Toye, III v. O'Donnell , 728 F.3d 41 ( 2013 )

United States Court of Appeals
For the First Circuit
No. 13-9001
IN RE DAVID O'DONNELL,
Debtor.
THOMAS A. TOYE III,
Appellee,
v.
DAVID O'DONNELL,
Appellant.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Torruella, Selya and Thompson,
Circuit Judges.
James F. Molleur, with whom Molleur Law Office was on brief,
for appellant.
Kelly W. McDonald, with whom Murray, Plumb & Murray was on
brief, for appellee.
August 26, 2013
THOMPSON, Circuit Judge.
Overview
David O'Donnell wants what every debtor in bankruptcy wants —
a fresh start. You see, a debtor generally gets a discharge from
debts owed at the time he files his bankruptcy petition. See 11
U.S.C. § 727(b). But this fresh-start opportunity is only for "the
honest but unfortunate debtor." Grogan v. Garner, 498 U.S. 279,
286-87 (1991) (internal quotation marks omitted). And that is why
Congress enacted a number of exceptions to discharge. One makes
debts for money procured by use of a written statement
nondischargeable — provided that that statement was "materially
false," related to the "debtor's . . . financial condition," and
"reasonably relied" on by the creditor, and provided also "that the
debtor caused [it] to be made or published with intent to deceive
. . . ." 11 U.S.C. § 523(a)(2)(B). An honest but unfortunate
debtor O'Donnell is not — or so a bankruptcy judge, relying on this
exception, ruled after a trial in a proceeding between O'Donnell
and one of his creditors, Thomas Toye III. The bankruptcy
appellate panel ("BAP," for short) later affirmed. Now O'Donnell
asks us to hold that the bankruptcy judge got it all wrong. What
follows is our explanation of why this ruling must stand.
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How the Case Got Here1
Fishy Financials
O'Donnell is an experienced real estate developer, jumping
into the field in the late 1990s. Eventually he teamed up with
Rudy Ferrante (a childhood friend), and the two began acquiring
real estate together, apparently through "LLCs" (limited-liability
companies, for the uninitiated). The pair were quite busy in the
late 2000s, doing multiple deals. We discuss three — including the
one that landed O'Donnell in this mess — to give a sense of what
the trial was about. All three occurred within months of each
other and featured Kevin Smith in a starring role. A longtime
acquaintance of Ferrante (they had once worked together as brokers
at the Lenders Network), Smith's supposed forte is real-estate
financing.
The first deal involved team O'Donnell/Ferrante's bid to
refinance a piece of commercial property already in their
portfolio. The second involved their attempt to acquire more
1
The facts recounted are either undisputed or based on the
bankruptcy judge's not-clearly-erroneous findings. The parties
spar over the effect of certain documents marked for identification
at trial but not introduced, though they agree that the bankruptcy
judge did not rely on them. We do not rely on them either. But
O'Donnell did testify — without objection — from his personal
knowledge about the documents, and under these circumstances, that
testimony is fair game for us to consider. See United States v.
Rodríguez-Durán, 507 F.3d 749, 774-75 (1st Cir. 2007) (concluding
that a witness's testimony touching on the content of a document
marked as an exhibit but not admitted into evidence sufficed to
support the lower court's decision).
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commercial property. For the first transaction, O'Donnell and
Ferrante asked Smith to prepare the financial paperwork. For the
second, O'Donnell asked Smith to help arrange the financing. "I
didn't ask him to help do the paperwork," O'Donnell added, that
just came "with the job." Smith said yes both times. And, among
other things, he ended up preparing various financial documents,
including O'Donnell's personal financial statements ("PFSs," from
here on out).
O'Donnell was no stranger to PFSs. He knew from past deals
that lenders wanted them, usually along with personal guaranties.
And he gave Smith some pertinent financial information to prepare
PFSs for both undertakings. Smith got other important data from
documents he had gathered. O'Donnell had what seemed to be a
hands-off attitude when it came to putting financials together,
"delegating" the bulk of the paperwork to Smith and relying on him
"to know what to do and how to do it" — an arrangement O'Donnell
was "very comfortable with." Smith sent O'Donnell's PFS to the
lender in the first deal. How the lender in the second deal got
O'Donnell's PFS is unclear on this record.
Now we come to the transaction that sparked this litigation.
