USCA1 Opinion
For the First Circuit
____________________
No. 96-2202
STEPHEN A. PALMACCI,
Appellant,
v.
P. FERNANDO UMPIERREZ,
Appellee.
____________________
RICHARD B. ERRICOLA,
Trustee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Steven J. McAuliffe, U.S. District Judge]
____________________
Before
Torruella, Chief Circuit Judge,
Bownes, Senior Circuit Judge,
and Lynch, Circuit Judge.
____________________
Dorothy F. Silver for appellant.
Edward Foye, with whom Ian Crawford and Todd & Weld were on
brief, for appellee.
____________________
August 11, 1997
____________________
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 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
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Palmacci filed an adversary proceeding pursuant to 11 U.S.C.
S 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, 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
1. The trial court styled its ruling as the grant of
defendant's motion for a directed verdict. In essence,
however, the ruling was a judgment as a matter of law on
partial findings. See Fed. R. Bankr. P. 7052; Fed. R. Civ. P.
52(c). We will treat it as such.
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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 (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
S 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
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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.
Section 523(a)(2)(A) of the Bankruptcy Code
provides:
S 523. Exceptions to discharge
(a) A discharge under section 727, 1141,
1228(a), 1228(b), or 1328(b) of this title
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. S 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 S 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
-5- 5
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 [S 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 S 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 (1991).
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Here, the claim and the reason for exemption from discharge are
essentially the same: the common law 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 S 7.1, at
381 (2d ed. 1986); Restatement (Second) of Torts S 525 (1977).
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
2. In Field v. Mans, 116 S. Ct. 437, 443 & n.9 (1995), the
Court construed S 523(a)(2)(A) to incorporate the "general
common law of torts," i.e., the "dominant consensus of common-
law jurisdictions, rather than the law of any particular
State." Of course, if we were to hold that Umpierrez was not
entitled to discharge them in bankruptcy, Palmacci's claims
themselves would be determined in accordance with the common
law of New Hampshire.
3. We set forth a similar, but not identical, list of elements
in In re Burgess, 955 F.2d at 140. We interpret Burgess to
apply the same test we have articulated in the text here,
except for the fifth element. In Burgess our reliance element
required "reasonable" reliance, but the Supreme Court has since
held that "justifiable" reliance is the proper test. See
Field, 116 S. Ct. at 445-46.
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makes the representation. Restatement (Second) of Torts
S 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 S 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 S 109, at 763 (5th ed.
1984) (footnotes omitted); see Restatement (Second) of Torts
S 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 S 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 q 523.08[1][d], at 523-
43.
The test may be stated as follows. If, at the time
he made his promise, the debtor did not intend to perform , then
he has made a false representation (false as to his intent) and
the debt that arose as a result thereof is not dischargeable
(if the other elements of S 523(a)(2)(A) are met). If he did
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so intend at the time he made his promise, but subsequently
decided that he could not or would not so perform, then his
initial representation was not false when made. See, e.g. , In
re Anastas, 94 F.3d at 1285; Milwaukee Auction Galleries Ltd.
v. Chalk, 13 F.3d 1107, 1109 (7th Cir. 1994) (more than mere
nonperformance of a contract was necessary to establish
misrepresentation); Mellon Bank Corp. v. First Union Real
Estate, 951 F.2d 1399, 1410-11 (3d Cir. 1991) (same); Craft v.
Metromedia, 766 F.2d 1205, 1219, 1221 (8th Cir. 1985).
The scienter element refers to a different type of
intent, namely, intent to deceive, manipulate, or defraud.
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). This
requirement may be met in one of several ways: if the maker of
the misrepresentation "(a) knows or believes that the matter is
not as he represents it to be; (b) does not have the confidence
in the accuracy of his representation that he states or
implies; or (c) knows that he does not have the basis for his
representation that he states or implies." Restatement
(Second) of Torts S 526; see Keeton, et al., supra, S 107, at
740-42.
