Opinion
CIVIL ACTION No. 02-0639, BANKR. NO. 00-15581, ADV. NO. 00-1249, SECTION: I/4
December 30, 2003
ORDER AND REASONS
Before the Court is the appeal of a creditor, General Electric Capital Corporation ("GECC"), from an order of the United States Bankruptcy Court denying it an exception to discharge and dismissing GECC's complaint seeking a determination of nondischargeability of a debt owed it by the debtor, Guilford Joseph Acosta ("Acosta"), pursuant to 11 U.S.C. § 523 (a)(2)(A) and § 523(a)(2)(B). Pursuant to 28 U.S.C. § 158(a)(1), this court has jurisdiction of this appeal from the final judgment of the bankruptcy court.
23 U.S.C. § 158 (a) states in pertinent part that:
The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.28 U.S.C. § 157 (b) states in pertinent part that:
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11 . . . and may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to —
* * * *
(I) determinations as to the dischargeability of particular debts;
(J) objections to discharges. . . .
Facts and Procedural History
Acosta was employed by Arnoult Equipment and Construction Company ("AEC"), an oilfield repair and refurbishment operations company, as corporate secretary, operations manager, chief administrative officer, and director. AEC was the majority owner of nine affiliated companies including AEC Energy Marine, Inc. ("AEC Energy Marine"), and Energy Labor Services, Inc. ("Energy Labor Services").During 1994 and 1995, AEC was hired as the exclusive oilfield contractor for WRT Energy Corporation (WRT). During this time period, 85% to 90% of AEC's revenues were generated by work it performed for WRT.
Tr. I, p. 99.
Tr. I, p. 99.
In order to perform the oilfield refurbishment services that WRT required, on March 11, 1994, AEC acquired the M/V POWER III, which it renamed the M/V ENERGY VII, with $360,000 in funds advanced to it by WRT. During 1994, the M/V ENERGY VII was refurbished at Marine Industrial Fabricators. In order to pay the cost of refurbishment, WRT advanced AEC in excess of $800,000.
Tr. I, pp. 129-130, Tr. Exh. 28. The purchase of the vessel occurred in conjunction with the settlement of a pending lawsuit captioned Power Well Service No. 3, Inc. v. LV Marine, Inc. and Leroy Vesper, No. 37-593-B, filed in the 25th Judicial District Court for the Parish of Plaquemines, State of Louisiana, to which AEC was also a party. Tr. Exh. 28.
Tr. I, p. 131.
Tr. I, p. 131.
On December 4, 1994, AEC executed a $1.8 million promissory note in favor of WRT. On the same date, AEC also executed a $1.8 million preferred ship mortgage on the M/V ENERGY VII in favor of WRT. Acosta signed the resolution authorizing the execution and delivery of the promissory note and mortgage. At the time Arnoult signed the resolution, he was aware that the note and mortgage created a legal obligation by AEC to WRT which WRT could seek to enforce. AEC utilized the M/V ENERGY VII to perform a substantial amount of work for WRT.
Tr. I, p. 131; Bankruptcy record, trial exhibit (Tr. Exh.) 30.
Tr. I, pp. 132-133; Tr. Exh. 29.
Tr. I, p. 133; Tr. Exh. 29.
Tr. I, p. 134.
Tr. I, p. 134.
In early 1995, WRT disputed the outstanding balances of certain AEC invoices. AEC and WRT resolved their differences at a meeting held on May 18, 1995, as reflected in a Memorandum of Understanding. The Memorandum of Understanding provided that for payment of $1,017,000.00, all outstanding invoices for work performed by AEC for WRT from February, 1994, to May 18, 1995, would be paid in full. The Memorandum of Understanding does not refer to the promissory note or mortgage and it specifically does not state that the payment of $1,017,000.00, satisfied the $1.3 million promissory note or extinguished the mortgage. No written satisfaction of mortgage was issued in connection with the $1.8 million mortgage encumbering the M/V ENERGY VII. While Acosta testified at trial that he thought the Memorandum of Understanding was a settlement agreement by which AEC satisfied the loan and extinguished the mortgage on the M/V ENERGY VII, approximately five months later, on October 7, 1995, he faxed a letter to Ray Landry of WRT acknowledging that the M/V ENERGY VII was owned by AEC and that it was subject to an existing $1.8 million mortgage in favor of WRT.
Tr. I, p. 134.
Tr. I, pp. 134-135; Tr. Exh. 31.
Tr. I, p. 135.
Tr. I, p. 146.
Tr. I, pp. 161-163; Tr. Exh. 102.
On May 18, 1995, the same day that the Memorandum of Understanding was executed by AEC and WRT, AEC Energy Marine, an AEC subsidiary of which AEC owned an 80% interest, executed a $3.4 million promissory note in favor of WRT. AEC Energy Marine also executed a $3.4 million mortgage in favor of WRT encumbering five vessels owned by AEC Energy Marine, i.e., the M/V AEC ENERGY II (formerly named the George Grimmer), the M/V LATIN LADY, the M/V CHERYL LYNN, the M/V ENERGY XI (formerly named the Jane R), and the M/V WIREMASTER. As an officer of AEC Energy Marine, Acosta signed the resolution authorizing the corporation to execute the promissory note and the mortgage.
Tr. I, p. 137; Tr. Exh. 33.
The record is replete with references to the M/V JANE R as opposed to the M/V ENERGY XI.
Tr. I, pp. 137-138; Tr. Exh. 32.
Tr. I, pp. 139; Tr. Exh. 33. The United States Coast Guard refused to record the $3.4 million preferred ship mortgage on the M/V JANE R because its records indicated that an AEC entity different than the one which executed the mortgage owned the vessel. Tr. I, p. 150.
On that same date, May 18, 1995, AEC Energy Marine and WRT entered into a Master Service Contract which effectively restructured the business relationship between AEC Energy Marine and WRT. Pursuant to that agreement, WRT was to pay AEC Energy Marine $250,500 per month. According to Acosta, "[t]he $250,000 a month was [for AEC to provide] . . . specific equipment within a specific time frame, a 12-hour workday. If any additional equipment or any additional personnel was included or if we worked more than 12 hours in any given day we had other rates at which we billed WRT over and above the $250,500." Eventually, WRT began experiencing financial problems and discontinued paying pursuant to the Master Service Contract, making its last payment of $10,000 in December, 1995.
Tr. I, p. 159; Tr. Exh. 103 [incorrectly listed in the transcript as Tr. Exh. 104].
Tr. I, p. 159.
Tr. I, p. 159; Tr. Exh. 103.
Tr. I, pp. 164-165.
On August 16, 1995, Claude Mayfield, an employee of Energy Labor Services and the captain of M/V ENERGY VII, the jackup vessel which AEC purchased in 1394, slipped and fell while working on the M/V ENERGY VII, sustaining injuries to his neck and back. In August or September, 1995, the attorney which Mayfield retained, Thomas Discon, Esq., contacted Acosta personally to demand that AEC provide maintenance and cure benefits to Mayfield. On September 8, 1995, Acosta was advised that the hull and P I insurance on the M/V ENERGY VII had been canceled effective August 11, 1995, due to nonpayment. Acosta told Discon that there was no insurance coverage on the M/V ENERGY VII with respect to this accident. Discon told Acosta that if Mayfield's compensation benefits were not instituted, he intended to file a lawsuit and seize the M/V ENERGY VII.
Tr. Exh. 38.
Tr. I, pp. 188-190.
Tr. Exh. 40; Bankruptcy record, day two trial transcript, November 30, 2001 (Tr. II), p. 39.
Tr. I, pp. 190-191.
Tr. I, p. 190.
On November 2, 1995, the AEC board of directors authorized its president, James L. Arnoult, Sr., or its secretary, Acosta, to negotiate a financing package to provide working capital and to purchase necessary equipment for operations. During that time frame, AEC contacted Dan Chopp, a loan broker. Chopp had been a previous acquaintance of Donald Arnoult of AEC and Acosta requested that he assist AEC in finding additional financing. While he had met Chopp and spoke with him twice, Acosta did not direct Chopp with respect to obtaining the loan.
