Cadle Co. v. Andrews (In Re Andrews) , 98 F. App'x 290 ( 2004 )

United States Court of Appeals
Fifth Circuit
F I L E D
April 15, 2004
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
______________________
No. 03-40362
______________________
In The Matter Of: JOE ALVIN ANDREWS, SR,
Debtor.
- - - - - - - - - - - - - - - - - - - - - - - - - - -
THE CADLE COMPANY; CADLEWAY PROPERTIES, Inc., Assignee of the
Cadle Company,
Appellants,
versus
JOE ALVIN ANDREWS, SR.,
Appellee.
____________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
(98-CV-53)
_____________________________________________________
Before DeMOSS, DENNIS, and PRADO, Circuit Judges.
DENNIS, Circuit Judge:*
Plaintiffs-Appellants, the Cadle Company, et al. (“Cadle”),
appeals the district court’s affirmance of the bankruptcy court’s
*
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this opinion should not be published and is not precedent except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.
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discharge of debts that Defendant-Appellee, Joe Alvin Andrews, Sr.
(“Andrews”) owed Cadle.
Each of Cadle’s arguments challenges a different factual
finding made by the bankruptcy court, which we can only overturn if
Cadle proves that they are clearly erroneous. Because the
bankruptcy court’s factual findings relating to Andrews’ discharge
were not clearly erroneous, we AFFIRM the district court’s
affirmance of the bankruptcy court.
I. BACKGROUND
In the mid-1960s, Andrews (now deceased) obtained royalty and
development rights from the restaurant chain Whataburger, Inc.
(“Whataburger”) to develop Whataburger franchises in Bexar County,
Texas. Andrews, to facilitate this development, incorporated
Whataburger of Alice (“WOAI”) in 1968 with his wife Louise Andrews.
Andrews and Louise Andrews were the sole shareholders of WOAI.
Over the course of the next few decades, in a series of
transactions ending in 1987, Andrews transferred all of the royalty
and development rights that Whataburger granted to him to WOAI in
exchange for an employment agreement and other consideration from
WOAI.
In the 1980's and early 1990's Andrews’ physical and mental
condition began to deteriorate. He also became involved in several
ill-conceived, high-risk investments that began to deplete his
2
assets. Mrs. Andrews became increasingly concerned about her
husband’s investments and, in 1984, entered into a separation
agreement with Andrews to divide the community property between
them to protect her interests. This agreement—along with transfers
of stock to his children—reduced Andrews’ shares in WOAI to 15,000.
One of Andrews’ questionable financial decisions involved a
loan from Laredo National Bank (LNB) to purchase a ranch in 1985.
Andrews defaulted on the loan in 1989. LNB was awarded a judgment
against Andrews of over $1.2 million. Execution of the judgment
was withheld upon an agreement that Andrews would pay LNB $6,607
per month. This agreement was secured by the pledge of Andrews’
15,000 shares of WOAI stock. This arrangement caused a potential
problem for WOAI and the Andrews family because a franchise
agreement between WOAI and Whataburger required that no WOAI stock
could be held by an third party unapproved by Whataburger. In
order to solve this problem, WOAI bought the LNB judgment against
Andrews and foreclosed on Andrews’ stock. As a result of the
foreclosure, WOAI obtained all of Andrews’ remaining shares in
WOAI.
WOAI and Whataburger later became involved in litigation which
led to a 1990 settlement agreement in which Whataburger bought
twenty-eight Whataburger stores from WOAI in exchange for $16
million paid to WOAI. As part of this settlement agreement Andrews
signed a release of any claims that he had against Whataburger and
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consented to the transfer to Whataburger of “all of the right,
title and interest to any real or personal property used or useful
in business operations.” Andrews personally received no
consideration in exchange for signing this release.
By the mid 1990s Andrews’ investment losses had escalated, and
he filed for Chapter 7 bankruptcy, claiming a negative net worth in
excess of $14 million.