Clause (b) of Restatement S 526 includes the
situation where the maker of a misrepresentation asserts
something "so positively as to imply that he has knowledge" of
its factual basis, even though he is conscious that he does not
know the fact to be true. Keeton, et al., supra, S 107, at
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742. Scienter exists even if he believes the "fact" is true,
if he is aware that he does not in fact possess the certitude
that he implies by the manner in which he makes his
representation. See Restatement (Second) of Torts S 526
cmt. e. One who makes a statement as if it were one of
positive fact ("as though he knew it") engages in a "conscious
deception" if he realizes he does not know the truth of his
statement, even though he honestly believes its truth. 2
Harper, et al., supra, S 7.3, at 393-94. In such a case, the
person is deemed to have the intent to deceive (scienter), not
so much as to the fact itself, but rather as to the extent of
his information. Id. ("He has in effect represented that he
knew a thing to be true when he knew that he only believed or
surmised it to be true."); see Metropolitan Life Ins. Co. v.
Ditmore, 729 F.2d 1, 5 (1st Cir. 1984) (Mass. law); Myron N.
Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454, 459 (1st Cir.
1929); Keeton, et al., supra S 107, at 742. "This is often
expressed by saying that fraud is proved if it is shown that a
false representation has been made . . . recklessly, careless
of whether it is true or false." Restatement (Second) of Torts
S 526 cmt. e; see In re Burgess, 955 F.2d at 140 ("false
representation" under section 523(a)(2)(A)); Harper, supra,
S 7.3, at 391-95.
The standard of proof of each element of a S 523
claim is by a preponderance of the evidence. Grogan, 498 U.S.
-10- 10
at 291. The burden of proof and the burden of production as to
each element rests with the party contesting the
dischargeability of a particular debt under Bankruptcy Code
S 523. See In re Burgess , 955 F.2d at 136; see also Insurance
Co. of N. Am. v. Cohn (In re Cohn) , 54 F.3d 1108, 1120 (3d Cir.
1995) (regarding S 523(a)(2)(B)). Thus, if Palmacci failed to
establish any one of the elements by a preponderance of the
evidence, then the court should reject his claim. See In re
Burgess, 955 F.2d at 139; 9A Wright & Miller, supra, S 2579, at
542-43 (a factual finding that negates one element of the
plaintiff's prima facie case renders findings concerning other
elements unnecessary).
We will discuss each of Palmacci's three
misrepresentation claims in turn. First, Palmacci claims that
Umpierrez falsely represented that he and his brother would
invest $75,000 of their own personal funds into the Chase
project. Umpierrez responds that he made good on his
representation because he did contribute $75,000 of his own
personal funds, albeit by giving the bank a lien on the Chase
project property as well as a second mortgage on his home.
According to Umpierrez, encumbering the project property does
not mean that he failed to satisfy his promise to contribute
funds personally, because he never told Palmacci that he would
not mortgage the Chase project property. The district court
agreed with Umpierrez: it found that there was no
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misrepresentation because "there was no representation that a
mortgage would not be placed on the project." We find this
argument untenable. An ordinary lay person like Palmacci would
not think, nor would it be reasonable to expect him to think,
that Umpierrez's representation that he would invest "his own
personal funds" in the Chase project could be read to include
funds he borrowed from a bank secured by a mortgage on the
project property itself. Thus, Umpierrez cannot claim that
there was no misrepresentation.
Umpierrez is more persuasive in contending that
Palmacci's first claim fails on the element of scienter or
fraudulent intent which is required in order to establish an
exception to discharge under S 523(a)(2)(A). See 2 Harper, et
al., supra, S 7.1, at 381; Restatement (Second) of Torts S 525.
Palmacci does not dispute that Umpierrez intended to obtain
most of the funds for his contribution to the project from a
second mortgage on his residence. Palmacci's argument, in
essence, is that, at the time Umpierrez induced Palmacci's
investment with the promise to invest his own personal funds,
Umpierrez's intention was fraudulent, based on a reckless
indifference to the truth (which rose to the level of
fraudulent intent) because Umpierrez knew or should have known
that he did not have enough equity in the house to raise the
money through a second mortgage, at least without encumbering
the project property with a mortgage as well.
