Court Opinion

ID: 170215
Source: CourtListenerOpinion
Date Created: 2010-08-14 18:02:07+00
Date Added: 2024-06-11T09:05:27.131138
License: Public Domain

FILED
                                                        United States Court of Appeals
                                                                Tenth Circuit
                  UNITED STATES COURT OF APPEALSJanuary 25, 2008

                         FOR THE TENTH CIRCUIT              Elisabeth A. Shumaker
                                                                Clerk of Court

 In re:

 DONALD ALVIN CARLSON,                               No. 06-8158
                                                 (BAP No. WY-06-027)
             Debtor.                                   (BAP)

 COBRA WELL TESTERS, LLC,

             Plaintiff-Appellant,

 v.

 DONALD ALVIN CARLSON,

             Defendant-Appellee.

                                    ORDER

Before TYMKOVICH, BALDOCK, and EBEL, Circuit Judges.

      An Order and Judgment was filed in this matter on January 23, 2008. The

panel hereby amends the last sentence on page thirteen of the Order and Judgment

to read “The judgment of the bankruptcy court is AFFIRMED.” A copy of the

amended Order and Judgment is attached to this order.

                                         Entered for the Court

                                         ELISABETH A. SHUMAKER, Clerk
                                                                      FILED
                                                          United States Court of Appeals
                                                                  Tenth Circuit
                   UNITED STATES COURT OF APPEALSJanuary 23, 2008

                          FOR THE TENTH CIRCUIT               Elisabeth A. Shumaker
                                                                  Clerk of Court

    In re:

    DONALD ALVIN CARLSON,

                                                       No. 06-8158
             Debtor.                               (BAP No. WY-06-027)
                                                         (BAP)

    COBRA WELL TESTERS, LLC,

             Plaintiff-Appellant,

    v.

    DONALD ALVIN CARLSON,

             Defendant-Appellee.

                           ORDER AND JUDGMENT *

Before TYMKOVICH, BALDOCK, and EBEL, Circuit Judges.

*
       After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. It may be cited, however, for its persuasive value consistent
with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
      In this bankruptcy adversary proceeding, plaintiff-creditor Cobra Well

Testers, LLC (Cobra) appeals the “Opinion on Complaint” and related judgment

entered by the United States Bankruptcy Court for the District of Wyoming

rejecting its claims that: (1) Cobra’s unsecured nonpriority claim for $24,000

should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A); and

(2) the Chapter 7 discharge of defendant-debtor Donald Alvin Carlson (Debtor)

should be denied pursuant to 11 U.S.C. § 727(a)(3) and (5). The United States

Bankruptcy Appellate Panel of the Tenth Circuit (BAP) entered an order and

judgment affirming the bankruptcy court’s opinion in all respects, and Cobra is

asking this court to reverse both the BAP and the bankruptcy court. Exercising

jurisdiction under 28 U.S.C. § 158(d)(1), we affirm.

                                         I.

      The bankruptcy court conducted a one-day bench trial regarding Cobra’s

claims, and both sides submitted evidence and testimony. In its order and

judgment, the BAP accurately summarized the evidence presented at trial and the

proceedings below as follows:

            Prior to filing bankruptcy, Debtor operated an oil field service
      business. Rick Adams (“Adams”), one of Cobra’s principals, was
      previously employed by Debtor. After leaving Debtor’s employ,
      Adams formed Cobra, which became a competitor. In late 2003,
      Debtor was facing financial difficulties and decided to cease
      operation of his business. Shortly thereafter, Cobra began
      negotiating with Debtor for the purchase of his business assets.

             In connection with the purchase, Cobra engaged a mutual
      acquaintance, Dan Smith (“Appraiser”), to appraise the Debtor’s
      assets. The Appraiser, with Adams, went to the storage yard and

                                        -2-
      building in Rock Springs, Wyoming, where Debtor’s equipment was
      located. Debtor was not present for the inspection. After inspection,
      Appraiser prepared an appraisal dated January 26, 2004
      (“Appraisal”), that valued the assets at $315,950. It was not until
      August 2, 2004, that Debtor and Cobra actually executed a contract
      for sale (“Contract”) regarding the oil field business assets. The
      agreed sales price was $155,000. The Contract was prepared by
      Cobra’s attorney and contained a list of the assets on the Appraisal.
      When the closing occurred on August 24, 2004, in Casper, Wyoming,
      Cobra provided Debtor with a bill of sale (“Bill of Sale”) that
      contained the same list of sale assets as the Appraisal and the
      Contract. Debtor executed the Bill of Sale, and a Cobra
      representative traveled to Rock Springs, Wyoming, to take
      possession of the purchased assets the next day.

