Filed: Mar. 27, 2019
Latest Update: Mar. 11, 2020
Summary: FILED MAR 27 2019 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT In re: BAP No. OR-18-1286-KuFS ANTOINETTE MICHELLE MAXWELL, Bk. No. 3:17-bk-32084-DWH Debtor. Adv. No. 3:17-ap-03113-DWH ANTOINETTE MICHELLE MAXWELL, Appellant, v. OPINION STATE OF OREGON, Appellee. Argued and Submitted on March 20, 2019 at Portland, Oregon Filed – March 27, 2019 Ordered Published – April 30, 2019 Appeal from the Unit
Summary: FILED MAR 27 2019 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT In re: BAP No. OR-18-1286-KuFS ANTOINETTE MICHELLE MAXWELL, Bk. No. 3:17-bk-32084-DWH Debtor. Adv. No. 3:17-ap-03113-DWH ANTOINETTE MICHELLE MAXWELL, Appellant, v. OPINION STATE OF OREGON, Appellee. Argued and Submitted on March 20, 2019 at Portland, Oregon Filed – March 27, 2019 Ordered Published – April 30, 2019 Appeal from the Unite..
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FILED
MAR 27 2019
ORDERED PUBLISHED
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. OR-18-1286-KuFS
ANTOINETTE MICHELLE MAXWELL, Bk. No. 3:17-bk-32084-DWH
Debtor. Adv. No. 3:17-ap-03113-DWH
ANTOINETTE MICHELLE MAXWELL,
Appellant,
v. OPINION
STATE OF OREGON,
Appellee.
Argued and Submitted on March 20, 2019
at Portland, Oregon
Filed – March 27, 2019
Ordered Published – April 30, 2019
Appeal from the United States Bankruptcy Court
for the District of Oregon
Honorable David W. Hercher, Bankruptcy Judge, Presiding
Appearances: Michael Fuller argued for appellant Antoinette Michelle
Maxwell; Sander Marcus Hull of Oregon Department of
Justice argued for appellee State of Oregon.
Before: KURTZ, FARIS, and SPRAKER, Bankruptcy Judges.
KURTZ, Bankruptcy Judge:
For several years, the State of Oregon (State) gave food stamp and
public assistance benefits to debtor, Antoinette Michelle Maxwell, based on
earned and unearned income reported in her benefit applications. State
later discovered that Ms. Maxwell failed to report all her income and thus
received benefits to which she was not entitled.
State filed an adversary proceeding against Ms. Maxwell seeking a
determination that the overpayments were nondischargeable under
§ 523(a)(2).1 After a trial and supplemental briefing by the parties, the
bankruptcy court issued a Letter Opinion finding that § 523(a)(2)(B)
applied to State's claim and that all elements of the statute were met. The
bankruptcy court entered judgment in favor of State, finding that
overpayments totaling $16,288.43 were nondischargeable. This appeal
followed. We AFFIRM.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
FACTS
A. Prepetition Events
Ms. Maxwell received food stamp benefits from State from
February 1, 2009 through May 31, 2013, through the Supplemental
Nutrition Assistance Program (SNAP). She also received public assistance
benefits from State through the Temporary Assistance for Needy Families
program (TANF) from April 22 through September 30, 2009. Finally, from
September 1, 2009 through May 31, 2013, Ms. Maxwell received public
assistance benefits through the Employment Related Day Care program
(ERDC).
During these time periods, Ms. Maxwell had earnings from her
employment with Oregon Health & Science University (OHSU) and from
her employment as a domestic employee for Martin Meaux. She also
received child support payments.
State began an investigation of Ms. Maxwell's income due to a report
that she had failed to advise State about a change of circumstances; i.e., that
her husband was part of her household. Although there was insufficient
evidence to confirm that her husband was part of her household, the
investigation revealed that Ms. Maxwell failed to report child support
payments and earned income on her benefit applications. In January 2017,
State recorded a Distraint Warrant for the balance due from Ms. Maxwell
for the overpayment of public assistance benefits in the amount of
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$16,288.42. This pushed Ms. Maxwell into a chapter 7 bankruptcy in June
2017.
