Court Opinion

ID: 34988
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:22:44+00
Date Added: 2024-06-11T17:12:44.446949
License: Public Domain

United States Court of Appeals
                                                                  Fifth Circuit
                                                               F I L E D
                                                                April 15, 2004
                 IN THE UNITED STATES COURT OF APPEALS
                                                           Charles R. Fulbruge III
                         FOR THE FIFTH CIRCUIT                     Clerk

                        ______________________

                             No. 03-40362
                        ______________________

               In The Matter Of: JOE ALVIN ANDREWS, SR,

                                                                  Debtor.

         - - - - - - - - - - - - - - - - - - - - - - - - - - -

  THE CADLE COMPANY; CADLEWAY PROPERTIES, Inc., Assignee of the
                          Cadle Company,

                                                            Appellants,
                                versus

                        JOE ALVIN ANDREWS, SR.,

                                                               Appellee.

         ____________________________________________________

              Appeal from the United States District Court
                   for the Southern District of Texas
                               (98-CV-53)
         _____________________________________________________

Before DeMOSS, DENNIS, and PRADO, Circuit Judges.

DENNIS, Circuit Judge:*

     Plaintiffs-Appellants, the Cadle Company, et al. (“Cadle”),

appeals the district court’s affirmance of the bankruptcy court’s

     *
     Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

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discharge of debts that Defendant-Appellee, Joe Alvin Andrews, Sr.

(“Andrews”) owed Cadle.

       Each of Cadle’s arguments challenges a different factual

finding made by the bankruptcy court, which we can only overturn if

Cadle    proves    that    they      are   clearly      erroneous.         Because   the

bankruptcy court’s factual findings relating to Andrews’ discharge

were    not    clearly    erroneous,       we     AFFIRM   the    district     court’s

affirmance of the bankruptcy court.

                                     I. BACKGROUND

       In the mid-1960s, Andrews (now deceased) obtained royalty and

development rights from the restaurant chain Whataburger, Inc.

(“Whataburger”) to develop Whataburger franchises in Bexar County,

Texas.        Andrews, to facilitate this development, incorporated

Whataburger of Alice (“WOAI”) in 1968 with his wife Louise Andrews.

Andrews and Louise Andrews were the sole shareholders of WOAI.

Over    the    course     of   the    next       few   decades,   in   a    series    of

transactions ending in 1987, Andrews transferred all of the royalty

and development rights that Whataburger granted to him to WOAI in

exchange for an employment agreement and other consideration from

WOAI.

       In the 1980's and early 1990's Andrews’ physical and mental

condition began to deteriorate. He also became involved in several

ill-conceived, high-risk investments that began to deplete his

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assets.   Mrs. Andrews became increasingly concerned about her

husband’s investments and, in 1984, entered into a separation

agreement with Andrews to divide the community property between

them to protect her interests. This agreement—along with transfers

of stock to his children—reduced Andrews’ shares in WOAI to 15,000.

     One of Andrews’ questionable financial decisions involved a

loan from Laredo National Bank (LNB) to purchase a ranch in 1985.

Andrews defaulted on the loan in 1989.        LNB was awarded a judgment

against Andrews of over $1.2 million.         Execution of the judgment

was withheld upon an agreement that Andrews would pay LNB $6,607

per month.    This agreement was secured by the pledge of Andrews’

15,000 shares of WOAI stock.       This arrangement caused a potential

problem for    WOAI   and   the   Andrews   family   because   a   franchise

agreement between WOAI and Whataburger required that no WOAI stock

could be held by an third party unapproved by Whataburger.               In

order to solve this problem, WOAI bought the LNB judgment against

Andrews and foreclosed on Andrews’ stock.            As a result of the

foreclosure, WOAI obtained all of Andrews’ remaining shares in

WOAI.

     WOAI and Whataburger later became involved in litigation which

led to a 1990 settlement agreement in which Whataburger bought

twenty-eight Whataburger stores from WOAI in exchange for $16

million paid to WOAI. As part of this settlement agreement Andrews

signed a release of any claims that he had against Whataburger and

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consented to the transfer to Whataburger of “all of the right,

title and interest to any real or personal property used or useful

in   business    operations.”     Andrews    personally   received   no

consideration in exchange for signing this release.