            A dispute arose between the parties as to some of the assets
      which were part of the sales transaction. Cobra alleged some items
      were missing and others were in a state of disrepair. The parties
      eventually agreed [and stipulated at trial] to a value of $24,000 for
      the missing . . . assets.

            Debtor filed his Chapter 7 petition on November 18, 2004.
      Cobra then filed this adversary proceeding, objecting to Debtor’s
      Chapter 7 discharge pursuant to § 727[(a)(3) and (5)]. Cobra also
      objected to the dischargeability of the debt for the missing . . .
      equipment pursuant to § 523(a)(2)(A) . . . . The bankruptcy court
      denied all of Cobra’s claims . . . .

See Aplt. App. at 321-22 (footnotes omitted). 1

                                         II.

      In this appeal, we are only reviewing factual findings of the bankruptcy

court, and we review those findings under the clearly erroneous standard. See

Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1370 (10th Cir. 1996). A

1
       In the proceedings below, Cobra also asserted claims under 11 U.S.C.
§§ 523(a)(6) and 727(a)(2)(A) and (a)(4), but it has abandoned those claims in
this appeal. We therefore do not need to consider them.

                                         -3-
finding of fact is clearly erroneous if “it is without factual support in the record,

or if the appellate court, after reviewing all the evidence, is left with the definite

and firm conviction that a mistake has been made.” Las Vegas Ice & Cold

Storage Co. v. Far West Bank, 893 F.2d 1182, 1185 (10th Cir. 1990) (quotation

omitted). In addition, as noted by the BAP, “[a] creditor has the burden of

proving the elements of a § 523 or § 727 claim by a preponderance of the

evidence.” Aplt. App. at 323 (citing Grogan v. Garner, 498 U.S. 279 [,291]

(1991) and First Nat’l Bank of Gordon v. Serafini (In re Serafini), 938 F.2d 1156

[,1157] (10th Cir. 1991)). As set forth below, we conclude that the bankruptcy

court’s factual findings are not clearly erroneous, and we agree with the

bankruptcy court that Cobra failed to prove its claims by a preponderance of the

evidence.

      A. Claims Under § 523(a)(2)(A).

      Under the Bankruptcy Code, a debtor will not be discharged from any debt

obtained by “false pretenses, a false representation, or actual fraud.” 11 U.S.C.

§ 523(a)(2)(A). To establish that a claim is nondischargeable under

§ 523(a)(2)(A), a creditor must prove the following elements by a preponderance

of the evidence: “[t]he debtor made a false representation; the debtor made the

representation with the intent to deceive the creditor; the creditor relied on the

representation; the creditor’s reliance was reasonable; and the debtor’s

representation caused the creditor to sustain a loss.” Young, 91 F.3d at 1373.

                                           -4-
      As recognized by the BAP, with regard to the scienter element, this court

“has stated that [the] requisite intent [to defraud] may be inferred from a

sufficiently reckless disregard of the accuracy of the facts.” Aplt. App. at 330

(citing Driggs v. Black (In re Black), 787 F.2d 503, 506 (10th Cir. 1986),

abrogated on other grounds by Grogan, 498 U.S. at 291, and Cent. Nat’l Bank

& Trust Co. v. Liming (In re Liming), 797 F.2d 895, 897 (10th Cir. 1986)). 2

Further, “[t]he fraudulent intent element of § 523(a)(2)(A) need not be shown by

direct evidence, but may be inferred from the totality of the circumstances.”

