## United States Bankruptcy Appellate Panel FO R T HE EIG HT H C IRC UIT

____________ No. 10-6040

____________ In re: * * Chad R . Toftness, * * Debtor. * * * Gene W. Doeling, * as Bankruptcy Trustee, * * Plainti ff - Appellee , * * v. * Appeal from the United States * Bankruptc y Court for the Coat ing Spec ia lt ie s, LLC; * Dis trict of M inne sota Co-op Credit

Union of Montevide o; * Co atin g S pec ialtie s, In c.; * Am erican Ban k of

St. P aul, *

* Defenda nts, * * v. * * Chad R . Toftness, * * De fend ant - A ppe llant. * *

______ Submitte d: November 4, 2010 File d: November 29, 2010

______1 The Honorable Dennis D. O’Bri en, Uni ted S tate s Bankrupt cy Court f or the Distric t of Minnesota.

2 Pl ainti ff als o made claims against ot her defendants, but those were resol ved by stipu lation . Thu s, the tria l only conce rned the tr ustee ’s ac tion f

or revoc ati on of discharge und er § 727(d)(2 ). 2 Before FE DER MA N, VE NTE RS, and S ALA DIN O, Bank ruptcy Judg es.

______ SALA DINO , Bankruptcy Judge. Chad R. Toftness appe als t he judgment

of the bankrup tcy court 1 dated June 1, 2010, revok ing the debtor-defend ant’s discharge pursuan t to 11 U.S.C. § 7 27(d)(2). We hav e ju risd ictio n o ver this app eal f rom the fina l ord er o f the ban kru ptc y co urt. See 28 U. S. C. § 15 8( b) . F orth e r ea son s s tate d be lo w, we af fi rm. STATEM ENT OF T

HE CASE The trus tee, Gene W. Doeling, brough t thi s pr oce edi ng un der 11 U.S .C. § 727(d)(2), 2 which p rovides:

(d) On req ues t of t he t rus tee, a cred itor , o r the United Stat es tr

ustee , and a fte r noti ce and a he ari ng, the court shall r evoke a discharge grant ed under subs ecti on (a) of this section if –

. . . (2) the debtor acquired p ro pe rty th at is pro perty of the est ate, or b ecam e entitle d to acquire pro perty that would be proper t y of the estate, and kno win gly and fra

udulent ly fai led t o report the acquis iti on of o r en titlem ent to such pro perty , or to del ive r or sur ren der suc h p rop erty to th e tru stee [.]3

In an acti on to re voke a dis charge , the plaintif f must pr ove each el ement by a preponderance of th e ev ide nce . O’N ea l v

. DePri est (In r e D ePr iest) , 414 B.R. 518, 521 (Bankr. W.D. Mo. 2009). Her e, t he bankrupt cy court

foun d tha t th e trust ee met his burden through both direct e vidence and advers e inf erenc e. Spec ifi cally, the bankruptcy court found that at the ti me of bankruptcy and subsequently, Chad Toftness had an o wn ersh ip inte rest in Co ating Sp ecialti e s, LLC, a Colorado limit ed liability company, and Coating Specialti es, LLC, a Minnes o ta lim ited liab ility company. Further , the bankrupt cy court found thatChad Toftness personally had an interestin cer

tai n promissor

y note payment s fl owing int o a ba nk account of Chad Toftness and the li mited liability companies. Thus, this action centers on C had’s involve ment in the two limite d liab ility co mp anies and his in terest in the n ote payments flowing through his bank account and the accounts of the li mited liability com pan ies, b oth pre - an d p ost -ba nk rup tcy
. Chad To ftnes s did not d isclos e his in terests in the vari ous companie s or i n the note p aym ents. T he b ank rup tcy co urt ag reed with the tru stee th at Ch ad T oftn es s sho uld have disclosed those intere sts and turned t hem over to the bankruptcy es tate. Accordingly, the c ourt found in favor of t he truste e and revoked Chad’s discharge. STANDARD OF REVI

