Filed: Jul. 13, 2004
Latest Update: Feb. 22, 2020
Summary: Harmans trust account.-4-, Courts dismissal of the three counts., The mere fact that these transfers were, immediately disclosed to [Premier] negates any, evidence of intent to hinder, delay or defraud, [Premier].Diamonds bankruptcy estate.Quinones Rivera), 184 B.R.
Not For Publication in West's Federal Reporter
Citation Limited Pursuant to 1st Cir. Loc. R. 32.3
United States Court of Appeals
For the First Circuit
No. 03-2640
IN RE: JOHN J. DIAMOND, III,
Debtor
--------------------------------------
PREMIER CAPITAL, INC.,
Plaintiff, Appellant,
v.
JOHN J. DIAMOND, III,
Defendant, Appellee.
_____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Hon. Steven J. McAuliffe, U.S. District Judge
______________________
Before
Torruella, Circuit Judge,
Rosenn, Senior Circuit Judge,*
Howard, Circuit Judge.
______________________
Randall L. Pratt was on brief for appellant.
James F. Molleur was on brief for appellee.
July 13, 2004
*
Of the United States Court of Appeals for the Third
Circuit, sitting by designation.
ROSENN, Senior Circuit Judge. A bankruptcy proceeding is
almost always disappointing to creditors. This is especially true
for creditors who have had no commercial transactions over the
years with a debtor and have derived no profits from him over time.
The bankruptcy is especially frustrating to a large unsecured
creditor whose credit arises out of a loan to the debtor who, as in
this case, has a substantial annual income with the apparent
capacity to pay the debt over a reasonable period of time.
The task of this court, however, is not to philosophize
over the purpose or policy of bankruptcy proceedings, but to review
the decision of the bankruptcy judge in this case to ascertain
whether his findings of fact were clearly erroneous or whether he
committed legal errors. Premier Capital, Inc. (Premier), the
principal creditor of John J. Diamond, the debtor, opposed
Diamond’s discharge in bankruptcy for unlawful transfer, unlawful
concealment, and false oath in violation of the Bankruptcy Code.
After a hearing and the taking of testimony, the Bankruptcy Court
found no violation by Diamond. Premier appealed to the United
States District Court for the District of New Hampshire. It
affirmed the Bankruptcy Court’s decisions. Premier appealed to
this court. We also affirm.
I.
The following facts are undisputed. Diamond defaulted on
the two promissory notes that he executed in favor of Premier in
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1986 and 1987. In May 1999, Premier brought an action in a New
Hampshire state court and obtained a judgment in the amount of
$131,215.12 plus statutory interest and costs. Subsequently, the
parties unsuccessfully attempted to negotiate a settlement of the
judgment.
In the course of the negotiation, Diamond resubmitted an
unsigned affidavit to Premier on June 1, 2000, which was first
submitted in January 1999. The affidavit purported to list his
assets and liabilities, but did not include his ownership interest
in two corporations, Dafil, Inc., and Real Estate Settlement
Services, Inc. Diamond resubmitted the affidavit to Premier. On
July 10, 2000, Premier obtained a trustee attachment. Between July
18 and 26, 2000, Diamond liquidated assets that he held in an
investment account with Solomon Smith Barney and a life insurance
policy that he owned with the Prudential Insurance Company of
America. Diamond deposited the proceeds in the trust account of
his then counsel, Terrie Harman. In a letter, dated July 21,
2000, addressed to counsel for Premier, attorney Harman informed
him that the Internal Revenue Service (IRS) was the holder of a
priority claim in the approximate amount of $75,000. She stated
that she had advised Diamond to file a Chapter 7 bankruptcy
petition, and that the bankruptcy would yield nothing to Premier.
Attorney Harman attached draft Schedules A through F to her letter
in connection with Diamond’s proposed bankruptcy filing, and tax
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returns for the years of 1997 and 1998. The attached schedules
disclosed Diamond’s ownership interest in the two corporations and
a completed and another pending transfer of funds to attorney
Harman’s trust account. Draft Schedule E also disclosed unsecured
tax liabilities, but having priority, in the amount of $75,000.
On October 6, 2000, Diamond filed a petition under
Chapter 13 of the Bankruptcy Code. This was converted on October
24, 2000, to a Chapter 7 petition. Diamond, a real estate broker,
was acting on several real estate deals when he filed for
bankruptcy. His petition failed to list these transactions as
executory contracts or as contingent commissions.