Groetken v. Davis (In re Davis), 246 B.R. 646, 652 (10th Cir. BAP 2000). We

have also cautioned, however, that the exceptions to discharge contained in

§ 523(a) “are to be narrowly construed, and because of the fresh start objectives

of bankruptcy, doubt is to be resolved in the debtor’s favor.” Bellco First Fed.

Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir. 1997)

(applying § 523(a)(2)(B)).

      The bankruptcy court found that Cobra’s claim under § 523(a)(2)(A) “fails

for want of fraudulent intent.” Aplt. App. at 316. This is a factual finding that

2
       Although Black and Liming involved denial-of-discharge claims under
§ 523(a)(2)(B), which provides that any debt obtained by the use of a materially
false written statement is not dischargeable, the reckless disregard standard
applies with equal force to the scienter element under § 523(a)(2)(A). See Gen.
Elec. Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 372 (5th Cir. 2005)
(noting that a reckless disregard for the truth or falsity of a statement can satisfy
the scienter element under § 523(a)(2)(A)).

                                          -5-
we review for clear error, and we see no such error here. See Cowen v. Kennedy

(In re Kennedy), 108 F.3d 1015, 1018 (9th Cir. 1997) (“Intent to defraud [under

§ 523(a)(2)(A)] is a question of fact.”); Anastas v. Am. Sav. Bank (In re Anastas),

94 F.3d 1280, 1283 (9th Cir. 1996) (“A finding of whether a requisite element of

[a] section 523(a)(2)(A) claim is present is a factual determination reviewed for

clear error.”). As the bankruptcy court succinctly explained:

      The appraisal and list of Sale Assets was prepared by Cobra’s agent,
      and Cobra did not inspect the assets against the list. The Contract
      and Bill of Sale containing the asset list was prepared by Cobra and
      its agent and not signed by the debtor until months after the list was
      prepared. The debtor did not make any pre-closing assertions as to
      the condition of the assets or the extent of the assets. The court
      believes [debtor] signed the documents presented to him by Cobra in
      a simple attempt to get the business sold and pay down his IRS debt.
      A warranty of title is not fraud. This is a case of contract default at
      best.

Aplt. App. at 316.

      We agree with the bankruptcy court’s analysis. Simply put, Cobra failed to

prove that Debtor did not intend to transfer title to all of the assets listed in the

Contract and Bill of Sale at the time those documents were executed and

therefore acted with an intent to deceive. Instead, at best, the evidence at trial

showed only a subsequent breach of contract, and a “mere inability or failure to

perform is not, in itself, sufficient evidence of fraudulent intent [for purposes of

§ 523(a)(2)(A)].” Williams v. Zachary (In re Zachary), 147 B.R. 881, 883

(Bankr. N.D. Tex. 1992); see also First Baptist Church v. Maurer (In re Maurer),

112 B.R. 710, 713 (Bankr. E.D. Pa. 1990) (“It is well established that a finding of

                                           -6-
fraud [under § 523(a)(2)(A)] cannot be premised upon a mere breach of contract.

Instead, to be actionable as fraud, the plaintiff must establish that the debtor

entered into the contract with the intent of never complying with its terms.”);

Donaldson v. Hayes (In re Hayes), 315 B.R. 579, 587 (Bankr. C.D. Cal. 2004)

(“In order for a representation regarding future performance to be actionable

under § 523(a)(2)(A), a debtor must lack an intent to perform when the promise

was made.”); Hall v. Jackson (In re Jackson), 348 B.R. 595, 599 (Bankr. M.D.

Ga. 2006) (“The failure to perform a mere promise is not sufficient to make a

debt nondischargeable [under § 523(a)(2)(A)], even [if] there is no excuse for the

subsequent breach.”) (quoting 4 Collier on Bankruptcy ¶ 523.08[1][d] (15th ed.

rev. 2006)).

      Cobra attempts to overcome this failure of proof by arguing that the

bankruptcy court committed a legal error because it “did not determine the claim

under . . . § 523(a)(2)(A) by considering whether Debtor’s reckless disregard

would satisfy the intent element required under the statute.” Aplt. Opening Br. at

14; see also id. at 12 (“The Bankruptcy Court never reviewed or determined the

issues of this case related to . . . § 523(a)(2)(A) on the basis of whether there had

been any sufficiently reckless disregard by Debtor.”). In addition, Cobra argues

that the BAP stepped outside of its role as an appellate court and made an

improper factual finding when it concluded in its order and judgment that “given

the overall facts and context surrounding the transaction, we do not believe

                                          -7-
Debtor’s acts are ‘sufficiently reckless’ to infer the requisite fraudulent intent and

warrant excepting Cobra’s debt from discharge.” Aplt. App. at 331.