Tr. Exh. 15; Tr. I, p. 171.
Tr. I, p. 170.
Tr. I, pp. 170-171.
Tr. I, p. 171.
Sometime in 1995, AEC applied to GECC for a working capital loan. Acosta was one of the AEC contact people from whom GECC could obtain information about the loan application and he faxed some information prepared by Maurice Hattier, AEC's chief financial officer, to GECC in connection with the loan. As collateral for the loan, AEC offered three vessels, i.e., the M/V ENERGY VII, the M/V ENERGY VI, and the M/V JANE R. Mike Gallo, a GECC sales representative, actually boarded the ENERGY VII and the JANE R to inspect the vessels in connection with the loan application.
Tr. Exh. 20.
Tr. I, pp. 172-173.
Tr. Exh. 20.
Tr. I, p. 180.
As part of the loan review process, AEC provided certain financial statements to GECC which included a "Report on Compilation of Financial Statements and Supplementary Information for the Year Ended December 31, 1994," prepared by William J. Vanderbrook, Jr., a certified public accountant. There is no evidence in the record that Acosta was the person who transmitted the financial statements to GECC. Acosta testified that while he, an AEC director, did nor have any knowledge or reason to believe that any of the reports contained in this compilation of financials for the year ending December were inaccurate or incomplete, the information was provided by Hattier who had complete control of AEC's accounting and accounting system. Acosta testified that only two AEC employees had access to the computers which stored AEC's financial information and that he was not one of them.
Tr. I, pp. 73, 110; Tr. Exh. 4.
Tr. I, pp. 110-111.
Tr. I, pp. 111-112.
Although he did not prepare the report, Acosta stated that as AEC's chief administrative officer and corporate secretary, he reviewed the 1994 financial report in order to ensure that it, to the best of his knowledge, was accurate and complete with respect to whether it listed all of AEC's liabilities. Acosta also testified that he expected Hattier, as AEC's chief financial officer, to furnish GECC with truthful and accurate financial information.
Tr. I, p. 112. There is no evidence in the record that Acosta was an accountant or that he was experienced in preparing financial statements.
Tr. II, p. 76.
AEC produced an internally prepared document entitled "Arnoult Equipment and Construction, Inc., and Subsidiaries, Report on Review of Consolidated Financial Statements and Supplementary Information, December 31, 1995" which was also included in GECC's review of the loan proposal. Acosta testified that he reviewed the 1995 financial report and to the best of his knowledge it was accurate and complete. He also stated that he relied on the chief financial officer with respect to the 1995 financial report's contents. The 1995 AEC financial report, reviewed by Acosta and GECC in connection with the loan application, did not reflect the financial status of AEC's subsidiaries.
Tr. Exh. 4.
Tr. 1, pp. 50-51.
Tr. I, p. 116.
Tr. I, p. 116.
Tr. I, p. 120.
A transaction summary dated December 18, 1995, a document described by William R. Duffek, the GECC national risk manager, as one which would normally be prepared by a sales representative, states that:
Tr. I, p. 34.
AEC is seeking to extract working capital thought [sic] the financing of existing free and clear equipment. The funds will be used in three areas. First, approximately $300,000 will be used to payoff [sic] Lynn Dan Corporation who presently holds several credit sale and lease purchase transactions with AEC as lessee. This will free up approximately $14,500 in lease payments per month. Second, an unspecified amount will be used to repair capital equipment in need of restoration. And third, the balance [will go] to general working capital.
Tr. Exh. 27.
Duffek, the only GECC representative who testified at trial, did not state that Acosta provided the information, but only that he was listed as a contact person.
Tr. I, p. 35.
The only written financial documents that Acosta, himself, forwarded to GECC in connection with the loan review process were AEC revenue projections after WRT, its main revenue source, filed for bankruptcy. Acosta testified that the revenue projections were given to him by Hattier and that he had no reason to doubt them.
Tr. I, p. 177; Tr. Exh. 60.
Tr. II, p. 71.
On December 6, 1995, Discon filed a complaint, Claude Mayfield v. AEC Energy Marine, Inc., and Energy Labor Services. Inc., Civil Action 95-4041, in the United States District Court for the Eastern District of Louisiana. On that date, Discon's process server served the summons and complaint upon Acosta, personally, as operations manager for AEC Energy Marine and Energy Labor Services. The lawsuit did not sue the vessel in rem and it did not seek to seize the M/V ENERGY VII. It did allege that the M/V ENERGY VII was unseaworthy.
Tr. Exh. 38.
Tr. Exh. 43.
Tr. Exh. 38; Tr. I, p. 194.
Tr. Exh. 38; Tr. I, p. 194.
Having been personally served with the lawsuit, Acosta forwarded the complaint, either by mail or fax, to an attorney, Steven Medo, who had previously performed legal services for AEC and who had formerly been an AEC director. AEC owed Medo some money and he refused to defend the lawsuit for AEC. Acosta also faxed the complaint to AEC's insurer, but the insurance company would not defend the lawsuit because, as previously noted, the insurance for the M/V ENERGY VII had been canceled for nonpayment. Acosta knew that unless he was an attorney, he could not file an answer on behalf of the AEC subsidiary defendants and that the AEC subsidiary defendants did not have the financial ability to retain an attorney. No answer to theMayfield lawsuit was ever filed.
Tr. II, p. 40.
Tr. II, p. 41.
Tr. II, pp. 39, 41.
Tr. II, pp. 41-42.
Pursuant to AEC's request, on December 11, 1995, GECC forwarded a proposal to loan AEC approximately $1,173,170.00, to be secured by a security interest in AEC Energy's three vessels, i.e., the ENERGY VII, ENERGY VI, and the JANE R. The proposal was accepted on behalf of AEC by James Arnoult, AEC president, subject to the investment approval process. Acosta did not sign the proposal.
Tr. Exh. 21.
Tr. Exh. 21.
Tr. Exh. 21.
GECC received a Dun Bradstreet business information report dated December 19, 1995, which included a credit report and public record filing information. A lawsuit filed against AEC in Second Parish Court for the Parish of Jefferson, State of Louisiana, appeared on the report, but the Mayfield lawsuit did not. Other than a UCC security filing in favor of John Deere Industrial Equipment dated October 6, 1994, no other security interest encumbering the vessels offered as collateral for the GECC loan appeared on the report.
Tr. Exh. 54.
Tr. Exh. 54.
Tr. Exh. 54.
On January 18, 1996, Discon filed a motion for entry of default in theMayfield litigation. In the motion, the plaintiff noted that on December 6, 1995, personal service of the complaint was made upon "Mr. Gil Acosta", the agent for service of process for defendants, AEC Energy Marine and Energy Labor Services. Acosta testified at the trial that he "probably" was provided with a copy of the preliminary default.
Tr. Exh. 43.
Tr. Exh. 43.
Tr. I, p. 42.
On February 6, 1996, Tim Kaabi, a GECC risk manager for the Dallas Region, sent a memorandum to Duffek seeking final review approval of the GECC loan to AEC. The memorandum contains a detailed outline of the loan, including sections on collateral, history of AEC, financial statements, revenue analysis, liquidity and capital structure of AEC, cash flow, bank reference, credit references, work reference, trade/vendor reference, and risk analysis and summary. The memorandum described the proposed collateral as three vessels including the ENERGY VII, the JANE R, and the ENERGY VI. Duffek testified at trial that when he reviewed Kaabi's memorandum summarizing the proposed transaction, he assumed that the collateral would be free and clear of all liens and encumbrances. Since Kaabi did not testify, there is no evidence, other than Acosta's testimony, concerning who furnished the information in Kaabi's report.
Tr. Exh. 20; Tr. I, pp. 32, 43, 50.
Tr. Exh. 20.
Tr. Exh. 20.
Tr. I, p. 52.