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We must parse this issue with some care. The factual
question to be determined by the trier of fact is not whether
Umpierrez knew or should have known that he did not have the
money available to invest, but whether in good faith he
intended to keep his promise. This is because "[a] finding
that a debt is non-dischargeable under 523(a)(2)(A) requires a
showing of actual or positive fraud, not merely fraud implied
by law ." In re Anastas , 94 F.3d at 1286 & n.3 (emphasis added)
(quoting 124 Cong. Rec. H11089 (Sept. 28, 1978) (statement of
Rep. Edwards), reprinted in 1978 U.S.C.C.A.N. 5787, 6436, 6453
("Subparagraph (A) is intended to codify current case law . . .
which interprets 'fraud' to mean actual or positive fraud
rather than fraud implied in law.")). This is not a negligence
case where the standard is whether a reasonable person would
have acted as Umpierrez did. See generally , 2 Harper, et al.,
supra, S 7.3, at 392-95. Fraudulent intent requires an actual
intent to mislead, which is more than mere negligence. Diduck
v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 277 (2d
Cir. 1992). An honest belief, however unreasonable, that the
representation is true and that the speaker has information to
justify it is an insufficient basis for deceit. Keeton, et
al., supra, at 742. A "dumb but honest" defendant does not
satisfy the test of scienter. 2 Harper, et al., supra, S 7.3,
at 393.
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Of course, the very unreasonableness of such a belief
may be strong evidence that it does not in fact exist. See
Pullman-Standard v. Swint , 456 U.S. 273, 289 (1982); Norris v.
First Nat'l Bank in Luling (In re Norris) , 70 F.3d 27, 30 n.12
(5th Cir. 1995); In re Cohn, 54 F.3d at 1118-19 (permitting
reckless disregard to be relied on as an evidentiary factor
that is probative of intent to defraud, if the totality of
circumstances supports that inference) (involving 11 U.S.C.
S 523(a)(2)(B)). Where this conclusion is reached as an
inference of fact, there is nothing inconsistent with that
unreasonableness forming an evidentiary basis for a finding of
intent. See Keeton, et al., supra, at 742. But then
unreasonableness would be providing evidentiary ballast, not
serving by itself as an element of the tort. Id. For example,
"[i]f [the] defendant had no adequate grounds for believing his
statement to be true this may afford a rational inference that
he did not in fact believe it to be true (so that there was
scienter)." 2 Harper, et al., supra, S 7.3, at 393. The
focus, however, should be on whether the surrounding
circumstances or the debtor's actions "appear so inconsistent
with [his] self-serving statement of intent that the proof
leads the court to disbelieve the debtor." In re Hunt , 30 B.R.
425, 441 (Bankr. M.D.Tenn. 1983).
Thus, while fraud may not be implied in law, it may
be inferred as a matter of fact. The finder of fact may
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"infer[] or imply[] bad faith and intent to defraud based on
the totality of the circumstances when convinced by a
preponderance of the evidence." In re Anastas , 94 F.3d at 1286
n.3; In re Sheridan, 57 F.3d 627, 633 (7th Cir. 1995); cf. In
re Cohn, 54 F.3d at 1118-19 (S 523(a)(2)(B)). Among the
circumstances from which scienter may be inferred are: the
defendant's insolvency or some other reason to know that he
cannot pay, his repudiation of the promise soon after made, or
his failure even to attempt any performance. Keeton, et al.,
supra, at 764-65.
Where, as here, reckless disregard is being urged
upon us as the basis for an inference of scienter, it is
important to distinguish what the debtor is being accused of
recklessly disregarding. Scienter may be found to exist where
a debtor recklessly disregards the truth of the representation,
e.g., in Umpierrez's case, whether he was recklessly
indifferent to whether he would actually keep his promise to
invest personal funds in the Chase project. See Restatement
(Second) of Torts S 526 cmt. e. There must, nonetheless, be an
actual finding of intent to deceive: mere inability to pay
does not constitute such a finding. See In re Anastas , 94 F.3d
at 1286 ("[T]he hopeless state of a debtor's financial
condition should never become a substitute for an actual
finding of bad faith."). This distinction is apparent from the
structure of the statute itself: 11 U.S.C. S 523(a)(2)(A)
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specifically excludes misrepresentations regarding a debtor's
financial condition, whereas 11 U.S.C. S 523(a)(2)(B) provides
separately for such misrepresentations. Thus, to the extent
Palmacci is claiming that Umpierrez implicitly misrepresented
his financial condition, that is not grounds for an exception
to discharge under S 523(a)(2)(A).
In the instant case, if Umpierrez knew or clearly
should have known that there was no realistic way for him to
use his own money to invest, then that is probative of his lack
of intent to keep his promise at the time he made the promise.
