PRN Real Estate & Investments, Ltd. v. William W. Cole, Jr. ( 2023 )

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[PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 22-11118
____________________
PRN REAL ESTATE & INVESTMENTS, LTD.,
Plaintiff-Appellant,
versus
WILLIAM W. COLE, JR.,
Defendant-Appellee.
____________________
Appeal from the United States District Court
for the Middle District of Florida
D.C. Docket No. 6:21-cv-711-WWB
____________________
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2 Opinion of the Court 22-11118
Before JILL PRYOR and GRANT, Circuit Judges, and MAZE, * District
Judge.
MAZE, District Judge:
William W. (“Bill”) Cole, Jr., petitioned for Chapter 7
bankruptcy and listed PRN Real Estate & Investments, Ltd.
(“PRN”) as his primary creditor. PRN sought to exempt debts that
Cole owes PRN from being discharged. The bankruptcy court
granted judgment for Cole on all of PRN’s claims and fully
discharged Cole’s debt. The district court affirmed.
For the reasons explained below, we agree with each of the
bankruptcy court’s rulings except one: we find that PRN pleaded a
viable discharge exception in Count 3. We therefore AFFIRM IN
PART and REVERSE IN PART the bankruptcy court’s rulings and
REMAND for further proceedings.
I. BACKGROUND
Bill Cole and Nancy Rossman partnered to develop
residential real estate for more than a decade. But their relationship
has since devolved into what the bankruptcy court described as
“open warfare.” In short, Rossman claims that Cole sought
bankruptcy to avoid paying the $15-plus million debt he owed
Rossman’s company, PRN. She also claims that Cole committed
multiple acts of fraud to place his assets out of PRN’s reach. The
* Honorable Corey L. Maze, United States District Judge for the Northern
District of Alabama, sitting by designation.
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resulting fight has spilled across multiple state and federal courts,
returning now to us for a second time.
A. Cole’s Debt to PRN
Bill Cole has worn many hats: accountant, CFO, and real
estate developer. As a developer, Cole would identify lucrative
projects, then find investors and builders. Cole managed the
projects on both ends, funding and construction. Some projects he
managed through entities that he created for the project; others he
managed with his partner, Allan Goldberg, through their joint
business, C&G Real Estate Group, LLC (“C&G”).
Nancy Rossman and her sisters owned PRN. PRN pumped
millions of dollars into C&G projects starting in 2000. For the next
eight years, Rossman’s relationship with Cole was amicable and
financially successful. Then the recession hit.
In 2008, Cole’s projects were struggling. So PRN agreed to
lend extra capital to Cole. In return, Cole agreed to personally
guarantee the loans. But Cole could not repay the loans when they
came due in November 2011.
So Cole and Rossman amended their 2008 agreement in
2012. Among the amended terms, Cole agreed to cut his partner
Allan Goldberg out of the projects. Cole agreed to continue old
projects that included PRN and to allow PRN to invest in Cole’s
new projects. And Cole agreed that he would pay a percentage of
his project income to PRN and provide detailed financial reports to
PRN to ensure Cole was upholding his end of the bargain.
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Cole eventually breached his duties under the 2012
Agreement. Rossman and PRN filed their first lawsuit against Cole
in Florida state court in July 2014. One year later, Cole filed for
Chapter 7 bankruptcy. That petition is now before this Court. But
before we can discuss Cole’s petition, we must detail some of
Cole’s actions leading up to its filing.
B. Alleged Fraud
PRN claims that Cole committed several fraudulent acts to
shield his money from PRN before and after Cole filed his Chapter
7 petition. Three are relevant here.
1. The COLP Transfers
In 2002, Bill Cole and his wife Terre formed Cole of Orlando
Limited Partnership (“COLP”), a Nevada entity, to hold their
investments. Each spouse owned a 49.5% interest in COLP
through his or her respective revocable trusts. The remaining 1%
was held by W&T Cole, LLP, another Nevada entity that the Coles
owned as tenants by the entireties.
Over the years, COLP held stocks, bonds, and brokerage
accounts. Relevant here, COLP also incurred debts related to
projects involving Cole and PRN.
In 2003, SunTrust Bank loaned $7.5 million to Douglasville
Development, LLC and Sweetwater Investment Properties, LLC.
Thirteen individuals and entities jointly and severally guaranteed
the loan, including Bill Cole, Terre Cole, Rossman, Goldberg,
PRN, and COLP.
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In August 2004, SunTrust Bank loaned $1.21 million to
RANC Development, Inc. Ten individuals and entities jointly and
severally guaranteed the loan, including Bill Cole, Terre Cole,
Rossman, Goldberg, PRN, and COLP.
Both Douglasville and RANC defaulted on their loans,
making the co-guarantors jointly and severally liable to SunTrust.
In September 2011, PRN agreed to pay SunTrust $5 million to
settle these and other debts. None of the co-guarantors paid PRN
contribution.
Two months later (November 2011), Cole’s debt to PRN
under their 2008 agreement matured. PRN notified Cole of his
default on December 15, 2011. At the time, Cole owed PRN more
than $12 million.
Over the next four weeks, Cole transferred about $4 million
from COLP’s coffers into a Florida-based account held by Bill and
Terre Cole as tenants by the entireties, thereby shielding the
money from Cole’s creditors under Florida law. The COLP
transfers are relevant in two proceedings besides this one.
First, PRN sued its co-guarantors under the Douglasville and
RANC notes for contribution in Florida state court. See PRN Real
Est. & Invs., Ltd. v. Cole, Fla. Orange County Ct., Case No. 2014-
CA-011835-O. PRN named COLP and Bill Cole (among others) as
defendants. PRN sought the following contribution from COLP:
$213,113.71 as co-guarantor of the Douglasville Note and
$187,121.46 as co-guarantor of the RANC Note.
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Second, the Bankruptcy Trustee sought to avoid the COLP
transfer as a fraudulent conversion of non-exempt assets into
exempt assets and to retrieve Cole’s personal interest for the estate.
See 11 U.S.C. § 544(b)(1) (allowing the Trustee to avoid transfers
under applicable state law); 11 U.S.C. § 550(a) (allowing the
Trustee to recover fraudulent transfers for the estate). The
bankruptcy court granted summary judgment for the Trustee by
finding that Cole controlled the transfers, and that Cole transferred
the money “actually intending to hinder, delay, and defraud his
creditors, primarily PRN.”
The bankruptcy court did not quantify Cole’s personal
interest in the COLP transfers, leaving that issue for trial. But Cole
and the Trustee settled the claim before trial. Under the settlement
agreement, Cole paid $350,000 to the estate and agreed that his
settlement with the Trustee did not affect PRN’s claims in this case
and the previously mentioned state case.
2. Coledev
In October 2012, Cole formed Coledev LLC to serve as his
primary operating business. Coledev was a closely held S
corporation. Bill and Terre Cole owned 99% of Coledev as tenants
by the entireties, with their son owning the remaining 1%.
Shortly after forming Coledev, Bill and Terre Cole
transferred about $1.18 million to Coledev to fund operations.
Money flowed freely between the Coles and Coledev for the next
three years. Then, shortly after Bill Cole filed his bankruptcy
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petition in July 2015, Coledev transferred $750,000 to a
construction business primarily owned (95%) by Terre Cole, and
about $250,000 to the Coles’ joint bank account.
Cole’s Trustee argued that Coledev’s postpetition transfer
was a repayment of a shareholder loan that Cole must turn over to
the estate under 11 U.S.C. § 542. Cole countered that the Coles’
initial $1.18 million transfer to Coledev was an equitable
contribution and thus Coledev was repaying a capital contribution;
a payment that needn’t be turned over to the estate.
The bankruptcy court sided with Cole, finding that the
initial 2012 transfer of money to Coledev was a capital contribution
(not a loan), so the 2015 transfer of money out of Coledev was an
equity repayment. The court thus issued judgment that the $1
million transfer need not be turned over to the estate.
The Trustee appealed but later waived the appeal as part of
the previously mentioned settlement that saw Cole pay $350,000
to the estate.
3. Homestead Fraud
When Cole filed his petition in July 2015, Bill and Terre Cole
lived in a 10,000 square foot lakefront home. Cole held title to the
property under a self-settled revocable trust. Cole’s original title
listed the property as a single 2.95-acre parcel of land, with most of
the land (2.185 acres) under water.
The Florida Constitution exempts a debtor’s homestead
from forced sale after bankruptcy but limits the exemption to 0.5
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acres if the homestead is within a municipality. See Fla. Const. art.
X, § 4. Because Cole’s 2.95-acre property was in a municipality, it
was too big for the exemption. So Cole split the property.
Two days after a failed mediation with Rossman, Cole asked
a surveyor to divide his property into two parcels. The first
contained the house, boathouse, and dock. The second parcel
contained everything else, including all of the submerged land. Just
before filing his bankruptcy petition, Cole executed and recorded
special warranty deeds that conveyed the newly split parcels from
the trust to the trust.
Cole filed his petition, and soon after, his schedules. In them,
Cole listed the two parcels separately. Cole gave the street address
for the smaller, dry-land parcel and valued it at $2.5 million. Cole
generically labeled the larger, mostly submerged parcel and valued
it at $1,000. Cole did not state the size of either parcel in his
schedules, nor did he list them as contiguous.