Duffek approved the loan, but placed certain conditions upon the approval. According to Duffek, particularly since most of AEC's revenues were from one contract, GECC, rather than looking at revenue streams, earnings history, or net income, was substantially relying on collateral as security for repayment of the loan. In order to approve the transaction, GECC required a two-to-one collateral ratio on a "force liquidation value," i.e., a disposal of the asset in 90 days, meaning that the "force liquidation value" of the collateral had to be twice the amount of the loan, with a maximum loan amount of $750,000. Duffek explained that GECC did not intend to take any enterprise risk in funding the loan and that it wanted the loan to be fully secured by the collateral. There is no evidence that any GECC representative ever advised Acosta that GECC decided to extend the loan to AEC based solely on the strength of the collateral, rather than on collateral and other factors, including income projections and the financial strength of the company.
Tr. I, p. 54.
Tr. I, pp. 54-55.
Duffek explained that "force liquidation value" is less than fair market value which, in contrast, allows for a liquidation of the asset over a longer period of time. Tr. I, p. 56.
Tr. I, pp. 55-56; Tr. II, p. 180.
Tr. I, pp. 55-56.
On February 14, 1996, WRT, the AEC customer which supplied 85% to 90% of its business, filed for bankruptcy protection. On February 16, 1996, Acosta referenced WRT's Chapter 11 bankruptcy filing in a letter to Kaabi.
Tr. I, pp. 99, 211.
Tr. Exh. 60.
On March 12, 1996, a default judgment was entered in favor of Mayfield against two of AEC's subsidiaries, AEC Energy Marine and Energy Labor Services, in the amount of $1,570,834.00. Acosta admitted that a copy of the default judgment was probably served upon him.
Tr. Exh. 43.
Tr. II, p. 45.
Ten days later, on March 22, 1996, the loan was closed and the funds were disbursed by GECC to AEC pursuant to AEC's instructions. Acosta was present when the mortgage and promissory note were executed on AEC's behalf. James Arnoult, Sr., the AEC president who was 84 or 85 years old at the time, actually signed the mortgage on AEC's behalf. Acosta, as the AEC secretary and a member of the board of directors, executed corporate resolutions authorizing AEC to borrow the funds from GECC and to mortgage its property to secure the loan. The mortgage that AEC executed on the ENERGY VII and the JANE R in favor of GECC provided in pertinent part that:
Tr. II, p. 45; Tr. Exhs, 68, 69, and 70a.
Tr. I, p. 220.
Tr.I, pp. 95, 220; Tr. Exh. 69.
Tr. Exh. 16; Tr. I, p. 139; Tr. II, p. 32.
Although AEC had originally offered GECC three vessels as collateral, only two were actually mortgaged in connection with the GECC loan. See Tr. Exh. 20.
Tr. Exh. 69.
Section 3. The Owner lawfully owns and is lawfully possessed of each of the Vessels free from any lien or other encumbrance whatsoever prior to the lien of this Mortgage, except for liens for crew's wages, fuel and supplies incurred by the Owner preliminary to purchase thereof, all of which in the aggregate do not exceed $25,000, and the Owner will warrant and defend the title and possession thereto and to every part thereof for the benefit of the Mortgagee against the claims and demands of all persons whomsoever.
* * * *
Section 9. If a notice of claim of lien be recorded against either of the Vessels, a libel be filed against either of the Vessels or either of the Vessels be otherwise attached, levied upon or taken into custody by virtue of any legal proceeding in any court, the Owner will promptly notify the Mortgagee thereof by telecopy, confirmed by letter, at its office as set forth in Section 3 of Article III below, and within 15 days of such recording, filing, attachment, levy or taking, will cause a certificate of discharge to be recorded in the case of any such recording of notice of claim of lien or will cause such Vessel to be released in the case of any such attachment, levy or other taking into custody and will cause all liens relating to such recording, libel, attachment, levy or other taking into custody (other than this Mortgage) to be discharged and will promptly notify the Mortgagee thereof in the manner aforesaid.
Duffek testified that Section 3 of the mortgage is a "standard non-negotiable provision" by which GECC requires vessel owners "[t]o confirm and attest that there were no prior liens on the vessel, that they do own the vessel, and [that] our mortgage is perfected in the position we expect." Acosta testified that he knew in March, 1996, that there was a covenant in every preferred ship mortgage that required a shipowner to agree that the vessel is free and clear of liens and encumbrances. As noted previously, Arnoult, not Acosta, signed the note and mortgage on AEC's behalf.
Tr. I, p. 62.
Tr. I, p. 221.
One of the conditions that GECC placed on the loan was that AEC had to provide "key man" life insurance on James Arnoult, Sr. After investigating the cost of such a policy, AEC learned that the policy premium over the term of the loan would have approximated the amount of the loan. GECC agreed to accept a personal guaranty from Acosta, as a director of the company who was much younger than Arnoult, in lieu of the "key man" life insurance policy on Arnoult. During the March 22, 1996, loan closing, Acosta personally guaranteed the GECC loan to AEC. With respect to Acosta's personal guarantee, GECC never requested any financial statements from Acosta and to his knowledge it did not run any credit check on his creditworthiness.
Tr. Exhs. 24 and 26.
Tr. II, p. 35.
Tr. II, p. 35.
Tr. Exh. 70a.
Tr. II, p. 72.
According to Acosta, at no time during the loan application process was he ever in the presence of any AEC personnel who represented to GECC how the loan proceeds would be applied. Acosta testified that there was no discussion at the closing with respect to how the loan proceeds would be used. The $656,625 in GECC loan proceeds were disbursed via wire transfer in accordance with Hattier's directions.
Tr. II, p. 73.
Tr. II, p. 72.
Tr. II, p. 46. While the loan was approved for a maximum amount of $750,000, the actual amount of the loan was $656,625. Tr. Exh. 69.
At the time of the loan closing, it was Acosta's understanding that AEC intended to repay the loan. During this time period, he testified that AEC was doing work for JESCO, Texaco and West Delta Oil Company. While WRT was seeking Chapter 11 bankruptcy protection at the time of the closing, Acosta anticipated that AEC would perform work for WRT.
Tr. II, p. 73.
Tr. II, p. 73.
Tr. II, pp. 73-74.
Acosta stated that one reason AEC was ultimately unable to pay the GECC loan was that James Arnoult, Jr., the older son of the company president, died in a plane crash shortly after the loan was closed. Arnoult's younger son, Donald Arnoult, AEC's main contact for obtaining business, was severely injured in the same plane crash. Acosta stated that this impacted AEC's ability to secure additional business. Acosta testified that if AEC never intended to repay the GECC loan, he would not have personally guaranteed it.
Tr. II, p. 76.
Tr. II, pp. 76-77.
Tr. II, pp. 76-77.
Tr. II, p. 75.
In connection with the AEG loan application to GECC, Acosta testified at trial that he did not "volunteer information" to GECC, he "didn't advise anyone of anything that he wasn't asked directly", and he "didn't impart anything to GE that [he] was not specifically asked." From the time AEC initially sought financing from GECC to the date of the loan closing, Acosta never informed GECC that (1) there was a GECC mortgage on the ENERGY VII in the amount of $1.8 million; (2) there was a mortgage on the JANE R in the amount of $3.4 million; or that (3) a $1.57 million default judgment had been rendered against two AEC affiliated companies with respect to a personal injury that had occurred on the ENERGY VII at a time when the vessel's insurance had been canceled for nonpayment. Duffek testified that GECC would have wanted and expected a prospective borrower to inform GECC that an uninsured personal injury had occurred on one of the vessels being offered as collateral for a loan and that a $1.5 million default judgment had been taken against two wholly owned subsidiaries of the loan applicant. Duffek testified that GECC would not have made the loan if it had known that a $1.5 million default judgment had been taken against two of the wholly-owned subsidiaries of AEC on an uninsured personal injury claim.
Tr. I, p. 183.
Tr. I, p. 221.
Tr. I, p. 183.
Tr. II, p. 31.
Tr. I, p. 221; Tr. II, p. 31.
Tr. II, pp. 35-36, 45.
Tr. I, pp. 62-64. Although Duffek's testified that GECC would have wanted to know that a default judgment was taken against two "wholly owned" subsidiaries of AEC, the record reflects that AEC was the majority owner/not the sole owner, of the two defendants in the Mayfield I lawsuit, i.e., AEC Energy Marine and Energy Labor Services. Tr. I, pp. 102-103.
