UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 16, 2009
No. 07-51118
Charles R. Fulbruge III
Clerk
IN THE MATTER OF: DAVID WILSON MORRISON
Debtor
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DAVID WILSON MORRISON
Appellant
v.
WESTERN BUILDERS OF AMARILLO INC.
Appellee
Appeal from the United States District Court
for the Western District of Texas
Before JONES, Chief Judge, and GARWOOD and SMITH, Circuit Judges.
EDITH H. JONES, Chief Judge:
David Wilson Morrison (“Morrison”) appeals the bankruptcy court’s
decision, affirmed by the district court, holding him personally liable for a
$549,773.63 nondischargeable debt pursuant to 11 U.S.C. § 523 (a)(2)(B). We
hold that the bankruptcy court had jurisdiction to enter a monetary judgment
No. 07-51118
against Morrison, and we reject his challenges to the nondischargeability
conclusion of the court. The judgment is AFFIRMED.
I. BACKGROUND
Morrison was the president and principal shareholder of Morrison
Excavation, Inc. On February 6, 2002, Morrison was informed by Larry Fuller,
his long-time business adviser and CPA, that his company was in serious
financial trouble.1 On February 14, Morrison Excavation submitted a bid for a
subcontract with Western Builders. On February 15, Shelly Dexter, the
bookkeeper for Morrison Excavation, found an accounting error that overstated
the company’s accounts receivable by approximately $857,000, which meant that
Morrison Excavation was no longer solvent. On February 22, Western Builders,
after reviewing Morrison Excavation’s work at several sites and doing a credit
reference check, requested a copy of Morrison Excavation’s financial statement.
The same day, Morrison faxed a copy of a financial statement that still reflected
the inflated accounts receivable error to Western Builders. On March 6,
Morrison Excavation and Western Builders entered into a contract.
1
Fuller described the business as “cash broke, way behind to vendors, collecting
money before job completed and no money to pay bills from completed jobs, and vendors filing
liens” in the notes he prepared for a meeting with Morrison on February 6, 2002.
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No. 07-51118
Starting on March 28, 2002, Western Builders began making advance
payments at the request of Morrison Excavation in order to allow Morrison to
pay subcontractors and suppliers. Morrison Excavation, however, used some of
the money to pay materialmens lienholders despite having certified to Western
Builders that prior payments to lien claimants and suppliers had been made.
During this time, Morrison also paid off his personal home equity loan from the
company account and gave himself a substantial raise. By mid-August,
Morrison Excavation abandoned the job. Western Builders paid the outstanding
liens and hired a new excavation company to finish the project for more than a
half million dollars over the original contract price.
On March 13, 2004, Morrison filed an individual Chapter 7 bankruptcy
case. Western Builders commenced an adversary proceeding to determine the
nondischargeability of the debt owed to it pursuant to 11 U.S.C. § 523(a)(2)(B).
At the trial of the nondischargeability claim, Morrison testified that he did not
learn about the accounting error until March 23 or 24, 2002. Dexter said that
she told Morrison “around February 15,” but she could not pinpoint an exact
date or month. Another employee, Jackie Davenport, testified that Morrison
was told “at or about the same time that the error was discovered.” This
information, at least in part, came from a conversation she overheard between
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No. 07-51118
Morrison and Dexter. Morrison objected to Davenport’s testimony as hearsay.
The bankruptcy court held that the testimony of Davenport was an admission
under FED. R. EVID. 801(d)(2)(D) as a statement by an agent or servant
concerning matters within the scope of his agency or employment. The court
found that her testimony “strongly suggest[ed] that Morrison most likely knew
by February 22, 2002, that the financial statement contained an error–but
perhaps did not know the magnitude of the error.”
In a thorough and comprehensive opinion, the bankruptcy court held that
the subcontract for services created a debt that could be found nondischargeable
under 11 U.S.C. § 523(a)(2)(B) because Morrison could be held liable for the
misrepresentation that benefited Morrison Excavation. The court concluded
that Morrison personally committed common law fraud in order to obtain the
subcontract. Thus, Morrison was personally liable for the debt either under
Texas common law, which holds a corporate agent liable for his
misrepresentations made on behalf of the corporation, or under TEX. BUS. CORP.
ACT, art. 2.21(A)(2) (Vernon 2006), which authorizes “veil-piercing” shareholder
liability.2
2
Because we agree that Morrison committed fraud in delivering the false financial
statement to Western Builders, we do not address the bankruptcy court’s alternative ground
of liability under the Texas Business Corporations Act.