B. Bankruptcy Events
1. The Adversary Complaint
State filed an adversary proceeding against Ms. Maxwell seeking to
find the overpayment nondischargeable under § 523(a)(2). State alleged
that Ms. Maxwell had a duty to accurately report her earnings and her
receipt of child support payments while receiving food stamps and public
assistance benefits. State further alleged that Ms. Maxwell failed to report
her earnings from Mr. Meaux or her child support payments. According to
State, this failure constituted material false representations that she had
insufficient income with which to meet the needs of her family. Finally,
State maintained that it acted in reliance on Ms. Maxwell's false
representations by providing her benefits which she was not entitled to
receive.
2. State's Trial Memorandum
In its trial memorandum, State argued that § 523(a)(2)(A) applied.
State asserted that it justifiably relied on Ms. Maxwell's false
representations when it provided her with public assistance benefits. In
support, State explained that it provides public assistance benefits to
numerous applicants and must rely upon the truth of each applicant's
statements in their applications. According to State, its reliance on
4
Ms. Maxwell's false representations was justifiable under the
circumstances.
3. The Trial
At the trial, State proceeded to prove its case presumably under
§ 523(a)(2)(A). State's sole witness was Marisol Carter, an employee with
the Department of Human Services, Overpayment Writing Unit. Ms. Carter
testified about the department's operations and procedures. As a benefit
overpayment specialist, she was familiar with State's policies and
procedures for evaluating benefit eligibility for the TANF, SNAP and
ERDC programs. Ms. Carter confirmed that the applicants fill out the
benefit application, not State, and that they must identify the benefits for
which they are applying so that State can determine eligibility. She testified
as to how benefits were calculated and the significance of accurately
completing applications.
Ms. Carter explained that State calculates the amount of a benefit that
an individual is entitled to based on his or her income and the number of
household members. Ms. Carter further explained that to qualify for
benefits, the household must be under the Countable Income Limit, which
is a government-mandated figure. According to Ms. Carter, if the amount
of earned income is reported inaccurately to State, the household ends up
receiving more benefits than what they are allowed. Ms. Carter also
testified about the overpayments made to Ms. Maxwell, and how they were
5
calculated with respect to TANF and ERDC benefits.
On cross-examination, Ms. Maxwell's attorney, Mr. Fuller, asked
Ms. Carter whether she had personal knowledge about whether anyone
with State ever actually relied on Ms. Maxwell's representations in her
applications when deciding whether to issue her public assistance from
2009 to 2013. Ms. Carter replied “no.”
At that point, Mr. Fuller moved for a directed verdict on the grounds
that there was no evidence that Ms. Maxwell had the intent to deceive and
no evidence showing actual reliance by State on the information
Ms. Maxwell provided in her benefit applications.
In response, State's attorney, Mr. Hull, explained that benefit
applications asked for unearned income from any source, including child
support, and for earned income. Mr. Hull stated that the applicants sign the
document under penalty of perjury that they are providing accurate
information. According to Mr. Hull, it was reasonable for State, under the
circumstances, to rely on individuals telling the truth on the applications.
Mr. Hull further argued that it was clear from the reports generated, and
the information that State had collected, that Ms. Maxwell knew enough
about the application process. She put information about her employment
income from OHSU, but did not put down information about income from
Mr. Meaux or her child support payments. From State's perspective,
Mr. Hull argued, the only reasonable conclusion was that Ms. Maxwell
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intended to keep this information from State so that she could increase her
benefits.
In reply, Mr. Fuller argued that there was no evidence showing that
State reviewed any of the documents submitted by Ms. Maxwell, which
suggested that State gave benefits without regard to anything in the
applications.
The bankruptcy court denied the motion for a directed verdict,
finding that there was enough evidence for it to infer that State relied on
the information in Ms. Maxwell's applications and the absence of
information.