Tr. I, pp. 63-64.
Duffek also testified that, in connection with the loan review process, GECC would have wanted and expected a borrower to advise it that there were mortgages encumbering the ENERGY VII and JANE R, the two vessels offered as collateral for the loan, irrespective of whether the mortgages were properly recorded or not. As to why he did not disclose the two pre-existing mortgages on the vessels offered as collateral, Acosta explained that it was his understanding that the $1.8 million promissory note and preferred ship mortgage were extinguished by the May 18, 1995, Memorandum of Understanding, stating, "I believed on May 18th that the $1.8 million mortgage was gone and I still believe it today." With respect to the $3.4 million note and mortgage on the M/V JANE R, Acosta testified that while he had no documentation saying that they were cancelled, it was his belief that the responsibility for the note "had died along with the master service contract with WRT." When asked whether he had "vehemently denied [in depositions] that there was ever any money . . . extended [by] WRT for the $3,400,000 promissory [note]" by AEC Energy Marine, Acosta replied, "That's correct." Acosta also stated that he was aware that the United States Coast Guard had not recorded the preferred ship mortgage given by AEC against the M/V JANE R because AEC was not the record owner of that vessel.
Tr. I, pp. 57-58, 65.
Tr. I, pp. 160, 162-163; Tr. Exh. 31.
Tr. I, p. 208. Acosta testified that the final $10,000 payment was received from WRT in December, 1995. AEC "shut down all unnecessary personnel" at that time and it returned certain vessels and equipment used to perform work for WRT. Tr. I, p. 167.
Tr. I, p. 141.
Tr. I, p. 150.
Acosta noted that in connection with the GECC loan application process, he never questioned Hattier about the mortgages and notes on the vessels offered as collateral because "at that point in time I had no reason to believe that the two mortgages still existed." He also explained that AEC "ran Coast Guard records before we ever turned in any information to General Electric and the Coast Guard records on both vessels came up clear." Acosta admitted, however, that despite his position that the notes and mortgages were not valid, he knew that "the signed paperwork [existed]." Acosta explained that he did not know "that it was [his] duty to bring [the information] about the mortgages to their attention."
Tr. I, p. 210.
Tr. I, p. 210.
Tr. I, p. 219.
Tr. II, p. 31.
Regarding GECC's interest in learning of the existence of any maritime liens on the M/V ENERGY VII arising out of the Mayfield claim, Acosta testified that he believed that GECC was "looking for collateral to base the loan on. Whether or not they were free and clear of liens or whether liens or mortgages could be paid off, you known, I don't know all the ends and outs on that. I wasn't that involved in that end of it." When asked whether he was aware that a maritime lien may arise against a vessel when there is a claim of personal injury due to a vessel's unseaworthiness or a claim for maintenance and cure, Acosta testified, "I'm very well aware of that now. Back then I was aware of that in certain cases that, you know, it was always a possibility. It was a possibility to get sued for any reason." When asked whether he had heightened concern about such a lien arising from a maritime claim when there was no insurance coverage on the vessel, Acosta replied, "At the time we were negotiating this loan with GECC I had no reason to be concerned about insurance coverage because the vessels were insured."
Tr. I, p. 182.
Tr. I, p. 186.
Tr. I, p. 186.
Acosta testified that he did not volunteer any information to GECC about the Mayfield claim because at the time the loan application was being considered, there had been no lawsuit filed against the M/V ENERGY VII itself. Despite the testimony by Mayfield's attorney, Discon, that he had repeatedly advised Acosta of his intention to seize the M/V ENERGY VII to satisfy any judgment in the case, Acosta stated that he "did not remember Mr. Discon telling me he would seize that vessel prior to the GE loan." Acosta did agree that he does recall Discon advising him at some point that he would seize the M/V ENERGY VII to satisfy theMayfield claim if it were not paid.
Tr. II, p. 29.
Tr. II, p. 30.
Tr. II, p. 30.
After March 29, 1996, the date GECC funded the loan and the loan was closed, AEC failed to make any payments to GECC in repayment of the loan. After no payments were made by AEC for three months, GECC defaulted AEC under the note and the mortgage.
Certified copy of bankruptcy record, Joint pre-trial order (PTO), Doc. No. P-11, Statement of uncontested material facts (SUMF), p. 3, Para. 9.
PTO, SUMF, p. 3, Para. 9.
On June 7, 1996, Claude Mayfield filed another action (Mayfield II) in the United States District Court for the Eastern District of Louisiana against the ENERGY VII, in rem, and against AEC, in personal. On July 22, 1996, GECC intervened in theMayfield II action asserting that the GECC mortgage was enforceable as a preferred ship mortgage lien pursuant to the Ship Mortgage Act, 46 U.S.C. § 31325 et seq. Summary judgment was entered in favor of GECC recognizing that the preferred ship mortgage granted by AEC in favor of GECC created a preferred ship mortgage lien on the M/V ENERGY VII in GECC's favor.
PTO, SUMF, p. 4, para. 16; Mayfield v. ENERGY VII, Civil Action No. 96-1954, Section J, United States District Court, Eastern District of Louisiana, Rec. Doc. No. 1.
PTO, SUMF, p. 5, para. 18; Mayfield II, Rec. Doc. No. 15.
PTO, SUMF, p. 5, para. 19; Mayfield II, Rec. Doc. No. 36.
WRT filed an intervention on February 24, 1997, in Mayfield II seeking to enforce its alleged mortgage rights against the M/V ENERGY VII. It alleged that AEC signed a note and granted a mortgage to WRT on the M/V ENERGY VII on December 4, 1994, in the principal sum of $1,800,000, and that AEC was in default on the note. On January 27, 1999, summary judgment was rendered in favor of WRT finding that the mortgage on the M/V ENERGY VII in favor of WRT primed the GECC mortgage.
PTO, SUMF, p. 6, para. 23; Mayfield II, Rec. Doc. No. 41.
PTO, SUMF, p. 5, para. 21, p. 6, para. 23. The United States Coast Guard had previously issued a revised abstract of title on the M/V ENERGY VII indicating that its initial abstract of title was incorrect and that in fact there was a mortgage on the vessel in favor of WRT that was superior in rank to the GECC mortgage. PTO, SUMF, p. 5, paras. 21-22.
PTO, SUMF, p. 6, para. 27.
GECC and WRT eventually reached a settlement with respect to their competing interests in the M/V ENERGY VII, agreeing to divide any proceeds remaining in the registry of the court from a judicial sale of the M/V ENERGY VII. Pursuant to this agreement, GECC received approximately $200,000 from the sale of the ENERGY VII.
PTO, SUMF, p. 6, para. 28.
PTO, SUMF, p. 6, para. 28.
While its claim against the M/V ENERGY VII was being litigated, GECC also filed a complaint seeking enforcement of its mortgage rights against the M/V JANE R by suing the vessel in rem and AEC, Arnoult, and Acosta in personam. On October 29, 1997, summary judgment was entered in favor of GECC against the M/V JANE R, AEC, Arnoult, and Acosta. WRT also intervened in that action and it sought to enforce its mortgage rights against the M/V JANE R arising out of the AEC mortgage. On March 2, 1998, a judgment was entered in favor of GECC dismissing WRT's intervention on the ground that the mortgage on the M/V JANE R was invalid because the record owner of the vessel was AEC Energy, not AEC. The judgment against the M/V JANE R, AEC, Arnoult and Acosta was never fully paid.
PTO, SUMF, p. 7, para. 29.
PTO, SUMF, p. 7, para. 30.
PTO, SUMF, p. 7, para. 31. As in the case of the M/V ENERGY VII, the United States Coast Guard issued a retroactive abstract of title stating that although the abstract of title it initially prepared for the M/V JANE R did not list the mortgage in favor of WRT, a corrected abstract indicates that there was a $3.4 million mortgage in favor of WRT which purportedly outranked GECC's mortgage. PTO, SUMF, p. 7. para. 32.
PTO, SUMF, p. 8, para. 35.
PTO, SUMF, p. 8, para. 35.
