RecoverEdge L.P. v. Pentecost

• Decision Date: 17 February 1995
• Docket Number: No. 93-2523,93-2523
• Citation: 44 F.3d 1284
• Parties: , 26 Bankr.Ct.Dec. 874 RECOVEREDGE L.P., Plaintiff-Appellee, v. Gary D. PENTECOST, et al., Defendants, David G. Carpenter, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1284

44 F.3d 1284

31 Fed.R.Serv.3d 1143, 26 Bankr.Ct.Dec. 874

RECOVEREDGE L.P., Plaintiff-Appellee, v. Gary D. PENTECOST, et al., Defendants, David G. Carpenter, Defendant-Appellant.

No. 93-2523.

United States Court of Appeals, Fifth Circuit.

Feb. 17, 1995.

H. Gray Burks, IV, Houston, TX, for appellant.

Henri-Ann Nortman, Nortman & Turet, Houston, TX, for appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before REYNALDO G. GARZA, WIENER, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

David G. Carpenter appeals the district court's judgment and order determining that a breach of contract judgment against him is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. Sec. 523(a)(2)(A) (1988). We REVERSE and REMAND.

I

In the early 1980's, Dr. David Carpenter, a practicing family physician, became involved as an investor in a real estate development project. Carpenter invested in the project at the behest of his brother-in-law, Gary Pentecost, a real estate developer and mortgage investor. Together with Pentecost's business associate, J.B. Westmoreland, Pentecost and Carpenter formed Houston Storage, Inc., ("Houston Storage") to purchase a warehouse. Houston Storage's articles of incorporation listed Carpenter as President and Director, and Gary Pentecost as Vice President, Secretary, and Treasurer. Pentecost, Westmoreland, and Carpenter each held one-third of Houston Storage's shares.

Houston Storage later purchased a 3.77-acre parcel of land from Universal Savings Association ("Universal Savings"). ¹ Universal Savings financed most of the purchase price, accepting a ten-percent down payment and a $1.6 million promissory note. In exchange, Houston Storage agreed to sell pieces of the property ("pad sites") and apply the proceeds first to expenses connected with the sale and interest on the note, and then to the principal due on the note. On behalf of Houston Storage, Carpenter executed the closing documents for the sale, including the promissory note. Carpenter also signed a personal guarantee on the note. In his capacity as secretary, Pentecost acknowledged the documents on Houston Storage's behalf. Pentecost also made the required down payment.

The transaction was ostensibly designed to enable Houston Storage to sell the pad sites for commercial development. In fact, the transaction was driven at least in part by ulterior motives. According to the Resolution Trust Corporation ("RTC"), which later sued Pentecost, Carpenter, and Westmoreland, the transaction was primarily designed to remove a nonperforming asset, the real estate, from Universal Savings' books and replace it with what appeared to be a good loan to Houston Storage. The scheme was structured through Houston Storage, the RTC alleged, in order to circumvent "loans-to-one-borrower" regulations, which would have prohibited Universal Savings from lending the money directly to Pentecost. ² Finally, although Houston Storage agreed to use the proceeds from the pad site sales to pay down the promissory note, some of the proceeds were diverted, with the cooperation of Universal Savings officers, to pay down other, unrelated loans that Pentecost had at Universal Savings.

In May of 1988, after it had been placed under the supervision of the Texas Savings and Loan Department, Universal Savings sued numerous individuals and business organizations in connection with six allegedly fraudulent transactions. The Houston Storage transaction was one of the six, and the complaint named Carpenter as a defendant in connection with that transaction. ³

Two years later, after Universal Savings had filed its Third Amended Complaint, the RTC, as conservator for Universal Savings, was substituted as the plaintiff in Universal Savings' suit against Carpenter. ⁴ The RTC then filed a Fourth Amended Complaint, the last one filed before trial. In the complaint, the RTC named Carpenter in the following four counts: civil conspiracy, common law fraud, unjust enrichment, and breach of contract. All of the RTC's claims against Carpenter related solely to the Houston Storage transaction. ⁵

Then, just before trial was scheduled to begin, Carpenter and his wife filed for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Secs. 701-766 (1988). The RTC promptly filed an emergency motion in the district court to withdraw the reference of the RTC's prospective bankruptcy claim, lift the automatic stay, and consolidate its bankruptcy claim with its civil case against Carpenter. ⁶ The district court granted the motion and denied Carpenter's emergency motion to reconsider. The consolidated case then proceeded to trial.

