The Cadle Company v. Friedheim

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 8, 2008
No. 07-10554 Charles R. Fulbruge III
Clerk
In the Matter Of: JOSEPH M. FRIEDHEIM and JOYCE A. FRIEDHEIM,
Debtors.
____________
THE CADLE COMPANY,
Appellant,
v.
JOSEPH M. FRIEDHEIM; JOYCE A. FRIEDHEIM,
Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:06-CV-2043
Before GARZA, STEWART, and OWEN, Circuit Judges.
PER CURIAM:*
The Cadle Company (“Cadle”) appeals the district court’s affirmance of a
final order issued by the bankruptcy court denying Cadle’s objections to the
Debtors’ discharge. Cadle, one of the Debtors’ creditors, had sought to deny
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 07-10554
discharge under 11 U.S.C. §§ 727(a)(2) and (a)(4), alleging that Debtors
fraudulently transferred or concealed their involvement in Park Cities Realty
(“PCR”) and that Debtors made false disclosures in connection with their
bankruptcy. Finding no reversible error, we affirm.
I.
PCR is a Texas corporation, formed in 2000, that is in the business of
managing apartment complexes. The sole shareholders and directors of PCR are
the Friedheims’ two daughters, Andrea Hundley and Annette Friedheim.
Hundley serves as the president and secretary of PCR. Joseph Friedheim has
served as vice-president of PCR. Joseph Friedheim received a salary for his
work at PCR and contributed to a SIMPLE IRA through PCR. Beginning in
2003, Joyce Friedheim began to work at PCR as a clerical employee; her duties
included bookkeeping and answering the phones. During 2005, Joyce Friedheim
terminated her employment at PCR. While employed at PCR, Joyce Friedheim
was paid a salary and contributed to a SIMPLE IRA through PCR.
On May 6, 2005, the Debtors filed for Chapter 7 bankruptcy. Their
schedules claimed over $300 million in unsecured debt which had arisen
primarily from their personal guarantees on a failed real estate venture. As for
assets, the Debtors’ schedules listed their home, retirement accounts, various
household goods and furnishings, and two vehicles, totaling in value $2,318,046.
On their filings, the Debtors did not claim PCR as an asset, but did make
various disclosures about PCR and their involvement in the company. In the
Schedules and Statements of Affairs, the Debtors stated that: (1) PCR is a
scheduled business for which Joseph Friedheim is the vice-president; (2) PCR
paid electric bills for the Debtors in 2003, 2004, and 2005; (3) PCR has an office
on the Debtors’ property and owns furniture and equipment located there; (4)
Joseph Friedheim has been employed as a real estate broker for PCR for five
years and has received a monthly salary; (5) Joyce Friedheim was employed as
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No. 07-10554
a clerical worker for PCR for one year and during that time received a monthly
salary; (6) PCR has relocated their offices from the Debtors’ home and will no
longer be paying electrical bills.
II.
On September 30, 2005, Cadle initiated an adversary action against
Debtors seeking to deny their discharge under 11 U.S.C. § 727(a)(2) and (a)(4).
Cadle owns a judgment against the Debtors in excess of $10,000,000. The
discharge action alleged that Debtors were not merely employees of PCR, but
actually owned PCR and utilized the appearance of ownership by their
daughters to retain control and an equitable interest in the business without
exposing the business’s assets to Debtors’ creditors. Debtors denied Cadle’s
allegations and asserted that PCR was owned and controlled by Hundley and
Annette Friedheim.
The Discharge Action was tried by the parties before the bankruptcy court
on August 9, 2006. At the trial, Joseph Friedheim, Joyce Friedheim, and Andrea
Hundley testified.