      Cobra’s arguments are without merit. To begin with, the question of

whether Debtor acted with a reckless disregard of the facts is not an element of a

§ 523(a)(2)(A) claim, but is instead simply a means of proving fraudulent intent

by inference. As a result, the bankruptcy court was not required to make any

specific factual findings regarding Debtor’s alleged recklessness. Instead, the

court was only required to determine the ultimate factual issue of whether Cobra

proved that Debtor acted with the requisite fraudulent intent, and we have

concluded that the court’s determination of that factual issue was not clearly

erroneous. We also reject Cobra’s argument that the BAP made an improper

factual finding, as we construe its statement to be a legal determination that

Cobra presented insufficient evidence of Debtor’s recklessness to require that an

inference of fraudulent intent be drawn by the bankruptcy court. Moreover,

having reviewed the matter de novo, we agree with the BAP’s legal conclusion.

                                          -8-
      B. Claims Under § 727(a)(3).

      Section 727(a)(3) provides as follows:

      (a) The court shall grant the debtor a discharge, unless–

             ....

             (3) the debtor has concealed, destroyed, mutilated, falsified,
      or failed to keep or preserve any recorded information, including
      books, documents, records, and papers, from which the debtor’s
      financial condition or business transactions might be ascertained,
      unless such act or failure to act was justified under all of the
      circumstances of the case[.]

11 U.S.C. § 727(a)(3).

      “[T]o state a prima facie case [under § 727(a)(3)], [Cobra] had to

demonstrate that [Debtor] had failed to maintain and preserve adequate records

and that the failure made it impossible to ascertain his financial condition and

material business transactions.” Gullickson v. Brown (In re Brown), 108 F.3d

1290, 1295 (10th Cir. 1997). However, “[i]n order to deny discharge for failure

to keep records the court need not find that the debtor intended to conceal his

financial condition.” Meridian Bank v. Alten, 958 F.2d 1226, 1234 (3d Cir.

1992); see also Razzaboni v. Schifano (In re Schifano), 378 F.3d 60, 70 (1st Cir.

2004) (“Under § 727(a)(3), a creditor need not prove a fraudulent intent, but only

that the debtor unreasonably failed to maintain sufficient records to adequately

ascertain his financial situation.”). The question of whether a debtor violated

§ 727(a)(3) is a factual determination that we review for clear error. See

Robertson v. Dennis (In re Dennis), 330 F.3d 696, 703 (5th Cir. 2003).

                                         -9-
      We agree with the BAP that “[t]he bankruptcy court committed no error in

ruling against Cobra’s § 727(a)(3) claim.” Aplt. App. at 327. As explained by

the BAP:

             In this case, Cobra argues Debtor’s discharge should be denied
      under § 727(a)(3) because Debtor did not possess any records for his
      oilfield service business. It is uncontroverted that Debtor lacked any
      business records at the time the Chapter 7 petition was filed. The
      evidence presented to the bankruptcy court was that the business
      records were destroyed by the Debtor’s former spouse who had been
      the bookkeeper for the business, even post-divorce. However, the
      bankruptcy court found “no evidence that the business records may
      have been material to any question raised about the [D]ebtor’s
      financial condition.” We agree.

             The sale of business assets from Debtor to Cobra shortly prior
      to the bankruptcy meant that Debtor had no business -- he sold
      whatever assets he had to Cobra and got out of the business. Further,
      [the Statement of Financial Affairs that Debtor submitted to the
      bankruptcy court] accounts for all distributions made from the net
      proceeds received from the sale of the business assets. It is difficult
      to see then, how the destroyed records made it impossible to
      ascertain Debtor’s financial condition or material business
      transactions.

Id. at 326-27 (footnote omitted).