Cadle became a creditor of Andrews prior to his bankruptcy
when it purchased a judgment against him held by Windsor Savings in
the amount of approximately one million dollars. After Andrews
filed for bankruptcy, Cadle began adversary proceedings in the
bankruptcy court, objecting to the discharge based on the bars to
the discharge provided by 11 U.S.C. §§ 727(a)(2)(A), 727(a)(4)(A),
and 727(a)(5). The bankruptcy court denied Cadle’s objections and
entered a discharge, which was affirmed by the district court.
Cadle now appeals that decision to this court.
II. ANALYSIS
A. Standard of Review
“On appeal from a judgment in bankruptcy, findings of fact
shall not be set aside unless clearly erroneous, and due regard
shall be given to the opportunity of the bankruptcy court to judge
the credibility of the witnesses.” In re Monnig’s Department
Stores, Inc., 929 F.2d 197, 200 (5th Cir. 1991) (internal citations
4
and quotations omitted). The bankruptcy court’s conclusions of
law, however, are reviewed de novo. Id. at 201. In addition, when
the bankruptcy court’s findings of fact are based on determinations
regarding the credibility of witnesses, they should be awarded even
greater deference. See Matter of Webb, 954 F.2d 1102, 1106 (5th
Cir. 1992). Finally, this court has recognized that courts must
grant a debtor a discharge in bankruptcy unless they find a
specific, statutory reason not to grant the discharge. Shelby v.
Texas Improvement Loan Co., 280 F.2d 349, 355 (5th Cir. 1960)(“A
bankrupt[cy petitioner] is not to be denied a discharge on general
equitable considerations. It can only be denied if one or more of
the statutory grounds of objection are proved.”). Accordingly,
unless 11 U.S.C. §§ 727(a)(2)(A), 727(a)(4)(A), or 727(a)(5)
operate to bar Andrews’ discharge, we must affirm it.
B. 11 U.S.C. § 727(a)(2)(A)–Transfers with Intent to Defraud
The bankruptcy court shall not grant a debtor a discharge if
the debtor, with intent to hinder, delay, or
defraud a creditor or an officer of the estate
charged with custody of property under this
title, has transferred, . . . , or has
permitted to be transferred . . . –property of
the debtor, within one year before the date of
the filing of the petition.
11 U.S.C. § 727(a)(2)(A) (internal numbering consolidated).
A party challenging a discharge under § 727(a)(2)(A) must
prove that there was “(1) a transfer of property; (2) belonging to
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the debtor; (3) within one year of the filing of the petition; (4)
with actual intent to hinder, delay or defraud a creditor.”
Robertson v. Dennis, 330 F.3d 696, 701 (5th Cir. 2003) (citing Pavy
v. Chastanat, 873 F.2d 89, 90 (5th Cir. 1989)). The bankruptcy
court’s determination that a debtor did or did not have the
requisite intent is a factual finding. Id.Cadle argues that Andrews owned five “substantial assets” that
he transferred within one year prior to his bankruptcy petition in
violation of § 727(a)(2)(A).1 However, for each of these five
transfers, the bankruptcy court found that section 727(a)(2)(A) did
not bar Andrews’ discharge because he lacked the requisite intent
to hinder, delay, or defraud a creditor in making the transfers.
The bankruptcy court’s findings were not clearly erroneous.
First, the bankruptcy judge considered evidence that Andrews’
mental and physical condition at the time of the transfers had
severely deteriorated. The bankruptcy court, relying on testimony
by Andrews’ family members concerning the circumstances surrounding
the transfers, found that each them were made, not to defraud
creditors, but out of the family’s concern for Andrews’ physical
1
Specifically, Cadel states that Andrews improperly
transferred (a) exclusive rights to develop Whataburger franchise
locations; (b) certain royalty rights (c) ownership of 15,000
shares of stock and rights in WOAI; (d) collaterally related
rights to receive dividends, bonuses, and rights of control
through his position as officer and/or director of WOAI; and (e)
personal litigation claims against Whataburger.
