o u g h n e v e r e v e n s u g g e s t e d t o W a g n e r t h a t h e w a s u n a b l e t o m a k e t h e

C a b i n L o a n p a y m e n t s

, a n d W a g n e r h a d t o l d h i m n u m e r o u s t i m e s i n t h e p a s t t h a t

a l l h e e v e r n e e d e d t o d o w a s a s k i f h e n e e d e d h e l p

. W a g n e r w a s u p s e t a n d a s k e d

M c D o n o u g h t o l e a v e

, b u t M c D o n o u g h i n s i s t e d t h a t a l a w y e r h a d t o l d h i m t h a t h e

w a s a c o

- o w n e r o f t h e C a b i n a n d r e f u s e d t o l e a v e t h e p r o p e r t y

. A t t h a t p o i n t

,

W a g n e r c a l l e d t h e S h e r i f f ’ s O f f i c e

. W h e n t h e S h e r i f

f ’ s o f f i c e r s a r r i v e d

,

M c D o n o u g h w a s e s c o r t e d o f f o f t h e p r o p e r t y

.

S u b s e q u e n t l y

, W a g n e r w a s a b l e t o r e f i n a n c e t h e C a b i n L o a n

, f i r s t t h r o u g h

M c D o n o u g h ’ s l e n d e r a n d

, u l t i m a t e l y

, w i t h U

. S

. B a n k

. I n o r d e r t o o b t a i n t h e U

. S

.

B a n k l o a n

, W a g n e r h a d t o a d d h i s d a u g h t e r A n n a t o t h e C a b i n t i t l e

, s o m e t h i n g

h e ’ d n e v e r d o n e b e f

o r e

. B y d o i n g s o

, h o w e v e r

, h e w a s a b l e t o o b t a i n a 3 0

- y e a r

m o r t g a g e w i t h a n i n t e r e s t r a t e o f 4

. 9 5 %

. I n J u n e 2 0 0 6

, f o l l o w i n g s e v e r a l f

a i l e d

a t t e m p t s t o r e s o l v e W a l k e r ’ s a n d M c D o n o u g h ’ s d i f f e r e n c e s

, W a l k e r f

i l e d s u i t

a g a i n s t M c D o n o u g h a n d K u z n i a i n M i n n e s o t a s t a t e c o u r t

, s e e k i n g $ 1 9 5

, 0 0 0 b a s e d

o n t h e i r f a i l u r e t o p a y t h e C a b i n L o a n

. I n 2 0 0 7

, M c D o n o u g h a g r e e d t o s e t t l e t h e 8

l a w s u i t b y r e f

i n a n c i n g t h e C a b i n L o a n

. H e a l s o a g r e e d t o e n t r y o f a j u d g m e n t b y

c o n f e s s i o n a g a i n s t h i m i n t h e e v e n t h e f a i l e d t o d o s o

. M c D o n o u g h d i d n o t

r e f i n a n c e t h e C a b i n L o a n a s a g r e e d

, a n d W a g n e r o b t a i n e d a j u d g m e n t i n t h e

a m o u n t o f $ 2 6 1

, 0 0 0 a g a i n s t h i m i n t h e M i n n e s o t a l a w s u i t

. H e r e g i s t e r e d t h a t

j u d g m e n t i n C o l o r a d o

, w h e r e M c D o n o u g h w a s l i v i n g

, i n 2 0 0 6

. I n J u n e 2 0 1 0

,

W a g n e r ’ s a t t o r n e y b o t h a t t e m p t e d t o g a r n i s h a b a n k a c c o u n t i n M c D o n o u g h ’ s

n a m e a n d i s s u e d i n t e r r o g a t o r i e s t o h i m

, s e e k i n g i n f o r m a t i o n r e g a r d i n g h i s a s s e t s

.

S h o r t l y t h e r e a f

t e r

, M c D o n o u g h c o n t a c t e d t h e a t t o r n e y a n d

, i n t h e c o u r s e o f

t h e i r c o n v e r s a t i o n

, t o l d h i m t h a t h e ’ d o n l y e a r n e d a p p r o x i m a t e l y $ 3 2

, 0 0 0 t h e

W a g n e r a l s o s o u g h t $ 2 4

, 0 0 0 i n u n p a i d m o n t h l y r e n t o n t h e C a b i n

, a s w e l l 8

a s $ 5 1

, 0 0 0 f

o r p r i o r l o a n s

, f

r o m M c D o n o u g h o n l y

.

-8-p r e v i o u s y e a r

, h a d n o a s s e t s

, a n d w a s “ b a r e l y s c r a t c h i n g b y

. ” A s a r e s u l t o f t h a t 9

c o n v e r s a t i o n

, W a g n e r a u t h o r i z e d h i s a t t o r n e y t o a c c e p t $ 2 0 0 m o n t h l y p a y m e n t s

f r o m M c D o n o u g h f

o r s i x m o n t h s f

o r t h e m t o h o l d o f

f c o l l e c t i o n

. A l t h o u g h

M c D o n o u g h ’ s p a y m e n t s w e r e n o t a l w a y s t i m e l y

, a l l s i x w e r e u l t i m a t e l y r e c e i v e d

.

W a g n e r l a t e r l e a r n e d

, f r o m a c o n v e r s a t i o n w i t h h i s a t t o r n e y

, t h a t M c D o n o u g h w a s

a c t u a l l y g r o s s i n g m o r e t h a n $ 1 0

, 0 0 0 p e r m o n t h i n w a g e s

, h a d n o s e c u r e d d e b t

, a n d

w a s l i v i n g i n M a u r e e n ’ s h o m e r e n t

- f r e e

.

B

. M c D o n o u g h ’ s V e r s i o n o f E v e n t s

A c c o r d i n g t o M c D o n o u g h

, i t w a s W a g n e r ’ s i d e a t o p l e d g e t h e C a b i n a s

s e c u r i t y f

o r a l o a n b e c a u s e “ h e n e e d e d t h e m o n e y

. ” M c D o n o u g h “ d i d n ’ t n e e d t h e

l o a n a t t h e t i m e

, ” a s h e w a s “ w e l l e m p l o y e d ” a n d “ d i d n o t h a v e a n y f i n a n c i a l

i s s u e s a t t h a t p o i n t

. ” M o r e o v e r

, h e a n d K u z n i a “ d i d n o t n e e d t o s e l l o u r F o r e s t

L a k e H o m e

. ” R e g a r d i n g W a g n e r

, M c D o n o u g h t e s t i f i e d t h a t

, “ s i n c e 1 9 9 8 h e h a s

s t a t e d t h a t h e i s p e n n i l e s s a n d u n e m p l o y e d a n d o n s o c i a l s e c u r i t y

. ” B a s e d o n a

l e t t e r r e c e i v e d f

r o m W a g n e r a r o u n d T h a n k s g i v i n g i n 2 0 0 3

, M c D o n o u g h “ o f f e r e d

t o p u r c h a s e t h e C a b i n o v e r t i m e a n d t a k e o u t a l o a n i n w h i c h I c o u l d g i v e h i m t h e

s u b s t a n t i a l d o w n p a y m e n t ” o f $ 4 0

, 0 0 0 W a g n e r r e q u e s t e d

. M c D o n o u g h w a s 10

c o n s i d e r i n g g e t t i n g o u t o f t h e I T c o n t r a c t i n g b u s i n e s s b e c a u s e o f t h e i n s t a b i l i t y o f

h i s e m p l o y m e n t

, a n d h e a n d W a g n e r d i s c u s s e d M c D o n o u g h ’ s i n t e r e s t i n t r a i n i n g

h o r s e s

, f o r w h i c h h e w o u l d n e e d a h o r s e t r a i l e r

. H o w e v e r

, a l t h o u g h t h e y “ t a l k e d

a b o u t m e p u r c h a s i n g t h i s h o r s e t r a i l e r

, ” M c D o n o u g h c o u l d h a v e q u a l i f i e d t o m a k e

t h a t p u r c h a s e o n h i s o w n a n d “ d i d n o t n e e d i t w r a p p e d i n t o ” t h e C a b i n L o a n

.

T h e b a n k r u p t c y c o u r t s e e m e d p a r t i c u l a r l y u n h a p p y w i t h t h e f a c t t h a t 9

M c D o n o u g h

, w h e n c o n f r o n t e d a b o u t t h e f

a l s i t y o f t h o s e s t a t e m e n t s

, “ m a d e t h e

p o i n t t h a t t h e [ s i c ] h e w a s n o t u n d e r o a t h ” a t t h e t i m e

, n o t i n g

, “ a s i f t h a t i s a d i s t i n c t i o n t h a t s h o u l d c o u n t i n h i s f a v o r

. ” S e e O r d e r o n P l a i n t i f f ’ s S e c o n d

A m e n d e d C o m

p l a i n t ( “ B R O p i n i o n ” ) a t 5

, i n A p p

. a t 8 4 8

.

T r a n s c r i p t o f T r i a l h e l d o n J

u n e 2 6

, 2 0 1 2 a t 6 8

, i n A p p

. a t 4 5 8

. O n c r o s s

10

e x a m i n a t i o n

, h o w e v e r

, M c D o n o u g h v e h e m e n t l y d e n i e d h a v i n g e v e r s a i d t h a t t h e C a b i n L o a n w a s f

o r t h e p u r c h a s e o f t h e C a b i n

. I d

. a t 1 2 1

, i n A p p

. a t 5 1 1

- 1 3

.

-9-S i n c e W a g n e r “ w a n t e d h i s m o n e y

, ” h i s o n l y r e q u i r e m e n t s f o r t h e l o a n w e r e t h a t h e

r e c e i v e t h e $ 4 0

, 0 0 0 “ d o w n p a y m e n t ” a n d t h a t M c D o n o u g h r e p a y “ t h e $ 5

, 0 0 0

a m o u n t t h a t h e g a v e m e i n 2 0 0 2

, 2 0 0 3

. ”

W a g n e r k n e w t h a t M c D o n o u g h i n t e n d e d t o s e l l h i s F o r e s t L a k e H o m e

, b u t

M c D o n o u g h n e v e r p r o m i s e d h i m h e w o u l d p a y d o w n t h e C a b i n L o a n b y $ 1 0 0

, 0 0 0

w i t h e q u i t y f

r o m t h a t s a l e

, n o r d i d W a g n e r e v e r d e m a n d t h a t M c D o n o u g h d o s o

.