Hard on the heels of these two earlier deals, O'Donnell and
Ferrante, through an LLC called Alder Street Properties, LLC,
agreed to buy some more property from another party. As part of
this transaction, they had to come up with a $350,000 down payment
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at closing. Once again, they recruited Smith to help secure the
financing. And Smith asked Thomas Toye to loan the
O'Donnell/Ferrante LLC the money. A highflyer in the local-
business community who had known Smith for years (Smith had hooked
him up three or four times with similar loan deals before), Toye
said yes, but he wanted (among other things) O'Donnell's and
Ferrante's personal guaranties for the loan's repayment. No
problem, O'Donnell and Ferrante essentially said.
So Smith set about preparing PFSs for both. O'Donnell
collected documents showing what stocks he owned and how much money
he had in the bank and gave them to Smith. No one disputes the
accuracy of this financial information. Smith also managed to get
other relevant data from other documents (credit reports, mortgage
statements, tax-assessment records, etc.) he already had on file or
had dug up through public-record searches he had conducted for this
deal. He cannot definitively say how he got some of the documents,
however. Nor can he say for sure whether he sent O'Donnell a copy
of the PFS, whether he reviewed every aspect of the PFS with him,
or whether he saw him sign the PFS. But he does remember emailing
a signed copy of O'Donnell's PFS, along with Ferrante's, to Toye.
For his part, O'Donnell insists that he never reviewed the PFS,
that the signature on the PFS is not his, and that he never
authorized anyone to send the PFS to Toye. What everyone now
agrees on, however, is that O'Donnell's PFS was "materially false,"
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containing serious misrepresentations and omissions regarding his
income and assets.
Wowed by O'Donnell's (supposed) net worth, Toye lent the
O'Donnell/Ferrante LLC the $350,000, receiving a promissory note in
that amount (at 13.50% interest) from the LLC secured by a mortgage
on some property and by O'Donnell's and Ferrante's personal
guaranties. Unfortunately, the LLC did not pay the loan as
required. And Toye ended up turning to O'Donnell, who, also
unfortunately, defaulted on his personal-guaranty obligations.
A Wave of Litigation
Unwilling to take this lying down, Toye sued O'Donnell in
state court on the personal guaranty. O'Donnell (supposedly) first
saw the false PFS here, in state court. Eventually that court
granted Toye summary judgment and entered a $417,974 judgment
against O'Donnell.
Later, O'Donnell sought bankruptcy protection under Chapter 7
of the Bankruptcy Code. Toye responded by initiating this
adversary proceeding in the bankruptcy court, alleging most
relevantly here that O'Donnell's debt to him was nondischargeable
per section 523(a)(2)(B). Under this provision (the reader will
recall), if a statement about a debtor's "financial condition" is
in a "writing" that is "materially false" and is "reasonably
relied" on by the creditor, and if the debtor "caused [that
statement] to be made or published with intent to deceive," then
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the debt cannot be discharged. Of course, Toye had to prove
nondischargeability by a preponderance of the evidence. See, e.g.,
Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 68 (1st Cir. 2012).
Highlighting only what is needed to understand the issues
before us, we note that the parties basically stipulated to
everything pretrial except whether O'Donnell had "caused [the PFS]
to be made or published with intent to deceive." At trial, Toye,
Smith, and O'Donnell took the stand. And after hearing their
testimony and examining the exhibits, the bankruptcy judge refused
to discharge O'Donnell's debt to Toye.
The judge began his reasoning this way: Contrary to
O'Donnell's contention, Smith had acted as his — not Toye's — agent
for this transaction. O'Donnell needed a $350,000 loan, and Smith
said he could make it happen. "O'Donnell said to Smith, go ahead
and give [Toye] what he needs" to make the loan, the judge wrote,
so Smith prepared the PFS "on the authority and at the instruction
of" O'Donnell, "and no one else." In other words, O'Donnell (to
quote the judge again) "set" the wheels "in motion" for Smith to
prepare and send the PFS to Toye.
True, O'Donnell did not "review and sign" the PFS, the judge
added. But, the judge ruled, nondischargeability under section
523(a)(2)(B) lies "whether the debtor intentionally did exactly
what was done" or whether he was "reckless[ly]" indifferent to "the
propositions asserted in the [PFS]." And here, according to the
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judge, the evidence showed that O'Donnell "willfully turned a blind
eye" to what the PFS said.2 And, the judge concluded, O'Donnell
did "not car[e]" what the PFS said, only that it said whatever Toye
needed to hear to make the loan.
