IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 23, 2008
No. 08-40446 Charles R. Fulbruge III
Summary Calendar Clerk
In the Matter of: NORMAL MICHAEL MILLER; SHERI PRATER MILLER
Debtors
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NORMAL MICHAEL MILLER; SHERI PRATER MILLER
Appellants
v.
NEIL LEWIS; SHARON LEWIS
Appellees
Appeal from the United States District Court
for the Eastern District of Texas
USDC No. 4:07-CV-193
Before WIENER, STEWART, and CLEMENT, Circuit Judges.
PER CURIAM:*
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 08-40446
Appellants, Norman and Sheri Miller, appeal the district court’s decision
to affirm the bankruptcy court’s ruling that a claim by Appellees, Neil and
Sharon Lewis (the “Lewises”), is not dischargeable in bankruptcy. We affirm.
I. FACTS AND PROCEEDINGS
This dispute arises out of fraudulent activities perpetrated by Norman
Miller1 against the Lewises and other investors. Over a fifteen-month period,
Miller stole $2.65 million from SDIC, an investment group headed by Neil Lewis.
Miller held himself out as a registered agent and represented that he would
invest money raised from investors in a high-reward trading program; he,
instead, misappropriated the funds for personal use. Unbeknown to investors,
Miller had previously been convicted in Texas for securities fraud and theft.
The Lewises eventually discovered the fraudulent scheme and brought suit
in Arizona federal district court in June 2000. On May 30, 2002, the parties
executed a settlement agreement. On June 19, 2002, the district court entered
a stipulated judgment (the “Arizona Judgment”). Under the terms of the
judgment, Miller agreed to pay $9 million for “breach of contract, conversion,
constructive trust, fraud and breach of fiduciary duty.” The judgment further
stated that “the Millers defrauded Lewis” and the judgment, “in its entirety, is
not dischargeable under any provision of the United States Bankruptcy Code.”
A settlement agreement was then signed as a discharge of the Arizona
Judgment, under which Miller agreed to pay the Lewises $3 million immediately
and a further $1.5 million in installments. Failure to pay the remaining
installments entitled the Lewises to enforce the $9 million judgment.
1
Sheri Miller’s participation is immaterial for this appeal and all references are to
Norman Miller.
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No. 08-40446
During the pendency of the Arizona Judgment, Miller was being
investigated for wire fraud in South Carolina. The Department of Justice had
filed a criminal complaint against Miller on May 14, 2002. Miller was arrested
and pled guilty, agreeing to pay $17 million. Miller did not disclose this to the
Lewises nor did he inform them of the criminal investigation when the Arizona
Judgment was entered. Miller was aware that he could not fulfill the remaining
$1.5 million obligation to the Lewises and, in fact, the initial $3 million payment
was the product of another fraudulent scheme similar to the one that had
ensnared the Lewises. Miller made no further payments on the settlement.
On November 22, 2004, Miller filed a petition for relief under Chapter 7
of the Bankruptcy Code in the bankruptcy court for the Eastern District of
Texas. He listed the Arizona Judgment as a “disputed” judgment for $6 million
and sought its discharge. On March 16, 2005, the Lewises filed claims asserting
that the balance was over $7.5 million in principal and interest and that Miller
could not discharge the obligation. On February 21, 2007, the bankruptcy court
found that the Arizona Judgment was not dischargeable. Miller appealed.
On March 21, 2008, the district court, agreeing with the bankruptcy court,
affirmed. Miller now appeals, arguing five grounds for reversal. He asserts that
the district court erred in affirming the bankruptcy court because: 1) the Lewises
lacked standing to sue; 2) the Lewises failed to meet the elements of §
523(a)(2)(A) of the Bankruptcy Code; 3) the Lewises did not meet the elements
of § 523(a)(4) of the Bankruptcy Code; 4) the Lewises failed to meet the elements
of § 523(a)(6) of the Bankruptcy Code; and 5) the Arizona federal district court
could not make a determination that a debt was nondischargeable.
