Boyuka v. Sigmon (In Re White) ( 2005 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 04-1774
In Re: RICHARD D. WHITE, d/b/a Source One
Management, LLC, d/b/a Divorce Financial
Consulting, LLC, formerly doing business as
Rick White and Company, LLC, formerly doing
business as Resource Marketing & Management;
In Re: ANTHONY D. PANGLE, formerly doing
business as Source One Management, LLC,
Debtors.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
DAVID A. BOYUKA; ANNA BOYUKA SABLITZ,
Plaintiffs - Appellants,
versus
RICHARD D. WHITE; ANTHONY D. PANGLE,
Defendants - Appellees,
and
WAYNE SIGMON; A. BURTON SHUFORD,
Trustees.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Graham C. Mullen, Chief
District Judge. (CA-03-337-MU-3; BK-02-31152; BK-02-32203; AP-02-
3129; AP-02-3175)
Argued: February 2, 2005 Decided: April 28, 2005
Before LUTTIG, WILLIAMS, and GREGORY, Circuit Judges.
Reversed and remanded by unpublished per curiam opinion.
ARGUED: Richard Stewart Gordon, DOZIER, MILLER, POLLARD & MURPHY,
Charlotte, North Carolina, for Appellants. Richard M. Mitchell,
MITCHELL, RALLINGS, SINGER, MCGIRT & TISSUE, Charlotte, North
Carolina; David Russell Badger, Charlotte, North Carolina, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
2
PER CURIAM:
Appellants brought adversary actions against two debtors
seeking to recover money paid for the purchase of certain notes and
requesting that the judgment be declared non-dischargeable pursuant
to 11 U.S.C. § 523(a)(2), which excludes fraudulently obtained
assets from discharge. After a bench trial, the bankruptcy judge
entered a judgment against the debtors and ruled that their debts
were non-dischargeable. The district court reversed, finding that
the debtors did not have the necessary scienter for fraud. Because
we cannot conclude that the bankruptcy court clearly erred in its
finding that the debtors did have the necessary scienter, we
reverse the district court’s order to the contrary and remand.
I.
Richard White (“White”) and Anthony Pangle (“Pangle”) were
engaged in the business of offering financial planning advice and
investment services to the public through a limited liability
company operating under the name “Source One Management,” of which
they were the only members. During May 1999, White and Pangle made
a presentation on biblical financial principles at the Pineville
Church of the Nazarene (“the church”), where they were members.
3
David A. Boyuka (“Boyuka”) was also a member of the church. Boyuka
attended the seminar.1
White had been a financial planner since the early 1990s and
had also sold securities. At the time of the seminar, White was a
certified financial planner but had let his license for selling
securities lapse. Pangle was Minister of Music at the church until
he resigned to join Source One shortly before the seminar in
question. He had previous experience as a salesman for a number of
companies, but no certifications or licenses relating to financial
planning or selling securities.
After the seminar, White and Pangle met with Boyuka. Boyuka
told them that he did not need their investment services but only
their estate planning services for his mother, Anna Boyuka Sablitz
(“Sablitz”), also an Appellant in this case.2 Yet, White and
Pangle continued to solicit Boyuka to use Source One for investment
advice. After several solicitations, Boyuka told White that he and
his mother had money that they might want to place in a safe,
short-term investment vehicle that would afford a better yield than
1
Boyuka worked in the chemical industry in a number of
positions before moving to North Carolina where he opened his own
business. He holds a college degree and a MBA. He is considered an
“accredited investor” with a net worth exceeding $1,000,000. He
testified that most of his assets were tied up in his new business.
2
After Boyuka moved to North Carolina, Sablitz moved to North
Carolina as well. She had a heart attack shortly after moving,
prompting, according to Boyuka’s testimony, a need for estate
planning services.
4
could be obtained through a certificate of deposit or money market
account. Boyuka told White that he was not interested in a
speculative investment but only a safe investment similar in risk
to a money market fund.