Acosta filed for bankruptcy protection seeking discharge of his obligation pursuant to his guarantee of AEC's debt owed GECC. GECC filed a complaint to determine the dischargeability of GECC's judgment against Acosta arising out of his guarantee of the AEC loan. After a bench trial, the bankruptcy court entered judgment in favor of the debtor/defendant, Acosta, and against the plaintiff/creditor, GECC, denying its request to hold the debt nondischargeable pursuant to 11 U.S.C. § 523. GECC has appealed from that judgment.
GECC v. Acosta, Adversary Proceeding 00-1249, Complaint, para. XXX.
GECC v. Acosta, Adversary Proceeding 00-1249, Complaint.
In Re Acosta, Bankr. No. 00-15581; GECC v. Acosta, Adversary No. 00-1249 (Bankr. E.D. La. 2001).
Issues Presented
I. Did the bankruptcy court err as a matter of law in finding that Acosta's debt was not excepted from discharge pursuant to 11 U.S.C. § 523 (a)(2)(A) because GECC failed to prove that Acosta made false representations with the intention of and for the purpose of deceiving GECC?
II. Did the bankruptcy court err in finding that Acosta's debt was not excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(B) because GECC failed to prove that Acosta obtained money by use of a written statement that was materially false respecting the debtor's or an insider's financial condition?
The Bankruptcy Court's Findings
The bankruptcy court concluded that the plaintiff, GECC, failed to establish that the debt Acosta incurred arising out of his AEC loan guarantee was exempt from discharge pursuant to 11 U.S.C. § 523 (a) (2)(A). The bankruptcy court initially reviewed the elements of a § 523(a)(2)(A) claim noting that:
To succeed under Section 523(a)(2)(A) the objecting party must prove the following five elements: "(1) the debtor made representations; (2) at the time they were made the debtor knew they were false; (3) the debtor made the representations with the intention and purpose to deceive the creditor; (4) that the creditor relied on such representations; and (5) that the creditor sustained losses as a proximate result of the representations." In re Bercier, 934 F.2d 689, 692 (5th Cir. 1991); RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir. 1995).
Tr. II, p. 186.
Noting that there were no affirmative representations by the debtor, the bankruptcy court observed that the linchpin of this case is whether Acosta's silence regarding the existence of the $1.8 million note and mortgage on the M/V ENERGY VII, the $3.4 million note and mortgage on the M/V JANE R, and the Mayfield personal injury claim against the M/V ENERGY VII, constituted (1) representations; (2) which Acosta knew were false; and (3) which were made with the intention and purpose to deceive the creditor. With respect to these elements, the bankruptcy court concluded:
Tr. II, p. 188.
Well, I find that on the facts of this case the plaintiff has not carried the burden of either proving Element 1 [that the debtor made representations] or Element 2 [that the debtor knew they were false]. And then that brings us to Element 3, which is that the debtor made the representations with the intention and purpose to deceive the creditor. There's no evidence that Mr. Acosta's silence as to these three elements-as to these three points constituted an intention to deceive the creditor, GECC. He had an explanation which may not have been correct but was at least a reasonable explanation that he thought the 1.8 note and mortgage were satisfied by a Memorandum of Understanding of May 18, 1995. And the same thing was true as to his testimony as to the 3.4 note and mortgage. Although there was nothing in that Memorandum of Understanding that effectuated in any way a discharge of those notes and mortgages that was Mr. Acosta's impression.
The failure to disclose the suit by Mr. Mayfield, which undoubtedly Mr. Acosta knew of at the time of the closing of the loan from GECC, is much more serious and raises a much more serious question as to whether his silence constituted a misrepresentation or a — that's sufficient under 523(a)(2)(A). I hold that it did not for several reasons: (1) Although the attorney had told Mr. Acosta on several occasions, and I believe had also told Mr. Hattier, that he intended to seize the vessel, ENERGY VII, he did not in fact seize the vessel until the summer of 1996, which was some — a couple of months after the loan was actually closed.
I go back to the requirements of 523(a)(2)(A) that the debtor must know at the time he makes the misrepresentations or at the time that he is silent in disclosing the information that they were false and that the silence or representation was made with the intention and purpose of deceiving the creditor. I find that the proof is lacking on the part of GECC on this point because it really didn't make sense that Mr. Acosta knew that the loans were not going to be paid or that the possibility of a seizure and a maritime lien on behalf of Mr. Mayfield would prime the GECC mortgages. If he knew that and had an intention to deceive it doesn't make sense that he would have executed a guarantee by which he personally bound himself to pay the loan if it were not paid by AEC.
Commenting on the import of the testimony of Mayfield's attorney, the bankruptcy court observed that, "Lawyers tell people all kind of things when they're trying to get them to pay up or do something, so. . . . I'm not deprecating Mr. Discon's testimony, but I don't think the fact that Mr. Discon told Mr. Acosta I'm going to seize it imposed an obligation on Mr. Acosta to go to GECC and say [that] some lawyer in New Orleans [who is] a maritime personal injury lawyer says he's going to seize the vessel." Tr. II, pp. 171-172.
Tr. II, pp. 188-189 (emphasis added).
(Emphasis added).
With respect to elements 4 and 5, the testimony of Duffek convinced the bankruptcy court that GECC would not have made the lean if it had known of the existence and claim priority of the $1.8 million note and mortgage, the $3.4 million note and mortgage, and the Mayfield claim against the vessel. Because of Duffek's testimony, the bankruptcy court concluded that GECC relied upon Acosta's representations which, in this case, were not overt statements but a failure to disclose certain facts. The bankruptcy court also concluded that GECC sustained losses as a proximate result of Acosta's silence.
Tr. II, p. 190.
Tr. II, p. 190.
Tr. II, p. 190.
With respect to the plaintiff's objection to discharge pursuant to 11 U.S.C. § 523 (a)(2)(B), the bankruptcy court also concluded that GECC failed to establish that Acosta "obtained money by or tendered or signed a financial statement with false information," stating that "I don't find any evidence that' he furnished any financial statements or financial information." Judgment: was entered in bankruptcy court dismissing GECC's objections to the dischargeability of Acosta's debt pursuant to the guarantee.
Tr. II, p. 129.
Tr. II, p. 191; Judgment, In re Acosta, Bankr. No. 00-15581; General Electric Capital Corporation v. Acosta, Adversary No. 00-1249.
Standard of Review
In reviewing the bankruptcy court's determination of whether to grant or deny a discharge, which is a "core" bankruptcy proceeding, "the district court is bound to review the bankruptcy court's decision under the same standards that [an appellate court applies] to an ordinary district court opinion." Coston v. Bank of Malvern (In Re Coston), 991 F.2d 257, 261 n. 3 (5th Cir. 1993), citing Matter of Hipp, Inc., 895 F.2d 1503, 1517 (5th Cir. 1990). When reviewing the bankruptcy court's findings of fact, the district court applies the clearly erroneous standard. A.T.T v. Mercer (In re Mercer), 246 F.3d 391, 402 (5th Cir. 2001) ( en banc). A bankruptcy court's factual findings which have been affirmed by the district court will be reversed only if, after considering all of the evidence, the appellate court is "left with the definite and firm conviction that a mistake has been made." Norris v. First National Bank in Luling (In re Norris), 70 F.3d 27, 29 (5th Cir. 1995), quoting Matter of Young, 995 F.2d 547, 548 (5th Cir. 1993). As the United States Supreme Court instructed in Anderson v. City of Bessemer City, 470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985):
[The clearly erroneous] standard plainly does not entitle a reviewing court to reverse the finding of a trier of fact simply because it is convinced that it would have decided the case differently. . . . If the district court's account of the evidence is plausible in light of the record viewed in its entirely, the court of appeals may not reverse it even though convinced that had it been sitting as a trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.470 U.S. at 573-574, 105 S.Ct. at 1511. "AlthoughAndersen concerned a federal appellate court's review of a district court decision, it is equally applicable to a district court's review of a bankruptcy court decision." Webb v. Reserve Life Ins. Co. (In Re Webb), 954 F.2d 1102, 1104 (5th Cir. 1992).