But the focus must be on whether the representation was made in
bad faith, i.e., whether he induced Palmacci's investment with
the intention of reneging on his promise to invest personal
funds (or while recklessly disregarding whether or not he would
keep his promise). See In re Anastas, 94 F.3d at 1286 (debt
incurred with the intention of avoiding the debt by petitioning
for bankruptcy).
Palmacci contends that the court erred by relying
exclusively on Umpierrez's self-serving testimony about his
subjective intent, and failing to consider the surrounding
circumstances in order to infer that Umpierrez's intent was not
as he claimed it to be. We do not think Palmacci is correct in
characterizing the trial court's reasoning as relying solely on
Umpierrez's self-serving testimony while ignoring the
circumstantial evidence Palmacci contends shows that testimony
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to be incredible. It is true that Umpierrez had just purchased
the residence a few months earlier, for $105,000 and that he
had an $80,000 mortgage on the residence at the time of
purchase. Based on this undisputed fact, Palmacci claims that
Umpierrez should have known that he only had $25,000 worth of
equity in the home, against which he could borrow on a second
mortgage without a likely encumbrance of the project property,
and therefore that the bankruptcy court clearly erred in
believing Umpierrez's testimony that, at the time he made his
promise, he fully intended to keep it. Umpierrez's claim that
an innocent lack of knowledge of these facts (and not a
fraudulent intent) caused him to err when he promised to
contribute the $75,000 arguably falls into the category of
"reckless disregard for the truth" such as to rise to the level
of establishing scienter.
These were not, however, the only facts before the
trial court. There was also testimony that Umpierrez had
discussed getting a personal loan with a banker, and that the
banker had told him he thought the loan would be possible.
Moreover, Umpierrez testified that he had had the house
appraised in October (shortly before the representation that
induced Palmacci to invest his money) and the house was valued
at $185,000, more than enough to secure a loan for the full
4. In addition, the Umpierrezes' share would include the
$5,000 down payment they invested at the time of the purchase
at auction.
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amount of Umpierrez's promised contribution. Thus, even though
Umpierrez did not have a commitment letter from the bank -- a
fact that Palmacci emphasizes -- he could well have honestly
believed that he could work something out with the bank whereby
the bank could protect its security needs without encumbering
the project property and therefore without rendering his
representation to Palmacci fraudulent. The court's decision
mentioned this possible interpretation, noting that the market
value of the house in early November (when Palmacci was induced
to make his investment in the Chase project) was not
necessarily limited to the price that Umpierrez paid when he
bought it in July.
Absent a showing to the contrary, and bearing in mind
that the burden of proof was on Palmacci, we must assume that
the trial court considered all the testimony (and other
evidence before it) in its entirety, as well as all reasonable
inferences therefrom, before making its determination that
Umpierrez did not intend to defraud Palmacci at the time he
promised to contribute $75,000 of his personal funds to the
project. We perforce reject Palmacci's claim that the court
relied exclusively on Umpierrez's testimony and failed to
consider the surrounding circumstances.
Moreover, while Palmacci is correct that intent to
deceive may be inferred from the totality of the circumstances,
including inferences from circumstantial facts, see Desmond v.
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Varrasso (In re Varrasso), 37 F.3d 760, 764 (1st Cir. 1994),
scienter cannot be presumed, id. at 764-65; In re Cohn , 54 F.3d
at 1120. "The mere breach of a promise is not enough in itself
to establish the fraudulent intent." Keeton, et al., supra,
S 108, at 764.
Thus, although the evidence here might "support the
bankruptcy court's decision had it inferred an intent to
deceive from the circumstantial evidence admitted in this case,
[it does] not compel such a finding and [does] not require us
to reverse the court's holding." National Union Fire Ins. Co.
of Pittsburgh v. Bonnanzio (In re Bonnanzio) , 91 F.3d 296, 301
(2d Cir. 1996) (emphasis added) (quoting In re Sheridan, 57
F.3d at 634); see also In re Varrasso, 37 F.3d at 764-65. It
is the province of the trial court to determine this issue:
the court may choose to infer intent or not to draw that
inference, based on all the evidence. Bonnanzio, 91 F.3d at
301; In re Varrasso, 37 F.3d at 764-65. The determination of
whether scienter exists based on certain circumstantial facts
must be treated merely as "a permissible inference of fact
. . . and not a presumption of law, or else the distinction
between fraud and negligence will be largely obliterated." 2
Harper, supra, S 7.3, at 393 (emphasis added). Even where "a
factfinder lawfully might draw an inference of fraud from the
totality of the circumstances," we accept the trial court's
findings unless the evidence "compels" such a conclusion. See
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In re Varrasso, 37 F.3d at 764-65; In re Burgess, 955 F.2d at
137.