M c D o n o u g h m a d e t h e C a b i n L o a n p a y m e n t s t h r o u g h J u n e 2 0 0 5

, a f t e r w h i c h h e

w a s u n a b l e t o d o s o b e c a u s e h e l o s t h i s j o b w i t h T a l e n t S o f t w a r e S e r v i c e s i n M a y

,

a n d K u z n i a h a d “ d r a i n e d ” t h e i r b a n k a c c o u n t w h e n s h e l e f t h i m

. M c D o n o u g h

11

b e g a n r e c e i v i n g u n e m p l o y m e n t b e n e f i t s i m m e d i a t e l y a f

t e r h i s t e r m i n a t i o n

,

b e c a u s e i t w a s a “ p l a n n e d l a y o f f

. ” H e r e m a i n e d u n e m p l o y e d f o r a b o u t t e n

m o n t h s

, a t w h i c h t i m e

, h e o b t a i n e d a t h r e e

- m o n t h I T j o b i n C o l o r a d o

. D u r i n g h i s

u n e m p l o y m e n t

, M c D o n o u g h r e c e i v e d b e n e f i t p a y m e n t s

, i n t h e a m o u n t o f $ 9 8 6

e a c h

, b i w e e k l y

. M c D o n o u g h t e s t i f i e d h e h a d o n l y a g r e e d t o r e f i n a n c e t h e C a b i n 12

L o a n i n A u g u s t 2 0 0 7 b e c a u s e h e d i d n ’ t h a v e t h e r e s o u r c e s t o c o n t e s t W a g n e r ’ s

l a w s u i t

. H e a l s o t e s t i f

i e d t h a t h e k n e w w h e n h e a g r e e d t o r e f i n a n c e t h a t h e d i d n o t

h a v e t h e r e s o u r c e s t o d o s o

. H o w e v e r

, W a g n e r w a s s t i l l t h r e a t e n i n g h i m w i t h a

“ b o g u s ” c r i m i n a l p r o s e c u t i o n o v e r a v a n h e h a d a s k e d M c D o n o u g h t o s e l l

, t h e n

l a t e r r e p o r t e d M c D o n o u g h h a d s t o l e n

. T h e p r o s e c u t i o n s e v e r e l y h a m p e r e d

M c D o n o u g h ’ s a b i l i t y t o w o r k i n h i s f i e l d

, a s i t r e q u i r e s f

u l l s e c u r i t y c l e a r a n c e

.

P u r s u a n t t o t h e t e r m s o f t h e p r o p o s e d s e t t l e m e n t

, w h i c h M c D o n o u g h c l a i m s w a s

“ c o e r c e d

, ” W a g n e r a g r e e d t o d i s m i s s t h e c r i m i n a l m a t t e r

.

M c D o n o u g h c l a i m e d K u z n i a t o o k a p p r o x i m a t e l y $ 8

, 0 0 0 f r o m t h e i r j o i n t 11

a c c o u n t

, w h i l e s h e t e s t i f i e d s h e t o o k a p p r o x i m a t e l y $ 8 0 0

. K u z n i a

, w h o t e s t i f i e d

a t t h e t r i a l b y t e l e p h o n e

, a l s o s t a t e d t h a t M c D o n o u g h h a d t o l d h e r o n o n e o c c a s i o n

t h a t h e d i d n ’ t i n t e n d t o p a y t h e C a b i n L o a n

. T h e p r o b a t i v e v a l u e o f h e r

s t a t e m e n t s i s t a i n t e d b y t h e f a c t s t h a t s h e a n d M c D o n o u g h a r e d i v o r c e d a n d s h e

w a s a c o

- o b l i g o r o n t h e C a b i n L o a n

.

$ 9 8 6 x 2 6 ÷ 1 2

= $ 2

, 1 3 6 p e r m o n t h

. T h e C a b i n L o a n p a y m e n t s w e r e 12

$ 1

, 1 6 3 p e r m o n t h

.

-10-W h e n M c D o n o u g h d i d n o t r e f i n a n c e t h e C a b i n L o a n

, W a g n e r r e g i s t e r e d a

M i n n e s o t a J u d g m e n t i n C o l o r a d o a n d b e g a n c o l l e c t i o n e f f o r t s

. I n e a r l y J u n e 2 0 0 9

,

a f t e r l e a r n i n g t h a t W a g n e r h a d g a r n i s h e d h i s G r e a t W e s t e r n B a n k a c c o u n t

,

M c D o n o u g h r e m o v e d h i s n a m e f r o m M a u r e e n ’ s P r e m i e r F e d e r a l C r e d i t U n i o n

a c c o u n t b e c a u s e h e “ d i d n ’ t w a n t M a u r e e n ’ s f u n d s t o b e g a r n i s h e d i n m y j u d g m e n t

d i s p u t e

. ” A l t h o u g h M c D o n o u g h n e v e r h a d a n o w n e r s h i p i n t e r e s t i n t h e P r e m i e r

A c c o u n t a f

t e r t h a t t i m e

, h e c o n t i n u e d t o h a v e h i s w a g e s d e p o s i t e d i n t o t h e a c c o u n t

u n t i l s h o r t l y b e f

o r e h e f i l e d h i s b a n k r u p t c y p e t i t i o n i n J a n u a r y 2 0 1 1

. H o w e v e r

,

“ h i s ” f u n d s i n t h e P r e m i e r A c c o u n t w e r e t r a n s f e r r e d b a c k t o h i m p r i o r t o t h e f i l i n g

d a t e s o

, o n t h a t d a t e

, a l l o f t h e f u n d s i n t h a t a c c o u n t “ w e r e c o m p l e t e l y

M a u r e e n ’ s

. ”

I n J u l y 2 0 1 0

, M c D o n o u g h s p o k e w i t h W a g n e r ’ s a t t o r n e y a n d a g r e e d t o p a y

W a g n e r $ 2 0 0 p e r m o n t h f o r s i x m o n t h s

, w h i c h h e d i d

. H o w e v e r

, i n N o v e m b e r

2 0 1 0

, t h e I R S b e g a n a t t e m p t i n g t o g a r n i s h m o n e y f r o m M c D o n o u g h ’ s t h e n

e m p l o y e r

, C A C I

, b a s e d o n o v e r $ 5 0 0

, 0 0 0 i n 2 0 0 0 a n d 2 0 0 1 t a x l i a b i l i t y

M c D o n o u g h h a d i n c u r r e d i n c o n n e c t i o n w i t h s o m e p r e v i o u s l y

- o w n e d b u s i n e s s e s

.

M c D o n o u g h b e l i e v e d t h a t h i s I R S d e b t h a d b e e n “ w r i t t e n o f f ” i n 2 0 0 9

.

I n N o v e m b e r 2 0 1 0

, M c D o n o u g h p u r c h a s e d a 1 9 9 8 F o r d R a n g e r

. O n

D e c e m b e r 2 0

, h e t r a d e d i n h i s 2 0 0 3 F o r d F 3 5 0 t r u c k

, w h i c h h e o w n e d f r e e a n d

c l e a r

, f o r $ 1 2

, 0 0 0

, w h i c h h e p u t t o w a r d s t h e p u r c h a s e o f a 2 0 0 8 F o r d F 3 5 0 f o r

a p p r o x i m a t e l y $ 4 5

, 0 0 0

. O n D e c e m b e r 2 4

, h e t r a d e d i n t h e 2 0 0 0 F e a t h e r l i t e t r a i l e r

f o r $ 1 9

, 0 0 0 t o w a r d s t h e p u r c h a s e o f a n e w 2 0 1 0 H o m e s t e a d l i v e

- i n t r a i l e r a t 2 2 %

i n t e r e s t

. M c D o n o u g h t e s t i f i e d t h a t h e h a d t o m a k e t h e s e p u r c h a s e s b e c a u s e h e a n d

M a u r e e n w e r e s e p a r a t i n g a n d h e w o u l d n e e d a p l a c e t o l i v e w h e n h e m o v e d o u t o f

M a u r e e n ’ s h o m e

. A t t h e t i m e t h e p u r c h a s e s w e r e m a d e

, M c D o n o u g h k n e w t h a t

h i s c o n t r a c t w i t h C A C I w o u l d b e e n d i n g i n M a r c h 2 0 1 1

, b u t h e h a d n o c h o i c e

, a n d

h e r e a f f i r m e d b o t h d e b t s i n b a n k r u p t c y

.

-11-I I

. A P P E L L A T E J U R I S D I C T I O N

T h i s C o u r t h a s j u r i s d i c t i o n t o h e a r t i m e l y f i l e d a p p e a l s f

r o m “ f i n a l

j u d g m e n t s

, o r d e r s

, a n d d e c r e e s ” o f b a n k r u p t c y c o u r t s w i t h i n t h e T e n t h C i r c u i t

,

u n l e s s o n e o f t h e p a r t i e s e l e c t s t o h a v e t h e d i s t r i c t c o u r t h e a r t h e a p p e a l

. A n 13

o r d e r d e n y i n g a d e b t o r ’ s d i s c h a r g e i n b a n k r u p t c y i s a f i n a l o r d e r f

o r p u r p o s e s o f

a p p e a l

. A s M c D o n o u g h t i m e l y f i l e d a n o t i c e o f a p p e a l f r o m t h a t j u d g m e n t

, a n d 14 15

n e i t h e r p a r t y e l e c t e d t o h a v e t h e a p p e a l h e a r d b y t h e d i s t r i c t c o u r t

, t h i s C o u r t h a s

v a l i d a p p e l l a t e j u r i s d i c t i o n

.

2 8 U

. S

. C

. § 1 5 8 ( a ) ( 1 )

, ( b ) ( 1 )

, a n d ( c ) ( 1 ) ; F e d

. R

. B a n k r

. P

. 8 0 0 2 ( n o w a l s o 13

a t F e d

. R

. B a n k r

. P

. 8 0 0 5

, e f f e c t i v e D e c

. 1

, 2 0 1 4 ) ; 1 0 t h C i r

. B A P L

. R

. 8 0 0 1

- 3 ( n o w c o d i

f i e d a t 1 0 t h C i r

. B A P L

. R

. 8 0 0 5

- 1

, e f f e c t i v e D e c e m b e r 1

, 2 0 1 4 )

.

U n i t e d S t a t e s T

r u s t e e v

. G a r l a n d (

I n r e G a r l a n d

)

, 4 1 7 B

. R

. 8 0 5

, 8 1 0 ( 1 0 t h 14

C i r

. B A P 2 0 0 9 ) ( c i t i n g L a w O f f i c e o f L a r r y A

. H e n n i n g v

. M

e l l o r ( I n r e M e l l o r )

, 2 2 6 B

. R

. 4 5 1

, 4 5 3 ( D

. C o l o

. 1 9 9 8 ) )

.