White suggested that an entity called U.S. Capital Funding,
Inc. (“U.S. Capital”) which issued notes, referred to as “Corporate
Funding Notes” (“Notes”), would meet his needs. White said that
the Notes represented investments in a firm that provided financing
for a factoring concern. He indicated that they were a safe and
suitable alternative for the investments of the Boyukas’ money.
White showed Boyuka a brochure from U.S. Capital containing
information about the Notes, and discussed with him the information
contained in it. When Boyuka questioned White about whether U.S.
Capital would pay interest and principal on the Notes, White
responded, “everything I’ve seen says they have.” J.A. 228.
Thereafter, Boyuka purchased one of the Notes for $50,000 and
Sablitz purchased another for $75,000. Pangle filled out and
submitted the paperwork on their behalf to U.S. Capital. White and
Pangle received commissions on the sales of the Notes.
Within the year following issuance of the Notes to the
Boyukas, U.S. Capital was placed into receivership and it was
revealed that the operation was a large Ponzi scheme.3 This scheme
3
A Ponzi scheme is essentially “a phony investment plan in
which monies paid by later investors are used to pay artificially
high returns to the initial investors,” rather than made from the
5
defrauded a great number of investors, across several states.
Although Boyuka and Sablitz received one installment of interest on
the Notes they purchased, the principal and all subsequent
installments of interest are and continue to be in default. White
did make some effort after the Ponzi scheme was discovered to
recover the Boyukas’ money by calling and sending e-mails to U.S.
Capital asking that the money be returned.
The main point of dispute at the bench trial was whether White
and Pangle had the scienter necessary to deny their discharge in
bankruptcy. White and Pangle claimed that they believed the Notes
were good investments.4 In contrast, Boyuka and Sablitz claimed
that neither White nor Pangle ever made any significant
investigation of the Notes.
After a two-day bench trial, the bankruptcy judge found that
White and Pangle were liable to the Boyukas for the value given to
them for the Notes (less the money the Boyukas received as
interest) and that the liabilities were non-dischargeable.
Specifically, the bankruptcy judge concluded, in pertinent part,
that:
success of a legitimate business venture. United States v. Godwin,
272 F.3d 659, 666 (4th Cir. 2001) (citation omitted).
4
Pangle presented a slightly different defense. He argued
that he was only a salesman for Source One and knew little about
the Notes, instead relying on the knowledge and expertise of White.
6
• in general the testimony of Boyuka was more credible than
White and Pangle and thus if there was a conflict between the
testimony, Boyuka’s account was more accurate;
• White and Pangle were guilty of fraud by willfully and
recklessly failing to divulge two material facts -- that the
Notes were unregistered and that they were not licensed to
sell the investments; they were also guilty of a direct
material misrepresentation when they represented the Notes as
safe investments;
• the willful and reckless failure of White and Pangle to
undertake any kind of reasonable, diligent investigation of
the Notes prior to selling them, coupled with their blind
endorsement of the promotional claims of U.S. Capital,
sufficed to form the scienter required to deny discharge; and
• the Boyukas justifiably relied on White and Pangle’s
misrepresentations because under the circumstances nothing was
apparent from a cursory glance to indicate that they should
beware.
J.A. 594-603.
The district court reversed the bankruptcy court concluding
that “[w]hile White and Pangle can readily be characterized as
‘dumb but honest’ the totality of the circumstances does not reveal
recklessness sufficient to impute scienter.” Id. at 618. The
district court acknowledged “that this case is as close as a case
7
can be to the line separating mere negligence from recklessness
sufficient to equate with scienter.” Id. at 617. However, it
found that given the strict standard by which dischargeability
exceptions are construed, it disagreed with the bankruptcy court’s
conclusions. It considered it important that “[t]here was at least
some attempt, however meager, to investigate the information in
U.S. Capital’s promotional materials” and that White made efforts
after the fact to get the Boyukas money back. Id. at 618. This
appeal follows.