In March 2001, Premier filed a six-count complaint in the
Bankruptcy Court, seeking denial of Diamond’s discharge pursuant to
§§ 727(a)(2) and 727(a)(4) of the Bankruptcy Code. The Bankruptcy
Court, Vaughn, C.J., conducted a two-day trial in August 2002. In
March 2003, the court issued a memorandum opinion dismissing all
counts of Premier’s complaint. Premier appealed the dismissal of
three of its counts to the District Court. These counts challenged
Diamond’s transfer of funds to attorney Harman’s trust account, his
failure to disclose ownership interest in the two corporations, and
his failure to disclose real estate brokerage commissions due him
on his bankruptcy schedules. The counts also attacked his alleged
false testimony in a creditors’ meeting. The District Court,
McAuliffe, J., by a memorandum opinion, affirmed the Bankruptcy
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Court’s dismissal of the three counts. This appeal followed.
II.
The District Court had appellate jurisdiction under 28
U.S.C. §§ 158(a)(1) and 158(c)(1). We have appellate jurisdiction
to review the District Court’s decision under 28 U.S.C. § 158(d).
“Notwithstanding the fact that we are the second-in-time
reviewers, we cede no special deference to the district court’s
determinations. Rather, our review directly addresses the
bankruptcy court’s decision. We scrutinize that court’s findings
of fact for clear error and its conclusions of law de novo.”
Gannett v. Carp (In re Carp), 340 F.3d 15, 21 (1st Cir. 2003)
(citations omitted).
The application of the Bankruptcy Code to a
particular case poses a mixed question of law
and fact, which this court reviews for clear
error unless the bankruptcy court’s analysis
was based on a mistaken view of the legal
principles involved. Under the clear error
standard, the trier’s findings of fact and the
conclusions drawn therefrom ought not to be
set aside unless, on the whole of the record,
we form a strong, unyielding belief that a
mistake has been made. It follows that if the
bankruptcy court’s findings are supportable on
any reasonable view of the record, we are
bound to uphold them.
Id. at 22 (internal citations and quotation marks omitted).
III.
Section 727(a) of the Bankruptcy Code enumerates a
debtor’s conduct that can preclude a Chapter 7 debtor’s discharge
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in bankruptcy. Premier invoked §§ 727(a)(2)(A) and (a)(4)(A) as a
bar to Diamond’s discharge. Section 727(a) provides in relevant
part:
The court shall grant the debtor a
discharge, unless . . .
(2) the debtor, with intent to hinder, delay,
or defraud a creditor or an officer of the
estate charged with custody of property under
this title, has transferred, removed,
destroyed, mutilated, or concealed, or has
permitted to be transferred, removed,
destroyed, mutilated, or concealed . . . (A)
property of the debtor, within one year before
the date of the filing of the petition. . . .
[or]
(4) the debtor knowingly and fraudulently, in
or in connection with the case . . . (A) made
a false oath or account.
11 U.S.C. § 727(a)(2)(A) and (a)(4)(A).
To deny a discharge to a debtor under § 727(a)(2), an
objector must show by a preponderance of the evidence that (1) the
debtor transferred, removed, or concealed (2) his or her property
(3) within one year of the petition filing date (for prepetition
transfers) (4) with intent to hinder, delay or defraud a creditor.
Groman v. Watman (In re Watman), 301 F.3d 3, 7 (1st Cir. 2003).
Under § 727(a)(4)(A), a debtor can be denied a discharge only if he
(1) knowingly and fraudulently made a false oath, (2) relating to
a material fact in connection with the case. Boroff v. Tully (In
re Tully),
818 F.2d 106, 110 (1st Cir. 1987).
Exceptions to discharge are narrowly construed
in furtherance of the Bankruptcy Code’s fresh
start policy, and, for that reason, the
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claimant must show that his claim comes
squarely within an exception enumerated in
Bankruptcy Code § 523(a). The statutory
requirements for a discharge are construed
liberally in favor of the debtor and the
reasons for denying a discharge to a bankrupt
must be real and substantial, not merely
technical and conjectural. On the other hand,
we have noted that the very purpose of . . . §
727(a)(2) . . . is to make certain that those
who seek the shelter of the bankruptcy code do
not play fast and loose with their assets or
with the reality of their affairs.