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STANDARD OF REVIEW
“We review the decision of a district court, sitting as an appellate court, by
applying the same standards of review to the bankruptcy court's findings of fact
and conclusions of law as applied by the district court.” In re Gerhardt, 348 F.3d
89, 91 (5th Cir. 2003). A bankruptcy court’s findings of fact are reviewed for
clear error while its conclusions of law are reviewed de novo. Id. Mixed
questions of law and fact are reviewed de novo. In re Quinlivan, 434 F.3d 314,
318 (5th Cir. 2005). Findings of fact will only be reversed if, “on the entire
evidence, we are left with the definite and firm conviction that a mistake has
been made.” In re Allison, 960 F.2d 481, 483 (5th Cir. 1992).
A. Real Party in Interest
Miller argues that the Lewises have no standing to pursue this
dischargeability action. Miller asserts that he only took money from SDIC, not
the Lewises, and is therefore only liable to that entity. Miller does not, however,
dispute that he did not raise this issue in the Arizona proceedings.
The Lewises respond that this argument is really a collateral attack on the
Arizona Judgment and an attempt to void that obligation. Furthermore, the
Lewises state that, as the parties to whom payment is due under the Arizona
Judgment, they are the only persons who can bring suit.
While Miller styles his argument as one of standing, both the bankruptcy
court and the district court analyzed the issue in terms of real party in interest
under Rule 17. FED. R. CIV. P. 17. Both found this argument waived.
Rule 17 governs the determination of who can properly assert a claim. “An
action must be prosecuted in the name of the real party in interest.” Id. “The
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No. 08-40446
real party in interest is the person holding the substantive right sought to be
enforced, and not necessarily the person who will ultimately benefit from the
recovery.” Wieburg v. GTE Sw. Inc., 272 F.3d 302, 306 (5th Cir. 2001) (quotation
omitted). Both the district court and the bankruptcy court were correct in
analyzing Miller’s first claim of error as a real party in interest argument. The
facts and the law support this conclusion. The Lewises prosecuted the Louisiana
suit in their individual capacity. They are therefore the real parties in interest
even though a large part of the Arizona Judgment was ultimately distributed to
the SDIC investors. The bankruptcy court, as affirmed by the district court, did
not err in holding that the Lewises were the real parties in interest.
Even accepting arguendo that the Lewises were not the proper parties to
prosecute the action, the argument is waived. Disputes over the real party in
interest “should be evident to a defendant at the onset of suit because the
defendant almost always knows whether suit has been filed by the party who
‘owns’ the claim.” Rogers v. Samedan Oil Corp., 308 F.3d 477, 483 (5th Cir.
2002). Failure to assert the defense in a timely manner constitutes waiver. Id.
As the district court pointed out, Miller never raised the standing or real party
in interest issue in the Arizona lawsuit and failed to timely assert the defense
in bankruptcy court. While the Lewises initiated their action in bankruptcy
court in March of 2005, it was not until the day before trial was set to start that
Miller urged the real party in interest argument. See id at 482–83 (finding the
real party in interest argument waived when not raised until the eve of trial).
Neither the bankruptcy court nor the district court erred.
B. Section 523(a)(2)(A) Dischargeability
Section 523(a)(2)(A) states in relevant part that “[a] discharge under . . .
this title does not discharge an individual debtor from any debt . . . to the extent
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No. 08-40446
obtained by -- false pretenses, a false representation, or actual fraud, other than
a statement respecting the debtor’s or an insider’s financial condition.” 11
U.S.C. § 523(a)(2)(A). Miller argues that the district court erred in affirming the
bankruptcy court’s determination that the Arizona Judgment was not
dischargeable pursuant to § 523(a)(2)(A)’s fraud exception because the judgment
also included dischargeable causes of action and did not allocate the amounts
owed for each cause. Also asserting that § 523(a)(2)(A)’s nondischargeability
effect should be limited to the amount actually stolen, Miller argues that the
Lewises are only entitled to the initial amount invested. Miller further assails
the underlying findings of the Arizona court, claiming that the Lewises were not
justified in relying upon his representations.