EW
We review the ban kruptcy cou rt’s findings of f act for c l ear er ror an d its conclus ions of la w d e no vo . First Nat’l Bank of Olat

he v. Pontow (

In re Pon tow) , 111 F.3d604, 609 ( 8thCi r. 1997) ; Sholdan v. Dietz (In re Sholdan) , 108 F. 3d 886, 888 (8th Cir. 1997); Fed. R. Bankr. P. 8013. W e w ill ove rturn a factu al find ing o nly if it is not supported by s ubstan tia l evi dence i n the r ecord, if i t is based on an e rroneous view of the law, or if we are lef t with the def

init e and fi rm conviction that an er rorwas made. Ric ha rds on v. Su gg , 448 R.3d 1046, 1052 (8th Cir. 2006). W e afford due regard to the bankr

uptcy cour

t’s judgment of

the cr edibil it

y of the witnes ses . Fe d. R. Bankr. P
. 801 3; Richards on v. Sugg, 448 F.3d at 1052. A fac tualfinding support ed by3 The date of formation of Coating Specia lit ies, Inc. i s not clear , alt hough Ch ad Toftness testifi ed that

he formed hi s own company aft er he cease d w ork ing f or h is father i n 2000. 4 substanti al evidence is not clearly erroneous. Id

. Likewise, a t rialcourt’s choi ce bet we en t wo per mi ssib le v iew s of the evi den ce is no t clea rly e rro neo us. Id. FACTUAL BACKGROUND The fact s of

this case are compli cate d and need not allbe pres ented he re. The most relevant f

acts ar e set forth in the f ollowing time line:

C Prior

to 2000. C had To ftness worked for Urethane S ystems, a company ow ned by his fath er, D enn is T oftn ess .

C Ap pro xim ately 2000. 3 Chad T oftness f or me d C oat ing Sp ecia lities , Inc ., a M inne sota corp oratio n, as the sol e owner. The company was pri maril y involve d in commercial painting and urethane co at ing o f com me rcial p rop erties in M inne sota and o the r s tate s, inc lud ing Co lora do. Ch ad’s mo ther, C onn ie Toftness, wa s the b ook keep er for Co ating Sp ecialties , Inc. an d th e Col orado and M inn eso ta L LC s referen ced bel ow .

C Novem ber 1, 2003. Setco U til ity Company, Inc. (“Set co”), a Kentucky corporation, was di ss ol ve d. Atthat time, Chad Toftnes s was a vi ce pre sident of Setco
. At tria l, Chad and D ennis Toftness bo th testifi ed that Denn is Toftness was the sol e, l egal and equit able owner of Setco, but no cor

porat e rec ords were produced.

C October 31, 2005. Viking Ene rgy , LL C (“V iking ”),exe cuted a pro mis sory note in favor of Set co for $700, 000.00.5

C January 3, 2006. Vik ing m ade a note pay me nt in th e am oun t of $ 50,0 00.0 0 into Ch ad’s pers ona l ban k acc oun t.

C July 200 6. V iking paid $10 0,00 0.00 to C had ’s pe rson al ban k acc oun t.

C October 2006. Coating Speci alitie s, Inc. cea sed doing business due to loan defaults and tax prob lems.

C Novem ber 3 , 200 6. C oatin g S pecia lities, LL C, a C olor ado limite d liab ility company (“Colorado LLC”), was formed. Michael McC arty was li sted as the regist ered agent , tho ugh no recor ds were pr oduced to s how who ow ned the me mb ersh ip in tere sts.

C December 2006. The amount of $65,000.00 was paid byor on behal f of Viking to t he Col ora do LLC.

C January 2007. Chad Toftness negotiate d contracts on beh alf of Coating Specialties, LL C, a M inne sota lim ited liab ility co mp any (“M inne sota LLC ”), and sign ed as pres iden t and som etim es as v ice pr eside nt.

C February 200 7. Th e sum of $ 10,0 00.0 0 w as w ired b y or on b ehalf of V iking to the Colo ra do LLC.

C March 2007. The sum of $50, 000.00 was wir ed by or on beh alf of V iking to the Colo ra do LLC.

C Ap ril 1, 2007. Invoices were i ssued by the Minnesota LLC three da ys before it w as o ffici ally for me d, an d fo r w ork alre ady per for me d.6

C Ap ril 4, 2007. The Minnes ota LLC was formed. The C olorado LLC w as dis sol ved s hortl y bef

ore the for

mat ionof t

he Minnes ota

LLC.

C May 3, 20 07. T he M inne sota L LC issue d tw o ch ecks totalin g $1 0,00 0.00 to Kim Stark, Chad’s gi rlf rie nd.

C May 4, 2007. Chad Toftness file d for rel ief under Chapter 7 of t he Bankruptcy Code. He listed as assets his stock in Coating Specialties, Inc., which he valued as “$ 0. 00. ” He did n ot lis t any owners hip int eres t in t he Colora do LLC, the Minnesota LLC, Setco, or the Viking promi ssory not e payabl e to Set co.