Ms. Maxwell subsequently testified and was cross-examined. She
testified that she was a domestic employee for Mr. Meaux and earned
about a couple hundred dollars a month, but was not sure of the exact
amount. On cross examination, Mr. Hull asked her why she did not list
income from Mr. Meaux on one of her applications. Ms. Maxwell
answered: “I don't know. I don't remember. To my knowledge, I forgot to
put it down. It wasn't intentionally.” Later, when asked why she did not
list the child support payments and income from Mr. Meaux, Ms. Maxwell
testified: “Because, at the time, I forgot about the second income.”
Ms. Maxwell also testified that she received letters from State which
explained that she did not need to report all her income if it was below a
certain level. She could not remember when she received those letters, but
7
relied upon them since she earned so little.
During closing argument, Mr. Hull maintained that State's reliance
on Ms. Maxwell's assertions in her application was “almost” res ipsa
loquitur. In other words, it was Ms. Maxwell's representations or omissions
in her applications that resulted in State paying the money to her. Mr. Hull
also walked the bankruptcy court through State's calculations for the
overpayments.
In response, Mr. Fuller argued that State was imposing or asking the
bankruptcy court to adopt a new rule—res ipsa loquitur means that benefits
equal reliance. Mr. Fuller maintained that was not the law and reiterated
that there was no evidence in the record of reasonable reliance.
The bankruptcy court took the matter under submission.
4. The Supplemental Briefing
The bankruptcy court subsequently held a hearing on the matter due
to its questions about the record. The court stated that it had to determine
whether every dollar of the alleged overpayment was attributable to
§ 523(a)(2) fraud. As a result, the bankruptcy court requested State to
further explain the legal basis for each of the line items on State's
calculations for benefits and explain how the items in the calculation were
supported by other items in the record.
Moreover, subsequent to trial, the Supreme Court issued its decision
in Lamar, Archer & Cofrin, LLP v. Appling,
138 S. Ct. 1752 (2018), which the
8
bankruptcy court interpreted as requiring Ms. Maxwell's omissions in her
written applications to be treated as false financial statements under
§ 523(a)(2)(B). As such, under § 523(a)(2)(B), State had to prove reasonable
reliance on Ms. Maxwell's misrepresentations.
In its supplemental brief, State argued that the holding in Lamar had
no material impact on the instant case. State maintained that Ms. Maxwell
conveyed her financial condition through the benefit applications such that
under Lamar, the benefit applications would be considered written
statements for her financial condition because they relate to her overall
financial status. State asserted that the elements for a § 523(a)(2)(B) claim
were met. Noting that Ms. Maxwell was obligated to provide true and
complete information, it contended that she failed to do so by not including
employment and income from Mr. Meaux or her child support in every
application she signed between January 2009 and January 2013. State
argued that the evidence showed she was working for Mr. Meaux for the
relevant time periods even though there was no pay advice for certain
months.
In addition, State claimed that the elements for a § 523(a)(2)(A) claim
had also been met. State noted that nondisclosure of a material fact in the
face of a duty to disclose had been held to establish the requisite reliance
and causation for actual fraud. Apte v. Romesh Japra, M.D., F.A.C.C., Inc.
(In re Apte),
96 F.3d 1319 (9th Cir. 1996). State maintained that Ms. Maxwell
9
had a duty to disclose all sources of employment and income on her benefit
applications and, by failing to do so, committed fraud by omission.
Finally, State attached a line item detail for the calculation of income
for each month Ms. Maxwell received food stamps and TANF benefits. In
addition, State provided the legal basis for each line item for those benefits.
State further explained that income calculations are less exacting under
ERDC and set forth the legal basis for such calculations.
Ms. Maxwell's supplemental brief consisted of three pages. She
objected to references of data, sources, or calculations not already admitted
into evidence at trial and contained in the record. The brief also stated that
the Lamar decision should not affect the court's analysis in this case because
the only statements at issue were Ms. Maxwell's benefit applications, which
were indisputably made in writing.
5. The Letter Opinion
On October 18, 2018, the bankruptcy court issued its findings of fact
and conclusions of law in a Letter Opinion.