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No. 07-51118
The bankruptcy court rendered judgment for the entire debt due to
Western Builders and declared the debt nondischargeable under 11 U.S.C. § 523
(a)(2)(B). On appeal, the district court affirmed. We affirm the judgment of the
district court.
II. DISCUSSION
A. Jurisdiction
Before reaching the substantive questions Morrison raises, this court must
determine sua sponte the legal issue whether the bankruptcy court had the
power to render a money judgment for the nondischargeable debt. See Bass v.
Denney (In re Bass), 171 F.3d 1016, 1022 (5th Cir. 1999). We received
supplemental briefing from the parties after identifying this issue, which has not
previously been decided by this court.
“The jurisdiction of the bankruptcy courts, like that of other federal courts,
is grounded in, and limited by, statute.” Celotex Corp. v. Edwards, 514 U.S. 300,
307 (1995). Pursuant to 28 U.S.C. § 1334, the district court has exclusive
jurisdiction of all bankruptcy cases under title 11 and “original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in or related
to cases under title 11.” 28 U.S.C. § 1334(b). See also 28 U.S.C. § 157(b)
(authorizing district courts to refer “core” and “related-to” proceedings to
5
No. 07-51118
bankruptcy courts for adjudication). Western Builders’ claim for a declaration
of nondischargeability is a core proceeding under 28 U.S.C. §157 and “is, without
question, a constitutional and statutory federal question claim ‘arising under’
the Bankruptcy Code, because the bankruptcy discharge is relief established by
federal bankruptcy law and Section 523 expressly authorizes such a declaration
regarding the effect of the federal bankruptcy discharge.” Ralph Brubaker, On
the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and
Constitutional Theory, 41 WM. & MARY L. REV. 743, 911 (2000).
The bankruptcy court here, however, went beyond a mere declaration to
award judgment against David Morrison individually in the amount of
$549,773.63 plus interest. See Western Builders of Amarillo, Inc. v. Morrison
(In re Morrison), 361 B.R. 107, 128 (Bankr. W.D. Tex. 2007). Thus, the question
presented is whether a bankruptcy court, in addition to declaring a debt non-
dischargeable, has jurisdiction to liquidate the debt and enter a monetary
judgement against the debtor. Several of our sister circuits that have considered
this question found that the bankruptcy courts have the power to enter
judgment in exactly this manner. See Cowen v. Kennedy (In re Kennedy),
108 F.3d 1015, 1017-18 (9th Cir. 1997); Longo v. McLaren (In re McLaren),
3 F.3d 958, 965-66 (6th Cir. 1993); Abramowitz v. Palmer, 999 F.2d 1274,
6
No. 07-51118
1278-79 (8th Cir. 1993); N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d
1496, 1508 (7th Cir. 1991); cf. Porges v. Gruntal & Co. (In re Porges), 44 F.3d
159, 163-65 & n.7 (2d Cir. 1995). Their reasoning, while pragmatic, stands in
tension with the predominant theory of bankruptcy court jurisdiction.
Nevertheless, while acknowledging the tension, we too conclude that jurisdiction
existed to issue, if not necessarily later to enforce, the personal judgment against
Morrison.
As noted, bankruptcy courts exercise jurisdiction, through referral from
the district courts, of two types of cases. “Core” proceedings are those that
“invoke[ ] a substantive right provided by title 11” or “could arise only in the
context of a bankruptcy case.” Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th
Cir. 1987). Cases “related to” the bankruptcy case are those whose outcome
could have any conceivable effect on the estate being administered in
bankruptcy. Id. at 93 (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir.
1984)). The bankruptcy court’s “related-to” jurisdiction is not limitless. Celotex,
514 U.S. at 308. Although determining that a debt is nondischargeable is
plainly a “core” proceeding governed by a specific provision of the Bankruptcy
Code, the rendition of a monetary judgment in favor of the creditor on that debt
is not itself a core proceeding and, further, is not clearly related to the
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No. 07-51118
bankruptcy case or administration of the debtor’s estate. Indeed, that portion
of the judgment has, in the usual case, no bearing on the bankruptcy case
because it requires the debtor to pay a single debt outside of, apart from, and
even after the completion of bankruptcy, and it frees the creditor thereafter from
limiting its collection efforts to those afforded by the bankruptcy system.
Commentators have noted the inconsistency inherent in a conclusion that
rendering a money judgment for a debt found to be nondischargeable falls within
the bankruptcy court’s “related-to” jurisdiction. See Ralph Brubaker, supra, at
912-920 (2000).