Both PRN and the Trustee objected, claiming that Cole
fraudulently split his property to shield the valuable portion from
the estate. The bankruptcy court held a two-day trial then issued a
written opinion. In it, the court found that Cole’s schedules were
“misleading” and that his testimony explaining the split was “not
credible.”
Yet “[d]espite Mr. Cole’s inequitable and incredulous
attempt to gerrymander his homestead exemption,” the
bankruptcy court found that Florida law required the court to grant
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Cole the homestead exemption. To undo the fraud, the court
treated the property as indivisible and held that Cole was entitled
to 16.95% of the forced sale of the whole—i.e., the 0.5-acre
homestead exemption limit divided by the entire 2.95-acre parcel.
The district court affirmed, as did this Court. See Cole v.
PRN Real Est. & Invs., Ltd., 829 Fed. App’x 399 (11th Cir. 2020).
C. The Bankruptcy Court’s Opinions
Cole filed his Chapter 7 petition and listed PRN (among
others) as a creditor. PRN filed an adversary proceeding. See Fed.
R. Bankr. P. 7001. In its operative complaint, PRN pleaded 13
counts that sought to deny Cole a discharge under 11 U.S.C. § 727,
or in the alternative, to except certain debts from discharge under
11 U.S.C. § 523. In this appeal, only Counts 3-4, 8-9, and 11 matter.
So we do not discuss the other counts.
1. Counts 3-4 sought to exempt from discharge some
portion of the $4 million transfer from COLP to the Coles’ tenancy
by the entireties (“TBE”) account—i.e., the transfer the bankruptcy
court found fraudulent under Florida law at the Trustee’s behest.
The bankruptcy court granted Cole summary judgment on these
claims, ruling orally that “I believe that PRN is asking for a cause
of action that just isn’t there, and to the extent that it ever could be
there, it would belong to the Trustee.”
The Honorable Cynthia Jackson held a trial on all other
counts in October 2018. Judge Jackson, however, could not issue a
posttrial opinion because of medical concerns. The case was thus
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reassigned to the Honorable Karen S. Jennemann, who recalled
Cole and the Trustee to testify in October 2020. Judge Jennemann
later granted judgment for Cole on all remaining counts.
2. Counts 8 and 9 sought a complete denial of discharge
under 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(2)(B), respectively.
Relevant here, PRN argued that Cole fraudulently concealed the
splitting of his homestead into two parcels and fraudulently
concealed the assets he received from Coledev by mislabeling his
initial contributions as equity rather than shareholder loans.
As for the Coles’ homestead, the bankruptcy court reiterated
its earlier ruling that Cole knowingly manipulated the parcels to
shield his home from becoming part of the estate. Still, the court
found that Cole had not “concealed” either parcel from the
Trustee, as required by § 727(a)(2), because Cole (1) listed both
parcels in his schedules and (2) told the Trustee about the division
when Cole first met her. The court also noted that, after its earlier
ruling that unified the parcels, the property sold for $2.25 million—
nearly the same amount Cole estimated ($2.5 million). So the
estate had not been harmed by Cole’s misconduct.
As for Coledev, the court noted that “all parties knew of
[Cole’s] ownership interest” in Coledev because Cole listed it in his
schedules. The court found the disagreement over labeling Cole’s
contributions as equity versus loans to “make[ ] no difference”
when it came to concealment because those labels “are often
meaningless” when it comes to closely held corporations. Plus, the
Trustee knew about the distinction early on and confirmed that
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“Cole was cooperative and supplied all the information and
documents she requested.” So the court could not find that Cole
concealed his Coledev-related assets with an intent to hinder,
delay, or defraud his creditors or the Trustee under § 727(a)(2).
3. Count 11 alleged that Cole knowingly made a false oath
under 11 U.S.C. § 727(a)(4) by concealing the value of Coledev and
failing to list COLP in his schedules. After trial, PRN added that
Cole made multiple false oaths about dividing his homestead.
As for Coledev, PRN complained that Cole listed its value as
“undetermined,” even though Cole told a bank that Coledev was
valued at $3.985 million just days before filing his petition. Cole
testified that the $3.985 million figure was his estimate about the
amount of money the Coles had given Coledev, not its value as a
going business concern. Cole testified that the latter value would
be difficult to calculate and drastically different. The bankruptcy
court found this testimony “credible and convincing” and thus held
that Cole’s oath was not false.
As for COLP and its 1% partner, W&T Cole LLC, the
bankruptcy court found that Cole’s omission of COLP from his
Statement of Financial Affairs (“SOFA”) was material. But the court
found credible Cole’s testimony that he inadvertently omitted
COLP from his SOFA, particularly because Cole disclosed COLP
as a co-obligor in his Schedule H and disclosed a COLP account
that had funds during his 341 meeting. Further, Cole provided the
Trustee with information about COLP once the omission was
noticed, and the Trustee testified that the omission did not affect
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her administration of the estate.
Finally, the bankruptcy court found that PRN had not
pleaded a false oath claim about the Coles’ homestead in its third
amended complaint, nor had PRN mentioned the claim in its
pretrial statement or posttrial brief. In the alternative, the court
also found that Cole had not made a false oath about his property.
Having ruled for Cole on all counts, the bankruptcy court
found that Cole’s debts should be discharged.
D. The District Court Appeal
PRN appealed to the district court. See 28 U.S.C. § 158(a)(1)
(giving district courts jurisdiction over appeals from a bankruptcy
court’s final order). The district court affirmed the bankruptcy
court’s posttrial rulings on Counts 8, 9, and 11 on the same grounds
found by the bankruptcy court. Because this Court directly
considers the bankruptcy court’s opinion, rather than the district
court’s opinion, see In re Hoffman, 22 F.4th 1341, 1344 (11th Cir.
2022), we do not recount the district court’s reasons for affirming
the bankruptcy court’s rulings on Counts 8, 9, and 11.
We do, however, dive deeper into the district court’s
opinion on Counts 3 and 4 because the district court offered more
grounds than the bankruptcy court’s oral ruling. As for Count 3,
the district court found that PRN pleaded that Cole was “liable as
the transferor” of the $4 million, and PRN had not alleged “a basis
to impute a new debt to Cole as transferor.” According to the
district court, “as alleged, Count III would only provide liability
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against Cole for the preexisting debts of Cole of Orlando—which
no one argues were obtained by fraud.” The court further found
that Florida law did not provide a cause of action to recover
compensatory damages against the recipient of a fraudulent
transfer, only “a vehicle for the equitable recovery of assets, a claim
that PRN concedes is typically within the exclusive standing of the
trustee.”
The district court found that PRN abandoned Counts 4-6 on
appeal because PRN inadequately briefed standing, the issue PRN
lost in the bankruptcy court. Alternatively, the court held that
PRN failed to meet its burden of proving that creditor standing
could exist beyond the “[T]rustee’s exclusive standing to . . . avoid
fraudulent transfers.” Like the bankruptcy court, the district court
held that “the proper ‘creditor’ to bring such a claim is the trustee
because, in the context of bankruptcy, the trustee has the exclusive
right to seek to avoid the transfers and return the sums to the
estate.”
PRN now appeals to this Court.
II. STANDARD OF REVIEW
We act as the second court of review in this bankruptcy
appeal. Because the district court affirmed the bankruptcy court on
all counts, we consider the bankruptcy court’s decision directly. In
re Hoffman, 22 F.4th at 1344.
We review the bankruptcy court’s entry of summary
judgment on Counts 3-6 de novo, viewing all evidence in the light
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most favorable to PRN as the non-moving party, and we resolve
reasonable inferences in PRN’s favor. In re Optical Techs., Inc., 246
F.3d 1332, 1334-35 (11th Cir. 2001).
As for the counts that went to trial, we review the
bankruptcy court’s conclusions of law de novo. In re Colortex
Indus., Inc., 19 F.3d 1371, 1374 (11th Cir. 1994); In re Vann, 67 F.3d
277, 280 (11th Cir. 1995). We review the bankruptcy court’s
findings of fact for clear error. In re Chase & Sanborn Corp., 904
F.2d 588, 593 (11th Cir. 1990). How we review a mixed question of
law and fact “depends on whether answering it entails primarily
legal or factual work.” In re Stanford, 17 F.4th 116, 121 (11th Cir.
2021) (quotation omitted). Our review is de novo when we must
“expound on the law, particularly by amplifying or elaborating on
a broad legal standard.” Id. (quotation omitted). But our review is
for clear error when we must “marshal and weigh evidence, make
credibility judgments, and otherwise address . . . multifarious,
fleeting, special, narrow facts that utterly resist generalization.” Id.(alteration in original) (quotations omitted). Finally, we review the
bankruptcy court’s evidentiary rulings for abuse of discretion. See
In re Int’l Mgmt. Assocs., LLC, 781 F.3d 1262, 1265 (11th Cir. 2015).
III. DISCUSSION
As a Chapter 7 debtor, Cole is entitled to a discharge of all
debts unless his Trustee, a creditor, or the United States trustee
establishes either (1) one of the twelve reasons to deny a discharge
listed in 11 U.S.C. § 727(a) or (2) that one or more of Cole’s debts
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should be individually excepted under 11 U.S.C. § 523(a). See 11
U.S.C § 727(b) (“Except as provided in section 523 of this title, a
discharge under subsection (a) of this section discharges the debtor
from all debts that arose before the date of the order for relief under
this chapter . . . .”).