II.
Section 523(a)(2)(A) of the Bankruptcy Code provides an
exception to discharge from debts obtained by fraud. It states, in
pertinent part, as follows:
(a) A discharge under section 727 . . . does not
discharge an individual debtor from any debt-
(2) for money, property, services, . . . to the extent
obtained by-
(A) false pretenses, a false representation, or actual
fraud . . .
11 U.S.C. § 523(a)(2)(A) (2004). Exceptions to discharge are
narrowly construed to further the Bankruptcy Code’s “fresh start”
policy; thus, the claimant has the burden to demonstrate that his
claim comes within an exception to discharge by a preponderance of
the evidence. Grogan v. Garner, 498 U.S. 279, 286 (1991). Still,
the very purpose of some sections of the Bankruptcy Code “is to
make certain that those who seek shelter of the bankruptcy code do
8
not play fast and loose with their assets or with the reality of
their affairs.” Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.
1997). In this respect, § 523(a)(2)(A), is intended to make
certain that those who obtain property by fraudulent means are not
afforded bankruptcy protection. Id.
To establish that a debt should not be subject to discharge,
a claimant must prove:
(1) that the debtor made a fraudulent
misrepresentation;
(2) that the debtor’s conduct was with the intention
and purpose of deceiving or defrauding the
creditor;
(3) that the creditor relied on the debtor’s
representations or other fraud; and
(4) that the creditor sustained loss and damage as a
proximate result of the representations of fraud.
In re Biondo, 180 F.3d 126, 134 (4th Cir. 1999); In re Hale, 274
B.R. 220, 222-23 (Bankr. E.D. Va. 2001)5. Element one is satisfied
if the debtor’s representation was known to be false or recklessly
made without knowing whether it was true or false. In re Woolley,
145 B.R. 830, 834 (Bankr. E.D. Va. 1991) (citing In re Taylor, 514
F.2d 1370, 1373 (9th Cir. 1975)). Pertinent considerations for
determining recklessness are the debtor’s pattern of conduct and
his prior business expertise. Id. at 834-35.
5
In Field v. Mans, 516 U.S. 59 (1995), the Supreme Court
established that § 523(a)(2)(A) incorporated the “general common
law of torts.” Id. at n.9. These elements are thus taken from the
definition of fraudulent misrepresentation under the Restatement
(Second) of Torts (1976). See In re Biondo, 180 F.3d at 134.
9
The conclusion that a debtor knew that his representations
were false is closely linked to, but separate from, the issue of an
intent to deceive to influence another’s conduct.6 Indeed, most
cases, including this one, revolve around this second element:
whether the debtor acted with the requisite intent to defraud. In
the situation presented here, when a debtor invests funds on behalf
of another party, “a debtor will be found to have acted with the
requisite intent to defraud under § 523(a)(2)(A) when, at the time
the transaction occurred, it is established that the debtor, for
his or her personal gain, knowingly mislead the investor as to a
material fact concerning the investment.” In re Grim, 293 B.R.
156, 163 (Bankr. N.D. Ohio 2003). A showing of reckless
indifference to the truth is sufficient to demonstrate the
requisite intent to deceive. Umpierrez, 121 F.3d at 787; In re
Bonnanzio, 91 F.3d 296, 301 (2d Cir. 1996); In re Woolley, 145 B.R.
at 835. Because a debtor will rarely, if ever, admit to acting
with an intent to deceive, intent may be inferred from the totality
of the circumstances. Umpierrez, 121 F.3d at 789; In re Woolley,
145 B.R. at 836.
Element three will be satisfied by a showing of “justifiable
reliance” on the representations. This standard of reliance
6
In this case, the facts that go to elements one and two are
virtually identical. Yet, we recognize that in some cases, facts
that may establish element one will not establish element two. See
Palmacci, 121 F.3d at 788 (finding fraudulent misrepresentations,
but not scienter, established).