Palmacci v. Umpierrez (In re Umpierrez), 121 F.3d 781, 786 (1st
Cir. 1997) (internal citations, quotation marks and brackets
omitted).
IV.
Premier alleged in count three of its complaint that
during the period July 18, 2000 to July 26, 2000, Diamond
transferred the sale proceeds from the liquidation of his Solomon
Smith Barney account and Prudential life insurance policy to the
trust account of his attorney, Terrie Harman, with the intent to
hinder, delay or defraud Premier. Diamond did not dispute that he
transferred the funds, and that the transfers occurred after
Premier had obtained a trustee process on other accounts held by
him. The funds transferred were not subject to Premier’s trustee
process.
The Bankruptcy Court concluded that count three must fail
for two reasons. First, Attorney Harman “identified” those
transfers to Premier, “some of which had not yet occurred,” in the
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draft bankruptcy schedules attached to her letter of July 21, 2000.
Second, Diamond “maintained control of these funds,” even though
they had been transferred to his attorney’s trust account. The
Bankruptcy Court reasoned further:
Although bankruptcy had not yet been filed,
[Premier], with knowledge of these transfers,
took no action to place a lien on the funds.
The mere fact that these transfers were
immediately disclosed to [Premier] negates any
evidence of intent to hinder, delay or defraud
[Premier].
Section 727 requires a showing of actual intent, nothing
less. In re Watman, 301 F.3d at 8. “The determination of actual
intent is a finding of fact. Often, the intent issue will turn on
the credibility and demeanor of the debtor, and in such
circumstances, we typically defer to the bankruptcy court’s
conclusions.”
Id. (citations omitted).
On appeal, Premier does not dispute the Bankruptcy
Court’s findings of fact underlying its conclusion that there was
no evidence to show that Diamond had the actual intent to “hinder,
delay or defraud.” Instead, Premier cites a number of cases,
especially In re Watman, 301 F.3d at 8 (listing a seven-factor test
for showing fraudulent intent), to support its argument that
Diamond had the actual intent to defraud it.
We are not convinced that the Bankruptcy Court’s
dismissal of Premier’s count three is clearly erroneous. It is not
disputed that attorney Harman disclosed a completed transfer and
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another pending transfer of funds to her trust account in draft
Schedule B (personal property) attached to her letter of July 21,
2000. Attorney Harman clearly informed Premier that IRS was the
holder of a priority claim in the amount of $75,000, and that all
assets of Diamond’s bankruptcy estate would be used to satisfy the
IRS priority claim. Premier does not dispute the IRS claim. The
record shows that IRS recorded a tax lien in the amount of
$12,544.20 against Diamond on July 21, 2000. There is nothing
covert, therefore, about Diamond’s transfer of funds to attorney
Harman. Additionally, the transferred funds were not legally
beyond Premier’s reach. Premier could have placed a lien on the
funds, but took no action.
Because the Bankruptcy Court’s findings of facts and its
conclusion are supportable on a reasonable view of the record, we
are bound to uphold them. In re Carp, 340 F.3d at 22.
V.
Premier alleged in count one that Diamond should be
denied a discharge because, with the intent to hinder, delay, or
defraud, he concealed his ownership interest in the two
corporations, Diafil, Inc., and Real Estate Settlement, Inc., in
his unsigned affidavit resubmitted in June 2000. It is not
disputed that Diamond failed to list the two corporations in that
affidavit.
Diamond testified that he was in a state of stress as a
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result of his son’s substance abuse problem and the dissolution of
his marriage, which ended in divorce in September 2000. As to the
affidavit, he testified that, since it was being prepared for the
purpose of settlement negotiations, he included only assets that
could readily be turned into cash. He did not believe that his
ownership interest in the two closely-held corporations had any
readily ascertainable value to a third party. The Bankruptcy Court
found his testimony credible and his explanation logical.
Furthermore, as found by the Bankruptcy Court, attorney Harman
disclosed Diamond’s ownership interest in the two corporations in
draft Schedules B and F attached to her letter of July 21, 2000.
Diamond also disclosed the same information in his bankruptcy
filings.
On appeal, Premier does not dispute the Bankruptcy
Court’s findings of fact underlying its conclusion that there is no
evidence to show that Diamond had the actual intent to defraud
Premier. Instead, Premier argues only that it was not for Diamond
to decide which assets had value and need be disclosed. This
argument, however, is not sufficient to show that the court’s
conclusion is clearly erroneous. Although Diamond failed to
disclose his ownership interest in an earlier unsigned affidavit,
he nonetheless disclosed the information in the draft bankruptcy
schedules sent to Premier more than three months before he filed
for bankruptcy. He also disclosed the same information in the
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bankruptcy filings.