First, the court noted that State had not specified whether it was
relying on § 523(a)(2)(A) or (B) in its complaint. The bankruptcy court
ultimately found that § 523(a)(2)(B) rather than subsection (A) applied
because (1) the misrepresentations on which State relied—nondisclosure of
some of Ms. Maxwell's sources of income—had a direct relation to and thus
were “respecting” her overall financial status and (2) Ms. Maxwell's
10
omissions of material information were from a writing respecting her
financial condition.
Second, the court found that State had proved all the elements of
§ 523(a)(2)(B). According to the bankruptcy court, Ms. Maxwell made
statements in her benefits applications that were materially false; i.e., she
failed to report income from Mr. Meaux and her child support payments.
The court found that Ms. Maxwell knew the representations were false. In
this regard, the bankruptcy court was not persuaded by her testimony that
the income from Mr. Meaux was so small as to be forgettable as her income
ranged from $134.28 to $626.65. The court was also not persuaded by her
testimony that she “didn't really read the applications” as she properly—
but incompletely—completed blanks in her applications disclosing her
primary employer and did not testify to any difficulty reading.
The court further found that Ms. Maxwell intended to deceive State
as each application included the following statement above the signature
line “by signing below I agree that I have given DHS true, correct, and
complete information.” The court held that she either knew that she had
omitted material information from the applications or acted so recklessly as
to warrant a finding that she acted fraudulently.
Next, the bankruptcy court determined that State had relied on the
representations in her applications by providing benefits to her. The court
noted that a logical inference was that State would not provide benefits in
11
the absence of an application from an apparently eligible person. The
bankruptcy court disagreed with Ms. Maxwell's argument that, to prove
reliance, State must reconstruct her applications by adding information that
should have been included and then calculating the benefits that would
have been paid under the corrected applications. The court also disagreed
that State's access to a database with information about Ms. Maxwell's
employers and child support payments, which it apparently used in
investigating her, excused her from truthfully answering application
questions about her employment income.
The bankruptcy court further decided that State's reliance was
reasonable. The court reached this conclusion based on Ms. Carter's
testimony that application forms, systems, and policies that State uses to
accept and process benefit applications, and to recover overpayments, are
designed to comply with laws, including federal regulations, regulating
eligibility for the benefits. In the end, the court found that although
Ms. Maxwell questioned State's actual reliance on her benefit applications,
she didn't offer any evidence or argument that State's reliance wasn't
reasonable.
Finally, the bankruptcy court found that Ms. Maxwell's debt to State
proximately resulted from her misrepresentations. The court observed that
Ms. Maxwell presented no evidence to contradict State's calculations of the
overpayment amounts.
12
The bankruptcy court entered judgment in favor of State, finding the
overpayments nondischargeable under § 523(a)(2)(B). Ms. Maxwell filed a
timely appeal.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334
and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether State met its burden of proof by a preponderance of the
evidence that it reasonably relied on Ms. Maxwell's written applications for
public assistance from 2009 to 2013.
STANDARD OF REVIEW
Whether a creditor reasonably relied upon false statements is a
question of fact which is reviewed under a clearly erroneous standard.
Siriani v. Nw. Nat'l Ins. Co. (In re Siriani),
967 F.2d 302, 307 (9th Cir. 1992);
Gosney v. Law (In re Gosney),
205 B.R. 418, 421 (9th Cir. BAP 1996). A finding
is clearly erroneous if it is “illogical, implausible, or without support in the
record.” Retz v. Samson (In re Retz),
606 F.3d 1189, 1196 (9th Cir. 2010)
(citing United States v. Hinkson,
585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009)