Circuit courts that have approved the entry of money judgments by
bankruptcy courts in nondischargeability cases have paid little attention to the
jurisdictional dichotomy of core and related-to jurisdiction and have instead
relied principally on tradition and pragmatism. “Traditionally,” under
Section 17(c)(3) of the 1898 Bankruptcy Act, bankruptcy courts were empowered
to enter such money judgments. See 11 U.S.C. § 35(c)(3) (repealed 1978). The
Bankruptcy Code did not specifically codify this authority upon its enactment in
1978, but, as one court noted, the Code authorized bankruptcy courts generally
to hear all core proceedings, including nondischargeability complaints, and to
“enter appropriate orders and judgments.” 28 U.S.C. § 157(b)(1), (2)(I); In re
8
No. 07-51118
Kennedy, 108 F.3d at 1017. It is not unreasonable to conclude that Congress,
which intended bankruptcy courts to exercise far more expansive jurisdiction
under the Code than under previous law, could not have intended to cut back on
their ability to enter money judgments in the core proceedings encompassed by
non-dischargeability complaints.
The pragmatic reasoning adopted by most circuit courts is hard to
contradict. Logically, the litigation necessary to prove nondischargeability also
proves the basis for and amount of the debt. There would be no judicial
efficiency in requiring the beneficiary of a nondischargeability judgment to
pursue a separate lawsuit in state or federal court in order to secure a money
judgment against the debtor.3 Moreover, entry of judgment for the debt is proper
because the court actually determined “the existence and validity of the debt” in
a core proceeding. In re McLaren, 990 F.2d 850 at 854.
Because the arguments of tradition and pragmatism make sense, and
because no Fifth Circuit law holds to the contrary,4 we opt to follow the
3
In some cases a creditor will have already obtained a judgment pre-bankruptcy,
which serves as the basis for the nondischargeability claim. This discussion concerns
nondischargeability claims made without preexisting judgments.
4
In Bass v. Denney (In re Bass), 171 F.3d 1016 (5th Cir. 1999), this court held that
a bankruptcy court lacks jurisdiction to adjudicate a suit brought to enforce a money judgment
rendered by another bankruptcy court in connection with a nondischargeability proceeding.
Bass, however, was an entirely separate suit from the proceeding that resulted in the money
judgment. See generally, Alan M. Ahart, Enforcing Nondischargeabable Money Judgments:
9
No. 07-51118
overwhelming authority and agree that the bankruptcy court had jurisdiction to
enter judgment against Morrison for the debt owed to Western Builders after it
found the debt nondischargeable.
B.
Having established that the bankruptcy court had the jurisdiction to
render judgment for dischargeability and for the amount Morrison owed to
Western Builders, we may reach the merits of Morrison’s appeal. We review the
decision of the district court by applying the same standard to the bankruptcy
court’s findings of fact and conclusions of law that the district court applied. A
bankruptcy court’s findings of fact are subject to review for clear error, and its
conclusions of law are reviewed de novo. Gen. Elec. Capital Corp. v. Acosta (In
re Acosta), 406 F.3d 367, 372 (5th Cir. 2005). “Under a clear error standard, this
court will reverse ‘only if, on the entire evidence, we are left with the definite
and firm conviction that a mistake has been made.’” Otto Candies, L.L.C. v.
The Bankruptcy Courts’ Dubious Jurisdiction, 74 AM. BANKR. L.J. 115, 120-21 (2000).
This court has also rejected supplemental jurisdiction for bankruptcy courts, see Walker
v. Cadle Co (In re Walker), 51 F.3d 562, 569 (5th Cir. 1995), a theory employed by at least one
court that sustained bankruptcy court jurisdiction in the instant context. N.I.S. Corp. v.
Hallahan (In re Hallahan), supra. Walker, however, involved the question of supplemental
jurisdiction over a third-party claim, rather than what is considered here, the jurisdiction to
enter complete relief between two parties on a claim.
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No. 07-51118
Nippon Kaiji Kyokai Corp., 346 F.3d 530, 533 (5th Cir. 2003) (quoting Walker v.
Cadle Co. (In re Walker), 51 F.3d 562, 565 (5th Cir. 1995)).
First, Morrison asserts that Western Builders did not plead a cause of
action to establish the debt. Only after trial, Morrison asserted in a post-trial
brief that Western Builders’ pleadings were insufficient. The bankruptcy court
determined in its memorandum opinion that common law fraud was sufficiently
pled and that any relevant issues not squarely presented in the original
pleadings were tried by consent. While a party must place an opposing party on
notice of a claim, see BANKR. R. 7008, incorporating FED.R.CIV.P. 8, an issue not
pled may also be tried by consent. BANKR. R.7015, incorporating FED.R.CIV.P.