PRN pleaded counts under § 727(a) and § 523(a). Because
success under § 727(a) would prevent Cole from discharging any
debts—thereby obviating the need to except individual debts under
§ 523(a)—we start by reviewing PRN’s § 727(a) claims.
A. Concealment of Property (§ 727(a)(2))
Section 727(a)(2) 1 prohibits the bankruptcy court from
granting a discharge if
(2) 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,
removed, destroyed, mutilated, or concealed, or has
permitted to be transferred, removed, destroyed,
mutilated, or concealed—
(A) property of the debtor, within one year before the
date of the filing of the petition; or
(B) property of the estate, after the date of the filing
of the petition . . . .
1 All references to sections refer to Title 11 of the United States Code.
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The only difference between subsections (A) and (B) is timing: the
former covers actions taken before the petition is filed; the latter
covers actions after the petition is filed.
To block Cole’s discharge under § 727(a)(2)(A), PRN had to
prove by a preponderance of the evidence “(1) that the act
complained of was done within one year prior to the date the
petition was filed, (2) with actual intent to hinder, delay, or defraud
a creditor, (3) that the act was that of the debtor, and (4) that the
act consisted on transferring, removing, destroying, or concealing
any of the debtor’s property.” In re Jennings, 533 F.3d 1333, 1339
(11th Cir. 2008). To block Cole’s discharge under § 727(a)(2)(B),
PRN had to prove the same elements by a preponderance of the
evidence, except the timing on the first element changes from one
year before the petition is filed to a date after the petition is filed.
PRN argues that all three of the actions described in Part B
of the Background section meet these elements. The Court starts
with the prepetition action.
1. The Homestead (§ 727(a)(2)(A))
PRN claims that Cole concealed the value of his lakefront
property by splitting it into two parcels less than two months
before filing his bankruptcy petition.2 The bankruptcy court
2 In its third amended complaint, PRN pleaded concealment of the homestead
split in Count 8 (§ 727(a)(2)(A)) but not Count 9 (§ 727(a)(2)(B)). PRN’s claim
is thus confined to concealment that occurred “within one year before the date
of the filing of the petition,” 11 U.S.C. § 727(a)(2)(A) and does not include
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rejected this claim, finding that “PRN failed to prove that Cole
concealed anything” because Cole publicly recorded both deeds
before filing his petition; he listed both parcels on his postpetition
schedules; and he told the Trustee about both parcels.
1. PRN argues that the bankruptcy court erred because it
applied an unduly narrow definition of conceal. The parties rightly
note that neither Congress nor this Court has defined conceal
under 11 U.S.C. § 727(a). We adopt the following definition of
conceal under § 727(a): “to knowingly withhold information about
property or to knowingly prevent its discovery.” We do so for
three reasons.
First, this definition comports with the plain meaning of the
word conceal, as shown by dictionary definitions at the time
Congress enacted the bankruptcy code (1978) and today. See, e.g.,
Conceal, Oxford English Dictionary Online, https://www.oed.co
m/dictionary/conceal_v (last visited Oct. 23, 2023) (“1.a. To keep
(information, intentions, feelings, etc.) from the knowledge of
others; to keep secret from (formerly also to) others; to refrain
from disclosing or divulging. 1.b. To keep the nature or identity of
(a person or thing) secret; to disguise. Now chiefly with as. 2.a. To
hide (a person or thing); to put or keep out of sight or notice. Also:
to prevent from being visible”); Conceal, Merriam-Webster
Dictionary Online, https://www.merriamwebster.com/dictionar
concealment that occurred “after the date of the filing of the petition.” 11
U.S.C. § 727(a)(2)(B).
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y/conceal (last visited Oct. 23, 2023) (“1: to prevent disclosure or
recognition of . . . . 2: to place out of sight”); Conceal, Webster’s
Third New International Dictionary (4th ed. 1976) (“1: to prevent
disclosure or recognition of; avoid revelation of; refrain from
revealing; withhold knowledge of; draw attention from; treat so as
to be unnoticed; 2: to place out of sight; withdraw from being
observed; shield from vision or notice”).
Second, our sister circuits have similarly defined conceal
under both § 727(a) and 18 U.S.C. § 152, which each address the
concealment of assets from the bankruptcy estate. See, e.g., United
States v. Turner, 725 F.2d 1154, 1157 (8th Cir. 1984) (holding in a §
152 case that concealment includes “withhold[ing] knowledge, or
prevent[ing] disclosure or recognition” (quotations omitted));
United States v. Weinstein, 834 F.2d 1454, 1462 (9th Cir. 1987)
(affirming a § 152 conviction because concealment element met if
defendant “withholds knowledge of assets about which the trustee
should be told” (citation omitted)); United States v. Grant, 971 F.2d
799, 807 (1st Cir. 1992) (“The crime of concealment includes
withhold[ing of] knowledge or prevent[ing] disclosure or
recognition.” (alteration in original) (quotations and emphasis
omitted)); In re Scott, 172 F.3d 959, 967 (7th Cir. 1999)
(“Concealment [for the purposes of § 727(a)] . . . includes
preventing discovery, fraudulently transferring or withholding
knowledge or information required by law to be made known.”
(omission in original) (citation omitted)); United States v. Atkins,
181 F.3d 91 (Table), 1999 WL 397711 (4th Cir. 1999) (finding
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substantial evidence supported a § 152 conviction when defendant
diverted funds from escrow account and created false documents
that showed he had sent the funds to the bankruptcy court); United
States v. Thayer, 201 F.3d 214, 224-25 (3d Cir. 1999) (upholding jury
instruction in a § 152 case that defined concealing estate property
to include “withholding knowledge concerning the existence or
whereabouts of property, or knowingly doing anything else by
which the person acts to hinder, delay or defraud any of the
creditors”), abrogated on other grounds by Skilling v. United
States, 561 U.S. 358 (2010); United States v. Love, 17 Fed. App’x
796, 800 n.5 (10th Cir. 2001) (finding concealment of assets from
creditors when disclosure of transfers of funds “was incomplete
and the purposes of the transfers were falsely identified”); United
States v. Wagner, 382 F.3d 598, 609 (6th Cir. 2004) (holding that
“‘concealing’ property encompasses actions designed to hinder,
delay, or otherwise obstruct the ability of a trustee to account for
and distribute the debtor’s estate”).
Third, we already use this definition in criminal proceedings.
District courts read the same definition when instructing jurors in
criminal cases where a debtor is accused of concealing estate
property from creditors or Trustees:
‘Conceal’ has its ordinary sense of ‘to hide’ or ‘to
prevent recognition’ of something. To ‘fraudulently
conceal’ property means to knowingly withhold
information about property or to knowingly prevent
its discovery while intending to deceive or cheat a
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creditor or custodian, usually for personal financial
gain or to cause financial loss to someone else.
Eleventh Circuit Pattern Jury Instructions (Criminal Cases) O2
(2022). We have similarly defined conceal when finding that the
Government offered sufficient evidence of concealment to prove
money laundering under 18 U.S.C. § 1956(a). See United States v.
Dennis, 237 F.3d 1295, 1302 (11th Cir. 2001) (The defendant
“fraudulently concealed property belonging to the bankruptcy
estate because he knowingly withheld information related to the
property and acted to prevent the discovery of the property,
thereby intending to deceive the bankruptcy court, the estate’s
creditors, or the custodian.”). We see no reason to define
concealment differently in the civil context. See 6 Collier on
Bankruptcy ¶ 727.02 (16th ed. 2020) (“Conduct that amounts to a
concealment from creditors or from an officer of the estate charged
with custody of property will in general be the same as that which
constitutes a concealment under section 152 of title 18, United
States Code. Cases decided under section 152 will afford helpful
analogies in determining what amounts to a concealment.”).
2. Using this definition, the bankruptcy court did not err in
finding that Cole did not conceal his property by splitting it into
two parcels because PRN presented no facts that show Cole
knowingly withheld information related to the property or acted
to prevent the discovery of the property. To the contrary, Cole
publicly recorded both deeds and continued to pay taxes on the
whole property. After Cole filed his petition, Cole told the Trustee
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22-11118 Opinion of the Court 21
about the split and listed both parcels in his schedules.
Because Cole did not conceal property within one year of
filing his petition, we agree with the bankruptcy court that PRN
failed to prove its § 727(a)(2)(A) claim.
2. Coledev (§ 727(a)(2)(B))
1. As detailed in the Background section, supra at 6-7, Cole
used Coledev LLC as his primary operating business from 2012
until he filed his petition in 2015. Bill and Terre Cole owned 99%
of Coledev as a tenancy by the entirety and put millions of dollars
into Coledev. The Coles would receive large sums of money back,
likely when one of Cole’s real estate projects ended.
In his schedules, Cole accurately disclosed the Coles’ interest
in Coledev, and he listed Coledev’s value as undetermined. PRN
claims that Cole should have also disclosed that the advances Cole
made to Coledev were repayable shareholder loans. PRN argues
that Cole’s failure to list the advances as shareholder loans
(available to the estate) amounts to the intentional, postpetition
concealment of property done to defraud Cole’s creditors and
Trustee under § 727(a)(2)(B). Cole retorts that he correctly treated
the advances as capital contributions, not shareholder loans, and
thus had no intent to hinder, delay, or defraud his creditors or the
Trustee.