     By the mid 1990s Andrews’ investment losses had escalated, and

he filed for Chapter 7 bankruptcy, claiming a negative net worth in

excess of $14 million.

     Cadle became a creditor of Andrews prior to his bankruptcy

when it purchased a judgment against him held by Windsor Savings in

the amount of approximately one million dollars.          After Andrews

filed for bankruptcy, Cadle began adversary proceedings in the

bankruptcy court, objecting to the discharge based on the bars to

the discharge provided by 11 U.S.C. §§ 727(a)(2)(A), 727(a)(4)(A),

and 727(a)(5).    The bankruptcy court denied Cadle’s objections and

entered a discharge, which was affirmed by the district court.

Cadle now appeals that decision to this court.

                             II. ANALYSIS

                         A. Standard of Review

     “On appeal from a judgment in bankruptcy, findings of fact

shall not be set aside unless clearly erroneous, and due regard

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

the credibility of the witnesses.”          In re Monnig’s Department

Stores, Inc., 929 F.2d 197, 200 (5th Cir. 1991) (internal citations

                                   4
and quotations omitted).         The bankruptcy court’s conclusions of

law, however, are reviewed de novo.          Id. at 201.   In addition, when

the bankruptcy court’s findings of fact are based on determinations

regarding the credibility of witnesses, they should be awarded even

greater deference.       See Matter of Webb, 954 F.2d 1102, 1106 (5th

Cir. 1992).      Finally, this court has recognized that courts must

grant a debtor a discharge in bankruptcy unless they find a

specific, statutory reason not to grant the discharge. Shelby v.

Texas Improvement Loan Co., 280 F.2d 349, 355 (5th Cir. 1960)(“A

bankrupt[cy petitioner] is not to be denied a discharge on general

equitable considerations. It can only be denied if one or more of

the statutory grounds of objection are proved.”).              Accordingly,

unless   11    U.S.C.   §§   727(a)(2)(A),    727(a)(4)(A),    or   727(a)(5)

operate to bar Andrews’ discharge, we must affirm it.

  B. 11 U.S.C. § 727(a)(2)(A)–Transfers with Intent to Defraud

     The bankruptcy court shall not grant a debtor a discharge if

              the debtor, with intent to hinder, delay, or
              defraud a creditor or an officer of the estate
              charged with custody of property under this
              title, has transferred, . . . , or has
              permitted to be transferred . . . –property of
              the debtor, within one year before the date of
              the filing of the petition.

11 U.S.C. § 727(a)(2)(A) (internal numbering consolidated).

     A party challenging a discharge under § 727(a)(2)(A) must

prove that there was “(1) a transfer of property; (2) belonging to

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the debtor; (3) within one year of the filing of the petition; (4)

with actual   intent   to   hinder,       delay   or    defraud    a   creditor.”

Robertson v. Dennis, 330 F.3d 696, 701 (5th Cir. 2003) (citing Pavy

v. Chastanat, 873 F.2d 89, 90 (5th Cir. 1989)).                   The bankruptcy

court’s determination that a debtor did or did not have the

requisite intent is a factual finding.            Id.

     Cadle argues that Andrews owned five “substantial assets” that

he transferred within one year prior to his bankruptcy petition in

violation of § 727(a)(2)(A).1         However, for each of these five

transfers, the bankruptcy court found that section 727(a)(2)(A) did

not bar Andrews’ discharge because he lacked the requisite intent

to hinder, delay, or defraud a creditor in making the transfers.

     The bankruptcy court’s findings were not clearly erroneous.

First, the bankruptcy judge considered evidence that Andrews’

mental and physical condition at the time of the transfers had

severely deteriorated.      The bankruptcy court, relying on testimony

by Andrews’ family members concerning the circumstances surrounding

the transfers, found that each them were made, not to defraud

creditors, but out of the family’s concern for Andrews’ physical

     1
     Specifically, Cadel states that Andrews improperly
transferred (a) exclusive rights to develop Whataburger franchise
locations; (b) certain royalty rights (c) ownership of 15,000
shares of stock and rights in WOAI; (d) collaterally related
rights to receive dividends, bonuses, and rights of control
through his position as officer and/or director of WOAI; and (e)
personal litigation claims against Whataburger.