10
requires more than actual reliance but less than reasonable
reliance. In re Justice, No. 01-02156, 2002 Bankr. LEXIS 1540,
n.3 (Bankr. N.D. Ohio Dec. 27, 2002). “It is a more subjective
standard . . . that takes into account the interactions between and
experiences of the two parties involved.” Id. (quoting Jeffrey R.
Priebe, Fields v. Mans and In re Keim: Excepting Debts From
Bankruptcy Discharge and The Difference Between Experienced
Horsemen and Reasonable Men, 54 Ark. L. Rev. 99, 109-110 (2001)).7
III.
A court reviewing a decision of the bankruptcy court may not
set aside findings of fact unless they are clearly erroneous,
giving “due regard . . . to the opportunity of the bankruptcy court
to judge the credibility of the witnesses.” Fed. R. Bank. P. 8013.
We review the bankruptcy court’s legal conclusions de novo. In re
Wilson, 149 F.3d 249, 251 (4th Cir. 1998). Although the district
court has already reviewed the bankruptcy court’s decision, on
appeal we independently review that decision, applying the same
standard of review that the district court applies. Id. at 251-52.
No special deference is owed to the district court’s
determinations. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26,
30 (1st Cir. 1994).
7
Element four is not at issue in this appeal.
11
A finding of fact is clearly erroneous, although there is
evidence to support it, when the reviewing court, after carefully
examining all of the evidence, is “left with the definite and firm
conviction that a mistake has been committed.” Anderson v. City of
Bessemer City, 470 U.S. 564, 573 (1985). Deference to the
bankruptcy court’s factual findings is particularly appropriate on
the intent issue “[b]ecause a determination concerning fraudulent
intent depends largely upon an assessment of the credibility and
demeanor of the debtor.” In re Burgess, 955 F.2d 134, 137 (1st
Cir. 1992), abrogated on other grounds by Field v. Mans, 516 U.S.
59 (1995). Of course, a trial court may not
insulate [its] findings from review by denominating them
credibility determinations, for factors other than
demeanor and inflection go into the decision whether or
not to believe a witness. Documents or objective
evidence may contradict the witness’ story; or the story
itself may be so internally inconsistent or implausible
on its face that a reasonable fact finder would not
credit it. Where such factors are present, the court of
appeals may well find clear error even in a finding
purportedly based on a credibility determination.
Anderson, 407 U.S. at 575.
A. Knowing Misrepresentation
The bankruptcy court found that White and Pangle recklessly
made three essential misrepresentations: they failed to disclose
that the Notes were unregistered; they failed to disclose that they
were not licensed to sell securities; and they directly
12
misrepresented the Notes as safe investments.8 Regarding the first
two misrepresentations, the bankruptcy court concluded that the
Notes qualified as securities under both the Securities Act of 1933
and the Securities Exchange Act of 1934.9 In addition, it found
that White knew, based on his prior training and experience, that
under certain circumstances securities are required to be
registered and that those selling securities must be licensed.
In its conclusion on the third misrepresentation, the
bankruptcy court noted that the only information that White and
Pangle obtained, independent of U.S. Capital’s promotional
materials, was a Dun & Bradstreet report and anecdotal information
from other customers who had bought the Notes regarding whether
they were receiving their interest payments. White, nonetheless,
stated to Boyuka that he believed the Notes were safe and secure;
that he had done business with U.S. Capital many times before; and
that he knew the principals of U.S. Capital personally.
In their defense, White and Pangle argue that they did not
knowingly misrepresent the Notes because they did not know that the
Notes were supposed to be registered as securities. White
testified that he researched North Carolina law, which he read to
8
The district court reversed the bankruptcy court on its
finding of scienter only, but we must address the other issues of
knowing misrepresentation and justifiable reliance, which White and
Pangle raised before the bankruptcy court and on appeal, as well.