An unhappy O'Donnell appealed. But the BAP affirmed the
judgment, ruling (pertinently for our situation) that the evidence
amply demonstrated that Smith was O'Donnell's agent and that by
having his agent prepare and send the PFS O'Donnell had (in the
lingo of section 523(a)(2)(B)) "caused [the PFS] to be made or
published . . . ." Turning to the question of intent, the BAP said
that a debtor's reckless indifference to the accuracy of the
submitted PFS satisfies the intent-to-deceive element of section
523(a)(2)(B). And, the BAP stressed, the evidence of O'Donnell's
turning a blind eye here proved his intent to deceive.
Which brings us to today, with a still unhappy O'Donnell
asking us to undo this result.
Our Take on the Case
Background Legal Principles
Before we go any further, a few reminders are in order. We
are the second set of reviewers here — the BAP was the first,
obviously. But we give the BAP's decision no special deference.
2
For those curious about the fate of O'Donnell's cohort, we
see that the same bankruptcy judge had (in an earlier proceeding)
also declared Ferrante's debt to Toye nondischargeable under
section 523(a)(2)(B). There is nothing indicating that Ferrante
appealed that ruling.
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See, e.g., Goguen, 691 F.3d at 68. Rather, we focus on the
bankruptcy judge's ruling, giving clear-error review to
factfindings and fresh review to legal conclusions. Id. Of
course, if there are a couple of plausible ways to view the
evidence, the judge's preference for one over the other cannot be
clear error. See, e.g., Berliner v. Pappalardo (In re Sullivan),
674 F.3d 65, 70 (1st Cir. 2012). And to find clear error, a
finding must hit us as more than probably wrong — it must prompt "a
strong, unyielding belief, based on the whole of the record," that
the judge made a mistake. Islamic Inv. Co. of the Gulf (Bah.) Ltd.
v. Harper (In re Grand Jury Investigation), 545 F.3d 21, 24 (1st
Cir. 2008); accord Goguen, 691 F.3d at 69. The case for deferring
to the bankruptcy judge's factfinding is "particularly strong" when
intent is at issue — since an intent finding depends heavily on the
debtor's credibility, and the bankruptcy judge is uniquely
qualified to make that call. See, e.g., Palmacci v. Umpierrez, 121
F.3d 781, 785 (1st Cir. 1997). And finally, because a principal
goal of the Bankruptcy Code is to provide deserving debtors with a
fresh start, we read exceptions to dischargeability narrowly. See,
e.g., Goguen, 691 F.3d at 68. Consequently, a person in Toye's
position must show that his claim fits snugly within an exception
contained in the Code. See, e.g., id.
Now on to the issues in play.
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Issues Presented
As framed by the parties, the case turns entirely on the final
element of section 523(a)(2)(B): whether O'Donnell "caused [the
"writing," i.e., the PFS] to be made or published with intent to
deceive." See § 523(a)(2)(B)(iv).3 The gist of O'Donnell's
argument is straightforward enough: Despite what the bankruptcy
judge thought, one cannot conclude that O'Donnell "caused" the PFS
— which he neither reviewed nor signed — "to be made or published,"
because Smith was functioning as Toye's agent. And with this PFS
the work of a runaway Smith, one also cannot conclude that
O'Donnell intended to deceive Toye with a shady PFS. Toye
disagrees, naturally. And we do too.
3
Relying on Kaspar v. Bellco First Fed. Credit Union (In re
Kaspar), 125 F.3d 1358 (10th Cir. 1997), among other sources,
O'Donnell floats the suggestion that the PFS is not a "writing"
under section 523(a)(2)(B). See 125 F.3d at 1359 (holding that "a
computer generated statement of financial condition given in an
application for credit neither seen nor signed by the debtor" is
not "'a writing' within the meaning of § 523(a)(2)(B)"); see also
Collier on Bankruptcy ¶ 523.08[2][a] (Alan N. Resnick & Henry J.
