Toye v. O'Donnell (In re O'Donnell)

Decision Date26 August 2013
Docket NumberNo. 13–9001.,13–9001.
Citation728 F.3d 41
PartiesIn re David O'DONNELL, Debtor. Thomas A. Toye III, Appellee, v. David O'Donnell, Appellant.
CourtU.S. Court of Appeals — First Circuit

OPINION TEXT STARTS HERE

James F. Molleur, with whom Molleur Law Office was on brief, for appellant.

Kelly W. McDonald, with whom Murray, Plumb & Murray was on brief, for appellee.

Before TORRUELLA, SELYA and THOMPSON, Circuit Judges.

THOMPSON, Circuit Judge.

Overview

David O'Donnell wants what every debtor in bankruptcy wants—a fresh start. You see, a debtor generally gets a discharge from debts owed at the time he files his bankruptcy petition. See11 U.S.C. § 727(b). But this fresh-start opportunity is only for “the honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (internal quotation marks omitted). And that is why Congress enacted a number of exceptions to discharge. One makes debts for money procured by use of a written statement nondischargeable-provided that that statement was “materially false,” related to the “debtor's ... financial condition,” and “reasonably relied” on by the creditor, and provided also “that the debtor caused [it] to be made or published with intent to deceive....” 11 U.S.C. § 523(a)(2)(B). An honest but unfortunate debtor O'Donnell is not-or so a bankruptcy judge, relying on this exception, ruled after a trial in a proceedingbetween O'Donnell and one of his creditors, Thomas Toye III. The bankruptcy appellate panel (“BAP,” for short) later affirmed. Now O'Donnell asks us to hold that the bankruptcy judge got it all wrong. What follows is our explanation of why this ruling must stand.

How the Case Got Here 1
Fishy Financials

O'Donnell is an experienced real estate developer, jumping into the field in the late 1990s. Eventually he teamed up with Rudy Ferrante (a childhood friend), and the two began acquiring real estate together, apparently through “LLCs” (limited-liability companies, for the uninitiated). The pair were quite busy in the late 2000s, doing multiple deals. We discuss three—including the one that landed O'Donnell in this mess—to give a sense of what the trial was about. All three occurred within months of each other and featured Kevin Smith in a starring role. A longtime acquaintance of Ferrante (they had once worked together as brokers at the Lenders Network), Smith's supposed forte is real-estate financing.

The first deal involved team O'Donnell/Ferrante's bid to refinance a piece of commercial property already in their portfolio. The second involved their attempt to acquire more commercial property. For the first transaction, O'Donnell and Ferrante asked Smith to prepare the financial paperwork. For the second, O'Donnell asked Smith to help arrange the financing. “I didn't ask him to help do the paperwork,” O'Donnell added, that just came “with the job.” Smith said yes both times. And, among other things, he ended up preparing various financial documents, including O'Donnell's personal financial statements (“PFSs,” from here on out).

O'Donnell was no stranger to PFSs. He knew from past deals that lenders wanted them, usually along with personal guaranties. And he gave Smith some pertinent financial information to prepare PFSs for both undertakings. Smith got other important data from documents he had gathered. O'Donnell had what seemed to be a hands-off attitude when it came to putting financials together, “delegating” the bulk of the paperwork to Smith and relying on him “to know what to do and how to do it”—an arrangement O'Donnell was “very comfortable with.” Smith sent O'Donnell's PFS to the lender in the first deal. How the lender in the second deal got O'Donnell's PFS is unclear on this record.

Now we come to the transaction that sparked this litigation. Hard on the heels of these two earlier deals, O'Donnell and Ferrante, through an LLC called Alder Street Properties, LLC, agreed to buy some more property from another party. As part of this transaction, they had to come up with a $350,000 down payment at closing. Once again, they recruited Smith to help secure the financing. And Smith asked Thomas Toye to loan the O'Donnell/Ferrante LLC the money. A highflyer in the local-business community who had known Smith for years (Smith had hooked him up three or four times with similar loan deals before), Toye said yes, but he wanted (among other things) O'Donnell's and Ferrante's personal guaranties for the loan's repayment. No problem, O'Donnell and Ferrante essentially said.