In support of their argument that Debtors were the true owners of PCR,
Cadle presented the following evidence to the bankruptcy court. First, Cadle
presented evidence of Joseph Friedheim’s extensive experience in the real estate
business and of his inability to raise or borrow money on his own for a new
business. Second, Cadle pointed to Hundley and Annette Friedheim’s lack of
experience managing apartment complexes, and Hundley’s involvement in other
employment and business ventures than PCR. For example, Hundley testified
that she never signed any loan agreements, management contracts, employment
agreements, insurance contracts or policies, or health insurance documents for
PCR. Further, Cadle pointed to Hundley’s testimony that she never received a
salary from PCR until July 2005, immediately after the Debtors declared
bankruptcy. Third, Cadle argued that it was Joseph Friedheim, not Hundley,
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No. 07-10554
who performed the essential tasks necessary to carry out the day-to-day business
of PCR, pointing to the fact that Joseph Friedheim signed all the checks (except
his own) drawn on PCR’s bank accounts, signed the lease on equipment owned
by the company, and that he helped set up PCR’s SIMPLE IRA program. Cadle
also asserted that PCR’s management contracts resulted solely from the contacts
and relationships Joseph Friedheim developed through his real estate career and
that it was he who negotiated the management agreements for PCR. Fourth,
Cadle presented evidence that for a significant period of time, PCR was run out
an apartment located above the Debtors’ garage and that, allegedly in exchange
for the use of the space, PCR paid for the Debtors’ electrical utilities, repairs to
Debtors’ home, plumbing and maintenance work to Debtors’ home, and Debtors’
personal cell phone and internet connection. Further, PCR paid for Joseph
Friedheim’s car insurance and car expenses, as part of an “oral agreement”
regarding the rental of the garage apartment. Finally, Cadle presented evidence
that since the Debtors’ employment with PCR in 2000, their primary source of
income, other than social security or their IRAs, is Joseph Friedheim’s
employment with PCR.
In response, Debtors presented evidence that the daughters were the true
owners of PCR and that Hundley makes all major business decisions. They
presented evidence of Hundley’s business experience, including a masters degree
in business administration and over ten years employment in the banking and
accounting industries. Hundley testified that it was her decision to start the
company and that she approached her father about starting a business. She
testified about the operations of PCR and her role within the company, stating
that she makes all major business decisions for the company and supervises the
company’s employees, including the Debtors and 4-5 other employees. Hundley
further testified that she has done all the accounting work for PCR, maintains
the company’s books and records, conducted due diligence on one of the two
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No. 07-10554
apartment complexes PCR manages, made the decision to open the bank
accounts, and made the decision to start the SIMPLE IRA plan. Hundley also
explained that PCR paid rent in the form of utilities and maintenance up to
$7200 per year for the use of the garage apartment, but that PCR was no longer
operating out of the apartment space, and was instead operating out of her bed
and breakfast. Joseph Friedheim testified that he does not own PCR, has never
owned PCR, has no control over the company, and that he could not make any
major business decisions without consulting with Hundley. Debtors also
presented evidence that PCR never paid any personal expenses of the
Friedheims, other than those expenses paid for as part of the rental agreement.
After the trial, the bankruptcy court issued its Findings of Fact and
Conclusions of Law. The bankruptcy court found that Hundley is an “integral
part of the business” and “makes all major business decisions.” It found that
Hundley testified credibly as to the reason she set up the company, how it
operates, and her future plans. It also noted that although Debtors are or were
employed by PCR, “there is nothing wrong or illegal for a child to set up a
company and employ her parents, particularly parents the age of the debtors.”
The court found that Debtors adequately disclosed their relationship with PCR,
did not conceal their involvement with PCR, and adequately disclosed their
relationship with PCR in the Schedules and Statement of Financial Affairs. The
bankruptcy court stated that Hundley, Joseph Friedheim, and Joyce Friedheim
all testified credibly on behalf of the Debtors. The Court concluded that Cadle
had not shown that Debtors acted with intent to defraud under § 727(a)(2), nor
had they shown that Debtors offered false oaths under § 727(a)(4). Thus, the
bankruptcy court entered Final Judgment denying Cadle’s complaint objecting
to the Debtors’ discharge and ordered that the Debtors be discharged from all
dischargeable debts.
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No. 07-10554
III.
We review the decision of the bankruptcy court “under the same standards
applied by the district court hearing the appeal from bankruptcy court;
conclusions of law are reviewed de novo, findings of fact are reviewed for clear
error, and mixed questions of fact and law are reviewed de novo.” In re Nat’l
Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000). “A finding of fact is clearly
erroneous only if on the entire evidence, the court is left with the definite and
firm conviction that a mistake has been committed.” Robertson v. Dennis, 330
F.3d 696, 701 (5th Cir. 2003). However, when a finding of fact is premised on an
improper legal standard, or a proper one improperly applied, that finding loses
the insulation of the clearly erroneous rule. Smith v. Hightower, 693 F.2d 359,
270 (5th Cir. 1982).
IV.
Under 11 U.S.C. § 727(a)(2), the bankruptcy court shall not grant a
discharge under Chapter 7 if:
the debtor, with intent to hinder, delay, or defraud a
creditor or an officer of the estate charged with custody
of property under this title, has transferred, removed,
destroyed, mutilated, or concealed, or has permitted to
be transferred, removed, destroyed, mutilated, or
concealed . . . property of the debtor, within one year
before the date of the filing of the petition; or . . .
property of the estate, after the date of the filing of the
petition.
