UNPUBLISHED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Reversed and remanded by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.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,

, 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, 

, 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, 

, 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, 

, 134 (4th Cir. 1999); In re Hale, 

, 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,

, 834 (Bankr. E.D. Va. 1991) (citing In re Taylor, 

, 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, 

 (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, 

,       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, 

, 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, 

. 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, 

, 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, 

,

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,   

,   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, 

, 137 (1st

Cir. 1992), abrogated on other grounds by Field v. Mans, 

 (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., 

, 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