Weber, Matter of

• Decision Date: 21 December 1989
• Docket Number: No. 89-1342,89-1342
• Citation: 892 F.2d 534
• Parties: , Bankr. L. Rep. P 73,133 In the Matter of Donald WEBER and Roxanne Weber, Debtors. Appeal of Michael C. ABLAN, Creditor.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 534

892 F.2d 534

19 Bankr.Ct.Dec. 1856, Bankr. L. Rep. P 73,133

In the Matter of Donald WEBER and Roxanne Weber, Debtors.

Appeal of Michael C. ABLAN, Creditor.

No. 89-1342.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 7, 1989.

Decided Dec. 21, 1989.

Michael C. Ablan, LaCrosse, Wis., pro se.

Richard Thompson, Phelps, Thompson & Koby, LaCrosse, Wis., for defendants-appellees.

Before WOOD, Jr., COFFEY and EASTERBROOK, Circuit Judges.

COFFEY, Circuit Judge.

Plaintiff Michael Ablan wanted a debt with defendant Donald Weber ¹ to be classified as nondischargeable in bankruptcy because, Ablan alleged, the debt arose when Weber embezzled proceeds of a sale from him. Ablan appeals the district court's affirmance of the bankruptcy court's finding that Weber lacked the fraudulent intent required for embezzlement under 11 U.S.C. § 523(a)(4).

I. Factual Background

Earlier litigation in this case established certain facts with respect to the transactions in question and the bankruptcy court held that the parties were estopped to deny them. The parties do not challenge this ruling, nor do they dispute the occurrence of the following events.

In early 1981, Ablan purchased 38 cows as a tax-favorable investment and leased them to Weber Farms. Weber, as president of Weber Farms, subsequently entered into a sales contract with Baker Farms to sell 130 cows (including Ablan's 38). The sales contract with Baker Farms did not disclose Ablan's ownership interest. In August 1981, Ablan became aware of the pending sale, and although he did not stop the sale, it is clear that he did not want to realize a sale in 1981 because of adverse tax consequences.

The sale was consummated and Weber received $195,000 for the 130 cows. Weber first received $50,000 as a down payment. He gave Ablan $5,000 of the down payment and applied $40,000 of the balance to a pre-existing business debt with the Westby-Coon Valley State Bank. ² When Weber received the remaining $145,000, he placed the money in the Weber Farm's account at the Bank and authorized the Bank to apply $113,000 of the deposit to a business debt of Weber Farms. Weber subsequently used the remaining $32,000 to pay pre-existing business and personal debts.

In 1983, Ablan sued the Bank in state court alleging that it wrongfully applied his sales proceeds to Weber Farm's debt. The state court held, however, that the Bank did not know of Ablan's claim to the proceeds because neither he nor Weber notified the Bank of their respective interests. The court also held that Ablan was fully aware of the sale, did not veto it, and told Weber that, in order to avoid tax consequences, he did not want to receive any of the proceeds until 1982. The court reasoned that Ablan was under a duty to protect his proceeds and that he should have notified the Bank of the true situation. Since Ablan failed to do so, knowing the relevant events that were occurring at the Bank, he could not now allege that the Bank was at fault. The court therefore dismissed Ablan's complaint.

Weber subsequently filed for bankruptcy under Chapter 7. In January 1985, Ablan petitioned the bankruptcy court to have his debt with Weber declared nondischargeable under section 523(a)(4). The bankruptcy court, 81 B.R. 482, accepting the state court findings as true, entered summary judgment for Weber on the ground that Ablan's knowledge of Weber's conduct precluded a finding that Weber acted fraudulently. On appeal, the district court reversed, holding that a finding of "knowledgeable acquiescence" on Ablan's part did not preclude Ablan from proving that Weber acted fraudulently. The court held that a cr editor's knowledgeable acquiescence was relevant evidence in disproving that the debtor acted with fraudulent intent, but the existence of such evidence did not absolutely foreclose a finding that the debtor, in fact, embezzled.

On remand, the bankruptcy court held a bench trial and subsequently entered judgment for Weber. As the bankruptcy court noted, the sole issue for trial was whether Weber possessed the requisite fraudulent intent when he used Ablan's proceeds for his own debts.