                                      6
and mental health and his ability to properly handle the assets.2

       Cadle contends that the bankruptcy court improperly allowed

its observations of Andrews’ physical and mental condition at trial

to color its findings with respect to Andrews’ mental state at the

time       of    the   transfers.        However,       the    bankruptcy    court’s

determination was based, in large part, on testimony by witnesses

who observed and worked closely with Andrews at the time of the

transfers.         In deference to the bankruptcy court’s findings of

facts based upon its assessment of the witnesses’ credibility, we

cannot say that the findings were clearly erroneous.                   Accordingly,

section 727(a)(2)(A) does not bar Andrews’ discharge.

   C. 11 U.S.C. § 727(a)(4)(A)–Making a False Oath or Account

       The bankruptcy court shall not grant the debtor a discharge if

“the debtor knowingly and fraudulently, or in connection with the

case, made a false oath or account.”                   11 U.S.C. § 727(a)(4)(A).

The party challenging the discharge has the burden of proving that

“(1)       the   debtor   made   a   false       statement   under   oath;   (2)   the

statement was false; (3) the debtor knew the statement was false;

(4) the debtor made the statement with fraudulent intent; and (5)

the statement was material to the bankruptcy case.”                      Sholdra v.

       2
     While the witnesses testifying about Andrews’ mental state
had an obvious interest in the outcome of the case, “due regard
shall be given to the opportunity of the bankruptcy court to
judge the credibility of the witnesses.” In re Monnig’s, 929
F.2d at 200-01.

                                             7
Chilmark Fin., L.L.P., 249 F.3d 380, 382 (5th Cir. 2001) (internal

citations omitted).     The bankruptcy court’s determination that a

debtor has or has not made a false statement pursuant to §

727(a)(4)(A) is a factual finding.        Keeney v. Smith, 227 F.3d 679,

685 (6th Cir. 2000) (citing Williamson v. Firemen’s Fund Ins. Co.,

828 F.2d 249, 251 (4th Cir. 1987)); cf. Robertson, 330 F.3d at 701

(involving § 727(a)(2)(A)).

     Cadle claims that Andrews knowingly and fraudulently made

twelve false statements in connection with the case in violation of

11 U.S.C. § 727(a)(4)(A).      Cadle argues again that the bankruptcy

court improperly based its findings to the contrary on Andrews’

mental state at the time of trial rather than at the time that the

statements were made.     Consequently, Cadle concludes, the factual

findings were “contrary to the greater weight of the evidence.”

     However, for the same reasons that Cadle’s first argument was

rejected, we conclude that the bankruptcy court did not commit

clear   error   in   finding   that   Andrews   did   not   knowingly   and

fraudulently make false statements in connection with this case.

The bankruptcy court heard testimony as to Andrews’ diminished

mental capacity by three witnesses–Bill York, Andrews’ business

manager, Garvin Stryker, Andrews’ bankruptcy counsel, and Mrs.

Andrews–who worked closely with Andrews at the time he made the

statements at issue.     Relying on the substance of the witnesses’

testimony and its assessments of their credibility, the bankruptcy

                                      8
court found that the alleged statements “were incorrect, but they

were not knowingly and fraudulently made as making a false oath.”

      D. 11 U.S.C. § 727(a)(5)–Unexplained Losses of Assets

     A court shall not discharge a debtor if “the debtor has failed

to explain satisfactorily . . . any loss of assets or deficiency of

assets to meet the debtor’s liabilities.”        11 U.S.C. § 727(a)(5).

The bankruptcy court’s determination that a debtor has or has not

satisfactorily explained a loss of assets is a factual finding.

See In re Hawley, 51 F.3d 246, 248 (11th Cir. 1995).

     Cadle    argues   that   Andrews   made    three   unsatisfactorily

explained transfers of assets which should operate to bar his

discharge under § 727(a)(5):     (1) The release of his claims in the

Whataburger litigation for no consideration; (2) the loss of his

rights to a “bonus distribution” in 1993; and (3) the transfer of

and foreclosure on Andrews’ 15,000 shares of WOAI stock.