15(b);5 see Schlotzsky's, Ltd. v. Sterling Purchasing & Nat'l Distrib. Co., 520 F.3d
393, 403 (5th Cir. 2008).
As noted, Morrison did not object before or during trial to the testimony
of witnesses regarding his personal liability or to the court’s request for amended
pleadings to reflect a claim for judgment against him under state law. Morrison
filed several motions acknowledging that Western Builders was seeking a
5
When an issue not raised by the pleadings is tried by the parties’ express or
implied consent, it must be treated in all respects as if raised in the pleadings. A party may
move--at any time, even after judgment--to amend the pleadings to conform them to the
evidence and to raise an unpleaded issue. But failure to amend does not affect the result of the
trial of that issue. FED. R. CIV. P. 15(b).
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No. 07-51118
judgment for damages. In addition, Morrison did not object to the court’s order
allowing an amendment of pleadings to conform to the evidence pursuant to
Bankruptcy Rule 7015(b), which specifically articulated the request for damages
by Western Builders. Under these circumstances, the bankruptcy court correctly
found that Morrison had adequate notice and the issues of his liability under
state law and damages were tried by the parties’ consent.
Second, Morrison asserts that Western Builders did not present sufficient
evidence to support Morrison’s personal liability for the debts of Morrison
Excavation. On the contrary, Texas courts have routinely found that “a
corporate officer may not escape liability where he had direct, personal
participation in the wrongdoing, as to be the ‘guiding spirit behind the wrongful
conduct or the central figure in the challenged corporate activity.’” Ennis v.
Loiseau, 164 S.W.3d 698, 707-708 (Tex. App.—Austin [3rd Dist.] 2005) (quoting
Mozingo v. Correct Mfg. Corp., 752 F.2d 168, 174 (5th Cir. 1985)). In this case,
Morrison, as a corporate agent, may be held “individually liable for fraudulent
or tortious acts committed while in the service of [his] corporation.” Shapolsky
v. Brewton, 56 S.W.3d 120, 133 (Tex. App.—Houston [14th Dist.] 2001, pet.
denied), disapproved on other grounds, Michiana Easy Livin’ Country, Inc. v.
Holten, 168 S.W.3d 777, 789 (Tex. 2005).
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No. 07-51118
Morrison relies heavily on but quotes selectively from Holloway v. Skinner,
898 S.W.2d 793 (Tex. 1995), in support of his argument. Morrison also argues
that the bankruptcy court erred by relying on Weitzel v. Barnes, 691 S.W.2d 598
(Tex. 1985), instead of the more recently decided Holloway.
In Holloway, the corporation failed to make payments due under a
promissory note, and the creditor sued a corporate officer who owned 40 percent
of the company for tortious interference with a contract. The court found that
the corporation’s severe cash flow problems and insolvency, not the actions of the
corporate officer, caused the failure to keep up with payments. The corporate
officer also reduced his salary and testified that “he was required to prioritize
between competing claims because the corporation had insufficient cash flow to
meet all obligations when they came due.” Holloway, 898 S.W.2d at 798. In
contrast, no matter what financial problems Morrison Excavation had, they did
not excuse Morrison’s decision to send the fraudulent financial statement to
Western Builders. Morrison also doubled his own salary after he learned of the
error in the statement.
Weitzel confirms, in the context of the TEXAS DECEPTIVE TRADE PRACTICES
ACT, that “there can be individual liability on the part of a corporate agent for
misrepresentations made by him.” Weitzel, 691 S.W.2d at 601. Similarly, the
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No. 07-51118
court in Miller v. Keyser, 90 S.W.3d 712 (Tex. 2002), decided that “an agent for
a disclosed principal may be held liable for passing along false representations
made in the course and scope of his employment.” Id. at 714. Morrison does not
attempt to distinguish Weitzel or Miller from his own situation, nor does he
explain why the facts in Holloway are at all analogous.
The bankruptcy court found that Morrison personally committed fraud
when he sent the financial statement on February 22, 2002. Morrison is,
therefore, personally liable for the damages.
Third, Morrison contends that the subcontract between Morrison
Excavation and Western Builders cannot result in a nondischargeable debt. In
order to be non-dischargeable under § 523(a)(2), a debt must be for “money,
property, services, or an extension, renewal, or refinancing of credit,” and
subsection (B) specifies nondischargeability of such debts to the extent they were
obtained by materially false financial statements. 11 U.S.C. § 523(a)(2)(B).