(en banc)). The clearly erroneous standard does not “entitle a reviewing
court to reverse the finding of the trier of fact simply because it is
convinced that it would have decided the case differently.” Anderson v. City
of Bessemer City,
470 U.S. 564, 573 (1985).
13
DISCUSSION
A. Legal Standards: Reliance Under § 523(a)(2)(B)
To prevail on an exception to discharge claim under § 523(a)(2)(B),
the creditor must show, by a preponderance of the evidence, that: (1) it
provided debtor with money, property, services or credit based on a
written representation of fact by the debtor as to the debtor's financial
condition; (2) the representation was materially false; (3) the debtor knew
the representation was false when made; (4) the debtor made the
representation with the intention of deceiving the creditor; (5) the creditor
relied on the representation; (6) the creditor's reliance was reasonable; and
(7) damage proximately resulted from the representation. Grogan v. Garner,
498 U.S. 279, 286-87 (1991) (setting forth the preponderance of the evidence
standard); Candland v. Ins. Co. of N. Am. (In re Candland),
90 F.3d 1466, 1469
(9th Cir. 1996); Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch),
237
B.R. 160, 167 (9th Cir. BAP 1999); In re
Siriani, 967 F.2d at 304 (adopting the
elements required under the companion § 523(a)(2)(A), with the additional
and obvious requirement that the alleged fraud stem from a false statement
in writing). The bankruptcy court found that State had proven all these
elements by a preponderance of the evidence.
On appeal, Ms. Maxwell contests the sufficiency of the evidence on
only the reliance requirements. Under § 523(a)(2)(B), the creditor's reliance
must be both actual and reasonable. Heritage Pac. Fin., LLC v. Montano (In re
14
Montano),
501 B.R. 96, 115 (9th Cir. BAP 2013) (citing Field v. Mans,
516 U.S.
59, 68 (1995)). The determination of reliance therefore requires a two-part
analysis. First, the court must determine whether the creditor actually
relied on the debtor's statements. Actual reliance means that the creditor in
fact relied on the omission or misrepresentation. Id.; see also First Nat'l Bank
v. Cribbs (In re Cribbs),
327 B.R. 668, 674 (10th Cir. BAP 2005) (“To establish
a claim under § 523(a)(2)(B), the Bank must show reliance in fact, i.e., that it
actually relied on the financial information . . . .”).
Second, the court must determine whether the creditor's reliance was
reasonable. The standard in the Ninth Circuit for “reasonable reliance”
does not require adherence to any particular list of factors; rather, the
bankruptcy court is to make its determination on a case-by-case basis in
light of the totality of the circumstances. See In re
Candland, 90 F.3d at 1471;
In re
Gertsch, 237 B.R. at 170. A creditor need not necessarily investigate
statements respecting a debtor's financial condition in order for its reliance
to be reasonable. In re
Gertsch, 237 B.R. at 170 (“when there is evidence of
materially fraudulent statements, little investigation is required for a
creditor to have reasonably relied on the representations.”).
While actual reliance presents a separate issue from a determination
of “reasonable reliance,” the analysis is an overlapping one. As in the case
of any other issue, the fact of reliance may be proved by circumstantial
evidence. Evidence that a creditor's reliance was reasonable is
15
circumstantial evidence of actual reliance by the creditor.
Field, 516 U.S. at
76 (“[T]he greater the distance between the reliance claimed and the limits
of the reasonable, the greater the doubt about reliance in fact.”); N. Tr. Co.
v. Garman (In re Garman),
643 F.2d 1252 (7th Cir. 1980) (claims to reliance
cannot be so unreasonable as to defeat a finding of reliance in fact).
In the end, the degree of reliance required—reasonable—is more
stringent than the justifiable reliance required under § 523(a)(2)(A), and
evidences Congressional intent to create a heightened bar to discharge
exceptions.
Lamar, 138 S. Ct. at 1763. This heightened requirement was not
erected to shield dishonest debtors, but to balance the potential misuse by
both debtors and creditors of statements reflecting a debtor's financial
condition.
Id. at 1763-64.
B. Analysis
At oral argument, Ms. Maxwell's counsel conceded that State had
actually relied on her benefit applications when extending her benefits.
Therefore, our focus is on whether State's reliance—a factual inquiry—was
reasonable in light of the totality of the circumstances.
According to Ms. Maxwell, the record contains no evidence to
establish reasonable reliance and it could not be proved in any event since
State automatically relied on her benefit applications without any cursory
examination or investigation and without caution or prudence. She further
contends that State had actual, concurrent knowledge of the source of
16
income it later complained was missing from the written financial
statements at issue. According to Ms. Maxwell, State had access to a
database which showed her employment and child support payments.