So Smith set about preparing PFSs for both. O'Donnell collected documents showing what stocks he owned and how much money he had in the bank and gave them to Smith. No one disputes the accuracy of this financial information. Smith also managed to get other relevant data from other documents (credit reports, mortgage statements, tax-assessment records, etc.) he already had on file or had dug up through public-record searches he had conducted for this deal. He cannot definitively say how he got some of the documents, however. Nor can he say for sure whether he sent O'Donnell a copy of the PFS, whether he reviewed every aspect of the PFS with him, or whether he saw him sign the PFS. But he does remember emailing a signed copy of O'Donnell's PFS, along with Ferrante's, to Toye. For his part, O'Donnell insists that he never reviewed the PFS, that the signature on the PFS is not his, and that he never authorized anyone to send the PFS to Toye. What everyone now agrees on, however, is that O'Donnell's PFS was “materially false,” containing serious misrepresentations and omissions regarding his income and assets.

Wowed by O'Donnell's (supposed) net worth, Toye lent the O'Donnell/Ferrante LLC the $350,000, receiving a promissory note in that amount (at 13.50% interest) from the LLC secured by a mortgage on some property and by O'Donnell's and Ferrante's personal guaranties. Unfortunately, the LLC did not pay the loan as required. And Toye ended up turning to O'Donnell, who, also unfortunately, defaulted on his personal-guaranty obligations.

A Wave of Litigation

Unwilling to take this lying down, Toye sued O'Donnell in state court on the personal guaranty. O'Donnell (supposedly) first saw the false PFS here, in state court. Eventually that court granted Toye summary judgment and entered a $417,974 judgment against O'Donnell.

Later, O'Donnell sought bankruptcy protection under Chapter 7 of the Bankruptcy Code. Toye responded by initiating this adversary proceeding in the bankruptcy court, alleging most relevantly here that O'Donnell's debt to him was nondischargeable per section 523(a)(2)(B). Under this provision (the reader will recall), if a statement about a debtor's “financial condition” is in a “writing” that is “materially false” and is “reasonably relied” on by the creditor, and if the debtor “caused [that statement] to be made or published with intent to deceive,” then the debt cannot be discharged. Of course, Toye had to prove nondischargeability by a preponderance of the evidence. See, e.g., Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 68 (1st Cir.2012).

Highlighting only what is needed to understand the issues before us, we note that the parties basically stipulated to everything pretrial except whether O'Donnell had “caused [the PFS] to be made or published with intent to deceive.” At trial, Toye, Smith, and O'Donnell took the stand. And after hearing their testimony and examining the exhibits, the bankruptcy judge refused to discharge O'Donnell's debt to Toye.

The judge began his reasoning this way: Contrary to O'Donnell's contention, Smith had acted as his— not Toye's—agent for this transaction. O'Donnell needed a $350,000 loan, and Smith said he could make it happen. “O'Donnell said to Smith, go ahead and give [Toye] what he needs” to make the loan, the judge wrote, so Smith prepared the PFS “on the authority and at the instruction of” O'Donnell, “and no one else.” In other words, O'Donnell (to quote the judge again) “set” the wheels “in motion” for Smith to prepare and send the PFS to Toye.

True, O'Donnell did not “review and sign” the PFS, the judge added. But, the judge ruled, nondischargeability under section 523(a)(2)(B) lies “whether the debtor intentionally did exactly what was done” or whether he was “reckless [ly] indifferent to “the propositions asserted in the [PFS].” And here, according to the judge, the evidence showed that O'Donnell “willfully turned a blind eye” to what the PFS said.2 And, the judge concluded, O'Donnell did “not car[e] what the PFS said, only that it said whatever Toye needed to hear to make the loan.

An unhappy O'Donnell appealed. But the BAP affirmed the judgment, ruling (pertinently for our situation) that the evidence amply demonstrated that Smith was O'Donnell's agent and that by having his agent prepare and send the PFS O'Donnell had (in the lingo of section 523(a)(2)(B)) “caused [the PFS] to be made or published....” Turning to the question of intent, the BAP said that a debtor's reckless indifference to the accuracy of the submitted PFS satisfies the intent-to-deceive element of section 523(a)(2)(B). And, the BAP stressed, the evidence of O'Donnell's turning a blind eye here proved his intent to deceive.

Which brings us to today, with a still unhappy O'Donnell asking us to undo this result.

Our Take on the Case
Background Legal Principles

Before we go any further, a few reminders are in order. We are the second set of reviewers here—the BAP was the first, obviously. But we give the BAP's decision no special deference. See, e.g., Goguen, 691 F.3d at 68. Rather, we focus on the bankruptcy judge's ruling, giving clear-error review to fact-findings and fresh review to legal conclusions. Id. Of course, if there are a couple of plausible ways to view the evidence, the judge's preference for one over the other cannot be clear error. See, e.g., Berliner v. Pappalardo (In re Sullivan), 674 F.3d 65, 70 (1st Cir.2012). And to find...

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