Evidence adduced at trial revealed that Ablan and Weber were close friends and that Ablan, an attorney, had represented Weber in various matters both before and after the sale of the cattle. In early 1981, Weber offered Ablan an opportunity to invest in the dairy cows. Ablan would be able to depreciate the cows over time and get a tax benefit; Weber would be able to increase the milk yield of his farm so that Weber's bank would lend him money for a new, larger barn. The bank refused to finance the barn expansion, however, and Weber decided that the best course of action was to sell the whole herd before winter. When Ablan learned of the pending sale, he made it clear to Weber that he could not report a sale of his cows in 1981 because of tax repercussions. After Weber sold the cows, Ablan did not, in fact, report the sale on his tax returns; instead, he continued to depreciate the cows and continued to receive monthly lease payments from Weber for nearly three years. Weber stopped making payments in April 1984, shortly before he filed bankruptcy.

Testimony at trial differed sharply on what the parties agreed to do with the sales proceeds. According to Ablan, Weber told him he put Ablan's proceeds in a CD account and would turn the money over in January 1982. Ablan also testified that he was aware of Weber's precarious financial situation and the possibility that Weber would file bankruptcy. According to Weber, Ablan never gave him any specific instructions to segregate the proceeds nor did Weber offer to do so. Weber also testified at trial that he and Ablan discussed whether unpledged collateral at the Weber Farm was available to secure Ablan's investment in the cows.

Based on this evidence, the bankruptcy court held that Weber lacked fraudulent intent under section 523(a)(4). The court found that although Ablan never gave Weber direct authority to dispose of the sales proceeds, he did give "tacit assent to Weber's continued possession and control of the proceeds." This assent was motivated by Ablan's concern about his taxes; the court found that Ablan "took steps to preserve the fiction that the cows were not sold for a considerable time." The court also found that Weber sold the cows for his own benefit without any regard for Ablan. And on the central issue of fraudulent intent, the court held that "Weber acted recklessly in disregarding Ablan's rights to the proceeds from the sale of cows but he did not intend to deprive Ablan of the proceeds of the sale or their equivalent." The court concluded that Ablan failed to prove by clear and convincing evidence that Weber "possessed an intention to defraud or acted with deceit required under section 523(a)(4)."

On appeal, the district court affirmed on the ground that the bankruptcy court's finding of fact as to Weber's intent was not clearly erroneous.

II. Jurisdiction

To determine whether we have proper jurisdiction in this case, we ask two questions: (1) did the bankruptcy court enter a final order that could be appealed to the district court?; and (2) did the district court then enter a final order appealable to us? In regard to the first question, we held in In re Riggsby, 745 F.2d 1153, 1154 (7th Cir.1984), that "the dismissal by the bankruptcy judge of a complaint objecting to the discharge of the bankrupt [under section 523(c) ] is final" for purposes of the district court's jurisdiction. The court reasoned: "The proceeding that such a complaint kicks off has traditionally been treated as a separate adversary proceeding within the framework of the overall bankruptcy case and ... Congress in overhauling the system of bankruptcy appeals in the 1978 act apparently meant to continue the former practice whereby orders disposing of such proceedings were appealable as final orders." Id.

Addressing the second question, the Riggsby court noted that the district court disagreed with the bankruptcy court's determination and reversed and remanded the case to the bankruptcy court for further proceedings. The creditor then attempted to appeal this remand order to us and we held that this district court order was not final and appealable. Id. at 1155. The court reasoned that it was more efficient to wait for the bankruptcy court to conclude the case, and thereby possibly avoid an appeal, than to decide the appeal ourselves and risk two appeals and further delays. Id. at 1155-56.

Applying this analysis to our facts, Ablan filed a petition in an adversary proceeding that would qualify as "traditionally ... separate" under Riggsby. This is true because once determination of dischargeability is made, the dispute between these two parties is for all practical purposes over. If the debt were held dischargeable, all Ablan would have to do would be to await "get[ting] a part of his debt repaid out of the assets of the estate," and thus the litigation was final enough to appeal. Id. at 1155; see also In re Sandy Ridge Oil Co., 807 F.2d 1332, 1334 (7th Cir.1986) (when one creditor's position is finally determined, the bankruptcy order is final). If it were held nondischargeable, Ablan would retain the right to sue for full reimbursement of his debt with Weber. Thus, the bankruptcy court entered a final order appealable to the district court.

The answer to the second Riggsby question in our case does not defeat jurisdiction. Where in Riggsby the district court reversed and remanded the order to the bankruptcy court for further proceedings, in our case the district court affirmed. When an order is remanded to the bankruptcy court, a determination must be made whether the remand requires further attention by the court (therefore making it nonfinal, see In re Goldblatt Bros. Inc., 758 F.2d 1248, 1250 (7th Cir.1985)), or whether the remaining work to be done is merely ministerial (making...