Sommer eds., 16th ed. 2013) (discussing "[e]lement [n]o. 1 under
[s]ection 523(a)(2)(B)" — "[s]tatement in [w]riting" — and noting
that "the statement, to be 'in writing,' must have been either
written by the debtor, signed by the debtor, or written by someone
else but adopted and used by the debtor"). But he stipulated below
that the dispute pivots "on the fourth prong of [s]ection
523(a)(2)(B)" — i.e., the made-or-published-with-intent-to-deceive
prong — so his Kaspar-based argument is off the table. See, e.g.,
Rodríguez v. Señor Frog's de la Isla, Inc., 642 F.3d 28, 34-35 (1st
Cir. 2011) (discussing a stipulation's effect on litigation).
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Analysis
Take the agency issue. To give his claim about Smith's being
Toye's agent an aura of plausibility, O'Donnell plays up how Smith
and Toye had known each other for years and how Smith had made Toye
money three or four times by helping him lend others money before
this deal went south. But the problem for O'Donnell is that other
evidence cuts against him. Recall how Smith had helped O'Donnell
and Ferrante on some deals right before the deal at issue, then how
the duo had enlisted his help in getting the $350,000 loan, and
finally how they had relied on him to prepare the necessary
documents for all three transactions. The bankruptcy judge chose
to accept this evidence in deeming Smith O'Donnell's agent on this
loan. And the judge's view seems entirely plausible, certainly not
"wrong with the force of a 5 week old, unrefrigerated, dead fish,"
which is what O'Donnell had to — but did not — show to get
anywhere. See S Indus., Inc. v. Centra 2000, Inc., 249 F.3d 625,
627 (7th Cir. 2001). Ultimately, then, we are in no position to
undo the judge's agency determination. See Goguen, 691 F.3d at 69.
Wait a second, O'Donnell says. Smith had "acted on his own"
in drafting up the false PFS, which means that the bankruptcy judge
clearly stumbled in finding that O'Donnell had "caused" that
document "to be made or published" to Toye — at least that is what
O'Donnell writes. But what dooms this theory is that the judge
expressly found that Smith had acted on O'Donnell's "authority" and
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"instruction." And our patient review of the record leaves us
convinced that the judge's view of the evidence is a permissible
one: Keep in mind that O'Donnell is a savvy businessman. He knew
that Toye needed a personal guaranty. He knew too that that would
require a PFS without (he must have known) omissions. So O'Donnell
gave Smith some financial information for the PFS, tasking him with
doing whatever was necessary to get the loan done (more on this in
a moment). And he knew from past experience that that would result
in Smith's preparing the PFS and sending it to Toye — or so at
least a factfinder could infer. Ever mindful that the clear-error
standard leaves us no room to second-guess the trier's choices
among plausible inferences, we easily reject O'Donnell's Smith-
went-rogue thesis, which necessarily means that the rest of his
argument on this score fails. See Anderson v. City of Bessemer
City, 470 U.S. 564, 575 (1985) (holding that if, on whole-record
review, the lower court's "account of the evidence is plausible,"
then we "may not reverse it even though convinced that had [we]
been sitting as the trier of fact, [we] would have weighed the
evidence differently").
That leaves the "intent to deceive" issue, with O'Donnell
protesting that the bankruptcy judge rested the intent-to-deceive
findings on air, basically. He reminds us, for starters, that he
had neither reviewed nor signed the false PFS before Smith emailed
it to Toye. Yes, but intent to deceive under section 523(a)(2)(B)
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may be demonstrated by the debtor's knowledge of, reckless
indifference to, or reckless disregard for the written statement's
falsity. See, e.g., Nat'l Union Fire Ins. Co. of Pittsburgh v.
Bonnanzio (In re Bonnanzio), 91 F.3d 296, 301 (2d Cir. 1996); Ins.
Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1118-19 (3d Cir.
1995) (citing additional cases from the 6th, 10th, and 11th
Circuits); Morrison v. W. Builders of Amarillo, Inc. (In re
Morrison), 555 F.3d 473, 482 (5th Cir. 2009).4 Our caselaw holds
that recklessness can suffice to prove the intent element under
section 523(a)(2)(A) — section 523(a)(2)(B)'s statutory sidekick,
see Field v. Mans, 516 U.S. 59, 66 (1995) — which (at the risk of
oversimplification) makes nondischargeable any debt for money
obtained by fraud, "other than a statement respecting the debtor's
. . . financial condition." Palmacci, 121 F.3d at 785-86, 788-89
(quoting § 523(a)(2)(A)). And today we join our sibling circuits
and hold that recklessness can suffice under section 523(a)(2)(B)
too. Anyway, recklessness is where O'Donnell gets tripped up. We
explain.