If the [bankruptcy] court's account of the
evidence is plausible in light of the
record reviewed in its entirety, the court
of appeals may not reverse it even though
convinced that had it been sitting as the
trier of fact, it would have weighed the
evidence differently. Where there are two
permissible views of the evidence, the
factfinder's choice between them cannot be
clearly erroneous.
Anderson v. City of Bessemer City, 470 U.S. at 573-74.
In the instant case, Umpierrez testified that he
thought he would be able to come up with his $75,000 investment
from his personal funds, and the judge believed him, apparently
taking into account all circumstances including the weight of
the alleged unreasonableness of his belief. The bankruptcy
court found, as a matter of fact, that Umpierrez did not intend
to defraud Palmacci when he promised to contribute $75,000 of
his own personal funds to the project. In the context of the
record in this case, we read this as a determination that there
was no scienter, i.e., that there was no knowing
misrepresentation and no reckless disregard for the truth such
as would rise to the level of fraudulent intent. After
carefully reviewing the record in its entirety, we conclude
that there is sufficient evidence for the trial court to have
concluded that Umpierrez's intent was not fraudulent. We
cannot say the trial court clearly erred in its choice of which
inferences to draw from the evidence presented to it.
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Therefore we affirm the court's rejection of the first alleged
misrepresentation claim.
Palmacci's second claim is that Umpierrez
misrepresented to him that the project would have a total
capital contribution of $250,000. This claim is derivative
from the first: to whatever extent Umpierrez fell short on his
contribution of $75,000, there would result a like shortfall in
the total project capitalization. Palmacci does not make any
argument as to his second claim that differs from his arguments
on the first claim. Therefore, our rejection of the second
flows ineluctably from our conclusion as to the first.
Palmacci's third claim is that Umpierrez
misrepresented the role of the trust that was created in
connection with the Chase project. According to Palmacci's
brief, Umpierrez represented that "the project was to be held
in trust supervised by a New Hampshire attorney." Palmacci
concedes that a trust was indeed set up after he made his
investment, but he argues that "[t]he reality of the situation
was that the trust had no role to play in the supervision of
the project." Palmacci does not make it clear exactly what was
allegedly represented to him regarding the trust's supervision
5. Palmacci also argues that the bankruptcy court erred in
holding that he was not justified in relying on Umpierrez's
representations. We need not decide this issue because, having
failed to meet his burden on the intent element, it does not
avail him that he may have met the remaining elements; he must
satisfy all requirements in order to establish his claim.
-21- 21
of the Chase project. In his brief he seems to imply that
Umpierrez actually told him the trust would supervise the
investment project itself (as opposed to being simply a vehicle
for controlling the flow of funds). Scrutiny of Palmacci's
factual assertions, however, in his testimony and in the
factual portion of his brief, reveal a claim merely that
Palmacci's "idea of the role of the trust" was that the trustee
would be responsible for and control how funds were used by the
builders. Because of this "idea," Palmacci "felt assured" that
the project "would be supervised correctly, and there was less
chance of things going bad." Palmacci did not testify as to
the basis for his subjective understanding. For all we know,
the basis could have been merely that Palmacci himself thought
a trust always does so supervise, without any representation by
Umpierrez beyond the mere creation of a trust.
The bankruptcy court dismissed the trust issue on the
ground that Palmacci could not have "justifiably relied" on the
role of the trust as supervising the real estate project. The
court reasoned that the trust was not established until
November 11, 1991, several days after November 7, when Palmacci
made his investment, so Palmacci could not have known the terms
of the trust instrument and therefore could not have been
justified in relying on any such terms. (The district court
decision did not specifically address the alleged
misrepresentation regarding the role of the trust.)