2. The parties presented competing fact and expert
testimony at trial. PRN introduced Cole’s accounting records that
labeled the advances as “shareholder loans payable.” PRN
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22 Opinion of the Court 22-11118
introduced Coledev’s 2014 and 2015 tax records that treated the
advances as shareholder loans. PRN presented Terre Cole’s
deposition testimony that she believed the advances were
shareholder loans. And PRN offered an expert who opined that the
advances were shareholder loans.
On the other hand, Cole testified that the advances were
capital contributions. To bolster his testimony, Cole pointed out
that he never created a promissory note for repayment; no interest
accrued on the advances; Coledev’s 2012 and 2013 tax returns
treated the advances as “additional paid-in capital”; and Coledev’s
2013 and 2014 financial statements did not show any shareholder
loans from Cole to Coledev. Cole also presented an expert who
opined that the advances were equitable contributions, not
shareholder loans.
The Trustee testified that Cole did not hide or conceal any
assets from her. She testified that she knew about Coledev once
Cole disclosed his tax returns. She testified that she could ask Cole
about Coledev’s postpetition operations, and that Cole was
cooperative and supplied all of the Coledev-related information
that she requested. Based on the information Cole provided, the
Trustee testified that she managed to object to Cole’s claimed
exemption of Coledev and propose a settlement of the issue. 3
3 The Trustee also testified that a third party told her that, in practice, the
terms “shareholder loans” and “capital contributions” are used
interchangeably. PRN objects that this testimony should not have been
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22-11118 Opinion of the Court 23
After reciting this evidence, the bankruptcy court found that
PRN failed to prove that “Cole concealed any property after this
bankruptcy case was filed intending to hinder, delay, or defraud his
creditors under § 727(a)(2)(B).”
3. We read the bankruptcy court’s ruling to find that PRN
failed to meet its burden of proof on both the intent and
concealment elements. We affirm both findings.
As for concealment, the bankruptcy court did not clearly err
in finding that Cole had not “knowingly withheld information
related to the property or acted to prevent the discovery of the
property” when he did not label his advances to Coledev as
shareholder loans. The bankruptcy court could reasonably rely on
the Trustee’s testimony that Cole did not hide or conceal any
information from her and that she discovered the ‘loan versus
equity’ issue once Cole disclosed his tax returns to find that Cole
was not concealing information. This finding is bolstered by the
Trustee’s testimony that Cole provided her with any information
or documents she asked for.
As for intent, the bankruptcy court did not clearly err in
finding that Cole did not intend to “hinder, delay, or defraud” PRN
or the Trustee when he did not label his advances to Coledev as
shareholder loans. 11 U.S.C. § 727(a)(2). The bankruptcy court
heard Cole’s testimony and found that Cole lacked a fraudulent
allowed because it was based on hearsay. We do not rely on this testimony to
reach our conclusions, so we needn’t consider the evidentiary objection.
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24 Opinion of the Court 22-11118
intent. The bankruptcy court also heard and found credible the
Trustee’s testimony that Cole had concealed no information from
her and had cooperated with her when she had questions about
Coledev. When this Court “examine[s] the facts adduced at trial,
generally we will not disturb a bankruptcy court’s credibility
determinations.” In re Kane, 755 F.3d 1285, 1288 (11th Cir. 2014).
We find no reason to second guess the bankruptcy court’s
credibility findings, especially when other evidence (e.g., the lack
of a promissory note or accrued interest) supports Cole’s belief that
he was making equitable contributions rather than loans to
Coledev.
Because we find no error in the bankruptcy court’s findings
about concealment and Cole’s intent, we affirm its denial of relief
under 11 U.S.C § 727(a)(2)(B).
3. COLP (§ 727(a)(2)(B))
1. As explained in the Background section, supra at 4-6,
Cole created COLP to hold the Coles’ personal investments. Cole
transferred about $4 million from COLP into the Coles’ tenancy by
the entireties in December 2011 and January 2012. Cole says that
he decided to close COLP in 2010 and that the $4 million transfers
that began in late 2011 were part of the winding down of COLP.
While Cole disclosed 14 businesses in his schedules, he did
not disclose COLP or its 1% general partner, W&T Cole, LLC.
PRN alleged that Cole violated § 727(a)(2)(B) by concealing COLP
to hide the $4 million transfers from his creditors and the Trustee.
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22-11118 Opinion of the Court 25
In a separate proceeding, the Trustee filed a claim against
Cole to recover Cole’s personal interest in the $4 million COLP
transfers, arguing that Cole made the $4 million transfer to hinder
PRN’s collection efforts. See 11 U.S.C § 544(b)(1) (allowing the
Trustee to avoid transfers made by the debtor that are voidable
under applicable state law).
2. Cole testified about COLP twice at trial. Cole told Judge
Jackson that his failure to disclose COLP was an “inadvertent
mistake.” After assuming the case, Judge Jennemann recalled Cole
and the Trustee to ask more questions about COLP. Cole told
Judge Jennemann that he missed COLP because he had several
entities that contained the name “Cole”; COLP was not listed in his
record of Florida businesses because COLP was a Nevada
partnership; and COLP had no valuable assets when he filed his
petition. Cole also pointed out that he listed COLP as a co-obligor
in another schedule; he disclosed the existence of an account held
by COLP at his creditors meeting; and he gave the Trustee COLP’s
financial records when they discovered that Cole omitted COLP
from his list of businesses.
The Trustee testified that Cole should have listed COLP on
his schedules and that she (the Trustee) could not focus on COLP
initially because of the omission. But the Trustee confirmed that
Cole gave her testimony and documents about the $4 million
COLP transfers the next time she saw Cole after COLP was
discovered during the creditors’ meeting.
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26 Opinion of the Court 22-11118
3. The bankruptcy court (Judge Jennemann) ruled on the
Trustee’s claim and PRN’s claim in separate orders. In the Trustee
proceeding, the court found that the Trustee proved that Cole
transferred the $4 million from COLP to his tenancy by the
entireties in late 2011 to hinder PRN’s ability to collect on Cole’s
debts to PRN. As a result, the court granted partial summary
judgment for the Trustee and ordered a trial to determine Cole’s
interest in the $4 million so that amount could be recovered for the
estate. See 11 U.S.C. § 550(a) (allowing the Trustee to recover
avoided transfers from the recipient). The parties settled that claim
before trial.
In this case, the bankruptcy court found that PRN failed to
prove that Cole omitted COLP from his list of businesses in 2015
with the intent to hinder, delay, or defraud PRN or the Trustee.
The court found Cole to be “forthright and candid” during his
supplemental testimony and found that his testimony was
“credible and believable.” The court found that Cole’s initial listing
of COLP in a different part of his schedules and Cole’s prompt
disclosure of COLP’s records once the omission was discovered
disproved PRN’s theory that Cole was trying to hide COLP. So the
court rejected PRN’s postpetition concealment claim under §
727(a)(2)(B).
4. We affirm. The bankruptcy court based its ruling largely
on a credibility determination. As stated, we generally defer to the
bankruptcy court’s credibility determinations. See Kane, 755 F.3d
at 1288. Knowing this, PRN argues that we should not apply
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22-11118 Opinion of the Court 27
standard deference here because (a) Judge Jennemann told Cole
that she wanted more testimony about the COLP omission, so
Cole had time to prepare his supplemental answers, and (b) Cole
testified by live video (Zoom), rather than in person, so the court
was less capable of judging his demeanor.
Cole argues that PRN waived these arguments because PRN
did not object to Judge Jennemann taking supplemental testimony,
or taking the supplemental testimony by Zoom, during the
bankruptcy court proceedings. PRN did not address waiver in its
reply brief. Because PRN does not point to its objections to the
bankruptcy court, and we have not found any, we find that PRN
waived both arguments. See Telfair v. First Union Mortg. Corp.,
216 F.3d 1333, 1337 n.6 (11th Cir. 2000) (arguments raised to this
Court and the district court, but not the bankruptcy court, will not
be heard on appeal).
We also find both arguments meritless. Judge Jennemann
did not err by telling the parties the topic for reexamination. Nor
was her order prejudicial. Cole has known that PRN or the
bankruptcy court could question him about his failure to list COLP
in his schedules since PRN pleaded the allegation in its complaint.
Telling Cole that the court wanted more testimony on a known
topic did not prejudice PRN.
Nor does taking testimony by Zoom diminish the
bankruptcy court’s credibility findings. We generally defer to the
trier of fact’s credibility determination because the fact finder heard
the witness’s testimony and saw his demeanor, while we are stuck
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28 Opinion of the Court 22-11118
with a “cold paper record.” United States v. Peters, 403 F.3d 1263,
1270 (11th Cir. 2005). While we agree that in-person testimony is
preferable to a live video stream, the bankruptcy court could hear
Cole testify and watch his demeanor live. Because PRN did not
object to the Zoom feed at the time, we must assume that the court
was able to judge Cole’s credibility the same as if Cole was sitting
in the witness box. And whatever the quality of the feed, the live
video stream gave the bankruptcy court greater insight into Cole’s
credibility than the cold paper record gives us. See id.We thus give due regard to the bankruptcy court’s
determination that Cole’s testimony was “credible and believable.”