M c D o n o u g h t i m e l y f

i l e d a m o t i o n t o e x t e n d t h e t i m e t o a p p e a l o n M a y 1 3

, 15

2 0 1 3

, w i t h i n 1 4 d a y s o f t h e b a n k r u p t c y c o u r t ’ s i n i t i a l j u d g m e n t o f A p r i l 3 0

. F e d

. R

. B a n k r

. P

. 8 0 0 2 ( c ) ( 2 ) ( n o w c o d i f i e d a t F e d

. R

. B a n k r

. P

. 8 0 0 2 ( d ) ( 1 ) ( B )

,

e f f e c t i v e D e c

. 1

, 2 0 1 4 )

. T h e r e q u e s t e d e x t e n s i o n w a s g r a n t e d b y t h e b a n k r u p t c y

c o u r t o n M a y 1 4

, a n d t h e a p p e a l d e a d l i n e w a s e x t e n d e d t o J u n e 3

. T h e e x t e n s i o n d a t e w a s w i t h i n t h e l i m i t s a l l o w e d b y f o r m e r F e d e r a l R u l e o f B a n k r u p t c y

P r o c e d u r e ( “ F R B P ” ) 8 0 0 2 ( c )

, a s i t r e q u i r e d t h e n o t i c e o f a p p e a l t o b e f i l e d w i t h i n

2 1 d a y s o f t h e o r i g i n a l a p p e a l d e a d l i n e o f M a y 1 4

. H o w e v e r

, o n M a y 1 7

, M c D o n o u g h f

i l e d a “ M o t i o n t o A l t e r o r A m e n d J u d g e m e n t [ s i c ]

, ” p u r p o r t e d l y

p u r s u a n t t o F e d e r a l R u l e o f C i v i l P r o c e d u r e ( “ F R C P ” ) 5 9 ( e ) ( m a d e a p p l i c a b l e t o

c e r t a i n b a n k r u p t c y c a s e s b y F R B P 9 0 2 3 )

, w h i c h o r d i n a r i l y w o u l d h a v e e x t e n d e d

t h e t i m e t o a p p e a l a u t o m a t i c a l l y

. F e d

. R

. B a n k r

. P

. 8 0 0 2 ( b ) ( 2 ) ( n o w c o d i f i e d a t

F e d

. R

. B a n k r

. P

. 8 0 0 2 ( b ) ( 1 ) ( B )

, e f f e c t i v e D e c

. 1

, 2 0 1 4 )

. T h e b a n k r u p t c y c o u r t

d e n i e d t h e m o t i o n u n d e r F R B P 9 0 2 3

, a s i t h a d b e e n u n t i m e l y f i l e d ( i

. e

. , m o r e t h a n

1 4 d a y s a f

t e r j u d g m e n t e n t e r e d )

. S u c h m o t i o n s m u s t b e t i m e l y t o e x t e n d t h e

a p p e a l d e a d l i n e u n d e r F R B P 8 0 0 2 ( b )

. I n a d d i t i o n

, t h e b a n k r u p t c y c o u r t d e e m e d

t h e m o t i o n t o b e i n t h e n a t u r e o f a m o t i o n f o r r e l i e f p u r s u a n t t o F R C P 6 0 ( b )

( m a d e a p p l i c a b l e t o c e r t a i n b a n k r u p t c y c a s e s b y F R B P 9 0 2 4 )

, w h i c h i t d e t e r m i n e d

t o b e w i t h o u t m e r i t

. N o n e t h e l e s s

, t h e b a n k r u p t c y c o u r t d i d a m e n d t h e j u d g m e n t

p u r s u a n t t o F R C P 6 0 ( a )

, c o n c l u d i n g t h a t t h e l a n g u a g e o f i t s p r i o r o r d e r “ c o u l d b e

m i s c o n s t r u e d

. ” O r d e r o n M o t i o n t o A l t e r o r A m e n d J u d g m e n t a t 1

, i n A p p

. a t

8 8 5

. A n a m e n d e d j u d g m e n t

, m a k i n g c l e a r t h a t t h e b a n k r u p t c y j u d g m e n t a m o u n t

w a s “ n o t i n a d d i t i o n t o ” W a g n e r ’ s s t a t e c o u r t j u d g m e n t

, b u t r e p r e s e n t e d o n l y t h e

p o r t i o n o f t h a t j u d g m e n t t h a t w a s n o n

- d i s c h a r g e a b l e i n b a n k r u p t c y

, w a s e n t e r e d

o n M a y 2 3

, 2 0 1 3

. A m e n d e d J u d g m e n t a t 1

, i n A p p

. a t 8 8 8

. O n J u n e 3

, M c D o n o u g h f

i l e d a t i m e l y n o t i c e o f a p p e a l f r o m b o t h t h e i n i t i a l a n d t h e a m e n d e d j u d g m e n t

, p u r s u a n t t o t h e p r e v i o u s l y g r a n t e d e x t e n s i o n o f t i m e t o a p p e a l a s w e l l

a s F R B P 8 0 0 2 ( a )

, a s t h e n o t i c e w a s f i l e d w i t h i n 1 4 d a y s o f t h e a m e n d e d j u d g m e n t

.

-12-I I I

. W A G N E R ’ S M O T I O N T O S T R I K E

I n t h i s a p p e a l

, W a g n e r h a s f i l e d a m o t i o n t o s t r i k e c e r t a i n p o r t i o n s o f

M c D o n o u g h ’ s A p p e n d i x

, s p e c i f i c a l l y

, t r a n s c r i p t s o f : 1 ) t h e § 3 4 1 m e e t i n g i n t h i s

c a s e ; 2 ) t h e R u l e 2 0 0 4 e x a m i n a t i o n o f M c D o n o u g h o n M a r c h 1 5

, 2 0 1 1 ; a n d t h e

d e p o s i t i o n o f M c D o n o u g h t a k e n i n D e c e m b e r 2 0 1 1

, a l o n g w i t h a n y d o c u m e n t s o r

e x h i b i t s t h a t w e r e a d m i t t e d i n t h o s e p r o c e e d i n g s

. W a g n e r l i s t e d a l l t h r e e o f t h e 16

t r a n s c r i p t s h e n o w w a n t s s t r i c k e n a s e x h i b i t s f o r t r i a l

, a n d p r o v i d e d t h e m t o t h e

b a n k r u p t c y c o u r t

, b u t t h e y w e r e n e i t h e r o f f e r e d n o r a d m i t t e d a s t r i a l e x h i b i t s

. 17

O n t h e o t h e r h a n d

, W a g n e r ’ s c o u n s e l d i d u s e a t l e a s t o n e o f t h e t r a n s c r i p t s i n t r i a l

c r o s s

- e x a m i n a t i o n o f M c D o n o u g h

. 18

M c D o n o u g h c o n t e n d s t h a t W a g n e r ’ s p r o v i s i o n o f t h e d i s p u t e d t r a n s c r i p t s a s

p a r t o f h i s t r i a l e x h i b i t s m a d e t h e m p a r t o f t h e r e c o r d

, a n d a l s o t h a t W a g n e r c a n n o t

u s e F e d e r a l R u l e o f B a n k r u p t c y P r o c e d u r e 8 0 0 6 ( “ R u l e 8 0 0 6 ” ) t o e x c l u d e

d e s i g n a t e d d o c u m e n t s f r o m t h e r e c o r d

. R e l y i n g o n t h e f o l l o w i n g e x c e r p t f

r o m I n

r e B e r g e

, w h i c h i s n o t a n a p p e l l a t e d e c i s i o n

, M c D o n o u g h a s s e r t s t h a t R u l e 8 0 0 6

o n l y p r o v i d e s a m e c h a n i s m t o a d d t o t h e a p p e l l a t e r e c o r d :

U n d e r t h e w e l l

- a c c e p t e d r u l e o f s t a t u t o r y c o n s t r u c t i o n s t a t e d a s

e x p r e s s i o u n i u s e s t e x c l u s i o a l t e r i u s

, t h e e x p r e s s i n c l u s i o n o f o n e i t e m o f a c l a s s e x c l u d e s o t h e r s o f t h e s a m e c l a s s

. T h e o n l y k i n d o f

m o d i f i c a t i o n p e r m i t t e d u n d e r [ R u l e ] 8 0 0 6 w o u l d t h u s b e a d d i t i o n t o

,

a n d n o t e x c l u s i o n f

r o m

, t h e r e c o r d

. . . . T h e r e c o r d i n a n a d v e r s a r y

p r o c e e d i n g i n b a n k r u p t c y p r e s u m e s a n d i n l a r g e m e a s u r e r e l i e s u p o n

, t h e f i l e i n t h e u n d e r l y i n g c a s e

. T h e r e c o r d o n a p p e a l

, f o r

c o m p l e t e n e s s a n d f

a i r p r e s e n t a t i o n o f t h e i s s u e s t o t h e a p p e l l a t e b o d y

,

W a g n e r a l s o r e q u e s t e d t h a t p a r a g r a p h 1 8 o n p a g e 8

, a n d t h e s e c o n d f u l l 16

p a r a g r a p h o n p a g e 3 3

, o f M c D o n o u g h ’ s o p e n i n g b r i e f a l s o b e s t r i c k e n

. M c D o n o u g h a p p a r e n t l y a g r e e d t o t h e s e r e d a c t i o n s p r i o r t o t h e f i l i n g o f t h e

m o t i o n

, a n d t h o s e p o r t i o n s o f t h e o p e n i n g b r i e f w e r e s t r i c k e n b y t h i s C o u r t ’ s

o r d e r o n J u n e 2 5

, 2 0 1 4

, w h i c h a l s o r e f e r r e d t h e m o t i o n t o s t r i k e p o r t i o n s o f t h e

A p p e n d i x t o t h i s p a n e l f o r d e t e r m i n a t i o n

.

E x h i b i t s f o r T r i a l a t 6

- 7

, i n A p p

. a t 5 5 7

- 5 8

. 17

S e e

, e

. g

. , T

r a n s c r i p t o f T r i a l h e l d o n J

u n e 2 5

, 2 0 1 2 a t 1 5

, i n A p p

. a t 1 5 4 18

( c o u n s e l r e f

e r e n c e s t h e M a r c h 2 0 1 2 R u l e 2 0 0 4 d e p o s i t i o n t r a n s c r i p t d u r i n g

M c D o n o u g h ’ s t r i a l t e s t i m o n y )

.

-13-s h o u l d t h e r e f o r e i n c l u d e t h o s e i t e m s f r o m t h e r e c o r d o f t h e w h o l e

c a s e w h i c h t h e p a r t i e s a g r e e u p o n

. 19

I t a p p e a r s f

r o m t h e a p p e l l a t e r e c o r d t h a t t h e b a n k r u p t c y c o u r t p r o b a b l y d i d n o t

c o n s i d e r t h e s u b

j e c t t r a n s c r i p t s i n c o n n e c t i o n w i t h i t s d e c i s i o n

. T h e t r a n s c r i p t s

w e r e n e i t h e r p r o f

f e r e d n o r a d m i t t e d

, a n d M c D o n o u g h t e s t i f i e d a t l e n g t h a t t r i a l

,

t h e r e b y m i n i m i z i n g t h e c o u r t ’ s n e e d t o c o n s i d e r a d d i t i o n a l t r a n s c r i p t s o f h i s

t e s t i m o n y

. I n a d d i t i o n

, M c D o n o u g h d i d n o t s p e c i f y a n y p a r t i c u l a r r e l i a n c e o n t h e

t r a n s c r i p t s b y t h e b a n k r u p t c y c o u r t a n d

, i n d e e d

, d o e s n o t a p p e a r t o e v e n r e l y o n

t h e m h i m s e l f

. W i t h o u t s u c h r e l i a n c e

, t h e t r a n s c r i p t s ’ i n c l u s i o n i n t h e a p p e l l a t e

r e c o r d i s e s s e n t i a l l y i r r e l e v a n t

. U n d e r t h e s e c i r c u m s t a n c e s

, t h e r a t i o n a l e b e h i n d

W a g n e r ’ s d e t e r m i n a t i o n t o e x c l u d e t h e m f r o m t h e a p p e l l a t e r e c o r d i s u n c l e a r

.

I n a n y e v e n t

, t h e a d d i t i o n a l t r a n s c r i p t s a r e n o t n e c e s s a r y t o t h i s C o u r t ’ s

c o n s i d e r a t i o n o f t h e s u f f i c i e n c y o f t h e e v i d e n c e p r e s e n t e d a t t r i a l

, a n d a n a p p e l l a t e

c o u r t d o e s n o t c o n s i d e r e v i d e n c e t h a t i s n o t r e l e v a n t t o t h e i s s u e s b e f o r e i t

.

T h e r e f o r e

, W a g n e r ’ s m o t i o n t o s t r i k e i s d e n i e d a s u n n e c e s s a r y

.