Because it would be a rare debtor who would concede that
"deception was his purpose," courts can take account of the
totality of the circumstances, including (as we just said) a
debtor's recklessness. Cohn, 54 F.3d at 1118-19; see also 4
Collier on Bankruptcy, supra, ¶ 523.08[2][e][ii]. And that review
4
That is six circuits, for those keeping count.
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reveals plenty of evidence from which a factfinder could infer
recklessness on O'Donnell's part.
Once again, O'Donnell is no babe in the woods when it comes to
real-estate financing. Far from it. He knew that Toye wanted a
personal guaranty. And because a guaranty is only worth something
if the lender knows the borrower's financial status, he knew (and
this is easily inferable) that Toye would want a comprehensive PFS
providing the truth, the whole truth, and nothing but the truth —
otherwise, why ask for one? "[G]o ahead and give [Toye] what he
needs," were O'Donnell's marching orders to Smith, the judge found,
which suggests that O'Donnell took a hands-off approach to the PFS
(just like he had before). True, he did give Smith some financial
items. But, as his lawyer candidly conceded at oral argument,
O'Donnell did not give Smith enough data to produce a complete PFS,
which meant (and this is easily inferable too) that Smith had to
come up with the missing information. Also, a trier could draw a
strong inference — as this one did — that O'Donnell knew that Toye
had gotten the PFS. O'Donnell knew this (at least inferentially)
probably by the time Toye had approved the loan, and certainly by
the time Toye had dispersed the loan proceeds (remember, Toye
wanted O'Donnell's PFS before making the loan). And yet O'Donnell
never even tried to check his agent's work at any point, bolstering
the judge's finding that he had "willfully turned a blind eye,"
"not caring" what the PFS said — though he clearly cared a lot
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about getting his hands on Toye's money, which he "happily" took
after "set[ting]" the false PFS "in motion."
Searching for a way out, O'Donnell complains that there is
zero evidence of his giving Smith carte blanche, which, he argues,
undercuts the intent-to-deceive findings. Hardly. A factfinder
could infer — as this one apparently did — that O'Donnell's
directing Smith to do the paperwork and then not ever asking to see
it shows a carte-blanche attitude. O'Donnell also grumbles that he
gave Smith accurate information, which, he maintains, cripples the
intent-to-deceive findings. Not at all. What O'Donnell ignores is
that his disclosure was so lacking in required information that
Smith could not do a complete PFS. That is the rub. And a
factfinder could infer — like this one basically did — that someone
with O'Donnell's résumé should have known that and did know that.
The bottom line here is this: Given these particular
circumstances, and knowing how famously deferential clear-error
review is, see, e.g., Goguen, 691 F.3d at 69, especially when it
comes to intent findings, see, e.g., Palmacci, 121 F.3d at 785, we
simply are in no position to upset the bankruptcy judge's intent
conclusion. See FDIC v. Reisman (In re Reisman), 149 B.R. 31, 38
(Bankr. S.D.N.Y. 1993) (rejecting a debtor's ostrich tactics, the
court found an intent to deceive where the debtor knew that the
bank required a PFS as a condition of a loan and that his
accountant had submitted the PFS to the bank, and yet "did not
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review [the PFS] or inquire as to [its] accuracy"); see also
Citizens Bank of Washington Cnty. v. Wright (In re Wright), 299
B.R. 648, 660-61 (Bankr. M.D. Ga. 2003) (finding a "claim of
ignorance" concerning the falsity of financial papers "unpersuasive
because, if true, it was by [d]ebtor's own design" and so
constituted recklessness on the debtor's part); First Commercial
Bank v. Robinson (In re Robinson), 192 B.R. 569, 578 (N.D. Ala.
1996) (similar). And that is that.
Summing Up
We see no clear error in the bankruptcy judge's conclusion
that Toye had satisfied his burden of proving that O'Donnell's debt
is not dischargeable under section 523(a)(2)(B). Consequently, we
uphold the judge's decision and the BAP's affirmance of that
decision.
Affirmed, with Toye awarded his costs on appeal.
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