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and mental health and his ability to properly handle the assets.2
Cadle contends that the bankruptcy court improperly allowed
its observations of Andrews’ physical and mental condition at trial
to color its findings with respect to Andrews’ mental state at the
time of the transfers. However, the bankruptcy court’s
determination was based, in large part, on testimony by witnesses
who observed and worked closely with Andrews at the time of the
transfers. In deference to the bankruptcy court’s findings of
facts based upon its assessment of the witnesses’ credibility, we
cannot say that the findings were clearly erroneous. Accordingly,
section 727(a)(2)(A) does not bar Andrews’ discharge.
C. 11 U.S.C. § 727(a)(4)(A)–Making a False Oath or Account
The bankruptcy court shall not grant the debtor a discharge if
“the debtor knowingly and fraudulently, or in connection with the
case, made a false oath or account.” 11 U.S.C. § 727(a)(4)(A).
The party challenging the discharge has the burden of proving that
“(1) the debtor made a false statement under oath; (2) the
statement was false; (3) the debtor knew the statement was false;
(4) the debtor made the statement with fraudulent intent; and (5)
the statement was material to the bankruptcy case.” Sholdra v.
2
While the witnesses testifying about Andrews’ mental state
had an obvious interest in the outcome of the case, “due regard
shall be given to the opportunity of the bankruptcy court to
judge the credibility of the witnesses.” In re Monnig’s, 929
F.2d at 200-01.
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Chilmark Fin., L.L.P., 249 F.3d 380, 382 (5th Cir. 2001) (internal
citations omitted). The bankruptcy court’s determination that a
debtor has or has not made a false statement pursuant to §
727(a)(4)(A) is a factual finding. Keeney v. Smith, 227 F.3d 679,
685 (6th Cir. 2000) (citing Williamson v. Firemen’s Fund Ins. Co.,
828 F.2d 249, 251 (4th Cir. 1987)); cf. Robertson, 330 F.3d at 701(involving § 727(a)(2)(A)).
Cadle claims that Andrews knowingly and fraudulently made
twelve false statements in connection with the case in violation of
11 U.S.C. § 727(a)(4)(A). Cadle argues again that the bankruptcy
court improperly based its findings to the contrary on Andrews’
mental state at the time of trial rather than at the time that the
statements were made. Consequently, Cadle concludes, the factual
findings were “contrary to the greater weight of the evidence.”
However, for the same reasons that Cadle’s first argument was
rejected, we conclude that the bankruptcy court did not commit
clear error in finding that Andrews did not knowingly and
fraudulently make false statements in connection with this case.
The bankruptcy court heard testimony as to Andrews’ diminished
mental capacity by three witnesses–Bill York, Andrews’ business
manager, Garvin Stryker, Andrews’ bankruptcy counsel, and Mrs.
Andrews–who worked closely with Andrews at the time he made the
statements at issue. Relying on the substance of the witnesses’
testimony and its assessments of their credibility, the bankruptcy
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court found that the alleged statements “were incorrect, but they
were not knowingly and fraudulently made as making a false oath.”
D. 11 U.S.C. § 727(a)(5)–Unexplained Losses of Assets
A court shall not discharge a debtor if “the debtor has failed
to explain satisfactorily . . . any loss of assets or deficiency of
assets to meet the debtor’s liabilities.” 11 U.S.C. § 727(a)(5).
The bankruptcy court’s determination that a debtor has or has not
satisfactorily explained a loss of assets is a factual finding.
See In re Hawley, 51 F.3d 246, 248 (11th Cir. 1995).
Cadle argues that Andrews made three unsatisfactorily
explained transfers of assets which should operate to bar his
discharge under § 727(a)(5): (1) The release of his claims in the
Whataburger litigation for no consideration; (2) the loss of his
rights to a “bonus distribution” in 1993; and (3) the transfer of
and foreclosure on Andrews’ 15,000 shares of WOAI stock.