B e r g e v

. S w e e t (

I n r e B e r g e )

, 3 7 B

. R

. 7 0 5

, 7 0 8 ( B a n k r

. W

. D

. W i s

. 1 9 8 3 )

. 19

T h i s s e e m s t o b e t h e c o n s e n s u s a m o n g t h e r e l a t i v e l y f e w c a s e s t h a t h a v e d i r e c t l y

c o n s i d e r e d t h e i s s u e

. S e e

, e

. g

. , P i n e w o o d E n t e r p r i s e s

, L

. C

. v

. W

i l l i a m s ( I n r e

L i v i n g H o p e S w

. M

e d

. S e r v s

. , L L C

)

, N o

. 4 : 1 3

- C V

- 0 4 0 2 8

, 2 0 1 3 W L 6 5 0 8 2 4 1

, a t

* 2

- 3 ( W

. D

. A r k

. D e c

. 1 2

, 2 0 1 3 ) ; I n r e V i l l

. G r e e n I G P

, N o

. 1 2

- 2 1 6 3

- S T A

, 2 0 1 2

W L 6 0 4 5 8 8 0

, a t * 2 ( W

. D

. T e n n

. D e c

. 5

, 2 0 1 2 ) ; I n r e S c h m i t

z

, 4 3 6 B

. R

. 1 1 0

, 1 1 1

- 1 2 ( B a n k r

. W

. D

. W i s

. 2 0 1 0 ) ; W e l l i n g e r v

. B o r t o n (

I n r e W e l l i n g e r )

, N o

. 0 7

- C V

- 1 0 6 3 0

- D T

, 2 0 0 7 W L 7 8 8 9 2 0

, a t * 1

- 2 ( E

. D

. M i c h

. M a r

. 1 4

, 2 0 0 7 ) ; I n r e

D o w C o r n i n g C o r

p

. , 2 6 3 B

. R

. 5 4 4

, 5 4 9 ( B a n k r

. E

. D

. M i c h

. 2 0 0 1 )

. H o w e v e r

,

s o m e c o u r t s h o l d t h a t t h e b a n k r u p t c y c o u r t h a s t h e p o w e r t o c o n t r o l t h e c o n t e n t s

o f t h e a p p e l l a t e r e c o r d

, e v e n a f t e r i t h a s b e e n s u b m i t t e d t o t h e a p p e l l a t e c o u r t

. S e e d i s c u s s i o n i n A m e d i s y s

, I n c

. v

. J P M o r g a n C h a s e M

a n h a t t a n B a n k (

I n r e

N a t ’ l C e n t u r

y F i n

. E n t e r s

. , I

n c

. )

, 3 3 4 B

. R

. 9 0 7

, 9 1 2

- 1 6 ( B a n k r

. S

. D

. O h i o 2 0 0 5 ) ( r e l y i n g o n F e d

. R

. A p p

. P

. 1 0 ( e ) )

.

-14-I V

. I S S U E A N D S T A N D A R D O F R E V I E W

A r e t h e b a n k r u p t c y c o u r t ’ s f a c t f i n d i n g s i n s u p p o r t o f i t s

d e c i s i o n t o d e n y M c D o n o u g h ’ s d i s c h a r g e c l e a r l y e r r o n e o u s ?

“ A d e c i s i o n w h e t h e r t o g r a n t o r d e n y a d i s c h a r g e [ p u r s u a n t t o 1 1 U

. S

. C

.

§ 7 2 7 ( a ) ] i s i n t h e s o u n d d i s c r e t i o n o f t h e b a n k r u p t c y c o u r t

, a n d a b a n k r u p t c y

20

c o u r t ’ s d e n i a l o f d i s c h a r g e i s t h e r e f o r e r e v i e w e d f

o r a b u s e o f d i s c r e t i o n

. ” O n t h e 21

o t h e r h a n d

, a n a p p e l l a t e c o u r t r e v i e w s a n o n

- d i s c h a r g e a b i l i t y r u l i n g u n d e r

§ 5 2 3 ( a ) d e n o v o

. B u t a n a p p e l l a n t ’ s c l a i m t h a t t h e e v i d e n c e i s i n s u f f i c i e n t t o 22

s u p p o r t t h e b a n k r u p t c y c o u r t ’ s l e g a l c o n c l u s i o n i s a n i s s u e o f f a c t t h a t w e r e v i e w

f o r c l e a r e r r o r

. A n a p p e l l a t e c o u r t m u s t c o n s i d e r e v i d e n c e p r e s e n t e d t o t h e t r i a l

23

c o u r t i n a l i g h t m o s t f

a v o r a b l e t o t h e p r e v a i l i n g p a r t y

, e s p e c i a l l y w h e r e t h e f a c t

f i n d e r w a s

, a s h e r e

, t h e c o u r t r a t h e r t h a n a j u r y

. “ A f i n d i n g o f f

a c t i s c l e a r l y 24

e r r o n e o u s [ o n l y ] i f i t i s [ e i t h e r ] w i t h o u t f a c t u a l s u p p o r t i n t h e r e c o r d

, o r t h e

a p p e l l a t e c o u r t

, a f

t e r r e v i e w i n g a l l t h e e v i d e n c e

, i s l e f t w i t h a d e f

i n i t e a n d f

i r m

c o n v i c t i o n t h a t a m i s t a k e h a s b e e n m a d e

. ” F i n a l l y

, t h e t r i a l c o u r t ’ s d e c i s i o n 25

n e e d o n l y b e “ p e r m i s s i b l e

, ” n o t “ c o r r e c t ” a n d

, i f p l a u s i b l e i n l i g h t o f t h e r e c o r d

, 26

i t i s n o t c l e a r l y e r r o n e o u s e v e n w h e n t h e r e v i e w i n g c o u r t w o u l d h a v e m a d e a

U n l e s s o t h e r w i s e s p e c i f i e d

, a l l f u r t h e r s t a t u t o r y r e f

e r e n c e s i n t h i s o p i n i o n 20

w i l l b e t o t h e B a n k r u p t c y C o d e

, w h i c h i s T i t l e 1 1 o f t h e U n i t e d S t a t e s C o d e

.

G a r l a n d

, 4 1 7 B

. R

. a t 8 1 0 ( i n t e r n a l c i t a t i o n a n d q u o t a t i o n m a r k s o m i t t e d )

. 21

C o u s a t t e v

. L u c a s ( I n r e L u c a s

)

, 3 0 0 B

. R

. 5 2 6

, 5 3 0 ( 1 0 t h C i r

. B A P 2 0 0 3 ) 22

( c i t i n g U n i t e d S t a t e s v

. V

i c t o r

, 1 2 1 F

. 3 d 1 3 8 3

, 1 3 8 6 ( 1 0 t h C i r

. 1 9 9 7 ) )

.

G a r l a n d

, 4 1 7 B

. R

. a t 8 1 0

. ( c i t i n g F a r m e r s C o

- o p

. A s s ’ n v

. S t r u n k

, 6 7 1 F

. 2 d 23

3 9 1

, 3 9 5 ( 1 0 t h C i r

. 1 9 8 2 ) )

.

C o w l e s v

. D o w K e i t h O i l & G a s

, I n c

. , 7 5 2 F

. 2 d 5 0 8

, 5 1 0

- 1 1 ( 1 0 t h C i r

. 24

1 9 8 5 ) ( s u c h f

i n d i n g s a r e “ p r e s u m p t i v e l y c o r r e c t ” )

.

I d

. a t 5 1 1

. ( i n t e r n a l c i t a t i o n s a n d q u o t a t i o n m a r k s o m i t t e d )

. 25

B i l l ’ s C o a l C o

. v

. B d

. o f P u b

. U t i l s

. o f S p r i n g f i e l d

, 8 8 7 F

. 2 d 2 4 2

, 2 4 4 ( 1 0 t h 26

C i r

. 1 9 8 9 ) ( q u o t i n g V

o l i s v

. P u r i t a n L i

f e I n s

. C o

. , 5 4 8 F

. 2 d 8 9 5

, 9 0 1 ( 1 0 t h C i r

. 1 9 7 7 )

.

-15-d i f

f e r e n t d e c i s i o n

. T h u s

, “ [ w ] h e r e t h e r e a r e t w o p e r m i s s i b l e v i e w s o f t h e 27

e v i d e n c e

, t h e f

a c t f i n d e r ’ s c h o i c e b e t w e e n t h e m c a n n o t b e c l e a r l y e r r o n e o u s

. ” 28

V

. D I S C U S S I O N

M c D o n o u g h a p p e a l s t h e b a n k r u p t c y c o u r t ’ s j u d g m e n t t h a t c o n c l u d e d

W a g n e r h a d p r o v e n t w o c l a i m s a g a i n s t M c D o n o u g h b a s e d i n f r a u d

. F i r s t

, t h e

c o u r t d e t e r m i n e d M c D o n o u g h ’ s d e b t t o W a g n e r w a s n o n

- d i s c h a r g e a b l e u n d e r

§ 5 2 3 ( a ) ( 2 ) ( A ) a n d

, s e c o n d

, M c D o n o u g h ’ s b a n k r u p t c y d i s c h a r g e w a s d e n i e d u n d e r

§ 7 2 7 ( a ) ( 4 )

.

S e c t i o n 5 2 3 ( a ) ( 2 ) p r o v i d e s

, i n p a r t

, t h a t a p a r t i c u l a r d e b t o w e d b y a d e b t o r

i s n o t d i s c h a r g e d i n b a n k r u p t c y w h e n t h a t d e b t i s “ f o r m o n e y

, p r o p e r t y

, s e r v i c e s

,

o r a n e x t e n s i o n

, r e n e w a l

, o r r e f i n a n c i n g o f c r e d i t

, t o t h e e x t e n t o b t a i n e d b y

- -

( A ) f a l s e p r e t e n s e s

, a f

a l s e r e p r e s e n t a t i o n

, o r a c t u a l f r a u d

. . . . ” S i m i l a r l y

, § 7 2 7

29

p r o v i d e s

, g e n e r a l l y

, t h a t a l l C h a p t e r 7 d e b t o r s s h a l l b e g r a n t e d a d i s c h a r g e u n l e s s

o n e o f s e v e r a l s p e c i f

i c e x c e p t i o n s i s a p p l i c a b l e

. S u b s e c t i o n ( a ) ( 4 ) ( A ) o f t h a t

p r o v i s i o n

, f

r e q u e n t l y c a l l e d t h e “ f

a l s e o a t h ” e x c e p t i o n

, p r o v i d e s t h a t a C h a p t e r 7

d e b t o r ’ s d i s c h a r g e m a y b e e n t i r e l y d e n i e d i f “ t h e d e b t o r k n o w i n g l y a n d

f r a u d u l e n t l y

, i n o r i n c o n n e c t i o n w i t h t h e c a s e

- - m a d e a f a l s e o a t h o r a c c o u n t

. ” 30

T h u s

, u n d e r § 7 2 7 ( a ) ( 4 ) ( A )

, a l l o f a d e b t o r ’ s d e b t s r e m a i n u n d i s c h a r g e d

, w h e r e a s

§ 5 2 3 ( a ) ( 2 ) ( A ) p r e c l u d e s d i s c h a r g e o n l y o f p a r t i c u l a r d e b t s t h a t a r e p r o v e n t o h a v e

b e e n f r a u d u l e n t l y o b t a i n e d

. T o g e t h e r

, t h e s e p r o v i s i o n s p r e c l u d e d i s c h a r g e s

, e i t h e r

e n t i r e l y o r a s t o s p e c i f

i c d e b t s

, w h e r e d e b t o r s h a v e d e f r a u d e d o r m a t e r i a l l y m i s l e d

e i t h e r t h e i r c r e d i t o r s

, t h e t r u s t e e i n b a n k r u p t c y

, o r t h e b a n k r u p t c y c o u r t

.