11 U.S.C. § 727(a)(2)(A)-(B). To prove a violation, Cadle must establish the
following four elements: (1) a transfer or concealment of property; (2) belonging
to Debtors; (3) within one year of the filing of the petition; (4) with intent to
hinder, delay, or defraud a creditor or officer of the estate. Cadle Co. v. Pratt,
411 F.3d 561, 565 (5th Cir. 2005). The creditor objecting to discharge bears the
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No. 07-10554
burden of proof on all elements, which he may meet by a preponderance of the
evidence. FED. R. BANKR. P. 4005.
Cadle argues that the bankruptcy court erred in concluding that Debtors
did not violate § 727(a)(2) because Debtors’ concealment of Joseph Friedheim’s
involvement with PCR constituted intentional conduct to shelter their assets
from creditors. Cadle argues that the evidence presented at trial showed that
PCR was, for all intents and purposes, Joseph Friedheim’s business and that
neither Hundley nor Annette Friedheim had anything to do with the operations
of PCR. In response, Debtors argue that the evidence supports the bankruptcy
court’s conclusion PCR is owned by Hundley and Annette Friedheim, the
bankruptcy court did not err.
Under the second element of § 727(a), a relevant concealment can occur
only if property of the debtor is concealed. Thus, it is clear from the language of
the statute that the debtor must possess some property interest in order to be
barred from discharge on the grounds of a “continuing concealment.” Rosen v.
Bezner, 996 F.2d 1527, 1531 (3d Cir. 1993). If the transfer is absolute, even if it
defrauds creditors, the transfer cannot bar the discharge. In re Olivier, 819 F.2d
550, 553 n.4 (5th Cir. 1987); Thompson v. Eck, 149 F.2d 631 (2d Cir. 1945)
(noting that “the bankrupt must have some legal interest in the property before
he can be charged with its concealment”). Thus, the debtor must retain control
of the property, or some secret or equitable interest in the property, before the
court may discharge under § 727(a)(2). Olivier, 819 F.2d at 553-555.
Here, the bankruptcy court concluded that the evidence presented before
it was “contrary” to the claim that Joseph Friedheim owns PCR or has an
ownership interest in the company. The finding that PCR is not property of
Joseph Friedheim is a factual finding that this Court reviews for clear error.
After reviewing the record, we are not “left with the definite and firm conviction
that a mistake has been committed,” and thus must affirm the bankruptcy
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No. 07-10554
court’s factual finding that Joseph Friedheim had no ownership interest in PCR.
Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574 (1985). First, the
evidence in the record does not contradict the bankruptcy court’s factual finding
that Hundley was an integral part of the business operations and that Joseph
Friedheim was merely an employee. Hundley herself testified as to her past
business experience and to the role she played within the company. In addition,
the Friedheims both testified that they were merely employees of the company
and that Joseph Friedheim did not have any ownership interest in PCR. Second,
the bankruptcy court’s finding turned primarily on its assessment of the
credibility of the three witness — Joseph Friedheim, Joyce Friedheim, and
Andrea Hundley. Finding the testimony of all three credible, it concluded that
it believed the Debtors’ contention that Joseph Friedheim was not the owner of
PCR. When the bankruptcy court’s findings of fact are based on determinations
regarding the credibility of witnesses, they should be awarded even greater
deference. Webb v. Reserve Life Ins. Co., 954 F.2d 1102, 1106 (5th Cir.1992); see
also FED. R. BANKR. P. 8013 (“[D]ue regard shall be given to the opportunity of
the bankruptcy court to judge the credibility of the witnesses.”). This Court has
previously stated that it “will not attempt to reassess the credibility of witnesses
whom we have not had the opportunity to see on the stand.” In re Texas Mortg.
Services Corp., 761 F.2d 1068, 1078 (5th Cir. 1985). Given this standard, we
cannot find that the bankruptcy court committed reversible error in finding that
PCR was not the Debtors’ property. See In re Espino, 806 F.2d 1001 (11th Cir.
1986) (finding that corporation was not property of debtors and affirming the
bankruptcy court’s refusal to deny discharge under § 727(a)(2)).
With regard to the third element, intent, based on what it deemed the
“credible testimony of the [Debtors],” the bankruptcy court found that Debtors
did not, “with the intent to hinder, delay or defraud their creditors,” transfer or
conceal property. The bankruptcy court’s determination that the debtor lacked
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No. 07-10554
the requisite intent is also a factual finding which this Court reviews under the
clear error standard. See, e.g., Robertson v. Dennis, 330 F.3d 696, 701 (5th Cir.
