Scott Pendergraft v. Network of Neighbors ( 2018 )

Case: 18-20045 Document: 00514590645 Page: 1 Date Filed: 08/08/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
No. 18-20045
August 8, 2018
Summary Calendar Lyle W. Cayce
Clerk
In the Matter of: SCOTT RICHARD PENDERGRAFT; DANIELLE
PAULINE PENDERGRAFT,
Debtors
SCOTT RICHARD PENDERGRAFT; DANIELLE PAULINE
PENDERGRAFT,
Appellants
v.
NETWORK OF NEIGHBORS, INCORPORATED,
Appellee.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:17-CV-2297
Before DAVIS, COSTA, and ENGELHARDT, Circuit Judges.
PER CURIAM:*
Debtors Scott Pendergraft and Danielle Pendergraft (“Scott P” and
“Danielle P,” also referred to collectively as “the Pendergrafts”) appeal the
* 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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH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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No. 18-20045
district court’s order affirming the bankruptcy court’s denial of motions for a
new trial and recusal. For the reasons stated below, we AFFIRM.
The Pendergrafts befriended Squire Rushnell (“Rushnell”) and Louise
DuArt (“DuArt”) in December 2010 while visiting Martha’s Vineyard in
Edgartown, Massachusetts. The next month, the Pendergrafts moved to
Edgartown. Soon thereafter, Rushnell and DuArt invited the Pendergraft’s to
join the board of directors for their non-profit charitable corporation, Network
of Neighbors, Inc. (“NON”). 1 Scott P became NON’s treasurer, and Danielle P
became one of several directors. Danielle P’s role with NON quickly expanded
because of her background in event planning and public relations: the core
needs of NON as a charitable organization focused on fundraising. 2
In May 2011, at Danielle P’s suggestion, NON entered into a contract
with her Texas-based business, which she and her husband controlled, Holiday
Public Relations and Events (“Holiday”). The contract gave limited authority
to the Pendergrafts to allow Holiday to engage third-party vendors and to incur
limited costs and expenses on NON’s behalf. Ignoring these limitations,
Holiday submitted fourteen invoices to NON totaling $51,531.47. 3 Scott P, as
NON’s treasurer, approved the invoices and wrote checks totaling $51,531.47
to Holiday from NON’s bank account. Most of the checks (totaling $43,486.30)
were funneled through Holiday to the Pendergrafts, which they ultimately
spent for their personal benefit.
1 Rushnell was the president of NON and DuArt was a director.
2 Danielle P previously owned multiple event planning and public relations
businesses.
3 Some of the invoices were associated with a November 2011 contract that the
bankruptcy court found to be void because the Pendergrafts fraudulently used Rushnell’s
signature from the May 2011 contract to make it appear as if he consented to the November
contract.
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Rushnell and DuArt eventually learned of the Pendergrafts’ self-dealing.
Shortly thereafter, NON, which was then controlled by Rushnell and DuArt,
filed an adversary proceeding in the Pendergrafts’ existing bankruptcy
proceeding, seeking a determination that the money the Pendergrafts had
funneled to themselves through Holiday was non-dischargeable under 11
U.S.C. § 523(a)(4) due to “fraud or defalcation while acting in a fiduciary
capacity.”
After a full hearing, the bankruptcy court found that the Pendergrafts
had diverted the funds discussed above to Holiday for services that either were
not performed, or not authorized by the contract, and used the funds for their
personal benefit. 4 This action, the court found, constituted self-dealing without
prior approval from NON’s disinterested directors. Consequently, the court
held that the Pendergrafts’ debt to NON was non-dischargeable for defalcation
while acting in a fiduciary capacity. The Pendergrafts then filed a timely post-
trial motion to recuse the bankruptcy judge and for a new trial. The bankruptcy
court denied these motions. Acting in its appellate capacity, the district court
affirmed the bankruptcy court’s judgment. The Pendergrafts filed a timely
notice of appeal.
The Pendergrafts argue that the district court erred by affirming the
bankruptcy court’s denial of their motion for a new trial. According to the
Pendergrafts, they should have received a new trial because the bankruptcy
court committed prejudicial error by: (1) applying the wrong standard of
mental culpability to debts incurred through fraud or defalcation while acting
in a fiduciary capacity; (2) improperly piercing Holiday’s corporate veil; and (3)
denying Holiday, a non-party, due process of law by “putting [it] on trial”
4 The bankruptcy court found that the Pendergrafts used the funneled money to make
at least one payment to their individual bankruptcy trustee and to purchase airline and
steamship tickets, furniture, meals, clothing, and hotel stays.