1. Claim 1: The release of Andrews’ claims in the Whataburger
litigation.
The bankruptcy court found that Andrews did not have any
rights to transfer at the time of the settlement with Whataburger.
Specifically, it found that Andrews had transferred all of his
rights and potential claims involving Whataburger to WOAI in
various transactions years before the settlement agreement.
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Therefore, the “release” of Andrews’ claims against Whataburger was
in the nature of a quitclaim deed—the parties to the release
believed that Andrews did not have any claims against Whataburger
that he had not transferred to WOAI at some point in the past;
however, due to the complex nature of the transactions between WOAI
and Andrews over the years, the parties “covered their bases” by
having Andrews release whatever claims he may have against
Whataburger as part of the settlement.
This finding is supported by the record. Joe Andrews, Jr.
(Andrews’ son) testified that “any rights that [his father] had and
the exclusivity or territorial rights along with any franchise
rights were conveyed to [WOAI] back in 1986.” The bankruptcy
court’s finding that Andrews’ release of his claims against
Whataburger did not constitute a “loss of assets,” because those
claims had already been transferred, is supported by evidence in
the record and is not clearly erroneous.
2. Claim 2: Andrew’s loss of a “bonus distribution” in 1993.
Cadle next claims that in December 1993, all WOAI shareholders
received a bonus distribution except for Andrews. It contends that
the bankruptcy court clearly erred in finding that the explanation
for the loss of the bonus was satisfactory. Specifically, it
contends that the explanation provided was “totally inadequate”
because Andrews was the “founding father” of WOAI and therefore
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deserved a bonus.
However, at trial Joe Andrews, Jr., who the bankruptcy court
found “very, very credible,” testified that “Andrews did not
receive a bonus because it would not look good to the creditors or
anything [sic] else if we were awarding him a bonus and he had
already cost us money in the past.”3 Therefore, the evidence is
sufficient to support the bankruptcy court’s finding that there was
a satisfactory explanation for Andrews’ lack of a 1993 bonus. The
bankruptcy court did not clearly err in relying on this evidence.
3. Claim 3: The foreclosure on Andrews’ WOAI stock.
Finally, Cadle contends that the bankruptcy court clearly
erred in finding that the circumstances involved in WOAI’s
foreclosure on Andrews’ 15,000 shares of WOAI stock as a result of
the LNB transaction were a satisfactory explanation for why Andrews
lost the stock. We disagree.
The bankruptcy court found that WOAI purchased the LNB
judgment in order to prevent the WOAI stock from going to an
unapproved third party in violation of WOAI’s franchise agreement
with Whataburger. The bankruptcy court found that this transaction
was “a very logical one that—we’re quite used to seeing.” The
bankruptcy court also found that, because Andrews had already
3
This statement referred to the money that Andrews was losing
due to his speculative investments and bad business decisions
made as a result of Andrews’ deteriorating mental condition.
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defaulted on his loan payments to LNB, that the foreclosure on his
15,000 shares by WOAI was not a transfer because it “was no
different than a foreclosure by LNB.” In short, the bankruptcy
court found that WOAI’s foreclosure on Andrews’ 15,000 shares was
not a “transfer” and, if it were a transfer, that Andrews provided
a satisfactory explanation for it. This finding was based on
evidence in the record and is not clearly erroneous.
The bankruptcy court did not clearly err in finding that the
three transfers of assets about which Cadle complains were
satisfactorily explained. Accordingly, it did not err in holding
that Section 727(a)(5) does not bar Andrews’ discharge.
III. CONCLUSION
Cadle claims that Andrews’ bankruptcy discharge should have
been barred by 11 U.S.C. §§ 727(a)(2)(A), 727(a)(4)(A) and
727(a)(5). However, the bankruptcy court’s factual findings were
not clearly erroneous. Therefore, we affirm the district court
decision affirming this discharge.
AFFIRMED
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