Because the Bankruptcy Court’s findings of facts and its
conclusion are supportable on a reasonable view of the record, we
are bound to uphold them. In re Carp, 340 F.3d at 22.
VI.
Premier asserted in count five of the complaint that
pursuant to § 727(a)(4) of the Bankruptcy Code, Diamond should be
denied a discharge because he gave a false oath by failing to list
the real estate commissions due him in his bankruptcy filings, and
gave false testimony in a creditors’ meeting.
Diamond testified at trial that he did not know what an
executory contract was, and that he did not believe that the
commissions were his until the real estate transaction actually
closed. Although it seems incredible that a real estate broker
would not know what was an executory contract, the Bankruptcy Court
found his testimony credible for a “lay person” and his explanation
valid. The court noted the “debate” in case law regarding when a
real estate broker was deemed to have earned his commissions. See
Parsons v. Union Planters Bank (In re Parsons), 262 B.R. 475, 478-
79 (B.A.P. 8th Cir. 2001) (noting that under Missouri law, the
general rule, as it is in many states, is that a real estate
commission is earned when the broker or agent produces a buyer
“ready, willing and able to buy” on the terms specified by the
seller, whether or not the sale is completed, but where the sale’s
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contract is conditional, such as upon the closing of the sale, the
contract does not become an enforceable obligation and the broker
does not earn a commission until the conditions are met); Tully v.
Taxel (In re Tully), 202 B.R. 481 (B.A.P. 9th Cir. 1996) (noting
the general rule that once a broker locates a buyer who is ready,
willing, and able to buy the property on terms acceptable to the
seller, the broker has earned the commission, even though the
commission is not paid until a post-petition closing, but where a
debtor derives post-petition commissions under a pre-petition
contract, and such commissions are dependent upon the continued
services of the debtor, they do not constitute property of the
estate).
On appeal, Premier argues that Diamond had an affirmative
duty to disclose in his bankruptcy filings any ownership interest,
including all equitable interest. Premier also disagrees with the
Bankruptcy Court’s crediting of Diamond’s testimony that he did not
know what was an executory contract. Premier notes that Diamond
did not leave petition Schedule G (Executory Contract) blank, but,
instead, chose to answer “none.” Premier asserts that Diamond’s
explanation was insufficient to rebut the inference of fraud.
We note that Premier has not alleged or briefed that at
the time Diamond filed for bankruptcy he had either secured a
“ready, willing and able” buyer or closed a real estate transaction
to have earned the undisclosed commissions. The question here is
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not whether the commissions should be deemed to be property of
Diamond’s bankruptcy estate. Premier’s brief indicates that the
trustee eventually recovered more than $30,000 from Diamond’s
unreported executory contracts and commissions. The issue here is
whether the Bankruptcy Court committed a clear error in concluding,
based on its view of the evidence, that Diamond did not knowingly
and fraudulently make a false oath or account in his bankruptcy
filings.
“[T]he existence of false or inaccurate statements is
not, in and of itself, sufficient cause to deny a debtor’s
discharge unless it is shown that these were knowingly and
fraudulently made.” Santana Olmo v. Quinones Rivera (In re
Quinones Rivera), 184 B.R. 178, 185 (D.P.R. 1995) (citing Commerce
Bank & Trust Co. v. Burgess (In re Burgess),
955 F.2d 134, 136 (1st
Cir. 1992), abrogated on other grounds, Field v. Mans,
516 U.S. 59
(1995); In re
Tully, 818 F.2d at 110). A determination concerning
the presence of fraudulent intent largely depends upon an
assessment of the credibility and demeanor of the debtor.
Therefore, deference here to the bankruptcy court’s factual
findings is particularly appropriate. In re
Burgess, 955 F.2d at
137.
Because the Bankruptcy Court’s findings of facts and its
conclusions of law are supportable on a reasonable view of the
record, we are bound to uphold them. In re Carp, 340 F.3d at 22.
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VII.
For the reasons set forth above, the District Court’s
decision affirming the Bankruptcy Court’s dismissal of Premier’s
counts one, three and five is affirmed. Each party is to bear its
own cost.
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