-22- 22
Palmacci is correct that the bankruptcy court's
analysis is flawed. Even if the trust was not actually created
until after he invested his money, Palmacci could conceivably
have relied on verbal (or written) representations from
Umpierrez -- made on or before November 7 -- as to how the
trust would be structured or what its role would be once the
trust was created. And it might well have been justifiable for
Palmacci to rely on such representations regardless of whether
the trust instrument had yet been drafted. If such
representations were false and made with scienter, then this
third claim could not be dismissed based on the trial court's
reasoning.
Nevertheless, we will affirm a correct result reached
by the court below "on any independently sufficient ground made
manifest by the record." AIDS Action Comm. of Mass. v. MBTA,
42 F.3d 1, 7 (1st Cir. 1994) (internal quotation marks
omitted). Although the bankruptcy court's stated reason for
rejecting Palmacci's argument concerning the establishment of
a trust was based on flawed reasoning, its conclusion was
correct. Our review of the record, including Palmacci's own
testimony, reveals absolutely no evidence clearly indicating
that Umpierrez's statements or actions were the basis for
Palmacci's subjective "idea" or feeling that the trust would
supervise the project. Indeed, as the bankruptcy court pointed
out, the attorney who drew up the trust testified that the
-23- 23
concept of a trust was not even discussed by the investors
before Palmacci invested his money in the project. Thus, the
only representation that is supportable on this record is that
a trust would be created and that the trustee would be an
attorney. This much was indisputably carried out. It is not
enough for Palmacci to testify that his "idea of the role of
the trust" was to supervise the operation of the project,
without specifying the source of this idea. Because the record
is devoid of evidence that would support a finding that a
misrepresentation was made on the trust issue, we need not
consider the dispute as to whether Palmacci was justified in
relying on any alleged representation about the role of the
trust.
Finally, Palmacci alleges that the bankruptcy court
erred as a matter of law when it restricted the testimony of
Palmacci's expert witness to events that took place only prior
to or soon after the transaction at issue. A trial court has
wide discretion in determining the admissibility of expert
testimony, especially where the issue is being tried directly
to the bench. Allied Int'l, Inc. v. Int'l Longshoremen's
Ass'n, 814 F.2d 32, 40 (1st Cir. 1987). Of course, this
latitude does not mean that, on appeal, we will abdicate our
responsibility to review such a determination. But, like other
evidentiary rulings, the exclusion of all or part of an
expert's proffered testimony is subject to review for abuse of
-24- 24
discretion. Williamson v. Busconi, 87 F.3d 602, 603 n.1 (1st
Cir. 1996). The trial court's decision will be "sustained
unless [its] discretion has been abused." Allied Int'l, 814
F.2d at 40.
In the instant case, the trial judge had heard
testimony from the creditor, the debtor, and the attorney for
the real estate project (who drew up the trust), as well as
some of the testimony of the expert in dispute (i.e., that part
of the expert's testimony relating to events that took place
prior to or soon after Palmacci's investment in the project).
The portion of the expert's proffered testimony that the court
excluded related to whether, when the trust was dissolved in
1993, Umpierrez "received a disproportionate return on his
investment, compared to other investors, which would be to the
detriment of Mr. Palmacci."
Palmacci acknowledges, as we discussed supra at 7-9,
that the alleged fraud must exist at the inception of the debt,
and statements or actions which were neither false nor
fraudulent when made will not be made so by the happening of
subsequent events. Nor does failure to carry out one's
intentions constitute a basis for finding a debt
nondischargeable under S 523(a)(2)(A) absent a showing that the
claimed fraud existed at the inception of the debt.
Palmacci argues, however, that a promissor's
subsequent conduct may reflect his state of mind at the time he
-25- 25
made the promise, and thus may be considered in determining
whether he possessed the requisite fraudulent intent ab initio .
It is true that subsequent conduct may be relevant to an
earlier state of mind. In Williamson v. Busconi, 87 F.3d at
603, we concluded that the bankruptcy court abused its
discretion by excluding evidence as to conduct subsequent to a
real estate closing, from which a factfinder reasonably could
have inferred that Busconi had not intended to pay the note at
the time it was executed. The lower court in Busconi said this
evidence was irrelevant, and then expressly credited Busconi's
testimony (although Williamson testified too). Finding that
Williamson had failed to establish the requisite fraudulent
intent, the bankruptcy court ruled the debt dischargeable. Id.
We rejected that reasoning, noting that:
As direct evidence is seldom available,
fraudulent intent normally is determined
from the totality of the circumstances.