9
White and Pangle do not challenge this legal conclusion.
13
exempt such short-term notes from registration,10 and that U.S.
Capital told him that the Notes were not required to be registered.
We review the bankruptcy court’s factual findings on this issue for
clear error.
We cannot say that the bankruptcy court committed clear error
in finding that White and Pangle made knowing misrepresentations.
Their failure to disclose that the securities were required to be
registered and that they were not licensed to sell securities was
indeed reckless given White’s prior experience and training with
securities. They also recklessly misrepresented the Notes as safe
when in actuality they had done little research to substantiate
this statement. As noted by one bankruptcy court in a similar case
involving short-term notes:
Before selling the notes, the broker must review
available investment ratings from qualified financial
rating services. The broker must request and review with
a critical eye audited financial statements . . . as well
as other literature . . . discussing . . . sales history
and the background of key employees. A broker cannot
rely on slick, marketing brochures or insurance coverage,
refrain from asking hard questions about the legitimacy
of the product, and then assure a proper investigation
was conducted.
In re World Vision Entertainment, Inc., 275 B.R. 641, 645 (Bankr.
M.D. Fla. 2002). While we need not adopt such a checklist here,11
10
White testified that he did not consult federal law.
11
The In re World Vision court used this checklist in
determining whether the brokers in the case before it were entitled
to a “good faith” defense, available to recipients of avoidable
transfers from a debtor operating a Ponzi scheme. 275 B.R. at 658.
14
it is instructive that White and Pangle failed to make even one of
these type of inquiries. As the bankruptcy court found, a
reasonably diligent investigation of the claims made by U.S.
Capital’s promotional material would have revealed that many of them
were false. J.A. 599. Thus, we find that no clear error occurred.
B. Intent to Deceive
The bankruptcy court found that White and Pangle’s reckless
misrepresentations combined with their endorsement of the
promotional claims of U.S. Capital sufficed to form the scienter
necessary to deny discharge. This is a factual finding that we
review for clear error. See Umpierrez, 121 F.3d at 790; In re
Bonnanzio, 91 F.3d at 301. As noted, deference to a factual finding
on the intent issue is particularly appropriate because it depends
largely upon an assessment of the credibility and demeanor of the
debtor.
We agree with the district court’s assessment that this is as
close as a case can be to the line separating mere negligence from
recklessness sufficient to equate with scienter. However, it is for
this reason that the district court erred in reversing the
bankruptcy court on the issue of intent. As the clear error
standard mandates, to reverse we must be left with the definite and
firm conviction that a mistake has been made. The district court,
it seems, conducted something like a de novo review of the record
making its own credibility assessments and re-weighing the evidence.
15
The bankruptcy court heavily relied on the case of In re
Justice, No. 01-2156, 2002 Bankr. LEXIS 1540 (Bankr. S.D. Ohio), a
case that closely parallels the one before this court.12 In In re
Justice, the bankruptcy court found that the actions of the debtor,
who was the creditor’s financial advisor, in inducing the creditor
to invest in what turned out to be a fraudulent securities
investment constituted gross recklessness rising to the level of an
intent to deceive. 2002 Bankr. LEXIS 1540, at *20. The facts that
distinguish Justice from the instant case are that the debtor had
a prior business relationship with the creditor, who invested his
life savings in the investment, and that the debtor and creditor had
significant differences in their education and sophistication. Id.
at *16-22.
These differences serve to make Justice a more egregious case
of recklessness, but do not make this case one of mere negligence.
As in Justice, the overwhelming failure of White and Pangle to do
any real investigation into the Notes characterizes their
recklessness. Their actions evidence that they wanted to receive
commissions without asking the hard questions.