Having reviewed the record, we cannot hold that this finding is
clearly erroneous. As the bankruptcy court noted, Cole’s testimony
is backed by Cole’s listing of COLP in a different part of the
schedules, followed by his disclosure of COLP and COLP records
in later meetings with the Trustee and creditors. While the
bankruptcy court’s finding that Cole fraudulently transferred
COLP’s assets in 2011-2012 to shield it from PRN gives us reason
to question whether Cole knowingly concealed COLP’s existence
in 2015 to cover up his earlier fraud, it is apparent from the record
that the bankruptcy court had the same concern. Unlike this Court,
the bankruptcy court could recall Cole to ask him about his 2015
actions, and the court believed his answers. Because certain
evidence supports that finding, we affirm it.
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22-11118 Opinion of the Court 29
B. False Oath (§ 727(a)(4))
Section 727(a)(4) precludes the bankruptcy court from
granting a discharge if the court finds, in relevant part, that “the
debtor knowingly and fraudulently, in or in connection with the
case, made a false oath or account. . . .” A debtor can make a false
oath in his petition, in his schedules, at creditor meetings, and
when giving sworn testimony. See, e.g., In re Chalik, 748 F.2d 616,
617-19 (11th Cir. 1984) (affirming the bankruptcy court’s finding
that the debtor omitted relevant businesses from his schedules); In
re Whigham, 770 Fed. App’x 540, 545-46 (11th Cir. 2019) (affirming
the bankruptcy court’s finding that the debtor made a false oath in
court filings and during questioning); Collier on Bankruptcy, supra,
¶ 727.04 (“The false oath that is a sufficient ground for denying a
discharge may consist of (1) a false statement or omission in the
debtor’s schedules or (2) a false statement by the debtor at an
examination during the course of the proceedings.”). The false oath
must be fraudulent and material. Chalik, 748 F.2d at 618.
PRN argues that Cole made false oaths in connection with
the same three actions discussed in the previous section. We
discuss the claims in the same order as before.
1. The Homestead
PRN argues that Cole made two false oaths related to his
homestead property: (1) Cole wrongly described his property as
two parcels in his schedules, and (2) Cole lied when he testified that
he divided the property because he believed the State of Florida
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30 Opinion of the Court 22-11118
owned the submerged land. The bankruptcy court found that PRN
failed to plead this false oath claim in its operative complaint and
that, even if it had, PRN failed to prove its claim. This Court
reviews the pleading ruling de novo, and we review the merits
ruling for clear error. We affirm both.
1. We start with pleading. Because fraud is a necessary
element in a false oath claim, PRN had to meet the heightened
pleading standard of Rule 9(b) of the Federal Rules of Civil
Procedure. See Fed. R. Bankr. P. 7009 (“Rule 9 F.R.Civ.P. applies
in adversary proceedings.”). PRN pleaded its false oath claim in
Count 11. After incorporating 66 paragraphs of general allegations,
some of which described the homestead division, PRN pleaded the
rest of Count 11 like this:
The Debtor knowingly and fraudulently, in or in
connection with this case has made multiple false
oaths and accounts, including: i) failing to include all
assets in his Schedules and SOFA while testifying
under oath they were accurate; ii) failing to provide
accurate information with respect to his income; iii)
claiming that he is utilizing assets he claims are owed
as tenancies-by-the-entirety in order to fund his
lifestyle; and iv) claiming that Coledev is owned as
tenancy by the entireties while recently stating under
oath he was the sole owner of the same.
Based upon the foregoing, Plaintiff seeks a declaration
and determination that the Debtor is not eligible for
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22-11118 Opinion of the Court 31
a discharge under Section 727(a)(4)(A) of the
Bankruptcy Code.
While some paragraphs PRN incorporated from another part of
the complaint described the homestead division, PRN did not
mention Cole’s homestead division in Count 11. PRN instead listed
four other actions or failures to act. PRN thus failed to put Cole on
notice that PRN intended to pursue a homestead-based false oath
claim at trial.
PRN perpetuated the limited scope of its false oath claim
when it failed to mention Cole’s homestead division as part of the
claim in its pretrial brief and its posttrial brief. PRN did not
associate the homestead division with its false oath claim until it
responded to the bankruptcy court’s invitation to comment on its
preliminary posttrial opinion.
We agree with the bankruptcy court that PRN failed to
plead with the requisite particularity a false oath claim based on
Cole’s homestead division before trial. And we find no error in the
bankruptcy court’s refusal to amend PRN’s complaint after trial to
add a homestead-based false oath claim under Rule 15(b). Rule
15(b) requires Cole’s express or implied consent to the
amendment. Cole has not expressly consented to the amendment;
he objects to it. And courts will not find implied consent “if the
defendant had no notice of the new issue, if the defendant could
have offered additional evidence in defense, or if the defendant in
some other way was denied a fair opportunity to defend.” Cioffe v.
Morris, 676 F.2d 539, 541-42 (11th Cir. 1982). The bankruptcy court
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32 Opinion of the Court 22-11118
found that it would be unfair and prejudicial to allow PRN to “fix”
its pleading deficiency after the court took evidence and issued its
preliminary opinion. This finding of prejudice is supported by the
record and thus precludes amendment by implied consent under
Rule 15(b).
2. Even if PRN pleaded a false oath claim related to Cole’s
homestead division, the bankruptcy court did not clearly err when
it alternatively rejected the claim on the merits. The bankruptcy
court found that Cole did not make a false oath when he listed his
property as two parcels in his schedule because, at the time, Cole’s
property was legally divided into two parcels. Plus, Cole’s attorney
told the Trustee about the division before Cole filed his schedule,
thus belying any argument that Cole fraudulently listed his
property as two parcels. Having reviewed the record, we find no
clear error with these findings.
As for Cole’s testimony that he believed Florida owned the
submerged land, Judge Jennemann noted that Judge Jackson had
not ruled whether Cole or PRN was correct about ownership of
submerged lands; she instead stated that both parties presented
“reasoned arguments” and the issue was “both fascinating and
complex.” Based on Judge Jackson’s statement that Cole’s position
was “reasoned,” Judge Jennemann found it impossible to rule that
Cole fraudulently testified under oath during the homestead
exemption trial (which Judge Jackson observed) or during this trial
(which Judge Jennemann observed). As stated, we generally defer
to the credibility determinations of the bankruptcy courts. Because
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22-11118 Opinion of the Court 33
the court did not find that Cole testified falsely under oath, we find
no clear error in the bankruptcy court’s rejection of PRN’s
testimony-based false oath claim.
—
To sum up, we find that PRN did not plead a false oath claim
related to Cole’s homestead division and was not entitled to a
posttrial amendment to add that claim. Further, the bankruptcy
court did not clearly err in its alternative ruling that PRN failed to
prove a false oath claim related to Cole’s homestead division. So
we affirm the bankruptcy court’s ruling on both grounds.
2. Coledev
Again, PRN argues that Cole should have listed his $1
million in advances to Coledev as “shareholder loans payable.”
PRN thus alleges that, when Cole signed his schedules as true and
correct, despite not listing the Coledev advances as shareholder
loans payable, he knowingly and fraudulently made a false oath in
violation of § 727(a)(4).
The bankruptcy court found that Cole reasonably believed
that the advances were equitable contributions, not shareholder
loans. The court thus found that PRN failed to prove that Cole had
an intention of hindering, delaying, or defrauding his creditors or
the Trustee.
False oath claims under § 727(a)(4) are similar, but a bit
broader, than concealment claims under § 727(a)(2) because the
intent to defraud needn’t be targeted at anyone, including the
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34 Opinion of the Court 22-11118
creditors and Trustee. See Collier on Bankruptcy, supra, ¶ 727.04.
But that distinction does not matter here because the bankruptcy
court found that Cole honestly believed that the advances were
capital contributions, meaning that he had no fraudulent intent
when he did not list the advances as shareholder loans.
Further, “[a] debtor coming forward of his or her own
accord to correct an omission is strong evidence that there was no
fraudulent intent in the omission.” Id. The Trustee testified that,
once the Coledev issue was identified, Cole was cooperative and
supplied all of the Coledev-related information that she requested.
The bankruptcy court found the Trustee’s testimony credible.
We find no reason to second guess the bankruptcy court’s
credibility findings, especially when other evidence (e.g., the lack
of a promissory note or accrued interest) supports Cole’s belief that
he made equitable contributions to Coledev. We thus affirm the
rejection of PRN’s false oath claim for failure to prove a knowing
and fraudulent intent.
3. COLP
Finally, PRN claims that Cole violated § 727(a)(4) when he
signed his Statement of Financial Activities as true and accurate
despite failing to list COLP and its 1% partner, W&T Cole, LLC on
his list of businesses. The bankruptcy court rejected this claim
because it found Cole’s omission of COLP to be “inadvertent—not
intentional.”
As detailed supra at 25, Judge Jennemann had reservations
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about Cole’s initial testimony on COLP, so she recalled him to
testify on the topic. Judge Jennemann found Cole to be “forthright
and candid,” and she found his testimony “credible and believable.”
The bankruptcy court therefore found that PRN failed to prove
that Cole intentionally and fraudulently left off COLP from his list
of businesses.
For the same reasons discussed in the concealment section,
supra at 27-29, we affirm. The bankruptcy court is in a better
position than this Court to judge Cole’s credibility, and we find no
clear error in its determination that Cole did not knowingly and
fraudulently omit COLP in violation of § 727(a)(4).