C June 2007. The sum of $150, 000.00 was pai d by or on behal f of Viking to the Minne sot a LLC.

C February 5, 2008. Chad Toftness received a Chapter 7 discharge.

C March 11, 2009. Trustee comme nced an adversary proceedi ng to revoke Chad’ s dis cha rge . DIS CUSS ION
Pursuant to 11 U .S.C. § 727(d)(2), the disch arge of a C hap ter 7 d ebto r sho uld be revoked i f the debtor acquire d property that is es tat e property and knowingly and fraud ulen tly failed to report the acquisition of such property o r t o deliversuch pro perty to the trus tee. The fir st st ep is to deter mine if the debtor acqu ire d pr ope rty of th e es tate. The ba nkruptcy co urt found that the “C olorado and Minn esota LLC s wer e sim ply continuations of C oating Specialties Inc., in other forms, and tha t control of all thre e were ( sic) always i n the Toft ness f amily, including Chad Toftness. ” The7

bankruptcy court furt

her found that the payments under the Viking no te flow ed to Chad To ftnes s per son ally an d thr oug h the M inne sota and Colorado LLCs and t hat he had an interest in that note. Those are factual findings which are re viewed f or clear error. On the i ssue of o wnership an d control of the Co lorado and M innesota LLC s, the bankrupt cy court , which ha d the opp ortu nity to obser ve the wi tness es and hear the testimony, found the testimon y of Ch ad Toft ness to be “not cre dible. ” Moreover, Chad and Dennis Toftness testifie d that Michael McCarty was the own er of the Colorado LLC. Ho we ver, M r. M cCa rty te st if ie d th at he wor ked f or t he Col ora do LLC and that it was created bythe Toftness family. Co nnie Toftness, the spou se of Denn is Toftness and the bookkeeper for al l of t he companie s, t esti fie d that the Colorado LLC belonged to both her and Denn is Toftness. The ban kruptcy court f

ound that the Minnesota LLC was funded with asset s and pro jects from Coating Specia lti es, Inc. and the Colo ra do LLC. The ban kruptcy cou rt further found that the testimony of Clint Lecy, who clai med to be the owner of t he Minnes ota LLC , was “c omplete ly inc redi ble. ” Mr. Lecy ha d no invest ment in t

he company, no control over the books, and was paid amodest sa lary. Allof the funding forthe comp any cam e from the To ftness famil y. The re w as no cred ible ev iden ce to the contr ary. The bankrupt cy court did not c ommit cle ar er ror i n finding that

the Colorado and M inne sota L LC s w ere sim ply c ontinuations of Chad’s c ompany, Coating Specialties, Inc.
W ith rega rd to the V iking note procee ds, Chad Tof tness testifi ed that

he had no interestin Setco, the dissolved K entucky corp oration, which w as the beneficiary o f the promissor

y note. However, the undi spu te d ev iden ce is th at the p rom issor y no te pay me nts were made both pre- and post-peti tion to Chad Toftnes s and to t he Colorado and M inn eso ta L LC s, en tities the cou rt fo un d w ere c on trol led by Ch ad T oftn ess .8

Chad and De nnis To ftnes s bo th testi fied that Dennis Toftness was the sole, legal and equit able owner of Setco and was ent itl ed to the note proceeds. Further , the owner of Viking, the pay or o f the n ote, tes tified th at he m ade th e pay me nts to whome ver Dennis Toft ness i nstr

ucted, and Dennis Tof

tness inst

ruct ed him to make the payments t o the account s of Chad Toft ness and t

he LLCs. However, the bankruptcy court

noted that the tes timony of D enn is To ftnes s w as co ntrary to sworn testimony he had pre sente d in adiffer ent case. The evidence also reveal ed that Chad Toftness was allowed to use t he money from thos e Viking payments for his own needs and the n eeds of

his compani es, as if

it wer e his money. There i s no documentation to esta blis h that ther e was any l oan or other agr eementbetween Chad To ftnes s and his father with re spect

to such f

unds . In f

act, neither t estif

ied to any speci fic l oan arrangement other

than simply asser

ting that the funds belongedto Denn is Toftness and he let

Chad and the c ompanies us e some funds. Despit e both being lis ted a s officers of Setco, neither Chad T oftness nor D ennis Toftness produced any corp orate recor ds of Setco to establish ow nership of the bene ficial interests i n tha t d issolved ent ity. Based on the evidence that the funds flow ed to Chad Toftness and/or to entities he con trolle d, and the la ck of any credible evidence to the contrary, the bankruptcy court did not clearly err in finding that Chad Toftness had an inte rest in the procee ds of the Viking promissor