And since "subsequent conduct may reflect
back to the promissor's state of mind and
thus may be considered in ascertaining
whether there was fraudulent intent" at
the time the promise was made, proper
application of the "totality" test in this
context often warrants consideration of
post-transaction conduct and
contemporaneous events.
Id. at 603 (citation omitted) (quoting Krenowsky v. Haining (In
re Haining), 119 B.R. 460, 464 (Bankr. D. Del. 1990)); cf.
United States v. Rodriguez, 858 F.2d 809, 816 (1st Cir. 1988)
("later events often may shed light on earlier motivations").
-26- 26
In the instant case, however, that relevance is very
attenuated. The facts of this case are nothing like the facts
in the cases relied upon by Palmacci, where an overarching
scheme to defraud the creditor was shown. In In re Haining,
119 B.R. at 464, the debtor engaged in a pattern of
transferring all her assets to a third party to the detriment
of her creditors. The court reasonably concluded that the
debtor's fraudulent scheme began prior to the debt in dispute,
and continued throughout the period. Similarly, in Comerica
Bank v. Weinhardt (In re Weinhardt) , 156 B.R. 677, 680 (Bankr.
M.D. Fla. 1993), the business into which the debtor was to have
invested the creditor's funds never existed, and the debtor
spent all the money on a gambling spree. The court concluded
that evidence of the subsequent pattern of conduct helped to
show that the debtor did not, even at the outset, intend to use
the funds obtained for the purposes stated.
In the instant case, the disputed testimony simply
does not rise to the same level of probative value on the issue
of Umpierrez's intent to defraud in the inducement. The
proffered testimony related to events almost two years after
Palmacci's investment was induced. Moreover, the allegations
6. The timing and other aspects of relevance were not
delineated in our opinion in Busconi. There we simply stated
that the proffered evidence of subsequent conduct was evidence
"from which a factfinder reasonably could have inferred that
Busconi had not intended to pay the note at the time it was
executed." 87 F.3d at 603. A similar conclusion cannot be
drawn in the instant case.
-27- 27
Palmacci sought to prove through his proffered expert -- that
the losses on the investment were not proportionately shared
and that the project's 1992 and 1993 financial statements
indicated that Umpierrez did not spend all project money
exactly as originally stated in the business proposal (although
they did not indicate that he failed to apply the funds to the
Chase project in some way) -- would not have been directly
probative of Umpierrez's intent to deceive in 1991. Certainly
the bankruptcy court, which heard all the evidence, did not
abuse its discretion in refusing to hear the proffered expert
testimony.
Even if we were to conclude on the present facts that
the bankruptcy court erred in excluding the expert testimony,
we need not reverse on this issue because excluding this
evidence did not affect Palmacci's substantial rights. See
Busconi, 87 F.2d at 603. In order to win a reversal, an
appellant who claims error in the admissibility of evidence
must also show that the evidentiary ruling adversely affected
his "substantial rights." See Fed. R. Bankr. P. 9005, 9017
(incorporating Fed. R. Civ. P. 61; Fed. R. Evid. 103(a)).
Here, as in Busconi, "[i]n light of all the evidence in the
record, we are not persuaded that the challenged judgment was
substantially influenced by the [presumptively] erroneous
evidentiary ruling." Busconi, 87 F.2d at 603 (citing Lubanski
v. Coleco Indus., Inc., 929 F.2d 42, 46 (1st Cir. 1991)).
-28- 28
In conclusion, we see no basis in the record for
second-guessing the trial court's determination that the Chase
project did not implicate fraudulent misrepresentation, and
that it was simply a failed real estate investment in which all
investors (including both the debtor and the creditor) lost a
portion of their investments. Palmacci had hoped to "turn[] a
pretty fast profit on it," as he had seen Gus Umpierrez do on
prior real estate deals. At the same time, Palmacci understood
that he was taking a risk; he might not only not make a "fast
profit" but he might lose money on the deal. Now that the
project has gone sour, Palmacci cannot prevent Umpierrez from
discharging his debts in bankruptcy unless he demonstrates all
the elements of fraud or false representation. He has failed
to meet this burden with respect to at least one element of
each of the three misrepresentations that he has alleged.
Accordingly, the judgment is affirmed. Costs on appeal awarded
to appellee.
-29- 29