I n r e I v e r s o n

, 2 7 1 B

. R

. 2 1 3

, N o

. 0 1

- 0 1 8

, 2 0 0 1 W L 8 6 3 4 4 4

, a t * 6 ( 1 0 t h C i r

. 27

B A P J u l y 3 1

, 2 0 0 1 )

.

A n d e r s o n v

. B e s s e m e r C i t y

, 4 7 0 U

. S

. 5 6 4

, 5 7 4 ( 1 9 8 5 ) ( c i t i n g U n i t e d S t a t e s 28

v

. Y e l l o w C a b C o

. , 3 3 8 U

. S

. 3 3 8

, 3 4 2 ( 1 9 4 9 )

.

1 1 U

. S

. C § 5 2 3 ( a ) ( 2 ) ( A )

. 29

1 1 U

. S

. C

. § 7 2 7 ( a ) ( 4 ) ( A )

. 30

-16-A c r e d i t o r a s s e r t i n g a n e x c e p t i o n t o d i s c h a r g e u n d e r e i t h e r o f t h e s e C o d e

p r o v i s i o n s b e a r s t h e b u r d e n o f p r o v i n g t h e e l e m e n t s o f t h e e x c e p t i o n b y a

p r e p o n d e r a n c e o f t h e e v i d e n c e

. M o r e o v e r

, d u e t o b a n k r u p t c y ’ s “ f r e s h s t a r t ” 31

o b j e c t i v e

, e x c e p t i o n s t o d i s c h a r g e a r e n a r r o w l y c o n s t r u e d

, a n d d o u b t i s r e s o l v e d i n

f a v o r o f t h e d e b t o r

. 32

A

. S e c t i o n 7 2 7 ( a ) ( 4 ) ( A ) f a l s e o a t h

S e c t i o n 7 2 7 ( a ) ( 4 ) ( A ) i s i n t e n d e d t o e n f o r c e t h e d e b t o r ’ s d u t y t o f u l l y

d i s c l o s e a s s e t s a n d i n t e r e s t s

, a n d t o e n s u r e t h a t r e l i a b l e i n f o r m a t i o n i s p r o v i d e d t o

t h o s e w i t h a n i n t e r e s t i n a d m i n i s t r a t i o n o f t h e d e b t o r ’ s e s t a t e

. A s u c c e s s f u l 33

§ 7 2 7 ( a ) ( 4 ) ( A ) c l a i m m u s t e s t a b l i s h t h a t : 1 ) t h e d e b t o r m a d e a f a l s e s t a t e m e n t

u n d e r o a t h ; 2 ) k n o w i n g i t t o b e f a l s e ; 3 ) w i t h f

r a u d u l e n t i n t e n t ; a n d 4 ) t h e

s t a t e m e n t w a s m a t e r i a l

. A s t a t e m e n t i s c o n s i d e r e d t o b e “ m a t e r i a l ” u n d e r 34

§ 7 2 7 ( a ) ( 4 ) ( A ) i f :

i t b e a r s a r e l a t i o n s h i p t o t h e b a n k r u p t ’ s b u s i n e s s t r a n s a c t i o n s o r

e s t a t e

, o r c o n c e r n s t h e d i s c o v e r y o f a s s e t s

, b u s i n e s s d e a l i n g s

, o r t h e

e x i s t e n c e a n d d i s p o s i t i o n o f h i s p r o p e r t y

. M o r e o v e r

, m a t e r i a l i t y i s

n o t d e f e a t e d b y t h e f

a c t t h a t t h e u n d i s c l o s e d p r o p e r t y i n t e r e s t s a r e d e t e r m i n e d t o b e w i t h o u t v a l u e

. T h i s i s b e c a u s e b a n k r u p t c y i s a

s e r i o u s m a t t e r a n d w h e n o n e c h o o s e s t o a v a i l h i m s e l f o f t h e b e n e f i t s

o f C h a p t e r 7 r e l i e f h e a s s u m e s c e r t a i n r e s p o n s i b i l i t i e s

, t h e f o r e m o s t

b e i n g t o f

u l l y d i s c l o s e h i s a s s e t s a n d t o c o o p e r a t e f u l l y w i t h t h e

t r u s t e e

. A s s u c h

, d e b t o r s h a v e a n u n c o m p r o m i s i n g d u t y t o d i s c l o s e

G a r l a n d

, 4 1 7 B

. R

. a t 8 1 0 ( c i t i n g F e d

. R

. B a n k r

. P

. 4 0 0 5 ) ( § 7 2 7 ) ; G r o g a n 31

v

. G a r n e r (

I n r e G a r n e r

) 4 9 8 U

. S

. 2 7 9

, 2 9 1 ( 1 9 9 1 ) ( § 5 2 3 )

.

A f f o r d a b l e B a i l B o n d

s

, I n c

. v

. S a n d o v a l (

I n r e S a n d o v a l

)

, 5 4 1 F

. 3 d 9 9 7

, 32

1 0 0 1 ( 1 0 t h C i r

. 2 0 0 8 ) ( q u o t i n g B e l l c o F i r s t F e d

. C r e d i t U n i o n v

. K a s p a r ( I n r e

K a s p a r )

, 1 2 5 F

. 3 d 1 3 5 8

, 1 3 6 1 ( 1 0 t h C i r

. 1 9 9 7 ) )

.

S i e r r a C h e m s

. , L L C v

. M o s l e y ( I n r e M o s l e y )

, 5 0 1 B

. R

. 7 3 6

, 7 4 2 ( B a n k r

. D

. 33

N

. M

. 2 0 1 3 ) ( q u o t i n g M a n n i n g v

. W

a t k i n s ( I n r e W a t k i n s )

, 4 7 4 B

. R

. 6 2 5

, 6 3 5 ( B a n k r

. N

. D

. I n d

. 2 0 1 2 ) )

.

I d

. ( q u o t i n g R a

j a l a v

. M

a j o r s ( I n r e M a j o r s )

, 3 3 0 B

. R

. 8 8 0

, N o s

. 34

K S

- 0 4

- 0 9 3

, K S

- 0 4

- 0 9 7

, 2 0 0 5 W L 2 0 7 7 4 9 7

, a t * 3 ( 1 0 t h C i r

. B A P A u g

. 2 9

, 2 0 0 5 ) )

. S e e a l s o G u l l i c k

s o n v

. B r o w n ( I

n r e B r o w n

)

, 1 0 8 F

. 3 d 1 2 9 0

, 1 2 9 4 ( 1 0 t h C i r

. 1 9 9 7 ) ( c r e d i t o r m a k i n g § 7 2 7 ( a ) ( 4 ) ( A ) c l a i m m u s t d e m o n s t r a t e t h a t “ d e b t o r k n o w i n g l y a n d f

r a u d u l e n t l y m a d e a n o a t h a n d t h a t t h e o a t h r e l a t e s t o a m a t e r i a l

f a c t ” )

.

-17-w h a t e v e r o w n e r s h i p i n t e r e s t t h e y h o l d i n p r o p e r t y

, a n d t h e y m u s t

d i s c l o s e e v e r y t h i n g

, r a t h e r t h a n m a k e d e c i s i o n s a b o u t w h a t t h e y d e e m i m p o r t a n t e n o u g h f

o r p a r t i e s i n i n t e r e s t t o k n o w

. 35

A f r a u d u l e n t o m i s s i o n o f a s s e t s f r o m a d e b t o r ’ s s c h e d u l e s i s c o n s i d e r e d t o b e a

“ s t a t e m e n t ” u n d e r § 7 2 7 ( a ) ( 4 ) ( A )

. I n t h i s c a s e

, W a g n e r c l a i m e d t h a t 36

M c D o n o u g h o m i t t e d h i s i n t e r e s t i n M a u r e e n ’ s P r e m i e r A c c o u n t

, a n d a l s o

m i s r e p r e s e n t e d h i s r e l a t i o n s h i p w i t h M a u r e e n a t t h e t i m e o f t h e p e t i t i o n i n o r d e r t o

c l a i m a h o m e s t e a d e x e m p t i o n i n h i s t r a i l e r

. T h e l a t t e r o f t h e s e c l a i m s

, w h i c h w a s

b a s e d o n t h e p r o x i m i t y i n t i m e o f s p e c i f i c f a c t s

, i n c l u d i n g

, M c D o n o u g h ’ s m o v e t o

t h e t r a i l e r

, t h e f

i l i n g o f h i s b a n k r u p t c y p e t i t i o n

, r e s u m p t i o n o f h i s r e l a t i o n s h i p a n d

l i v i n g a r r a n g e m e n t s w i t h M a u r e e n

, a n d a p p l i c a t i o n f o r a m a r r i a g e l i c e n s e

, w a s

r e j e c t e d b y t h e b a n k r u p t c y c o u r t

, w h i c h c o n c l u d e d t h a t “ [ t ] h e w e i g h t o f t h e

e v i d e n c e o n t h i s p o i n t f a v o r s [ M c D o n o u g h ] a n d d o e s n o t p r o v i d e g r o u n d s f o r

d e n i a l o f d i s c h a r g e u n d e r § 7 2 7 ( a ) ( 4 ) ( A )

. ” T h u s

, W a g n e r f a i l e d t o p r o v e t h a t

M c D o n o u g h ’ s m o v e o u t o f M a u r e e n ’ s h o m e s h o r t l y b e f o r e h e f i l e d b a n k r u p t c y

w a s n o t a l e g i t i m a t e s e p a r a t i o n

. S i n c e W a g n e r d i d n o t a p p e a l t h a t r u l i n g

, t h i s

o p i n i o n d o e s n o t a d d r e s s i t s m e r i t s

.

W i t h r e s p e c t t o t h e P r e m i e r A c c o u n t

, i t w a s u n c o n t e s t e d t h a t M c D o n o u g h

w a s a n a m e d c o

- o w n e r o f t h e a c c o u n t f r o m F e b r u a r y t o J u n e 2 0 1 0

, a n d t h a t h i s

w a g e s w e r e r e g u l a r l y d i r e c t l y d e p o s i t e d i n t o t h a t a c c o u n t b y h i s e m p l o y e r f r o m

F e b r u a r y 2 0 1 0 t o J a n u a r y 2 0 1 1

. T h u s

, M c D o n o u g h a d m i t t e d t h a t h i s p a y c h e c k s 37

c o n t i n u e d t o b e d i r e c t l y d e p o s i t e d i n t o t h e P r e m i e r A c c o u n t u n t i l w e l l a f t e r h i s

n a m e w a s r e m o v e d f

r o m i t

, a n d t h a t t h e a c c o u n t c o n t i n u e d t o b e u s e d t o p a y h i s

G a r l a n d

, 4 1 7 B

. R

. a t 8 1 4

- 1 5 ( i n t e r n a l c i t a t i o n s a n d q u o t a t i o n m a r k s 35

o m i t t e d )

.

I d

. a t 8 1 4 ( a § 7 2 7 ( a ) ( 4 ) ( A ) f a l s e o a t h m a y b e a n “ o m i s s i o n i n t h e d e b t o r ’ s 36

s c h e d u l e s

. . . . ” ( q u o t i n g 6

- 2 7 C o l l i e r o n B a n k r u p t c y ¶ 7 2 7

. 0 4 [ 1 ] [ c ] ( 1 5 t h e d

. r e v

. 2 0 0 9 ) ) )

.