In reviewing factual determinations by the bankruptcy court, "[d]ue regard [must be given] to the opportunity of the bankruptcy court to judge the credibility of witnesses." In re Coston, 991 F.2d at 262, citing Fed.R.Civ.P. 52(a); Bankr.R. 8013. "The bankruptcy court is in the best position to judge the credibility of any witness who testified under oath before it."Anderson v. Anderson (In re Anderson), 936 F.2d 199, 204 (5th Cir. 1991).
Fed.R.Civ.P. 52(a) states in pertinent part that, "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of [sic] the credibility of the witnesses."
Bankruptcy Rule 8013 provides that, "On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses."
"Questions concerning intent and reliance are questions of fact, and, thus, the bankruptcy court's findings on these issues are subject to appellate review under the clearly erroneous standard." In re Coughlin, 27 B.R. 632, 636 (Bankr. App. 1st Cir. 1983), citing Anderson. Clayton Co. v. Wingfield (In re Wingfield), 15 B.R. 647, 649 (D. Ct. W.D. Okla. 1981).
The district court reviews the bankruptcy court's conclusions of law and mixed questions of fact and law de novo. Century Indemnity Co. v. National Gypsum Settlement Trust (In re National Gypsum Co.), 208 F.3d 498, 504 (5tn Cir. 2000).
§ 523(a)(2)(A) Dischargeability Exception
11 U.S.C. § 523 provides exceptions to the discharge of debts in bankruptcy proceedings. As observed in Jordan v. Southeast National Bank (In Re Jordan), 927 F.2d 221 (5th Cir. 1991), it is almost axiomatic that "[a] guiding principle in analyzing [§ 523's] exceptions [to discharge] is that they be narrowly and strictly construed." Id. at 224-225, quoting In re Levitan, 46 B.R. 380 (Bankr. E.D.N.Y. 1985)."The rationale of reading the nondischargeability provisions narrowly, of course, is to help preserve `the Code's basic policy of giving an honest debtor a `fresh start.'" 927 F.2d at 225, quoting In re Medlin, 74 B.R. 726, 729 (Bankr. N.D.N.Y. 1986).
"[T]he standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard." Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
Pursuant to 11 U.S.C. § 523 (a)(2)(A), a debt is excepted from discharge if it is "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." "The operative terms in § 523(a)(2)(A), . . . `false pretenses, a false representation, or actual fraud,' carry the acquired meaning of terms of art . . . [and] are common-law terms." Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 437, 443, 133 L.Ed.2d 351 (1995). "Debts falling within section 523(a)(2)(A) are debts obtained by frauds involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made." First National Bank LaGrange v. Martin (In Re Martin), 963 F.2d 809, 813 (5th Cir. 1992), citing Matter of Foreman, 906 F.2d 123, 127 (5th Cir. 1990).
"[W]here Congress uses terms that have accumulated settled meaning under common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms." Field 516 U.S. at 69, 116 S.Ct. at 443 internal quotation marks, ellipses, and citations omitted).
In its brief, GECC does not precisely identify whether it is alleging that Acosta's conduct constituted "false pretenses", a "false representation", or "actual fraud" as those terms are used in § 523(a)(1)(A). In addressing the question of whether Acosta's conduct was an "actual fraud," a "false representation," or "false pretenses" case, the bankruptcy court noted that GECC's § 523(a)(2)(A) count raised the issue of whether Acosta "personally obtained money or property from GECC by a false representation or false pretenses. I don't find there's any actual fraud." The bankruptcy court, however, analyzed the evidence to determine whether Acosta's debt to GECC was excepted from discharge using the "actual fraud" elements of § 523(a)(2)(A) which were applied in Mercer. The Mercer court noted that, prior to Field, the Fifth Circuit "applied different, but somewhat overlapping, elements of proof for § 523(a)(2)(A) actual fraud, as opposed to false pretenses/representation." 246 F.3d at 403, citing RecoverEdge, 44 F.3d at 1292-93. Neither the Supreme Court inField nor the Fifth Circuit in Mercer settled the question of whether different elements of proof are applicable for a § 523(a)(2)(A) actual fraud claim as contrasted with a false pretenses or false representation claim. Field, 516 U.S. at 70 n. 8, 116 S.Ct. at 443 n. 8; Mercer, 246 F.3d at 403.
Tr. II, p. 129.
The § 523(a)(2)(A) elements of proof for an "actual fraud" analysis, described in RecoverEdge and applied inMercer, are:
[T]he objecting creditor must prove that: "(1) the debtor made representations; (2) at the time they were made the debtor knew they were false; (3) the debtor made the representations with the intention and purpose to deceive the creditor; (4) that the creditor relied on such representations; and (5) that the creditor sustained losses as a proximate result of the representations."RecoverEdge, 44 F.3d at 1293, quoting Keeling v. Roeder (In re Roeder), 61 B.R. 179, 181 (Bankr. W.D. Ky. 1986), as quoted in Bank, of La. v. Bercier (In re Bercier), 934 F.2d 689, 692 (5th Cir. 1991).
"Actual fraud, by definition, consists of any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another-something said, done or omitted with the design of perpetrating what is known to be a cheat or deception."RecoverEdge, 44 F.3d at 1293, quoting 3 Collier on Bankruptcy I 523.08 [5], at 523-57 to 523-58 (footnote omitted). "Fraud can be based on any type of conduct calculated to convey a misleading impression, thus, it is not relevant whether the representation is express or implied." Minnesota Client Security Board v. Wyant (In re Wyant), 236 B.R. 684, 695 (Bankr. D. Minn. 199), quoting In re Ellingsworth, 212 B.R. 326, 333 (W.D. Mo. 1997)(italics) (other citations omitted).
RecoverEdge, 44 F.3d at 1293. InRecoverEdge, however, the court observed that while "[s]ome courts require the creditor to have reasonably relied on the representations, . . . the Fifth Circuit does not." 44 F.3d at 1293 n. 17, citing Allison v. Roberts (In re Allison), 960 F.2d 481 at 484-85 n. 3. When applying the RecoverEdge elements of an "actual fraud" analysis to determine dischargeability of credit card debt, the Mercer court required proof of both actual and justifiable reliance for the fourth element. Mercer, 246 F.3d at 403. In the present case, it is not necessary to determine the scope of the "reliance" prong since the bankruptcy court found that GECC relied on the representations and that finding is not challenged on appeal.
The first two elements of the Mercer test require that the creditor prove that the debtor made a representation which he knew was false at the time he made it. GECC's position is that Acosta made a false representation by failing to disclose certain material facts. Bankruptcy courts have consistently held that "a debtor's silence regarding a material fact can constitute a false representation actionable under section 523(a)(2)(A)."
See also Mercer, 246 F.3d at 404, citing Restatement (Second) of Torts, §§ 550, 551; Citibank (S.D.), N.A. v. Eashai (In Re Eashai), 86 F.3d 1082, 1089 (9th Cir. 1996) ("When one has a duty to speak, both concealment and silence can constitute fraudulent misrepresentation; an overt act is not required.");Wyant, 236 B.R. at 695, quoting Rezac v. Maier (In re Maier), 38 B.R. 231, 233 (Bankr. D. Minn. 1984)("Accordingly, `silence, or the concealment of a material fact, can be the basis of a false impression which creates a misrepresentation actionable under section 523(a)(2)(A).'"); Caspers v. Van Horne (Matter of Van Horne), 823 F.3d 1285, 288 (8th Cir. 1987), citing Matter of Newmark, 20 B.R. 842, 855 (Bankr. E.D.N.Y. 1982) (When borrowing funds, a "borrower had the duty to divulge all material facts to the lender."); Matter of Van Home, 823 F.3d at 1288 ("While it is certainly not practicable to require the debtor to `bare his soul' before the creditor, the creditor has the right to know those facts touching upon the essence of the transaction.").