Morrison argues that Morrison Excavation did not obtain services but entered
into a contract to provide services. The plain language of §523(a)(2) does not
require that the transaction be in any particular form. Rather, the purpose of
§523(a)(2) is to govern transactions where “the debtor's fraud . . . result[ed] in
a loss of property to the creditor.” 4 COLLIER ON BANKRUPTCY P523.08 (15th ed.
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No. 07-51118
rev. 2004). The contract with Western Builders enabled Morrison to secure
periodic payments—until his company defaulted. As Morrison stated, these
came as a result of and through the contract. It is conceivable, as Morrison
asserts, that fraudulently obtaining a contract by or on behalf of the debtor to
perform services might not furnish the basis for a nondischargeability claim
under § 523(a)(2)(B) if, for instance, the ultimate contract breach was caused by
some event other than the insolvency of the debtor or his company. That is not
the case here. Morrison Excavation was insolvent before it began to perform the
Western Builders project, and it misapplied progress payments while certifying
that suppliers and lien claimants on the project were being paid. The parlous
financial condition of Morrison Excavation, which would have been fully
revealed in an accurate pre-contract financial statement, was directly connected
to the ultimate contract default.
Fourth, Morrison contends that Western Builders did not establish the
requisite intent to deceive under §523(a)(2)(B)(iv) when Morrison sent the
materially false financial statement. The bankruptcy court’s determination of
intent to deceive is a finding of fact subject to the clearly erroneous standard of
review. Under §523(a)(2)(B), this Court has held that “intent to deceive may be
inferred from use of a false financial statement.” In re Young, 995 F.2d 547, 549
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No. 07-51118
(5th Cir. 1993).6 A judge may look at the totality of the circumstances and infer
an intent to deceive when “[r]eckless disregard for the truth or falsity of a
statement combined with the sheer magnitude of the resultant
misrepresentation may combine” to produce such an inference. Norris v. First
Nat’l Bank (In re Norris), 70 F.3d 27, 31 n.12 (5th Cir. 1995) (quoting In re
Miller, 39 F.3d 301, 305 (11th Cir. 1994)). The bankruptcy court found that “the
totality of the facts taken together indicate that Morrison knew of the error on
February 22.” Because the record supports this finding, it supported a finding
of intent to deceive Western Builders.7
Finally, Morrison objects to the admission of Davenport’s statements as
hearsay. Davenport, an employee of Morrison Excavation, testified that she
“overheard Ms. Dexter tell Morrison about the error.” She also testified that she
knew that Dexter approached Morrison “several times” about the financial
6
See also In re Towers, NO. 07-4039, 2008 U.S. Dist. LEXIS 18624 (E.D. La. Mar.
10, 2008) (finding that the debtor had exhibited the requisite intent to deceive when it
delivered a financial report that overestimated the accounts receivable by $40,000 and where
the debtor knew that its loan would not be refinanced if the statement was corrected).
7
Morrison argues that the bankruptcy court erred when it found that Morrison
“had a continuing duty to send Western Builders a corrected financial statement.” Morrison
also contests that he “has been held personally liable for a corporate obligation based in part
on a ‘duty of fair dealing’ that has never been asserted that is not recognized in Texas law, and
that was raised for the first time by the Bankruptcy court in its opinion handed down after
trial.” We do not endorse these findings of the bankruptcy court nor do we comment on the
legal theories they support. The findings are irrelevant to upholding the judgment.
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No. 07-51118
statement’s being incorrect and asked whether Morrison wanted to send it to
Western Builders. This court reviews evidentiary rulings for abuse of
discretion.
FED. R. EVID. 801(c) defines hearsay as “a statement, other than one made
by the declarant while testifying at the trial or hearing, offered in evidence to
prove the truth of the matter asserted.” Testimony offered to prove that the
party had knowledge or notice is not hearsay because “the value of the statement
does not rest upon the declarant’s credibility and, therefore, is not subject to
attack as hearsay.” Alexander v. Conveyors & Dumpers, Inc., 731 F.2d 1221,
1230 (5th Cir. 1984). Davenport’s testimony was not offered to prove that the
financial statement was incorrect, but that Morrison had knowledge that it was
incorrect before he sent it to Western Builders. Thus, it is not hearsay. See
Snyder v. Whittaker Corp., 839 F.2d 1085, 1090 (5th Cir. 1988) (holding that a
statement does not fall under the hearsay rule if it was offered to prove that
certain statements were made to defendant corporation).
III. CONCLUSION
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
17
Morrison v. Western Builders of Amarillo, Inc. (In Re Morrison)
Court: Court of Appeals for the Fifth Circuit
Date filed: 2009-01-16
Citations: 555 F.3d 473
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