T h e l a s t o f t h e s e d i r e c t d e p o s i t s t o o k p l a c e i n e a r l y J a n u a r y 2 0 1 1

. 37

M c D o n o u g h f

i l e d h i s p e t i t i o n o n J a n u a r y 1 8

, 2 0 1 1

.

-18-l i v i n g e x p e n s e s a s w e l l

. S i g n i f i c a n t l y

, M c D o n o u g h ’ s w a g e s w e r e d e p o s i t e d i n t o

t h e P r e m i e r A c c o u n t u n t i l t h e m o n t h i n w h i c h h e f i l e d h i s p e t i t i o n

. H o w e v e r

,

M c D o n o u g h c l a i m s t h a t

, p r i o r t o t h e f i l i n g o f h i s p e t i t i o n

, M a u r e e n r e p a i d h i m t h e

a m o u n t o f h i s w a g e s t h a t w e r e d e p o s i t e d i n t o t h e P r e m i e r A c c o u n t i n J a n u a r y

2 0 1 1

. B a s e d o n t h i s

, M c D o n o u g h a s s e r t s t h a t n o n e o f h i s f u n d s w e r e i n t h e 38

P r e m i e r A c c o u n t w h e n h e f i l e d h i s p e t i t i o n

.

T h e b a n k r u p t c y c o u r t f o u n d

, b a s e d o n t h e e v i d e n c e a t t r i a l

, t h a t M c D o n o u g h

r e m o v e d h i s n a m e f

r o m t h e P r e m i e r A c c o u n t i n J u n e 2 0 1 0 i n o r d e r t o “ f r u s t r a t e

c r e d i t o r c o l l e c t i o n a c t i v i t y

. ” S p e c i f i c a l l y

, t h e b a n k r u p t c y c o u r t f o u n d t h a t

M c D o n o u g h s o u g h t t o t h w a r t W a g n e r ’ s “ l a w f u l c o l l e c t i o n e f

f o r t s ” o f h i s

M i n n e s o t a J u d g m e n t i n C o l o r a d o

, b o t h b y r e m o v i n g h i s n a m e f r o m t h e P r e m i e r

A c c o u n t a n d b y m i s r e p r e s e n t i n g h i s f i n a n c i a l c o n d i t i o n t o W a g n e r ’ s a t t o r n e y

.

H o w e v e r

, b o t h o f t h e s e e v e n t s t o o k p l a c e i n J u n e a n d J u l y o f 2 0 1 0

, a n d

§ 7 2 7 ( a ) ( 4 ) ( A ) s p e c i f

i c a l l y a p p l i e s o n l y t o a c t i v i t y t h a t t o o k p l a c e “ i n o r i n

c o n n e c t i o n w i t h t h e [ b a n k r u p t c y ] c a s e

. ” T h e r e f o r e

, i n c o n s i d e r i n g W a g n e r ’ s

§ 7 2 7 ( a ) ( 4 ) ( A ) c l a i m

, t h e b a n k r u p t c y c o u r t o n l y c o n s i d e r e d M c D o n o u g h ’ s p r e

p e t i t i o n a c t i v i t i e s a s e v i d e n c e o f h i s g e n e r a l i n t e n t r e g a r d i n g t h e p a r t i e s ’ d i s p u t e

,

a n d b a s e d t h e § 7 2 7 ( a ) ( 4 ) ( A ) d e n i a l o f d i s c h a r g e o n M c D o n o u g h ’ s f a i l u r e e i t h e r t o

d e c l a r e o n h i s S c h e d u l e B t h a t t h e f u n d s i n t h e P r e m i e r A c c o u n t w e r e h i s j o i n t

p r o p e r t y w i t h M a u r e e n

, o r t o d e c l a r e t h e a c c o u n t i t s e l f u n d e r p a r a g r a p h 1 1 o f h i s

S O F A

, a s a p r e

- p e t i t i o n t r a n s f e r o f a f i n a n c i a l a c c o u n t t h a t o c c u r r e d w i t h i n o n e

y e a r o f t h e p e t i t i o n f

i l i n g

. 39

D e s p i t e t h e n u m e r o u s P r e m i e r A c c o u n t s t a t e m e n t s i n c l u d e d i n t h e a p p e l l a t e 38

r e c o r d

, i t d o e s n o t a p p e a r t h a t s t a t e m e n t s f o r J a n u a r y t h r o u g h J u n e o f 2 0 1 1 w e r e i n c l u d e d

. W e t h e r e f

o r e r e l y o n M c D o n o u g h ’ s t e s t i m o n y r e g a r d i n g t h i s f a c t

.

S c h e d u l e B r e q u i r e s a d e b t o r t o “ l i s t a l l p e r s o n a l p r o p e r t y o f t h e d e b t o r o f 39

w h a t e v e r k i n d

, ” i n c l u d i n g p r o p e r t y “ b e i n g h e l d f o r t h e d e b t o r b y s o m e o n e

e l s e

. . . . ” V

o l u n t a r y P e t i t i o n a t 1 0

, i n A p p

. a t 4 1

. P a r a g r a p h 2 o f S c h e d u l e B

s p e c i f i e s “ C h e c k i n g

, s a v i n g s o r o t h e r f i n a n c i a l a c c o u n t s

. . . o r s h a r e s i n b a n k s

, ( c o n t i n u e d

. . . )

-19-I t i s c l e a r t h a t M c D o n o u g h h a d a n o w n e r s h i p i n t e r e s t i n t h e P r e m i e r

A c c o u n t u n t i l a t l e a s t J u n e 2 0 1 0

, w h e n h e h a d h i s n a m e r e m o v e d f r o m i t

. 40

T h e r e f o r e

, t h e P r e m i e r A c c o u n t s h o u l d h a v e b e e n l i s t e d o n M c D o n o u g h ’ s S O F A

a s a f i n a n c i a l a c c o u n t t h a t w a s t r a n s f e r r e d w i t h i n o n e y e a r p r e c e d i n g h i s

b a n k r u p t c y p e t i t i o n

. A l t h o u g h M c D o n o u g h c o n t e n d s t h a t h i s f a i l u r e t o l i s t t h e

P r e m i e r A c c o u n t w a s b a s e d o n a s i m p l e m i s u n d e r s t a n d i n g o f w h a t h e w a s r e q u i r e d

t o l i s t

, t h i s i s s u e w a s r e s o l v e d a g a i n s t h i m b y t h e b a n k r u p t c y c o u r t o n t h e b a s i s o f

c r e d i b i l i t y

. S u c h d e t e r m i n a t i o n s a r e g i v e n g r e a t d e f e r e n c e b y a p p e l l a t e c o u r t s

. 41

M c D o n o u g h ’ s f

a i l u r e t o d i s c l o s e t h e P r e m i e r A c c o u n t i n h i s b a n k r u p t c y

f i l i n g s i s u n c o n t e s t e d

, a s a r e t h e f a c t s o f h i s o w n e r s h i p a n d u s e o f t h a t a c c o u n t

.

(

. . . c o n t i n u e d ) 39

s a v i n g s a n d l o a n

. . . o r c r e d i t u n i o n s

. . . . ” I d

. S i m i l a r l y

, P a r a g r a p h 1 1 o f t h e S O F A i n s t r u c t s a d e b t o r t o “ [ l ] i s t a l l f i n a n c i a l a c c o u n t s a n d i n s t r u m e n t s h e l d i n

t h e n a m e o f t h e d e b t o r o r f o r t h e b e n e f

i t o f t h e d e b t o r w h i c h w e r e c l o s e d

, s o l d

, o r

o t h e r w i s e t r a n s f

e r r e d w i t h i n o n e y e a r i m m e d i a t e l y p r e c e d i n g t h e c o m m e n c e m e n t

o f t h i s c a s e

. ” I

d

. a t 3 4

.

P r e m i e r i s a f

e d e r a l l y r e g u l a t e d c r e d i t u n i o n

, s u b j e c t t o r e g u l a t i o n b y t h e 40

N a t i o n a l C r e d i t U n i o n A d m i n i s t r a t i o n

, p u r s u a n t t o t h e F e d e r a l C r e d i t U n i o n A c t

, 1 2 U

. S

. C

. § § 1 7 5 1

- 1 7 9 5 k ( 2 0 0 6 )

. F e d e r a l c r e d i t u n i o n s a r e a l l o w e d t o i s s u e j o i n t

a c c o u n t s

, e v e n w h e r e o n e o f t h e o w n e r s i s a n o n m e m b e r

. T h e a p p e l l a t e r e c o r d

d o e s n o t d i s c l o s e w h e t h e r M c D o n o u g h w a s a m e m b e r o f P r e m i e r

, b u t i t i s c l e a r

t h a t

, a s a j o i n t o w n e r

, h e e f f e c t i v e l y o w n e d t h e a c c o u n t ’ s e n t i r e c o n t e n t s

, a n d

c o u l d w i t h d r a w a n y o r a l l o f t h e f u n d s t h e r e i n

. S e e N A F C U C o m p l i a n c e B l o g

,

“ J o i n t A c c o u n t s

- t h e D o u b l e E d g e d S w o r d

, ” ( M a y 2 1

, 2 0 1 0 )

h t t p : / / n a f

c u c o m p l i a n c e b l o g

. t y p e p a d

. c o m / n a f c u

_ w e b l o g / 2 0 1 0 / 0 5 /

j o i n t

- a c c o u n t s

- t h

e

- d o u b l e

- e d g e d

- s w o r d

. h t m l

. S i m i l a r l y

, C o l o r a d o l a w a l l o w s c r e d i t u n i o n s t o

c a r r y j o i n t m e m b e r s h i p a c c o u n t s

, t h e e n t i r e t y o f w h i c h m a y b e p a i d t o a n y o n e o f

t h e j o i n t a c c o u n t h o l d e r s

. C o l o

. R e v

. S t a t

. § 1 1

- 3 0

- 1 0 3 ( 4 ) ( 2 0 0 2 )

. A p r i n t e d

c o p y o f t h e c i t e d w e b p a g e i s p r o v i d e d a s a n a t t a c h m e n t l o c a t e d a t t h e e n d o f t h i s d e c i s i o n

. T h e C o u r t a c c e p t s n o r e s p o n s i b i l i t y f o r

, a n d d o e s n o t e n d o r s e

, a n y

p r o d u c t

, o r g a n i z a t i o n

, o r c o n t e n t a t a n y h y p e r l i n k e d s i t e

, o r a t a n y s i t e t o w h i c h

t h a t s i t e m i g h t b e l i n k e d

. T h e C o u r t a c c e p t s n o r e s p o n s i b i l i t y f o r t h e a v a i l a b i l i t y

o r f u n c t i o n a l i t y o f a n y h y p e r l i n k

. T h u s

, t h e f a c t t h a t a h y p e r l i n k c e a s e s t o w o r k

o r d i r e c t s t h e u s e r t o s o m e o t h e r s i t e d o e s n o t a f f e c t t h e O p i n i o n o f t h e C o u r t

.