—
In sum, we affirm all of the bankruptcy court’s rulings under
11 U.S.C. § 727(a), meaning that Cole was entitled to a discharge of
all debts, minus any individual debt excepted under 11 U.S.C. § 523.
See 11 U.S.C. § 727(b). We now turn to PRN’s claim to except a
debt under § 523(a)(2)(A), the so-called “Husky” claim.
C. Husky Claim (§ 523(a)(2)(A))
Fraudulent transfers generally involve two parties: the
transferor and the recipient. Bankruptcy debtors are usually the
transferor trying to conceal assets from creditors and the estate.
Four code provisions cover this scenario. If the debtor transferred
assets less than a year before filing his bankruptcy petition, or after
he filed his petition, then § 727(a)(2) allows the Trustee or a creditor
to seek total preclusion of a discharge. If the transfer occurred less
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36 Opinion of the Court 22-11118
than two years before the debtor filed his petition, then § 548(a)(1)
allows the Trustee to nullify the transfer, and § 550(a) allows the
Trustee to retrieve the money for the estate. If the transfer
occurred more than two years before the debtor filed his petition,
then § 544(b)(1) allows the Trustee to seek the same remedies
(avoidance and retrieval) if the transfer is voidable under state law.
While these provisions cover the usual scenario of debtors
transferring assets, sometimes the debtor receives a fraudulent
transfer. That’s where § 523(a)(2) kicks in. If someone sends the
bankruptcy debtor money to fraudulently avoid his debt, the party
owed the money can have the debt excepted from the recipient
debtor’s discharge—if the creditor can show that, under state law,
the recipient took on the sender’s debt.
The proceedings below and before this Court reveal much
confusion about the interplay among these provisions. So we
create this chart to highlight the key distinctions:
11 U.S.C. § 727(a)(2)
Fraud. transfer: Bankruptcy Debtor Third Party
Timing of fraud: Within one year of filing or postpetition
Relief: No discharge of any debt
Who can file: Trustee, Creditor, or U.S. Trustee
11 U.S.C. § 548(a)(1)(A)
Fraud. transfer: Bankruptcy Debtor Third Party
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22-11118 Opinion of the Court 37
Timing of fraud: Within two years before filing the petition
Relief § 548: Avoidance (nullification) of transfer
Relief § 550(a): Estate Third Party
Who can file: Trustee
11 U.S.C. § 544(b)(1)
Fraud. transfer: Bankruptcy Debtor Third Party
Timing of fraud: Governed by applicable state law
Relief § 544: Avoidance (nullification) of transfer
Relief § 550(a): Estate Third Party
Who can file: Trustee
11 U.S.C. § 523(a)(2)(A)
Fraud. transfer: Third Party Bankruptcy Debtor
Timing of fraud: Governed by applicable state law
Relief: Except discharge of traceable debt
Who can file: Creditor
In separate proceedings, PRN and the Trustee invoked one
of these provisions to challenge the $4 million COLP transfers. The
Trustee sought to nullify the transfers under § 544(b)(1) and
retrieve Cole’s personal interest in the money under § 550(a)(1).
The Trustee and Cole settled this claim for $350,000.
In Count 3, PRN sought to except a debt that, PRN claims,
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38 Opinion of the Court 22-11118
Cole assumed from COLP under § 523(a)(2)(A). 4 PRN alleged that
when Cole caused COLP to transfer $4 million to the Coles’ TBE
account, Cole obtained both COLP’s money and COLP’s
contribution debt to PRN arising from PRN’s payment of the
SunTrust loans. PRN did not ask to retrieve or set aside Cole’s
personal interest in the $4 million transfer. 5 Rather, PRN asked for
a discharge exception so that it can collect COLP’s contribution
debt from Cole.
The bankruptcy court summarily dismissed Count 3, finding
“that PRN is asking for a cause of action that just isn’t there, and to
the extent that it ever could be there, it would belong to the
Trustee.” We understand the bankruptcy court’s ruling to mean
that (a) PRN failed to plead a viable claim under § 523(a)(2)(A) but,
if it did, (b) the Trustee’s action to avoid the transfer under § 544(b)
and to retrieve Cole’s personal interest in COLP’s assets under §
550(a) preempted PRN’s § 523(a)(2)(A) discharge exception claim.
As a result, the bankruptcy court did not consider the merits of
4 PRN pleaded various challenges to the COLP transfers in Counts 3-6 of its
complaint. The district court held that PRN waived Counts 4-6 on appeal
because of inadequate briefing. PRN does not challenge that ruling in its briefs,
and PRN expressly dropped Counts 5-6 in its opening brief. PRN primarily
focused on Count 3 in its later briefing and at argument. So we limit our
review to Count 3. Counts 4-6 remain dismissed.
5 Unlike Count 3, PRN requested that Cole’s 49.5% personal interest in
COLP’s assets be deemed non-dischargeable in Count 4. This may explain
why the bankruptcy and district courts held that the Trustee’s action
preempted Cole’s action and why Cole shies away from that count on appeal.
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22-11118 Opinion of the Court 39
PRN’s claim.
As explained below, we find that the bankruptcy court erred
on both counts: viability and preemption. To explain why, though,
we must first dive deeper into § 523(a)(2)(A) and the case that lends
its name to claims filed under that provision: Husky Int’l Elecs., Inc.
v. Ritz, 578 U.S. 355 (2016).
1. Defining a Husky claim
Pared down to its relevant part, § 523(a)(2)(A) says that an
otherwise complete discharge under § 727 “does not discharge an
individual debtor from any debt . . . for money . . . to the extent
obtained by . . . actual fraud.” The Supreme Court has clarified that
the phrase “to the extent obtained by” modifies “money,” not “any
debt.” Cohen v. de la Cruz, 523 U.S. 213, 218 (1998). Section
523(a)(2)(A) thus “turns on how the money was obtained.”
Bartenwerfer v. Buckley, 598 U.S. 69, 72 (2023). If the debtor
obtained money by actual fraud, then “any debts ‘traceable to’ the
fraudulent conveyance will be nondischargeable under §
523(a)(2)(A).” Husky, 578 U.S. at 365 (citations omitted).
To define a viable claim under this provision, we look to the
Supreme Court’s decision in Husky and our most detailed
treatment of Husky: In re Gaddy, 977 F.3d 1051 (11th Cir. 2020).
1. Husky shares an important fact with this case: The
bankruptcy debtor, Daniel Ritz, used companies he controlled to
both send and receive money by actual fraud. Ritz was the director
and 30% owner of Chrysalis Manufacturing Corp. Husky, 578 U.S.
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40 Opinion of the Court 22-11118
at 357. Chrysalis bought electronic parts from Husky International
Electronics. Id. Chrysalis owed Husky about $164,000 when Ritz
used his power as Chrysalis’ director to transfer at least $270,000 to
other businesses Ritz controlled, making Chrysalis unable to pay
its $164,000 debt to Husky when Chrysalis filed for bankruptcy. Id.
at 357-58.
Husky sued Ritz under a Texas veil piercing statute that
makes shareholders liable for corporate debts if the shareholder
committed actual fraud. See Tex. Bus. Orgs. Code Ann. § 21.223(b).
Ritz later filed for Chapter 7 bankruptcy, and Husky filed a claim
for exception under 11 U.S.C. § 523(a)(2)(A), arguing that under
Texas’s veil piercing statute, Ritz obtained Chrysalis’ debt to Husky
when he caused Chrysalis to transfer money to other Ritz-owned
companies. Husky, 578 U.S. at 358.
The district court agreed with Husky that Ritz was liable for
Chrysalis’ debt under Texas law but held that § 523(a)(2)(A) did not
apply because Ritz did not obtain Chrysalis’ debt by actual fraud.
Id. at 358. The Fifth Circuit affirmed, finding that Ritz did not
commit actual fraud because the transfer of money from one Ritz
company to other Ritz companies did not involve a fraudulent
misrepresentation. Id. at 358-59.
The Supreme Court reversed, finding that “actual fraud . . .
can be effected without a false representation.” Id. at 359
(quotations omitted). Actual fraud “is not in dishonestly inducting
a creditor to extend a debt. It is in the acts of concealment and
hinderance.” Id. at 362.
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After rejecting the Fifth Circuit’s rationale, the Court then
tackled two other arguments relevant here. First, the Court
rejected Ritz’s argument that Husky’s reading of § 523(a)(2)(A)
made the provision redundant with § 727(a)(2). The Court noted
that, while both provisions “could cover some of the same conduct,
they are meaningfully different” in scope and timing. Id. at 364. As
for scope, the Court noted that relief under § 727(a)(2) is the
broader, “blunt remedy” of blocking the discharge of any debt. Id.
As for timing, the Court noted that a § 727(a)(2) claim arises only
in the year before the petition is filed, a limitation that does not
apply to § 523(a)(2)(A). Id. Because the two provisions differ in
timing and scope of relief, creditors can use either (if available).