The third element of the Mercer test requires proof that the debtor made the false representations with the purpose and intent to deceive the creditor. In determining whether the debtor had an intent to deceive, the Fifth Circuit has observed that "if the debtor does not know the representation is false, there is no misrepresentation; therefore, [the debtor] does not intend to deceive." In re Mercer, 246 F.3d at 410, citing FCC Nat'l Bank/First Card v. Friend, 146 B.R. 257, 262 (Bankr. W.D. Mo. 1993) ( italics in original). "An intent to deceive may be inferred from a false representation which the debtor knows or should know will induce another to advance money to the debtor."P S X-Ray Company. Inc. v. Dawes (In re Dawes), 189 B.R. 714, 720 (Bankr. N.D. Ill. 1995), citing First Nat'l Bank of Red Bud v. Kimzey (In re Kimzey), 761 F.2d 421, 423-424 (7th Cir. 1985).
"An honest belief, however unreasonable, that the representation is true and that the speaker has information to justify it is an insufficient basis for deceit." Palmacci v. Umpierrez, 121 F.3d 781, 788 (1st Cir. 1997), citing W. L. Keeton, et al, Prosser and Keeton on the Law of Torts § 109, at 742 (5th ed. 1984). "A `dumb but honest' defendant does not satisfy the test of scienter." Palmacci, 121 F.3d at 788, citing 2 F. Harper, et al, Law of Torts § 7.3, at 393 (2nd Ed. 1986).
"Fraudulent intent [i.e., an intent to deceive] can be established by circumstantial evidence." In re Dawes, 189 B.R. at 720, citing Union Nat'l Bank of Marsilles v. Leigh (In re Leigh), 165 B.R. 203, 215 (Bankr. N. D. Ill. 1993); Katahan Asoc., Inc. v. Wien (In re Wein), 155 B.R. 479, 488 (Bankr. N.D. Ill. 1993).
GECC first argues that the bankruptcy court clearly erred in finding that GECC did not prove by a preponderance of evidence that Acosta's failure to inform it of the preexisting $1.8 million note and mortgage on the M/V ENERGY VII, one of the vessels offered as collateral, and the preexisting $3.4 million note and mortgage on the M/V JANE R, the second vessel offered as collateral, were false representations made with the intent and purpose to deceive the creditor.
Citing In re Wyant, 236 B.R. at 695, and In re Docteroff, 133 F.3d 210, 216 (3rd Cir. 1997), the bankruptcy court recognized that under certain circumstances, "a debtor's silence regarding a material fact can . . . constitute a false representation actionable under Section 523(a)(2)(A)." In considering whether GECC proved the elements of a § 523(a)(2)(A) exception to discharge, the bankruptcy court concluded that Acosta's silence with respect to "the existence of the 1.8 note and mortgage, the existence of the 3.4 note and mortgage, and the existence of the claim against ENERGY VII by Mr. Mayfield" did not constitute false representations. The bankruptcy court also observed that the evidence was insufficient to prove that Acosta's silence with respect to those matters was calculated, i.e., that he deliberately remained silent with the intention and purpose to deceive GECC. GECC argues that, viewed in the context of the entire transaction, the bankruptcy court was clearly wrong in not inferring, from Acosta's silence, an intent to deceive regarding the two preexisting mortgages and the default judgment in the Mayfield I lawsuit.
Tr. II, p. 186.
Tr. II, p. 188. As noted previously, the bankruptcy court made a specific finding that GECC failed to prove "actual fraud," in addition. to its finding that GECC failed to prove that Acosta made "false representations" with the intent to deceive" pursuant to § 523(a) (2)(A). The bankruptcy court's factual finding with respect to the lack of proof of "actual fraud" is not challenged on appeal. In addition, there is no specific finding by the bankruptcy court with respect to whether GECC proved "false pretenses" rather than "false representations". The lack of any such finding is similarly not the subject of the instant appeal.
GECC does not suggest that the bankruptcy court applied an incorrect legal standard when it utilized the Mercer elements to analyze GECC's proof. Although the bankruptcy court did not make specific factual findings using the "false representation/false pretenses" elements described in RecoverEdge, the elements of proof are similar to those applied in Mercer.
"In order for a debtor's representation to be a `false representation or false pretense' under § 523(a)(2), it `must have been (1) [a] knowing and fraudulent falsehood, . . . (2) describing past or current facts, (3; that [was] relied upon by the other party."RecoverEdge, 44 F.3d at 1292-1293, quoting Allison v. Roberts (In re Allison), 960 F.2d 481, 483 (5th Cir. 1992) (other citation omitted). "[T]o be a false representation or false pretense under § 523(a)(2), the `false representations and false pretenses [must] encompass statements that falsely purport to depict current or past facts.'" RecoverEdge L.P., 44 F.3d at 1293, quoting Keeling v. Roeder (In re Roeder), 61 B.R. 179, 181 (Bankr. W.D. Ky. 1986)). In its application of theMercer elements, the bankruptcy court found that GECC's proof did not establish that Acosta's silence was knowing and done with the intent to deceive. In essence, the bankruptcy court found that although Acosta may have been mistaken in his assumptions about the validity of the pre-existing ship mortgages and the effect of the lawsuit arising out of a claim against one of the vessels offered as collateral, there was no proof that his omissions were knowingly and fraudulently made. As more fully discussed infra, the Court finds that the bankruptcy court's account of the evidence is "plausible" and, therefore, its factual findings may not be reversed as "clearly erroneous." See Mercer, 246 F.3d at 402.
Tr. II, p. 188.
In rejecting GECC's contention that an intent to deceive is the only logical inference to be drawn from Acosta's silence, the bankruptcy court, in connection with the notes and mortgages, observed that Acosta "had an explanation which may not have been correct but was at least a reasonable explanation that he thought the 1.8 note and mortgage were satisfied by a Memorandum of Understanding of May 18, 1995. And the same thing was true as to his testimony as to the 3.4 note and mortgage. Although there was nothing in the Memorandum of Understanding that effectuated, in any way a discharge of those notes and mortgages [,] that was Mr. Acosta's impression."
Tr. II, pp. 188-189.
The question for this Court is whether the bankruptcy court's weighing of the evidence "is plausible in light of the record viewed in its entirety." In deciding this question, the Court bears in mind that the bankruptcy court was in the best position to judge the credibility of Acosta, the only witness who testified on behalf of AEC and the only trial witness who was directly involved in the actual transmission of information involving the transaction. It should be noted that there is no evidence that it was Acosta who was interviewed by the GECC loan officer in connection with the loan application. There is also no loan application signed by Acosta in evidence. While Acosta was designated as an AEC contact, other than some AEC revenue projections prepared by Hattier, there is no evidence that he supplied information which GECC relied upon in connection with the loan.
See Anderson, 470 U.S. at 573-574, 105 S.Ct. at 1511; In re Anderson, 936 F.2d at 204.
While the case might have been decided differently by another factfinder, this Court cannot conclude that the bankruptcy court's view of the evidence was "implausible." Although another judge might have, in light of the totality of the evidence, doubted Acosta's sincerity in explaining why the two preexisting preferred ship mortgages were not revealed, the bankruptcy court, which presided over the trial, gave credence to Acosta's explanations. Reviewing the evidence, it is apparent that AEC and WRT, AEC's largest customer which held the mortgages on the two vessels in question, had extensive dealings during the time period in which AEC was seeking financing from GECC. Additionally, WRT was experiencing financial difficulties, a fact revealed by Acosta to AEC when he informed them of WRT's bankruptcy filing.
See Anderson, 470 U.S. at 573-574, 105 S.Ct. at 1511.
The bankruptcy court's acceptance of Acosta's explanation that the mortgages were no longer viable is bolstered by his testimony that, prior to the closing, he obtained a United States Coast Guard certificate which indicated that there were no mortgages on the vessels. Acosta's mistaken belief that the mortgages in favor of WRT were extinguished by the transactions between the parties is not so unreasonable as to make the bankruptcy court's acceptance of his testimony reversible. This Court finds that the bankruptcy court was not clearly erroneous in determining that GECC did not prove by a preponderance of evidence that Acosta's failure to disclose the $1.8 million note and ship mortgage, as well as the $3.4 million note and ship mortgage, was a false representation made knowingly and with the intent to deceive GECC.