     1. Claim 1: The release of Andrews’ claims in the Whataburger

litigation.

     The bankruptcy court found that Andrews did not have any

rights to transfer at the time of the settlement with Whataburger.

Specifically, it found that Andrews had transferred all of his

rights and potential claims involving Whataburger to WOAI in

various   transactions   years   before   the    settlement   agreement.

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Therefore, the “release” of Andrews’ claims against Whataburger was

in the nature of a quitclaim deed—the parties to the release

believed that Andrews did not have any claims against Whataburger

that he had not transferred to WOAI at some point in the past;

however, due to the complex nature of the transactions between WOAI

and Andrews over the years, the parties “covered their bases” by

having    Andrews   release   whatever     claims    he    may     have   against

Whataburger as part of the settlement.

     This finding is supported by the record.                   Joe Andrews, Jr.

(Andrews’ son) testified that “any rights that [his father] had and

the exclusivity or territorial rights along with any franchise

rights were conveyed to [WOAI] back in 1986.” The bankruptcy

court’s   finding   that   Andrews’    release      of    his    claims   against

Whataburger did not constitute a “loss of assets,” because those

claims had already been transferred, is supported by evidence in

the record and is not clearly erroneous.

     2. Claim 2: Andrew’s loss of a “bonus distribution” in 1993.

     Cadle next claims that in December 1993, all WOAI shareholders

received a bonus distribution except for Andrews. It contends that

the bankruptcy court clearly erred in finding that the explanation

for the loss of the bonus was satisfactory.                     Specifically, it

contends that the explanation provided was “totally inadequate”

because Andrews was the “founding father” of WOAI and therefore

                                      10
deserved a bonus.

     However, at trial Joe Andrews, Jr., who the bankruptcy court

found “very, very credible,” testified that “Andrews did not

receive a bonus because it would not look good to the creditors or

anything [sic] else if we were awarding him a bonus and he had

already cost us money in the past.”3          Therefore, the evidence is

sufficient to support the bankruptcy court’s finding that there was

a satisfactory explanation for Andrews’ lack of a 1993 bonus.                  The

bankruptcy court did not clearly err in relying on this evidence.

     3. Claim 3: The foreclosure on Andrews’ WOAI stock.

     Finally, Cadle contends that the bankruptcy court clearly

erred   in    finding   that   the   circumstances       involved   in    WOAI’s

foreclosure on Andrews’ 15,000 shares of WOAI stock as a result of

the LNB transaction were a satisfactory explanation for why Andrews

lost the stock.     We disagree.

     The     bankruptcy   court   found    that   WOAI    purchased      the   LNB

judgment in order to prevent the WOAI stock from going to an

unapproved third party in violation of WOAI’s franchise agreement

with Whataburger. The bankruptcy court found that this transaction

was “a very logical one that—we’re quite used to seeing.”                      The

bankruptcy court also found that, because Andrews had already

3
 This statement referred to the money that Andrews was losing
due to his speculative investments and bad business decisions
made as a result of Andrews’ deteriorating mental condition.

                                      11
defaulted on his loan payments to LNB, that the foreclosure on his

15,000 shares by WOAI was not a transfer because it “was no

different than a foreclosure by LNB.”              In short, the bankruptcy

court found that WOAI’s foreclosure on Andrews’ 15,000 shares was

not a “transfer” and, if it were a transfer, that Andrews provided

a satisfactory explanation for it. This finding was based on

evidence in the record and is not clearly erroneous.

       The bankruptcy court did not clearly err in finding that the

three    transfers     of   assets   about     which   Cadle   complains   were

satisfactorily explained.        Accordingly, it did not err in holding

that Section 727(a)(5) does not bar Andrews’ discharge.

                               III. CONCLUSION

       Cadle claims that Andrews’ bankruptcy discharge should have

been    barred    by   11   U.S.C.   §§    727(a)(2)(A),   727(a)(4)(A)     and

727(a)(5).       However, the bankruptcy court’s factual findings were

not clearly erroneous.         Therefore, we affirm the district court

decision affirming this discharge.

AFFIRMED

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