y note. Accordingly, the tr ustee has satisf

ied the firstelement – ac qu isitio n b y th e de bto r of pro per ty o f the esta te. The next and f

inal elem ent nec ess ary to a cau se o f act ion un der 11 U.S .C. § 727(d)( 2) is wh ether the d ebto r kn ow ingly and fraud ulen tly faile d to d eliver pro perty of the estate to the truste e . Fo kke na v. K lag es (In re K lag es), 381 B.R. 550, 554 (B. A.P. 8th Cir . 2008). It i s un disput ed t hat C had To ftnes s failed to de liver th e no te procee ds or an y inte rests in or as sets o f th e Colorado an d Minnesota LLCs t o the truste e. It is also und ispu ted th at Ch ad T oftn ess “ kno win gly” failed to do so. In fact, Chad Toftness deniedhaving any interestin the LLCs and the Viking note, testifying9

thatthe Viking note payment s belonge d to his father and t hat he di d no t o wn any inte rest in th e L LC s or the ir as sets
. Thus, the ul timat e quest ion is whether t he fai lure to del iver

was done frau du len tly.
In order to support re vocati on of the discharge, the

Debtor’s failure to de liver th e [estate asset] must also have been done fraudulentl y. Fraudulent inten t may be establi shed by showing that the debtor knowingly made an omissi on that

misle ads the trus tee or

that t he debtor engaged in a frau dule nt co urse of co ndu ct. In re Kasden , 209 B.R. at 244. A debtor’s intent may be infe rred f rom allthe surrounding circumstances w here the debtor’ s pa tte rn of conduct supp orts a fin din g o f fra ud ule nt in ten t. Id. The focus is on wh ether the debtor’s acti on s appear so inconsi stent

with hi s sel f-se rving s tat ement of intent that the pro of le ads the cou rt to dis bel iev e th e de bto r. Id. Klages, 381 B .R. at 554. Although the bankrup tcy court did not sp ecifically address this element in i ts order, it i s clear that i t deter

mined all of the elem e nts – i ncludi ng fraudul entin tent

– of a cause of act ion under 11 U.S.C. § 727(d)(2) had been est abli shed. The order discusses t he conflicting test imony of the witnesses an d th e natural in fe re nc es dr awnfrom the evidenc e. “Fr aud is rarely esta blis hed by admiss ion. Inst ead, the tria l court mus t look at the circumstantia l evidence and the events that occurred to try to deter

mine intent. ” Kla ges , 38 1 B .R. a t 55 4. The bankrupt cy court

deter mined that the exp la nati on of the ownership of the Co lo rado LLC, the Minnes ota LLC, and the Viking note payment s was si mply not credible
. The bankrupt cy court made this d eterm inatio n afte r care fully observing the testimony of Chad Toftness, his father, and other witnesses. W e afford due deference to the bankr

uptcy cour

t’s de te rminat ion re gardi ng credibility and f ind nothing in the10

record to reverse that det erminat ion. The ban kruptcy cou rt’s factual findings are suppo rt edby t

he ev id en ce an d the ba nkr uptcyco urt c orre ct lyap pl ie d the law. Chad Toftness argues o n appeal that he shou ld not be require d to “prove a negative” by prod ucing docu ments that do n ot exist . H is arg um ent m isses th e po int. The bankruptcy court found the t estim onie s of Dennis Toftnes s, Chad Tof tness , and Clint Lecy to be not cr edibl e. That , combine d with the act ions of Chad Tof

t ness in connect ion with the operations of Coating Specia lti es, Inc. , and s ubsequent ly the Colorado and Minnesota LLCs, the manner in whic h t h e books were handled f or the comp anies, th e use of th e com pan y fu nds , and the m ann er in w hich the V iking note procee ds were dis bursed wer e suff ici entevid ence to esta blish the tru stee’s prim a facie case under 11 U .S.C. § 727(d)(2). Upon establishment of the t rustee’ s prima faci e case, the bu rde n o f pr oo f sh ifted to C had To ftne ss. Cadlerock Jt. Venture II, L.P. v. Sand iford

(In re Sandif

ord) , 394 B.R . 487 , 490 (B.A .P. 8th Cir. 2 008 ). Sin ce his testimon y was found to not be cre dible , and s ince t here was no doc umentat ion produced t o support

his al legations, he fai led t o meet hi s burden.

DECI SI ON
Ac cord ingly , we a ffirm the d ecisio n of the b ank rup tcy co urt.

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