Tr. II, pp. 23-24.
GECC next argues that the bankruptcy judge clearly erred in concluding that Acosta's silence with respect to the default judgment inMayfield I rendered against AEC's subsidiaries, combined with the threats of Mayfield's attorney to seize the vessel, did not constitute an actionable § 523(a)(2)(A) misrepresentation. As noted previously, the bankruptcy judge offered several reasons for his conclusion that Acosta's failure to disclose the Mayfield default judgment and the threats of seizure was not done intentionally and for the purpose of deceiving GECC. Although the bankruptcy judge recognized that Acosta's silence with respect to those matters raised "a much more serious question" of an intentional misrepresentation pursuant to § 523(a)(2)(A), he noted that Mayfield's attorney did not actually seize the vessel until a couple of months after the loan was actually closed. Relying on the requirements of § 523(a)(2)(A) that the debtor "must know at the time he makes the misrepresentations or at the time he is silent in disclosing the information that they were false and that the silence was made with the intention and purpose of deceiving the creditor", the bankruptcy court found that the proof was lacking. The bankruptcy court did not believe that Acosta would know that the vessel seizure and the maritime lien which resulted from personal injuries suffered by Mayfield aboard the vessel would prime the GECC mortgages. The bankruptcy court concluded that if Acosta had known that a maritime lien was to prime the GECC mortgages and that the vessel was to be seized, Acosta would not have "executed a guarantee by which he personally bound himself to pay the loan if it were not paid by AEC."
Tr. II, p. 189.
Tr. II, pp. 189-190.
Tr. II, pp. 189-190.
As stated, in order to determine whether the bankruptcy court was clearly erroneous in its reasoning, the issue is whether the bankruptcy judge's view of the evidence was "implausible" in light of the entire record. While Acosta certainly had knowledge that a default judgment had been rendered in the Mayfield I case against two AEC subsidiaries, AEC was not an in personam defendant in that lawsuit nor was the M/V ENERGY VII an in rem defendant. Acosta is not a lawyer and there is no proof that he knew that an injury which occurred on the vessel prior to the GECC loan closing would prime the GECC mortgages. While Acosta agreed that Mayfield's attorney had threatened to seize the vessel, he stated that he did not think such threats were made before the GECC loan closing. As a factual matter, the second Mayfield lawsuit seeking to enforce the maritime lien was not filed until after the loan closing.
See Anderson, 470 U.S. at 573-574; 105 So. Ct. at 1511.
The bankruptcy court's view of the evidence is plausible in light of the entirety of the record evidence. The Court finds that the bankruptcy court's finding that GECC failed to prove by a preponderance of evidence that Acosta intended to deceive GECC with respect to theMayfield lawsuit was not clearly erroneous.
GECC also argues that the bankruptcy court erred when, it failed to conclude that Acosta intentionally and falsely misrepresented the purpose for which AEC borrowed the funds from GECC. While the bankruptcy court made no specific findings on these points, the Court notes that there is no evidence in the record that Acosta spoke to any GECC representatives regarding the purpose of the loan or that Acosta made any representations to GECC regarding the purpose for which AEC applied for the loan.
GECC's final argument pursuant to § 523(a)(2)(A) is that Acosta misrepresented the fact that AEC intended to repay the loan proceeds. The evidence in the record does not support a finding that AEC never intended to repay the loan. Acosta testified that if he had thought AEC had no intention of repaying the loan, he would not have personally guaranteed it, a factor cited by the bankruptcy judge as important in determining whether Acosta intended to deceive GECC. Acosta explained that the financial difficulties facing AEC after the closing significantly affected its ability to meet its obligation to GECC.
After reviewing the entirety of the record, the Court does not find that the bankruptcy judge was clearly erroneous with respect to any finding of fact regarding its determination that the creditor failed to prove its § 523(a)(2)(A) exception to dischargeability by a preponderance of evidence. The bankruptcy judge did not err in rejecting plaintiff's claim that Acosta's debt arising out of his guarantee of the GECC loan to AEC was nondischargeable.
§ 523(a)(2)(B) Dischargeability Exception
11 U.S.C. § 523 (a)(2)(B) excepts from discharge any debt:
[F]or money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such . . . credit reasonably relied; and
(iv) that the debtor caused to be made or published with the intent to deceive.Norris v. First National Bank of Luling, 70 F.3d 27, 29 (5th Cir. 1995). "The existence of each of these four elements is a question of fact which the creditor must prove by a preponderance of evidence." Id., citing Matter of Coston, 991 at 260; Grogan, 498 U.S. at 291; 111 S.Ct. at 661.
As noted previously, the bankruptcy judge denied GECC's § 523(a) (2)(B) dischargeability exception, finding that there was no evidence that Acosta prepared or furnished any financial statements or financial information, but that he simply transmitted information furnished to him by AEC chief financial officer Hattier.
Tr. II, p. 129.
GECC argues that the 1994 and 1995 financial statements which AEC provided to it "painted a false financial picture of AEC by failing to disclose over $6,700,00.00 in debts owed AEC and its majority owned affiliates consisting of the $1,800,000.00 WRT Mortgage No. 1, the $3,400,000.00 WRT Mortgage No. 2 and the $1,500,000.00 liability posed by the Mayfield personal injury claim." Acosta counters that GECC waived its claim pursuant to § 523(a)(2)(B) by failing to argue that the bankruptcy judge's factual finding that Acosta did not prepare or furnish any written financial information to GECC was clearly erroneous.
Appellant's original brief, p. 35.
"Failure to brief and argue an issue constitutes waiver." Goldin v. Bartholow, 166 F.3d 710, 716 n. 3 (5th Cir. 1999), citing Applewhite v. Reichhold Chemicals, 67 F.3d 571, 573 (5th Cir. 1995); HECI Exploration Co., Inc. v. Holloway, 862 F.2d 513, 525 (5th Cir. 1988). While GECC directs its efforts at establishing that the financial statements furnished by AEC were materially false, it has waived its argument that the bankruptcy court was clearly erroneous in concluding that Acosta did not make or publish any written financial statements with the intent to deceive GECC. The creditor had the burden of proving this element of its § 523(a)(2) (B) claim by a preponderance of the evidence and, therefore, its failure to preserve this issue on appeal is fatal to its claim.
For purposes of appellate review, the Court would note that the bankruptcy judge's findings with respect to the section 523(a)(2)(B) claim were not clearly erroneous. Acosta testified that he did not prepare either the 1994 or the 1995 financial statements in question and that financial statements were the responsibility of Hattier. Tr. I, pp. 110-111. Indeed, Acosta testified that he did not even have access to the financial information contained in AEC's computers. Tr. I, pp. 111-112.
While Acosta stated that he reviewed the 1994 and 1995 financial statements, there is no evidence that he signed or prepared them. In order to "come within the exception of section 523(a)(2)(B), the statement . . . [must] be in writing, must have been written by the debtor, signed by the debtor, or the particular writing must have been adopted and used by the debtor." Bellco First Federal Credit Union v. Kaspar (In Re Kaspar), 200 B.R. 399, 401 (D. Col. 1996), citing Collier on Bankruptcy 523.09[1] (15th ed. 1996) (other citations omitted). "Though it is now generally accepted that a debtor need not sign a document for the writing requirement to be satisfied, . . . it is clear that the debtor must affirm the writing in some respect. That is, as noted above, if the debtor does not draft or sign the writing, he must either use or adopt it." In re Kaspar, 200 B.R. at 402, citing In re Shelton, 42 B.R. 547, 548 (Bankr. E.D. Mo. 1984); Collier, 523.09[1]. "The analog to this principle is that mere oral representations, without anything more, cannot constitute a writing under section 523(a)(2)(B)."In re Kaspar, 200 B.R. at 402, citing Engler v. Van Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984) (other citations' omitted).
Reviewing the record evidence respecting whether Acosta made or "published" the financial statements, the bankruptcy judge's finding that Acosta did not prepare or furnish, i.e., adopt or affirm, any financial statements in connection with AEC's loan request to GECC is entirely plausible and, therefore, the bankruptcy judge's finding is not clearly erroneous.