Second, the Court rejected Ritz’s argument that debts are
not “obtained by” a fraudulent transfer of monies because the
person who sent the money—the transferor—was already in debt
to the creditor when the transfer occurred:
It is of course true that the transferor does not ‘obtain’
debts in a fraudulent conveyance. But the recipient of
the transfer—who, with the requisite intent, also
commits fraud—can ‘obtain’ assets ‘by’ his or her
participation in the fraud. If that recipient later files
for bankruptcy, any debts ‘traceable to’ the fraudulent
conveyance will be nondischargeable under §
523(a)(2)(A). Thus, at least sometimes a debt
‘obtained by’ a fraudulent conveyance scheme could
be nondischargeable under § 523(a)(2)(A). Such
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42 Opinion of the Court 22-11118
circumstances may be rare because a person who
receives fraudulently conveyed assets is not
necessarily (or even likely to be) a debtor on the verge
of bankruptcy, but they make clear that fraudulent
conveyances are not wholly incompatible with the
‘obtained by’ requirement.
Id. at 365 (citations and footnote omitted) (cleaned up). In short,
the Court agreed that § 523(a)(2)(A) cannot apply to the party who
fraudulently transferred money because his debt preexisted the
fraud. But while it “may be rare,” id., § 523(a)(2)(A) can apply to
the party who received the money because his debt resulted from
the fraudulent transfer.
The Supreme Court remanded the case to the Fifth Circuit,
who in turned remanded to the bankruptcy court to determine
whether Ritz assumed Chrysalis’ debt to Husky under Texas’s veil
piercing law. See In re Ritz, 832 F.3d 560, 565-66 (5th Cir. 2016).
The bankruptcy court tried the case and found that, through actual
fraud, Ritz “became personally liable to Husky by virtue of the
Texas veil-piercing statute.” In re Ritz, 567 B.R. 715, 773 (Bankr.
S.D. Tex. 2017). Because Ritz’s debt could be traced to his
fraudulent receipt of money, the bankruptcy court held that §
523(a)(2)(A) precluded Ritz from discharging the debt. Id.
2. Our Gaddy decision starts with facts similar to this case.
The bankruptcy debtor, Jerry Gaddy, took part in a real estate
development project. In 2006, Gaddy’s business, Water’s Edge
LLC, received two loans from Vision Bank, who we will call SEPH
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22-11118 Opinion of the Court 43
going forward based on a later merger. Gaddy, 977 F.3d at 1054.
Gaddy personally guaranteed the SEPH loans for just over $10
million when they were made, then increased his guarantee to
$12.5 million in 2008. Id.
The project had more than 30 guarantors, including Gaddy.
The project became troubled in 2009, and SEPH warned the
guarantors of potential default. Less than two weeks later, Gaddy
started transferring property to an LLC he created for his wife and
daughter. Id. Gaddy continued these transfers through 2014.
Water’s Edge defaulted on the SEPH loans in 2010. So SEPH
demanded Gaddy pay the loans as the guarantor, and SEPH sued
Water’s Edge, Gaddy, and other guarantors to reclaim its losses on
the project. SEPH won the lawsuit, including a $9.1 million
judgment against Gaddy. Id. All the while, Gaddy kept transferring
assets to his wife and daughter.
So SEPH sued Gaddy and his wife (and later their daughter)
under Alabama’s fraudulent transfer law. Id. Gaddy, in turn, filed
for Chapter 7 bankruptcy. Id. Relying on Husky, SEPH argued that
the transfers from Gaddy to his family amounted to actual fraud,
thus requiring the bankruptcy court to except SEPH’s $9.1 million
judgment against Gaddy under § 523(a)(2)(A). The bankruptcy
court rejected the exception, finding that SEPH could not allege or
prove that Gaddy’s debt to SEPH “was obtained by fraud or was
anything other than a standard contract debt.” Id. at 1055.
We affirmed. We noted that, “for a debt to be exempt from
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44 Opinion of the Court 22-11118
discharge under § 523(a)(2)(A), the money or property giving rise
to the debt must have been ‘obtained by’ fraud, actual or
otherwise.” Id. at 1057. But the “Water’s Edge debt existed long
before Gaddy began transferring his assets, and that debt is an
ordinary contract debt that did not arise from fraud of any kind.”
Id. at 1058. In other words, Gaddy’s debt was not traceable to the
fraudulent transfer of money to his family; Gaddy’s debt resulted
from the non-fraudulent guarantee of the SEPH loans. So §
523(a)(2)(A) could not apply.
—
Taken together, Husky and Gaddy teach that, for a creditor
to except a debt under § 523(a)(2)(A), the creditor must show that
(a) the bankruptcy debtor obtained money, property, or services by
actual fraud; and, (b) the debt to be excepted resulted from the
debtor’s fraudulent receipt. 6 Further, § 523(a)(2)(A) can only apply
to the recipient of a fraudulent transfer because the transferor did
not “obtain” money, property, or services, and his debt necessarily
resulted from an earlier event.
With these requirements in mind, we now turn to the
bankruptcy court’s ruling that PRN failed to plead a viable Husky
claim, or if it did, the Trustee’s action preempted PRN’s claim.
6 As long as fraud was involved when the debtor obtained the assets, the
debtor need not be the party who committed the fraud for § 523(a)(2)(A) to
apply. See Bartenwerfer, 598 U.S. at 83.
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2. Viability
We find that PRN pleaded a viable claim of exception under
§ 523(a)(2)(A). PRN alleges that Cole obtained money by actual
fraud—i.e., the transfer of money from a non-exempt limited
partnership to an exempt TBE account to hinder PRN’s claim for
the money. And PRN alleges that, under state law, Cole took on
COLP’s debt when he fraudulently obtained COLP’s money.
Placing PRN’s allegations in our chart shows that PRN’s
claim mirrors the claim in Husky, not Gaddy:
Husky’s § 523(a)(2)(A) Claim against Ritz
Original debt: Chrysalis owes Husky
Fraud. transfer: Chrysalis Ritz-controlled companies
Traceable debt: Yes. Under Texas law, Ritz took on Chrysalis’
debt because of the fraud.
PRN’s § 523(a)(2)(A) Claim against Cole
Original debt: COLP owes PRN a contribution debt
Fraud. transfer: COLP Cole’s TBE
Debt transfer: Yes. Under Nevada law, Cole took on
COLP’s debt because of the fraud.
SEPH’s § 523(a)(2)(A) Claim against Gaddy
Original debt: Gaddy owes SEPH via loan guarantee
Fraud. transfer: Gaddy Gaddy’s wife and daughter
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46 Opinion of the Court 22-11118
Traceable debt: No. Gaddy already had the debt.
Because PRN’s claim fits within the plain language of § 523(a)(2)(A)
and mirrors the Husky claim in all relevant parts, we find that the
bankruptcy court erred when it found that PRN did not plead a
viable cause of action in Count 3.
We also disagree with the district court’s additional findings
that (a) PRN pleaded transferor liability, rather than recipient
liability, and (b) under state law, Cole could not obtain COLP’s
debt when he obtained COLP’s money by actual fraud. To explain
why, we must first choose between PRN’s alternate pleading of
Nevada and Florida law.
1. Nevada’s alter ego law applies. Circuit courts have split
when choosing between federal and state choice of law rules in
bankruptcy. See In re First River Energy, LLC, 986 F.3d 914, 924
n.19 (5th Cir. 2021) (noting the split). In an unpublished opinion,
we have stated that federal courts apply the forum state’s choice of
law rules in bankruptcy cases. Mukamal v. Bakes, 378 Fed. App’x
890, 896 (11th Cir. 2010). But we needn’t decide whether to
officially adopt that rule here because both federal and Florida law
tell us to apply the Restatement (Second) of Conflict of Laws and
thus would lead to the same result. See Bishop v. Fla. Specialty
Paint Co., 389 So. 2d 999, 1001 (Fla. 1980) (looking to the
Restatement (Second) for choice of law issues); First River Energy,
986 F.3d at 924 (not deciding between Texas or federal choice of
law rules because both bodies of law reached the same result by
pointing to the Restatement (Second)).
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The Restatement says that courts must follow “a statutory
directive of its own state on choice of law.” Restatement (Second)
of Conflict of Laws, § 6(1) (Am. Law Inst. 1977). If the state has not
adopted a statute that directs the choice of law, the Restatement
requires courts to consider seven factors listed in § 6(2).
Florida has a statute on point, so the statute controls. Id. §
6(1). COLP is a limited partnership organized in Nevada. Section
620.1901(1) of the Florida Statutes provides that “[t]he laws of the
state or other jurisdiction under which a foreign limited
partnership is organized govern relations among the partners of the
foreign limited partnership and between the partners and the
foreign limited partnership and the liability of partners as partners
for an obligation of the foreign limited partnership.” (emphasis
added). Because COLP is foreign to Florida, Nevada law governs
the liability of COLP’s partners for COLP’s obligations.
2. Nevada law says that an individual cannot be personally
liable for a corporation’s debt unless the individual “acts as the alter
ego of the corporation.” Nev. Rev. Stat. § 78.747. A person acts as
a corporation’s alter ego “only if: (a) The corporation is influenced
and governed by the person; (b) [t]here is such unity of interest and
ownership that the corporation and the person are inseparable
from each other; and (c) [a]dherence to the notion of the
corporation being an entity separate from the person would
sanction fraud or promote a manifest injustice.” Id.The Supreme Court of Nevada answered three relevant
certified questions about this statute in Magliarditi v. TransFirst
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48 Opinion of the Court 22-11118
Group, Inc., 135 Nev. 681, No. 73889, 2019 WL 5390470, at *1 (filed
Oct. 21, 2019) (unpublished disposition). 7 First, the court said that
creditors can file a cause of action against the alter ego to make him
personally liable for the corporation’s debt. Id. at *2-3. Second, the
court said that § 78.747 applies to partnerships, in addition to
corporations. Id. at *3. And third, the court said that the alter ego
becomes a “debtor” (i.e., “a person who is liable on a claim” of the
creditor) when the alter ego violates Nevada’s version of the
Uniform Fraudulent Transfer Act. Id. at *4-5 (looking at Nev. Rev.