Finally, Ms. Maxwell asserts that “some actual evidence of creditor's
behavior, of creditor's state of mind, of creditor's actual reliance, of
creditor's actual cautiousness or prudence, must be present in the record to
satisfy the required element of reasonableness under § 523(a)(2)(B).”
Ms. Maxwell's understanding of what is required to prove reasonable
reliance by a preponderance of the evidence is flawed. Although
Ms. Maxwell complains that there was no direct evidence of State's
reasonable reliance in the record, there are ample facts in the record from
which a factfinder may infer that State's reliance on Ms. Maxwell's benefit
application was reasonable.
This is not a typical § 523(a)(2)(B) case where a creditor required the
debtor to furnish a financial statement as part of the credit transaction.
Rather, the reasonableness of State's reliance is properly analyzed in the
context of applying for and receiving public assistance benefits, which by
its nature, does not form a creditor-debtor relationship at the outset. As
noted by the bankruptcy court, the types of governmental-benefit
payments at issue in this case are intended for people whose other
resources are insufficient to support them or their dependents. It follows
that the benefits sought are essential to applicants and their families.
17
The record shows that to facilitate access to necessary assistance
without delay, an applicant completes the benefit application in order to
receive the various benefits and signs it under penalty of perjury, testifying
that he or she is providing accurate and truthful information. Indeed, one
purpose of the benefit application is to provide information to State about
the applicant's financial need for benefits.
The import of an applicant's truthfulness on his or her benefit
application was explained by Ms. Carter. She testified that eligibility for
benefits is based on numerous laws and regulations, and that the income
level of an applicant is a significant factor in the calculation of benefits
based on government formulas. Further, according to Ms. Carter and
State's attorney, Mr. Hull, State takes the applications at face value since
the applicant is signing under penalty of perjury.
Considering these facts, the bankruptcy court did not clearly err in
finding that it was more likely than not that State's reliance on
Ms. Maxwell's benefit applications was reasonable. The essential nature of
the benefits at issue, the design of the benefits system, and policies
employed by State demonstrate that the benefit application, objectively
speaking, amounts to the sort of financial statement that State could
reasonably rely upon without further inquiry or verification. In short, the
record shows that the benefit-seeking process depends in most instances on
the benefit application and the honesty of the applicant, as happened here.
18
From all appearances, Ms. Maxwell's applications signed under penalty of
perjury showed that she was eligible for a certain level of benefits, but that
was not true.
The fact that State had access to a database with information about
her employers or child support payments does not negate the
reasonableness of State's reliance on Ms. Maxwell's benefit applications.
Absent patent falsity, or prior knowledge of the falsity of a representation,
or circumstances that would have aroused suspicion as to her earned and
unearned income in the mind of a reasonable person, State had no duty to
affirmatively investigate and determine for itself whether or not the debtor
was telling the truth. In re
Gertsch, 237 B.R. at 170; cf. Heritage Pac. Fin., LLC
v. Machuca (In re Machuca),
483 B.R. 726, 737 (9th Cir. BAP 2012) (creditor
cannot ignore red flags that directly call into question the truth of
statement on which creditor claims to have relied).
Although reasonable reliance is determined on a case-by-case basis
for purposes of § 523(a)(2)(B), other courts have similarly found reasonable
reliance in this context. See Cabarrus Cty. v. Boyd (In re Boyd),
525 B.R. 299,
306 (Bankr. M.D.N.C. 2015) (finding that programs administered by the
County were intended to help struggling families receive assistance and
their policy was to presume that customers would complete the forms
truthfully); Colorado v. O’Brien (In re O’Brien),
110 B.R. 27, 33 (Bankr. D.
Colo. 1990) (noting that an immediate investigation to ensure only truly
19
eligible persons receive benefits would bog down the system and delay
payments to those truly in need).
CONCLUSION
The bankruptcy court's factual finding of reasonable reliance was
plausible and supported by inferences drawn from the facts in the record.
Accordingly, we AFFIRM.
20