At trial, Carpenter testified that he had participated in the Houston Storage transaction only as an investor, understanding the purpose of the project to be the purchase and sale of commercial real estate. He further testified that Pentecost handled the books, wrote the checks, and was generally responsible for making interest and principal payments on the promissory note. Carpenter denied having any knowledge that proceeds from the pad sales were used to pay down some of Pentecost's other loans from Universal Savings. He did, however, concede that he had failed to pay the promissory note.

At the close of the evidence, the RTC filed a "Supplement to Plaintiff's Complaint (Complaint to Determine Dischargeability of Debt)" alleging that Carpenter's debt on the promissory note was nondischargeable under section 523(a)(2) of the Bankruptcy Code, 11 U.S.C. Sec. 523(a)(2) (1988). ⁷ As factual allegations supporting nondischargeability, the RTC simply incorporated the allegations contained in its Fourth Amended Complaint.

The RTC then submitted only the conspiracy to defraud count to the jury, apparently deciding to abandon its common law fraud and unjust enrichment claims against Carpenter. During trial, the court had directed a verdict against Carpenter on the RTC's breach of contract claim for nonpayment of the promissory note.

The jury ultimately rendered a special verdict finding that all of the Houston Storage transaction defendants except Carpenter had engaged in a conspiracy to defraud the RTC as receiver for Universal Savings. Consistent with this finding, the jury awarded punitive damages against Pentecost and Houston Storage but none against Carpenter. After the jury rendered its verdict, the RTC successfully moved the court to accept the jury's verdict. At no time either during or after trial did the RTC file a motion for judgment as a matter of law on its conspiracy claim against Carpenter. To the contrary, the RTC moved for entry of final judgment pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, which the court entered. The court held Carpenter jointly and severally liable with Pentecost, Westmoreland, and Houston Storage for actual damages of approximately $1.6 million, pre- and postjudgment interest, $110,000 in attorneys' fees, and costs. ⁸ The RTC did not appeal the jury's verdict on its conspiracy claim against Carpenter, and Carpenter did not appeal the court's directed verdict on the RTC's breach of contract claim.

A full year after the civil conspiracy trial, the RTC requested, and the district court ordered, briefing on the dischargeability issue. Carpenter argued that his debt to the RTC was dischargeable because the jury found that he had not committed fraud and because the RTC had not proven by a preponderance of the evidence the elements of nondischargeability under 11 U.S.C. Sec. 523(a)(2)(A). The RTC argued in response that the court was not bound by the jury's verdict in part because "the evidence showed as a matter of law that Carpenter engaged in the conspiracy." The RTC also argued that it did not need to prove all of the traditional elements of nondischargeability under Sec. 523(a)(2)(A).

In its Order on Dischargeability, the district court held that Carpenter's debt was nondischargeable under Sec. 523(a)(2)(A). Although the court recognized that the jury did not find that Carpenter conspired to defraud Universal Savings, it explained:

[T]he Court must disregard the jury's finding on this point because the evidence establishes and logic dictates that Houston Storage, Inc. could not be a conspirator except through the conduct of Carpenter.... Moreover, the question of whether Carpenter participated in a conspiracy is not controlling.

Section 523(a)(2)(A) of the Bankruptcy Code (Title 11), requires the Court to determine the individual conduct of Carpenter. The inquiry is whether Carpenter incurred a debt by false pretenses, representation or fraud. This Court finds that he did and the record is sufficiently ample on this point.

Based on this ruling, the court entered a final judgment of nondischargeability.

Carpenter appeals the court's final judgment of nondischargeability on two alternative grounds. First, he contends that the jury's verdict in his favor precluded the court from determining whether his debt on the note was nondischargeable under Sec. 523(a)(2)(A). In the alternative, Carpenter argues that even if the nondischargeability issue was not precluded, the record contains insufficient evidence to support the court's ruling.

After Carpenter perfected his appeal to this court, RecoverEdge Limited Partnership ("RecoverEdge") acquired the RTC's claim against Carpenter, and we granted the RTC's motion to substitute RecoverEdge as appellee.

II

Before reaching the merits of Carpenter's appeal, we must address RecoverEdge's request that we dismiss the appeal based on Carpenter's failure to comply with Rule 10 of the Federal Rules of Appellate Procedure. Rule 10(b)(2) requires that an appellant who "intends to urge on appeal that a finding or conclusion is unsupported by the evidence ... include in the record a transcript of all evidence relevant to such finding or conclusion." Rule 10(b)(3) then requires that if...