Stat. § 112.140, et seq. (2017)).
Applying the high court’s reading of Nevada law here, PRN
can plead a state law alter ego claim against Cole for fraudulently
transferring COLP’s assets to the Coles’ TBE, and if PRN proves
that claim, Cole becomes liable for COLP’s contribution debt to
PRN. Because Cole’s debt to PRN arises from his role in a
fraudulent transfer—or, as § 523(a)(2)(A) puts it, Cole would
possess a “debt for money . . . obtained by . . . actual fraud”—PRN
has pleaded a viable Husky claim.
3. Cole argues that even if PRN could plead a viable Husky
claim, the district court rightly affirmed the dismissal of Count 3
because PRN pleaded transferor liability like Gaddy, rather than
recipient liability like Husky.
7 Magliarditi is unpublished. Rule 36(c) of the Nevada Rules of Appellate Pro-
cedure states that an unpublished opinion may be cited for its persuasive value
and citations must be to an electronic database. We cite Westlaw.
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As explained, we agree with Cole that the party who
fraudulently transfers money to avoid paying an existing debt is not
subject to § 523(a)(2)(A)’s exception because that party did not
“obtain” money by fraud and his (preexisting) debt is not traceable
to the fraudulent transfer. See Gaddy, 977 F.3d at 1057-58. But
COLP would be the forbidden transferor here, not Cole, because
COLP, not Cole, possessed the debt at issue before the transfer.
Count 3 properly alleges that, by application of Nevada law,
Cole became liable for COLP’s debt when Cole fraudulently
obtained COLP’s assets:
94. Pursuant to Nevada common law and Nevada
Revised Stated [sic] Section 78.746, the Debtor is
liable to PRN for the subsequent fraudulent
transfers and conversions made by Cole [of]
Orlando. . . .
103. By causing Cole of Orlando to make the [$4
million transfers], the Debtor obtained debts
owed to PRN which are the subject of this Count
against the Debtor.
104. By causing the [$4 million transfers], the Debtor
obtained assets that are directly traceable to the
transfers from Cole of Orlando because he
obtained the right to the whole of the assets
transferred and he conspired with [Terre] Cole
to hinder, delay[,] or defraud PRN by
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50 Opinion of the Court 22-11118
transferring the assets.
As discussed, under Nevada law, PRN must prove that Cole (as
COLP’s alter ego) forced COLP to transfer its assets to establish
that Cole became responsible for COLP’s debt to PRN when he
obtained COLP’s assets. So when PRN pleaded that Cole caused
the COLP transfers, PRN did so out of necessity—not out of error.
—
In sum, PRN pleaded facts in Count 3 that, if proved, would
show that (a) Cole obtained COLP’s money by actual fraud, and as
a result, (b) Cole became responsible for COLP’s debt to PRN. As
a result, the bankruptcy court erred in holding that PRN did not
state a viable cause of action to except that debt from discharge
under 11 U.S.C. § 523(a)(2)(A).
3. Preemption
Alternatively, the bankruptcy court held that, even if PRN
had a viable cause of action stemming from the COLP transfers, “it
would belong to the Trustee,” who sought to avoid the transfers
under § 544(b) and retrieve Cole’s portion of the money under §
550(a). Cole casts this ruling as one of standing and argues that the
Trustee had exclusive standing to challenge the COLP transfers
under § 544(b). We disagree.
1. For starters, Cole raises a question of preemption, not
standing. Assuming the pleaded facts are true, PRN meets the
requirements for Article III standing: (1) the fraudulent transfers
injured PRN by rendering COLP unable to pay its debt to PRN; (2)
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22-11118 Opinion of the Court 51
Cole caused PRN’s injury by causing COLP to transfer its money
to an exempt TBE account; and, (3) excepting from discharge any
debt traceable to Cole’s fraudulent receipt of COLP’s money
would redress PRN’s injury because PRN could seek payment from
Cole. See Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992)
(listing the elements of standing). And Congress gave creditors like
PRN the ability to seek exceptions to redress their injuries. See 11
U.S.C. § 523(c)(1) (permitting creditors to request an exception
under § 523(a)(2) and requiring notice and a hearing before the
bankruptcy court can determine whether to except the challenged
debt from discharge).
As a result, the question is not whether PRN had standing to
plead its § 523(a)(2)(A) claim or whether the bankruptcy court had
subject matter jurisdiction to hear PRN’s claim. They did. Rather,
the question is whether the Trustee’s action to avoid the $4 million
transfers under § 544(b)(1) and recover Cole’s personal interest in
the money under § 550(a)(1) preempted PRN’s statutory right to
seek a discharge exception for a debt owed to it.
2. The Trustee’s § 544(b) action did not preempt PRN’s §
523(a) action. No Code provision extinguishes a creditor’s right to
seek a discharge exception under § 523(a)(2)(A) because the
Trustee seeks to avoid a fraudulent transfer under § 544(b) or §
548(a) or the full denial of discharge under § 727(a). Nor does it
appear that Congress intended Trustees to have exclusive
authority to press claims based on fraudulent transfers. For
example, if a fraudulent transfer happens within one year of the
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52 Opinion of the Court 22-11118
petition, Congress gives the Trustee and creditors the right to
challenge the discharge under § 727(a)(2). See 11 U.S.C. § 727(c)(1).
This case proves that both can challenge a fraudulent transfer
under § 727(a)(2): PRN challenges the Coledev transfers under §
727(a)(2) in this appeal, without a standing or preemption
challenge, see Parts III(A)(2), (B)(2), despite the Trustee settling the
same § 727(a)(2) claim in her own action.
Further, Congress added “actual fraud” to § 523(a)(2)(A) as
part of the Bankruptcy Reform Act of 1978. See Husky, 578 U.S. at
359. As the Supreme Court noted about this addition in Husky,
when “Congress acts to amend a statute, we presume it intends its
amendment to have real and substantial effect.” Id. (quotation
omitted). If Cole is correct that Trustees have exclusive authority
to challenge fraudulent transfers under §§ 544 and 548, then
Congress’ addition of “actual fraud” to creditors’ § 523 arsenal was
meaningless. Courts must allow creditors to raise “actual fraud”
claims under § 523(a)(2)(A), even if Trustees can raise avoidance
claims under § 544(b) or § 548(a), to give that provision real and
substantial effect.
Finally, Trustees and creditors have different interests, and
thus seek different outcomes, when they invoke Chapter 5 to
challenge a fraudulent transfer. When a Trustee invokes § 544 or §
548, plus § 550, he seeks to nullify the transfer and recover the
money for the benefit of all creditors. On the other hand, when a
creditor invokes § 523(a), he does not seek to bring the money back
to the estate to divvy up among the creditors. Rather, the creditor
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22-11118 Opinion of the Court 53
wants the recipient to keep the money so that the creditor alone
can collect it after the bankruptcy court excepts the corresponding
debt from discharge under § 523(a)(2)(A). Simply put, a Trustee
action cannot preempt the field of fraudulent transfer actions
because creditors are playing on a different field. See Husky, 578
U.S. at 364 (rejecting Ritz’s argument that allowing creditors to
raise “actual fraud” claims under § 523(a)(2)(A) makes § 727(a)(2)
redundant because “[a]lthough the two provisions could cover
some of the same conduct, they are meaningfully different”).
3. To be clear, we are not saying that the settlement of the
Trustee’s § 544(b) avoidance claim is meaningless. As PRN
concedes, Cole may have a viable argument for satisfaction or
double recovery if (a) PRN succeeds in obtaining a judgment that
requires Cole to pay COLP’s portion of the SunTrust contribution
debt and (b) Cole can show that PRN included that debt as part of
the proof of claim that Cole’s estate paid in the underlying
bankruptcy case. But we leave those ‘ifs’ for another day. Today,
our holding is limited: The Trustee’s § 544(b) avoidance action
does not preempt Cole’s § 523(a)(2)(A) action for a discharge
exception.
—
To sum up, Congress gave PRN the right to request an
exception of COLP’s contribution debt, if PRN can prove that Cole
fraudulently obtained COLP’s money, and as a result, became
responsible for COLP’s contribution debt. PRN has pleaded facts
that, if proved, meet these requirements. And the Trustee’s action
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54 Opinion of the Court 22-11118
to avoid the same fraudulent transfer does not preempt PRN’s right
to seek a discharge exception.
Because the bankruptcy court dismissed PRN’s claim based
on non-viability and lack of standing, the bankruptcy court did not
rule on the merits of Cole’s motion for summary judgment. We
thus remand the case for the bankruptcy court to determine in the
first instance whether any facts material to Count 3 are genuinely
disputed, and if not, whether Cole is entitled to judgment on Count
3. See Fed. R. Civ. P. 56(a).
IV. CONCLUSION
We REVERSE the bankruptcy court’s order granting sum-
mary judgment for Cole on Count 3 and AFFIRM the court’s or-
ders granting judgment for Cole on all other counts. We REMAND
the case to the district court for further proceedings consistent with
this opinion.