12
In Justice, the debtor represented the investment as “safe”
to the creditor; the debtor, who had experience with securities,
relied solely on the claims of the investment brochure that it was
exempt from registration and otherwise legitimate; the debtor did
not call the SEC, the Ohio Attorney General, any financial rating
service, or otherwise test the validity of the information; and the
debtor did not question how the investment could guarantee such a
high rate of return. 2002 Bankr. LEXIS 1540, at *16-22.
16
Similarly, In re World Vision, a case not relied on by the
bankruptcy court in its scienter finding, is instructive. This case
concerned whether a bankruptcy trustee could pierce the corporate
veil of corporate defendants, who had allegedly received fraudulent
transfers of broker’s fees paid in connection with a Ponzi scheme
operated by the debtor. 275 B.R. at 645. While In re World Vision
is procedurally different, the type of investigation done by brokers
selling the debtor’s notes is strikingly similar to the instant
case. The brokers’ investigation in In re World Vision consisted
of concluding that the Notes were not subject to registration after
consulting state securities law and running a Dun & Bradstreet
report. 275 B.R. at 650. As the In re World Vision court aptly
concluded:
[The broker] therefore started selling the debtor’s notes
based upon verbal assurances from the debtor, a look at
the debtor’s slick marketing brochures, a cursory check
on [the debtor on Dun & Bradstreet], and possibly, a
little legal research. [The broker] never made any good
faith attempt to ascertain the legitimacy of the debtor,
the debtor’s business, or the note program.
. . .
By and large, [the broker] merely accepted the debtor’s
representations that the debtor’s notes were a legal,
viable, investment. [The broker]’s cursory and almost
nonexistent investigation indicates that he did not want
to know more. He saw the notes promising a high interest
earned by investors in a quick period of time and
promising high commissions for his agents and himself.
He was sold. [The broker] simply did not ask how the
debtor was going to earn the 30 percent return needed to
pay the notes or whether the underlying certificate of
insurance was valid. [The broker] did not want to know
that the debtor’s promises were too good to be true.
17
Id. at 650-51.
Because an intent to deceive may be found upon a finding of
recklessness and the facts of the instant case are similar to other
cases in which courts have found the requisite level of
recklessness, the bankruptcy court did not clearly err in likewise
holding.13 As discussed, this is a close case, but we are not left
with a firm and definite conviction that the bankruptcy court made
a mistake.
C. Justifiable Reliance
The bankruptcy court found that under the circumstances nothing
was apparent to indicate to the Boyukas that they should be wary of
this investment, especially given that the solicitations arose out
of a church relationship. White and Pangle argue that this finding
was error and contend that Boyuka was an experienced businessman,
who should have done research into the investments himself. This
is likewise a factual finding that we review for clear error. See
In re Bonnanzio, 91 F.3d at 304.
The bankruptcy court did not clearly err in this regard.
Justifiable reliance is a subjective standard that takes into
13
While the recklessness of Pangle may be an even closer
question, the bankruptcy court did not clearly err in finding that
his involvement in Source One, especially his role as a salesman of
the Notes, without knowing anything about financial investments,
was also extremely reckless. Indeed, Pangle should have known of
the risks involved with investments because he had personally lost
money on a “payphone” investment that White had recommended to him.
J.A. 79.
18
account the relationship of the parties. Here, the parties met at
church and White and Pangle solicited Boyuka during a seminar held
at the church. It is not clearly erroneous to find that such a
setting would engender more of a feeling of trust than would occur
in some other settings. The Boyukas also took time to review U.S.
Capital’s materials after being solicited by White and Pangle
repeatedly. Thus, they did not rush into their decision to invest
in the Notes. The fact that Boyuka is an accredited investor does
not negate a finding of justifiable reliance because the bankruptcy
court found that Boyuka’s education and experience involved business
management and that he did not have extensive knowledge of
securities.
IV.
In conclusion, we find that the bankruptcy court did not commit
clear error and reverse the district court’s order to the contrary.
On remand the district court will return the case to the bankruptcy
court for the entry of an order consistent with this opinion.
REVERSED AND REMANDED
19