V a u g h n v

. U

n i t e d S t a t e s (

I n r e V a u g h n )

, 7 6 5 F

. 3 d 1 1 7 4

, 1 1 8 0 ( 1 0 t h C i r

. 41

2 0 1 4 ) ( “ W h e r e

. . . c e r t a i n ‘ f i n d i n g s a r e b a s e d o n d e t e r m i n a t i o n s r e g a r d i n g t h e

c r e d i b i l i t y o f w i t n e s s e s

, R u l e 5 2 ( a ) [ o f t h e F e d e r a l R u l e s o f C i v i l P r o c e d u r e ]

d e m a n d s e v e n g r e a t e r d e f e r e n c e t o t h e t r i a l c o u r t ’ s f i n d i n g [ s ]

. ’ ” ( q u o t i n g

B e s s e m e r C i t

y

, 4 7 0 U

. S

. a t 5 6 5 ) )

. S e e a l s o F e d

. R

. C i v

. P

. 5 2 ( a ) ( 6 )

, m a d e

a p p l i c a b l e t o a d v e r s a r y p r o c e e d i n g s b y F e d

. R

. B a n k r

. P

. 7 0 5 2 ( a p p e l l a t e c o u r t

m u s t g i v e d u e r e g a r d t o t r i a l c o u r t ’ s o p p o r t u n i t y t o j u d g e w i t n e s s c r e d i b i l i t y )

.

-20-O t h e r f

a c t s t h a t w e r e r e s o l v e d c o n t r a r y t o M c D o n o u g h ’ s t e s t i m o n y w e r e t h a t h e :

1 ) e x e r c i s e d o w n e r s h i p o f t h e P r e m i e r A c c o u n t ; 2 ) h a d h i s n a m e r e m o v e d f r o m t h e

a c c o u n t i n o r d e r t o p r o t e c t i t s f u n d s f r o m W a g n e r ’ s c o l l e c t i o n e f f o r t s ; a n d 3 )

c o n t i n u e d t o k e e p h i s w a g e s a n d o t h e r i n c o m e i n t h e a c c o u n t t h e r e a f t e r a n d t o u s e

i t t o p a y h i s l i v i n g e x p e n s e s

. T h e b a n k r u p t c y c o u r t w a s v e r y c l e a r r e g a r d i n g t h e

f i n d i n g s i t m a d e t h a t w e r e c o n t r a r y t o M c D o n o u g h ’ s t e s t i m o n y

, s t a t i n g :

T h e o v e r r i d i n g i m p r e s s i o n t h e C o u r t i s l e f t w i t h a f t e r h e a r i n g t h e

D e f e n d a n t ’ s t e s t i m o n y i s t h a t h e i s a n i n d i v i d u a l w h o w i l l s a y

v i r t u a l l y a n y t h i n g t h e s i t u a t i o n s e e m s t o r e q u i r e

. R a r e l y

, i t s e e m e d

,

w a s h e c a p a b l e o f g i v i n g a s t r a i g h t a n s w e r t o a s i m p l e q u e s t i o n

. . . . T h e r e s u l t o f t h e C o u r t ’ s o b s e r v a t i o n s o f t h e D e f e n d a n t o n t h e

w i t n e s s s t a n d a n d t h e C o u r t ’ s a s s e s s m e n t o f h i s c r e d i b i l i t y i s t h a t t h e

C o u r t c a n h a v e n o c o n f i d e n c e i n a n y o f t h e D e f e n d a n t ’ s t e s t i m o n y

. T h e c o n s e q u e n c e o f t h a t a s s e s s m e n t i s t h a t

, w h e n e v e r o t h e r e v i d e n c e

c o n t r a d i c t s t h e D e f

e n d a n t ’ s t e s t i m o n y a n d t h e D e f e n d a n t ’ s c r e d i b i l i t y

o n a p a r t i c u l a r p o i n t i s p u t a t i s s u e

, t h e C o u r t h a s g i v e n c r e d e n c e t o

t h e c o n t r a d i c t o r y e v i d e n c e a b s e n t o t h e r f a c t o r s c a u s i n g t h e C o u r t t o

q u e s t i o n i t ’ s [ s i c ] v e r a c i t y

. 42

G i v e n t h e s e c i r c u m s t a n c e s

, t h i s C o u r t s i m p l y c a n n o t c o n c l u d e t h a t t h e b a n k r u p t c y

c o u r t ’ s f i n d i n g t h a t M c D o n o u g h “ k n o w i n g l y a n d f r a u d u l e n t l y ” o m i t t e d t h e

P r e m i e r A c c o u n t f

r o m h i s b a n k r u p t c y f

i l i n g s

, w a s c l e a r l y e r r o n e o u s

.

B

. S e c t i o n 5 2 3 ( a ) ( 2 ) ( A ) f r a u d

A s a r e a l l d i s c h a r g e e x c e p t i o n s

, § 5 2 3 ( a ) ( 2 ) ( A ) i s n a r r o w l y c o n s t r u e d a n d

,

t h e r e f o r e

, i t s a p p l i c a t i o n i s l i m i t e d t o “ f r a u d s i n v o l v i n g m o r a l t u r p i t u d e o r

i n t e n t i o n a l w r o n g

. ” I n o r d e r t o e x c e p t a d e b t f r o m d i s c h a r g e u n d e r t h i s 43

p r o v i s i o n

, a c r e d i t o r m u s t e s t a b l i s h t h e f o l l o w i n g f

i v e e l e m e n t s :

( 1 ) t h e d e b t o r m a d e a f a l s e r e p r e s e n t a t i o n ;

( 2 ) t h e d e b t o r m a d e t h e r e p r e s e n t a t i o n w i t h t h e i n t e n t t o d e c e i v e t h e

c r e d i t o r ;

( 3 ) t h e c r e d i t o r r e l i e d o n t h e r e p r e s e n t a t i o n ;

B R O p i n i o n a t 4

- 5 i n A p p

. a t 8 4 7

- 4 8

. 42

D S C N

a t ’ l P r o p s

. , L L C v

. J

o h n s o n ( I n r e J o h n s o n )

, 4 7 7 B

. R

. 1 5 6

, 1 6 9 ( 1 0 t h 43

C i r

. B A P 2 0 1 2 ) ( q u o t i n g D r i g g s v

. B l a c k (

I n r e B l a c k

)

, 7 8 7 F

. 2 d 5 0 3

, 5 0 5 ( 1 0 t h

C i r

. 1 9 8 6 ) )

.

-21-( 4 ) t h e c r e d i t o r ’ s r e l i a n c e w a s j u s t i f i a b l e ; a n d

( 5 ) t h e d e b t o r ’ s r e p r e s e n t a t i o n c a u s e d t h e c r e d i t o r t o s u s t a i n a l o s s

. 44

N o t a b l y

, u n l i k e § 7 2 7 ( a ) ( 4 ) ( A )

, w h i c h r e q u i r e s o n l y t h a t t h e f a l s e s t a t e m e n t b e

“ m a t e r i a l

, ” § 5 2 3 ( a ) ( 2 ) ( A ) r e q u i r e s a c r e d i t o r a s s e r t i n g a c l a i m u n d e r i t t o p r o v e

t h a t t h e d e b t o r ’ s c o n d u c t c a u s e d i t t o s u f f e r a l o s s

. T h e r e w a s n o r e a l d i s p u t e i n

t h i s c a s e t h a t W a g n e r s u f f e r e d a l o s s a s a r e s u l t o f M c D o n o u g h ’ s d e f a u l t o n t h e

C a b i n L o a n

. 45

T h e b a n k r u p t c y c o u r t f o u n d t h a t M c D o n o u g h ’ s s t a t e m e n t t o W a g n e r t h a t h e

w o u l d s e l l h i s r e s i d e n c e a n d u s e $ 1 0 0

, 0 0 0 o f t h e e q u i t y t o p a y d o w n t h e C a b i n

L o a n w a s a f

a l s e r e p r e s e n t a t i o n u n d e r § 5 2 3 ( a ) ( 2 ) ( A )

. T h e c o u r t a l s o d e t e r m i n e d

t h a t M c D o n o u g h m a d e t h a t s t a t e m e n t w i t h i n t e n t t o d e c e i v e W a g n e r

, s i n c e

M c D o n o u g h k n e w t h e h o u s e w a s a l r e a d y s o l d w h e n h e m a d e t h e s t a t e m e n t a n d

t h a t t h e s a l e w o u l d n o t g e n e r a t e $ 1 0 0

, 0 0 0 i n e q u i t y

. T h e b a n k r u p t c y c o u r t a l s o 46

f o u n d t h a t W a g n e r h a d r e l i e d o n M c D o n o u g h ’ s s t a t e m e n t

, a s h e w o u l d n o t h a v e

a g r e e d t o m o r t g a g e t h e C a b i n f o r m o r e t h a n $ 9 4

, 0 0 0 w i t h o u t M c D o n o u g h ’ s

p r o m i s e t o p a y t h e l o a n d o w n w h e n h i s h o u s e s o l d

. F i n a l l y

, t h e c o u r t c o n s i d e r e d

W a g n e r ’ s r e l i a n c e t o b e “ j u s t i f i a b l e ” b e c a u s e

, a s a n o w n e r

, M c D o n o u g h c o u l d b e

I d

. a t 1 6 9

. 44

M c D o n o u g h d i d c l a i m a t t r i a l t h a t h i s s i b l i n g s h a d m a d e a l l t h e p o s t

- d e f a u l t 45

m o r t g a g e p a y m e n t s

. H o w e v e r

, W a g n e r t e s t i f i e d t h a t h e m a d e a l l t h e p a y m e n t s

, b u t t h a t A n n a d i d p r o v i d e h i m w i t h s o m e f i n a n c i a l s u p p o r t

. E i t h e r w a y

, W a g n e r ’ s

p r o p e r t y w a s i n d e b t e d f o r t h e e n t i r e r e m a i n i n g b a l a n c e o f t h e C a b i n L o a n a f t e r

M c D o n o u g h ’ s d e f

a u l t

, e v e n t h o u g h W a g n e r t e s t i f i e d

, a n d t h e b a n k r u p t c y c o u r t

f o u n d

, t h a t h e w o u l d n o t h a v e a l l o w e d t h e C a b i n t o b e m o r t g a g e d f o r m o r e t h a n $ 9 4

, 0 0 0 w i t h o u t M c D o n o u g h ’ s a s s u r a n c e t h a t t h e m o r t g a g e w o u l d b e r e d u c e d b y $ 1 0 0

, 0 0 0 f

r o m t h e s a l e o f M c D o n o u g h ’ s F o r e s t L a k e H o m e

. T h u s

, t h e n o n

d i s c h a r g e a b i l i t y a w a r d t o W a g n e r w a s m e a s u r e d b y t h e $ 1 0 0

, 0 0 0 e x c e s s l i e n

,

r a t h e r t h a n b y t h e e n t i r e l o a n a m o u n t

, a s t h e c o u r t f o u n d t h a t o n l y t h e $ 1 0 0

, 0 0 0

p a y d o w n w a s a f

a l s e r e p r e s e n t a t i o n u n d e r § 5 2 3 ( a ) ( 2 ) ( A )

, w h e r e a s W a g n e r ’ s

c l a i m t h a t M c D o n o u g h d e f a u l t e d o n t h e C a b i n L o a n w a s a d i s c h a r g e a b l e b r e a c h

o f c o n t r a c t c l a i m

.

A l t h o u g h M c D o n o u g h a n d K u z n i a d i d n e t a p p r o x i m a t e l y $ 1 0 7

, 0 0 0 f r o m 46

b o t h t h e F o r e s t L a k e H o m e s a l e a n d t h e C a b i n L o a n

, t h e e x t e n t o f t h e e q u i t y t h e y

r e c e i v e d o n t h e h o m e s a l e w a s o n l y a p p r o x i m a t e l y $ 1 8

, 5 0 0

.

