121 F.3d 781 (1st Cir. 1997), 96-2202, Palmacci v. Umpierrez

Docket Nº:96-2202.
Citation:121 F.3d 781
Party Name:Stephen A. PALMACCI, Appellant, v. P. Fernando UMPIERREZ, Appellee. Richard B. Erricola, Trustee.
Case Date:August 11, 1997
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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121 F.3d 781 (1st Cir. 1997)

Stephen A. PALMACCI, Appellant,


P. Fernando UMPIERREZ, Appellee.

Richard B. Erricola, Trustee.

No. 96-2202.

United States Court of Appeals, First Circuit

August 11, 1997

        Heard May 9, 1997

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        Dorothy F. Silver, for Appellant.

        Edward Foye, with whom Ian Crawford and Todd & Weld were on brief, for Appellee.

        Before TORRUELLA, Chief Circuit Judge, BOWNES, Senior Circuit Judge, and LYNCH, Circuit Judge.

        BOWNES, Senior Circuit Judge.

        This case arises out of a speculative investment that went bad. Plaintiff Stephen A. Palmacci invested $75,000 in a project, known as "the Chase project," to purchase and develop distressed real estate. He had heard that the defendant's brother, Gus Umpierrez, who was a real estate agent and knowledgeable in real estate matters, had "turned a pretty fast profit" on similar ventures, and he wanted to reap some of the same type of profits.

        Palmacci acknowledges that he understood the risks inherent in any investment and, in particular, the increased risk involved in the speculative type of investment in which he was getting involved. He claims that he took this risk because his friend P. Fernando Umpierrez ("Umpierrez"), the defendant, and Umpierrez's brother, Gus, promised to invest $75,000 of their own personal funds in the

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project. According to Palmacci's testimony, he "decided that if they thought it was worth the risk with the knowledge that Gus had, that [Palmacci] would do the same." Palmacci also claims that he relied on the representation that project funds would be placed in a trust, which he believed would reduce the chance of "things going bad." The project failed (for reasons that are not set forth in the record), and Palmacci received only 80% of his principal back.

        Umpierrez filed a petition for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code, and Palmacci filed an adversary proceeding pursuant to 11 U.S.C. § 523(a) (2) (A), claiming that the debt owed him should not be discharged because it was the product of false representations. The United States Bankruptcy Court for the District of New Hampshire held a trial in the matter, and at the close of the plaintiff's evidence, entered a judgment as a matter of law in favor of the debtor, 1 holding that the debt was dischargeable in bankruptcy. This ruling was affirmed by the United States District Court for the District of New Hampshire. We affirm.

         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. Bankr.P. 8013; see Commerce Bank & Trust Co. v. Burgess (In re Burgess), 955 F.2d 134, 137 (1st Cir. 1992); Fed.R.Civ.P. 52(c), advisory committee's note to 1991 Amendment (applying clearly erroneous standard in the case of a judgment on partial findings). The bankruptcy court's legal conclusions, drawn from the facts so found, are reviewed de novo. Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st Cir. 1997). 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 applied. See In re Bajgar, 104 F.3d at 497; In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir. 1991). No special deference is owed to the district court's determinations. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994).

         A finding of fact is clearly erroneous, although there is evidence to support it, when the reviewing court, after carefully examining all the evidence, is "left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (internal quotation marks omitted). 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, 955 F.2d at 137 (internal quotation marks omitted) (applying § 727(a), relating to fraud by the debtor in representations in the course of the court proceeding). Particular deference is also due to the trial court's findings that depend on the credibility of other witnesses and on the weight to be accorded to such testimony. See Fed. R. Bankr.P. 8013; Keller v. United States, 38 F.3d 16, 25 (1st Cir. 1994). 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 factfinder 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, 470 U.S. at 575, 105 S.Ct. at 1512.

        Section 523(a) (2) (A) of the Bankruptcy Code provides:

§ 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title

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does not discharge an individual debtor from any debt--

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.

See 11 U.S.C. § 523(a) (2) (A).

         "Exceptions to discharge are narrowly construed in furtherance of the Bankruptcy Code's 'fresh start' policy," and, for that reason, the claimant must show that his "claim comes squarely within an exception enumerated in Bankruptcy Code § 523(a)." Century 21 Balfour Real Estate v. Menna (In re Menna), 16 F.3d 7, 9 (1st Cir. 1994); see In re Bajgar, 104 F.3d at 498 n. 1. The statutory requirements for a discharge are "construed liberally in favor of the debtor" and "[t]he reasons for denying a discharge to a bankrupt must be real and substantial, not merely technical and conjectural." Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987) (internal quotation marks omitted). On the other hand, we have noted that "the very purpose of certain sections of the law, like [§ 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." Id. Likewise, other sections of the law, like § 523(a) (2) (A), are intended to make certain that bankruptcy protection is not afforded to debtors who have obtained property by means of a fraudulent misrepresentation.

        Palmacci alleges that Umpierrez made three misrepresentations which induced him to invest $75,000 in the project: (1) that Umpierrez and his brother would invest $75,000 of their own money in the project; (2) that the project would have a total investment of $250,000; and (3) that a trust would be established to hold the funds and to supervise the project.

         With respect to each of these three claims, Palmacci was required to establish both that he had a valid claim against Umpierrez and that the claim should not be discharged in bankruptcy. See Grogan v. Garner, 498 U.S. 279, 283, 111 S.Ct. 654, 657, 112 L.Ed.2d 755 (1991). Here, the claim and the reason for exemption from discharge are essentially the same: the common law 2 tort of false representation, also known as deceit.

         Under the traditional common law rule, a defendant will be liable if (1) he makes a false representation, (2) he does so with fraudulent intent, i.e., with "scienter," (3) he intends to induce the plaintiff to rely on the misrepresentation, and (4) the misrepresentation does induce reliance, (5) which is justifiable, and (6) which causes damage (pecuniary loss). 2 F. Harper, et al., Law of Torts § 7.1, at 381 (2d ed.1986); Restatement (Second) of Torts § 525 (1977). 3

         Regarding the first element, the concept of misrepresentation includes a false representation as to one's intention, such as a promise to act. "A representation of the maker's own intention to do ... a particular thing is fraudulent if he does not have that intention" at the time he makes the representation. Restatement (Second) of Torts § 530(1); see Anastas v. American Sav. Bank (In re Anastas), 94 F.3d 1280, 1285 (9th Cir. 1996). "The state of a man's mind is as much a fact as the state of his digestion." Restatement (Second) of Torts § 530 cmt. a. Likewise, "a promise made without the intent to perform it is held to be a sufficient basis for an action of deceit." W. Page Keeton, et al., Prosser and Keeton on the Law of Torts

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§ 109, at 763 (5th ed.1984) (footnotes omitted); see Restatement (Second) of Torts § 530(1) cmt. c. On the other hand, if, at the time he makes a promise, the maker honestly intends to keep it but later changes his mind or fails or refuses to carry his expressed intention into effect, there has been no misrepresentation. Restatement (Second) of Torts at § 530 cmts. b, d. This is true "even if there is no excuse for the subsequent breach. A debtor's statement of future intention is not necessarily a misrepresentation if intervening events cause the debtor's future actions to deviate from previously expressed intentions." 4 Collier on Bankruptcy ¶ 523.08[1] [d], at 523-43.

         The test may be stated as follows. If, at the time he made...

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