      Having found no clear error in the bankruptcy court’s analysis of Cobra’s

claim under § 727(a)(3), we affirm the court’s rejection of the claim.

                                        -10-
      C. Claims Under § 727(a)(5).

      Section 727(a)(5) provides as follows:

      (a) the court shall grant the debtor a discharge, unless–

             ....

             (5) the debtor has failed to explain satisfactorily, before
      determination of denial of discharge under this paragraph, any loss of
      assets or deficiency of assets to meet the debtor’s liabilities[.]

11 U.S.C. § 727(a)(5).

      Under § 727(a)(5), “a bankruptcy court has broad power to decline to grant

a discharge . . . where the debtor does not adequately explain a shortage, loss, or

disappearance of assets.” In re D’Agnese, 86 F.3d 732, 734 (7th Cir. 1996)

(quotation omitted). “Section 727(a)(5) requires a satisfactory explanation which

must consist of more than vague, indefinite and uncorroborated assertions by the

debtor.” Damon v. Chadwick (In re Chadwick), 335 B.R. 694, 703 (W.D.

Wis. 2005). However, “[a]s is the case with Section 727(a)(3), no requirement

exists that debtors act fraudulently or intentionally to sustain an objection to

discharge based on Section 727(a)(5).” Shappell’s Inc. v. Perry (In re Perry),

252 B.R. 541, 549 (Bankr. M.D. Fla. 2000). On the other hand, “[w]hen deciding

whether a debtor’s explanation is satisfactory for purposes of Section 727(a)(5),

the issue is whether the explanation satisfactorily describes what happened to

assets; not whether what happened to assets was proper.” Id. at 550; see also

Buckeye Retirement Props. of Indiana, LLC v. Tauber (In re Tauber), 349 B.R.

540, 564 (Bankr. N.D. Ind. 2006) (stating that, for purposes of § 727(a)(5), “the

                                         -11-
debtor does not need to justify the wisdom or prudence in the disposition of

assets”). “[A] bankruptcy court’s decision under Section 727(a)(5) will not be

overturned unless it is clearly erroneous.” Chadwick, 335 B.R. at 703.

      “A prima facie case under Section 727(a)(5) has been held to exist where a

creditor shows that . . . there was an unusual and unexplained disappearance of

assets shortly before the debtor filed bankruptcy.” Perry, 252 B.R. at 549. Cobra

claims that it has made such a showing because, in August 2004, approximately

three months before Debtor filed his Chapter 7 petition, there was an unexplained

disappearance of some of Debtor’s business assets that were listed in the Contract

and Bill of Sale. We disagree. As the bankruptcy court found, “Cobra failed to

show a loss of assets and [Debtor] addressed and explained each and every loss or

deficiency of assets in question.” Aplt. App. at 315. This factual finding is

supported by the record and is not clearly erroneous to the extent it is referring to

any loss of assets suffered by Debtor’s bankruptcy estate, which is how we

interpret it. Most importantly, the record shows that, although Cobra did not

receive all of the business assets which it purchased from Debtor, Debtor received

the full sale price of $155,000, 3 id. at 232-33, and Debtor fully disclosed and

3
       The net amount that Debtor actually received was $108,732.88 because
$41,250.12 was deducted from the total sale price of $155,000 and used to pay
back rent owed by Debtor and the state sales tax due from Debtor as a result of
the asset sale. See Aplt. App. at 232-33, 286. A $17.00 wire transfer fee was
also deducted. Id. at 233. From the $108,732.88, Debtor then used $84,646.71 to
make a number of payments to creditors, and each of the payments is listed in his
Statement of Financial Affairs. Id. at 286.

                                         -12-
explained how this money was expended in the Statement of Financial Affairs that

he submitted to the bankruptcy court as part of his Chapter 7 petition, id. at 276,

286. This is all that § 727(a)(5) required, and the fact that Cobra may now be

challenging the propriety of the cash distributions that Debtor made with the sale

proceeds is not relevant to the analysis under § 727(a)(5).

      The judgment of the bankruptcy court is AFFIRMED.

                                                     Entered for the Court

                                                     Bobby R. Baldock
                                                     Circuit Judge

                                         -13-