-22-r e l i e d o n t o s t a t e t h e v a l u e o f h i s h o m e

, a n d b e c a u s e t h e p r o p o s e d l o a n w o u l d b e

t o a f a m i l y m e m b e r

- - s i m i l a r t o o t h e r l o a n s W a g n e r h a d m a d e t o h i s c h i l d r e n i n

t h e p a s t

. W e r e v i e w t h e b a n k r u p t c y c o u r t ’ s d e t e r m i n a t i o n o f j u s t i f i a b l e r e l i a n c e

f o r c l e a r e r r o r

. 47

T h e f a c t u a l d i f

f i c u l t i e s p r e s e n t e d b y t h i s c a s e a r e m a n y

, i n c l u d i n g t h a t t h e

p a r t i e s ’ “ a g r e e m e n t ” w a s : 1 ) n o t w i t n e s s e d b y a n y o n e b u t t h e p a r t i e s t o i t ; 2 )

n e v e r r e a l l y e v e n d i s c u s s e d w i t h a n y o n e e l s e ; 3 ) n o t i n w r i t i n g ; a n d 4 ) w a s

r e a c h e d i n a c o n t e x t t h a t w a s

, f r a n k l y

, r i f

e w i t h p o t e n t i a l f

o r m i s i n t e r p r e t a t i o n

.

B e s i d e s a l l t h a t

, n e i t h e r p a r t y ’ s a c c o u n t o f t h e a g r e e m e n t i s e i t h e r e n t i r e l y

c o n s i s t e n t o r l o g i c a l l y s o u n d

. Y e t t h i s k i n d o f “ a r r a n g e m e n t ” w a s e s s e n t i a l l y

s t a n d a r d p r a c t i c e f

o r t h e p a r t i e s ’ f

a m i l y

. G i v e n a l l o f t h e s e f a c t o r s

, t h e c o n f

l i c t

c o u l d o n l y b e r e s o l v e d o n t h e b a s i s o f c r e d i b i l i t y o f t h e p a r t i e s t o t h e a g r e e m e n t

.

P a r s i n g t h e i r t e s t i m o n y a t t r i a l r e v e a l s m a n y i n c o n s i s t e n c i e s o n b o t h s i d e s

. B a s e d

o n t h e t r a n s c r i p t o f t h e t r i a l

, i t a p p e a r s t h a t n e i t h e r p a r t y w a s p a r t i c u l a r l y c r e d i b l e

,

t h o u g h a l s o n o t p a r t i c u l a r l y i n c r e d i b l e

. T h i s i s p r e c i s e l y w h y a p p e l l a t e c o u r t s

“ m u s t g i v e d u e r e g a r d t o t h e t r i a l c o u r t ’ s o p p o r t u n i t y t o j u d g e t h e w i t n e s s e s ’

c r e d i b i l i t y

. ” Q u i t e s i m p l y

, i t i s n e a r l y i m p o s s i b l e t o m a k e a b e t t e r w i t n e s s

c r e d i b i l i t y d e t e r m i n a t i o n f r o m a w r i t t e n t r a n s c r i p t t h a n f r o m l i v e t e s t i m o n y

. I n

t h i s c a s e

, t h e b a n k r u p t c y c o u r t

, a s t h e t r i e r o f f a c t

, r e s o l v e d c r e d i b i l i t y i s s u e s i n

f a v o r o f W a g n e r

, r a t h e r t h a n M c D o n o u g h

.

A s t h e p a r t i e s ’ d i s p u t e i s v i r t u a l l y e n t i r e l y f a c t

- b a s e d

, t h i s a p p e a l p r e s e n t s

e s s e n t i a l l y n o l e g a l i s s u e s

. T h u s

, M c D o n o u g h c a n o n l y a r g u e t h a t t h e e v i d e n c e

p r e s e n t e d t o t h e b a n k r u p t c y c o u r t i s i n s u f f i c i e n t t o s u p p o r t i t s f

i n d i n g s

. I f t h e

w i t n e s s e s ’ p r e s e n t a t i o n a l c r e d i b i l i t y w e r e n o t p a r t o f t h e e q u a t i o n

, t h i s d i s p u t e

c o u l d h a v e b e e n r e s o l v e d i n f a v o r o f e i t h e r p a r t y

. T h a t a l o n e m a k e s t h e e v i d e n c e

s u f f i c i e n t t o u p h o l d a t r i a l c o u r t ’ s f i n d i n g s

, s i n c e t h e f

a c t f i n d e r ’ s c h o i c e b e t w e e n

J o h n s o n v

. R i e b e s e l l (

I n r e R i e b e s e l l

)

, 5 8 6 F

. 3 d 7 8 2

, 7 9 2 ( 1 0 t h C i r

. 2 0 0 9 )

. 47

-23-t w o a c c o u n t s

, e s p e c i a l l y w h e n m a d e o n t h e b a s i s o f t h e w i t n e s s e s ’ c r e d i b i l i t y

,

c a n n o t b e r e v e r s e d o n a p p e a l

. 48

V I

. C O N C L U S I O N

F o r t h e r e a s o n s s t a t e d h e r e i n

, t h e b a n k r u p t c y c o u r t ’ s f a c t f i n d i n g s a r e n o t

c l e a r l y e r r o n e o u s

. T h e r e f o r e

, t h e d e c i s i o n s 1 ) d e n y i n g M c D o n o u g h ’ s d i s c h a r g e

p u r s u a n t t o § 7 2 7 ( a ) ( 4 ) ( A ) w a s n o t a n a b u s e o f d i s c r e t i o n

, a n d 2 ) d e n y i n g

d i s c h a r g e o f h i s d e b t t o W a g n e r p u r s u a n t t o § 5 2 3 ( a ) ( 2 ) ( A )

, w a s a p p r o p r i a t e

. W e

t h e r e f o r e a f f i r m t h o s e r u l i n g s

.

S e e B e s s e m e r C i t

y

, 4 7 0 U

. S

. a t 5 7 4 ( “ [ w ] h e r e t h e r e a r e t w o p e r m i s s i b l e 48

v i e w s o f t h e e v i d e n c e

, t h e f a c t f i n d e r ’ s c h o i c e b e t w e e n t h e m c a n n o t b e c l e a r l y

e r r o n e o u s ” ) ( c i t i n g Y

e l l o w C a b

, 3 3 8 U

. S

. a t 3 4 2 ) )

.

-24-NAFCU Compliance Blog: Joint Accounts - the Double Edged Sword

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May 21, 2010



### Joint Accounts - the Double Edged Sword

Posted by Anthony Demangone

We get a number of questions about joint accounts. Usually, the caller wants to know if a

joint account owner can do this or that on an account. For example:

Can a non-member joint owner close an account? A 1993 NCUA legal

opinion letter stated that, yes, assuming your account agreement permits it, a

nonmember joint owner could withdraw all funds. This would effectively

close the account, and possibly the membership, for the member. Note: that

letter is no longer available on NCUA's website. This came up quite a bit

when I worked at a credit union, often during a family dispute. Members

were shocked to learn that a joint owner could drain the account. It is my

money, the member would say. True. But in a joint account, it is their money

as well.

Can a joint owner remove another joint owner from the account? Look

to your contract. Usually, both account owners must agree to a change of that

type. What do you mean I can't remove him. But I just added him so he could

stop by the branch on my behalf. That doesn't matter. Once a person

becomes a joint owner, they are...well, a joint owner.

Is it true that a joint owner owns the entire account when the other joint

owner dies? It is very possible. Most credit unions that I talk to set their

accounts up to be "joint tenancies with the right of survivorship." This means

that both owners have complete access to the account's funds. Upon the death

of one joint owner, the other joint owner's right of survivorship means they

now own the entire account. Contrast this with a joint tenancy without right

of survivorship. In this case, the deceased owner's share passes on to his

estate. You mean grandma's account goes to Jimmy! He was simply added

as a joint owner to deposit checks for her and make ATM withdrawals! Look

at the account agreement. Jimmy very well may own all the account funds if

the account was a joint tenancy with right of survivorship.

Here's the classic. I added my son to my account so he could make

withdrawals while at school. You're telling me he could withdraw ALL THE

MONEY? I always wanted to answer this question with: "Yes, sir. In tens

and twenties if he wanted."

All of these situations flow from the same issue. Members don't always understand the

implications of adding a joint owner to a credit union account. Often, what they really

want is a power of attorney or an authorized user. Giving access, without ownership,

while retaining the right to revoke access may be what they want. That's where a POA

can work very well. Make sure your front-line staff understands the distinctions

between regular accounts and joint accounts, and what other alternatives exist at your Subscribe in a reader

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BSANAFCU Compliance Blog: Joint Accounts - the Double Edged Sword

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Nolan

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Catches... None!; Nuptial Pictures credit union. Here's a sample line that can come in handy for member service reps:

Ms. Jones, all you need to do is to complete and return the joint owner

addition card and other materials as we discussed, making sure it is

signed by you and (insert name.) Keep in mind that once the joint owner

is added, he/she will have immediate and complete access to all funds in

the account.

The last sentence really drives home the characteristics of a joint account. If the member

balks, that's a great time to mention the possibility of using a POA to achieve his or her

goals.

Posted by NAFCU on May 21, 2010 | Permalink

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Comments

1. You suggest that removing a joint owner from a joint account is a matter

of what is written in the credit union’s deposit contract. In fact, it is most

often a matter of state law. I know this is the case in California where code

sections specifically address multiple-party accounts. Further, while it is

advisable to address this issue in a deposit contract, it is not a required

provision and is often not addressed. In any event, if it is addressed, it must

comply with state law.

2. You also suggest that using a POA or authorized user will overcome the

problems inherent in the joint account scenario. However, the only problem

that is overcome is the the inability to remove the other joint account holder

and even in that scenario it can be overcome by the joint owner draining the

account and opening a different account. The POA or authorized user is just

as capable of legally draining the account as is the joint account holder. In

addition, a POA is typically used to empower the holder to act on behalf of a

principal who cannot himself act either because he is incapable of acting, is

out of the country or some other reason. In fact, in over 33 years of practice

as a lawyer at the NCUA and in representing credit unions, I have never seen

a POA used solely for this purpose when the principal is capable of acting

on his own. Further, in recommending the use of POA, the credit union then

needs to deal with the issue of whether or not a given POA is valid under

state law. In addition, members and customers will not be anxious to hire

lawyers to provide POAs or even to search for free ones on the internet.

Finally, it simply is not a good idea for the credit union to subject itself to

potential liability for recommending any course of action to protect the

member that might not turn out to be successful, particularly if it provides a

template POA to the member.

I think the important point to be made is that in taking on a joint account

owner, as well as in giving someone a POA or making them an authorized Reblog (0) Tweet

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LendingNAFCU Compliance Blog: Joint Accounts - the Double Edged Sword

http://nafcucomplianceblog.typepad.com/nafcu_weblog/2010/05/joint-accounts-the-double-edged-sword.html [2/11/2015 11:07:41 AM] The comments to this entry are closed. user, a member had better make sure that he has chosen someone he can

trust because he has potentially given away the keys to the vault.

Posted by: Todd Okun | May 25, 2010 at 11:15 AM

Anthony, Sounds like a good topic to plagiarize for our newsletter. :-)

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