2003). Like the finding of ownership, the bankruptcy court’s finding that
Debtors lacked the requisite intent turned primarily on its assessment of the
credibility of the testimony of the Freidheims and Hundley. As stated above,
this Court ordinarily gives great deference to the bankruptcy court’s findings of
fact that are based on determinations regarding the credibility of witnesses. See
In re Webb, 954 F.2d at 1106; Baum v. United States Trs., No. 06-10620, 2007
U.S. App. LEXIS 22791, at 11 (5th Cir. 2007) (refusing to overturn bankruptcy
court’s finding of intent to conceal when based on determinations regarding
credibility of witnesses). Further, under the clearly erroneous standard, if the
factfinder’s “account of the evidence is plausible in light of the record viewed in
its entirety, the court of appeals may not reverse it even though convinced that
had it been sitting as trier of fact, it would have weighed the evidence
differently.” Anderson, 470 U.S. at 573-74. Here, after examining the record, we
conclude that the bankruptcy court’s conclusion that Debtors lacked the
requisite intent is plausible, thus we will not reverse its factual finding that
Debtors lacked the intent necessary under § 727(a)(2). See Razzaboni v.
Schifano, 378 F.3d 60 (1st Cir. 2004) (failing to find fraudulent concealment
where debtor dissolved a corporation and debtor’s brother formed a new
corporation using same equipment and location and paying salary to debtor); In
re Reedy, 169 B.R. 28, 30 (Bankr. E.D. Va. 1994) (refusing to deny discharge
where debtor’s wife formed corporation, debtor was only employee, business was
created before the filing of bankruptcy, there was no transfer of property by
debtor, and wife contributed capital and services); Cullen Ctr. Bank & Tr. v.
Lightfoot, 152 B.R. 141, 148 (Bankr. S.D. Tex. 1993) (refusing to deny discharge
where there was no transfer of assets from debtor’s business to wife’s business
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No. 07-10554
and wife financed company from her separate funds; retention of debtor as
employee does not alter corporation’s status as separate property).
Because we find no clear error in the district court’s factual findings that
Hundley is the true owner of PCR and that the Debtors lack any fraudulent
intent, we affirm the bankruptcy court’s refusal to deny discharge under §
727(a)(2).
V.
Under 11 U.S.C. § 727(a)(4), the bankruptcy court shall not grant the
debtor a discharge if “the debtor knowingly and fraudulently, or in connection
with the case . . . made a false oath or account.” 11 U.S.C. § 727(a)(4)(A). See
Cadle Co. v. Pratt, 411 F.3d 561, 566 (5th Cir. 2005). “To establish a false oath
under this section, the creditor must show that (1) [the debtor] made a statement
under oath; (2) the statement was false; (3) [the debtor] knew the statement was
false; (4) [the debtor] made the statement with fraudulent intent; and (5) the
statement related materially to the bankruptcy case.” Id. (alterations in
original). “An omission of an asset can constitute a false oath.” Id.
Cadle argues that denial of the Debtors’ discharge was also appropriate
under 11 U.S.C. § 727(a)(4) because Debtors failed to disclose, under oath, their
ownership of PCR in their Schedules and Statements of Affairs.1 Specifically,
Cadle argues that Debtors failed to adequately disclose the Debtors’ ownership
in PCR. However, as discussed above, we affirm the bankruptcy court’s
conclusion that Debtors did not possess an ownership interest in PCR. Because
Debtors did not possess an ownership interest in PCR, it is not possible for their
1
In its opening brief, Cadle also argues that Debtors also failed to disclose the lease
between Debtors and PCR as well as the rental income derived from this lease. But, at the
start of trial, the bankruptcy court ruled that Cadle would only be permitted to enter evidence
under § 727 (a)(4) “as it relates to an alleged omission of the Debtor’s ownership in the realty
company.” Cadle does not argue that the bankruptcy court erred in limiting the scope of the
hearing, therefore the alleged omissions regarding the lease and the rental income are not
properly before the Court.
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No. 07-10554
failure to disclose an ownership interest in PCR to be a false oath. Further, as
the bankruptcy court found, the Debtors sufficiently disclosed the extent of their
relationship with PCR in their bankruptcy filings. Therefore, we affirm the
bankruptcy court’s holding that none of the actions of Debtors constituted
knowing and fraudulent false oaths under § 727 (a)(4).
VI.
For the reasons stated above, the judgment is AFFIRMED.
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