The bankruptcy court stated that the Arizona Judgment represented
money obtained by Miller through false pretenses, false representation, and
actual fraud. The district court affirmed, finding that the full amount of the
Arizona Judgment was not dischargeable because § 523(a)(2)(A) excepts from
discharge any debt arising from the debtor’s fraud. The finding was based on the
fact that Miller obtained both the original investments and the Arizona
settlement through fraud, having no intention of paying the Lewises. Applying
Arizona law on issue preclusion, the district court also found that Miller was
barred from re-litigating the issue of justifiable reliance.
“Despite the more general purpose of the bankruptcy code, which is to give
debtors a fresh start, § 523(a)(2)(A) captures a competing principle.” In re
Quinlivan, 434 F.3d at 319. Congress intended § 523(a)(2)(A) to protect victims
of fraud over the defrauding debtors. Cohen v. de la Cruz, 523 U.S. 213, 223
(1998). As a result, § 523(a)(2)(A) “does not impose any limitation on the extent
to which ‘any debt’ arising from fraud is excepted from discharge. . . . Once it
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is established that specific money or property has been obtained by fraud . . .
‘any debt’ arising therefrom is excepted from discharge.” Id. at 219. Allowing
the fraudulent debtor “to discharge any liability for losses caused by his fraud
in excess of the amount he initially received, [would be] leaving the creditor far
short of being made whole.” Id. at 223.
Miller’s argument that the Lewises should only recover the amount
invested is without merit. As the Supreme Court clearly outlined in Cohen, no
such restitutionary cap applies to § 523(a)(2)(A). Furthermore, as the Arizona
Judgment made clear and the bankruptcy court found, the damages suffered by
the Lewises as a result of Miller’s fraud extend far beyond the initial investment.
Miller is also precluded from lodging a collateral attack on the Arizona
Judgment by arguing that it does not delineate between the various causes of
action arising out of Miller’s fraud or that the Lewises did not justifiably rely on
his representations. Both grounds are foreclosed by issue preclusion. Arizona
law applies to determine the preclusive effect of the Arizona Judgment. Semtek
Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508–509 (2001). The Arizona
Supreme Court has stated that the will of the parties controls, noting that,
Collateral estoppel or issue preclusion is applicable when the issue
or fact to be litigated was actually litigated in a previous suit, a final
judgment was entered, and the party against whom the doctrine is
to be invoked had a full opportunity to litigate the matter and
actually did litigate it, provided such issue or fact was essential to
the prior judgment. . . . However, in the case of a judgment entered
by confession, consent or default, none of the issues is actually
litigated. A judgment entered by stipulation is called a consent
judgment, and may be conclusive, with respect to one or more
issues, if the parties have entered an agreement manifesting such
intention. . . . If the parties to this action had intended the . . .
dismissal to be binding as to certain factual issues, and if their
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No. 08-40446
intention was reflected in the dismissal, we would enforce the intent
of the parties and collateral estoppel would apply.
Chaney Bldg. Co. v. City of Tucson, 716 P.2d 28, 30 (Ariz. 1986) (internal
citations omitted). As the bankruptcy court found—and Miller does not
dispute—the parties specifically allocated the full amount of the $9 million
Arizona Judgment to nondischargeable debt. The bankruptcy court also found
that the Lewises are not sophisticated business people with investment
expertise. Further, having admitted to defrauding the Lewises, Miller cannot
now re-litigate the issue.
Neither the bankruptcy court nor the district court erred in finding that
the Arizona Judgment was a nondischargeable debt under § 523(a)(2)(A).
C. Remaining Grounds for Dischargeability
Having found the Arizona Judgment nondischargeable under §
523(a)(2)(A), Miller’s remaining arguments need not be addressed.
CONCLUSION
The judgment of the district court is AFFIRMED.
8