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without adequate representation and forewarning. Alternatively, the
Pendergrafts contend the district court should have reversed the bankruptcy
court’s denial of a new trial because that court’s findings were against the great
weight of the evidence. 5
We review the lower courts’ disposition of the Pendergrafts’ motion for a
new trial for abuse of discretion and find none. 6 First, the bankruptcy court
applied the proper standard to determine the mental culpability of the
Pendergrafts. The bankruptcy court applied the standard set forth by the
Supreme Court in Bullock v. BankChampaign, N.A. 7 and found that the
Pendergrafts knowingly defalcated monies from NON by diverting funds to
themselves through Holiday without first seeking majority approval from
NON’s disinterested directors, which flouted NON’s bylaws. Second, contrary
to the Pendergrafts’ argument, the bankruptcy court did not pierce Holiday’s
corporate veil. Rather, the court determined that the debt at issue was non-
dischargeable because of the torts that the Pendergrafts personally committed.
Holiday was not a party to the proceeding and was not affected by the
judgment. Third, the Pendergrafts do not explain why Holiday’s due process
rights were violated simply by a discussion in the bankruptcy court’s opinion
that it was a conduit for their self-dealing. Finally, the record fully supported
the bankruptcy court’s factual findings. Rushnell’s detailed testimony and the
abundance of documentary evidence demonstrated that the Pendergrafts
fraudulently wrote checks on NON’s account to Holiday that the Pendergrafts
5 When this Court “review[s] the decision of a district court, sitting as an appellate
court, [it] appl[ies] 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 Entringer Bakeries, Inc., 548
F.3d 344, 348 (5th Cir. 2008) (quotation marks omitted). We review the bankruptcy court’s
findings of fact for clear error and its legal conclusions de novo. In re Gerhardt, 348 F.3d 89,
91 (5th Cir. 2003).
6 Benson v. Tyson Foods, Inc., 889 F.3d 233, 234 (5th Cir. 2018).
7 569 U.S. 267, 269 (2013).
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ultimately received. The district court did not err in affirming the bankruptcy
court’s denial of the Pendergraft’s motion for a new trial.
The Pendergrafts next argue that the district court erred by affirming
the bankruptcy judge’s denial of the motion to recuse. We review the denial of
a motion to recuse for abuse of discretion. 8 Generally, “one seeking
disqualification must do so at the earliest moment after knowledge of the facts
demonstrating the basis for such disqualification.” 9 The “most egregious delay”
is when “a party already knows the facts purportedly showing an appearance
of impropriety but waits until after an adverse decision has been made by the
judge before raising the issue of recusal.” 10
On appeal, the Pendergrafts argue, as they did before the district court,
that the bankruptcy judge had a personal bias against them such that they did
not receive a fair trial. According to the Pendergrafts, their attorney told them
prior to trial that he did not believe the Pendergrafts would receive a fair trial
because “for whatever reason, the judge hates y’all.” Such non-specific facts do
not present a ground for recusal. Moreover, where, as here, a losing party
learns of facts he relies on as a basis for recusal before trial yet waits until
after he receives an unfavorable ruling to file his motion, his motion is almost
“per se untimel[y].” 11
We have carefully examined the record in light of the Pendergrafts’
complaint that the bankruptcy judge was hostile to them during the trial and
prevented them from fully presenting their case. As the district court observed,
managing a trial involving untrained pro se plaintiffs is frustrating for all
involved. However, we see no evidence of hostility or abuse that prevented the
8 Trevino v. Johnson, 168 F.3d 173, 178 (5th Cir. 1999).
9 Travelers Ins. v. Liljeberg Enter., 38 F.3d 1404, 1410 (5th Cir. 1994).
10 United States v. Sanford, 157 F.3d 987, 989 (5th Cir. 1998).
11 Id.
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Pendergrafts from presenting their case. The district court did not abuse its
discretion by affirming the bankruptcy court’s denial of the Pendergrafts’
motion to recuse.
AFFIRMED.
6