Palmacci v. Umpierrez CV-96-271-M 09/26/96 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Stephen A. Palmacci, Appellant,

v. Civil No. 96-271-M

P. Fernando Umpierrez, Appellee.

Richard Erricola, Trustee

O R D E R

P. Fernando Umpierrez ("debtor"), filed for bankruptcy

protection under Chapter 7 of the United States Bankruptcy Code.

Stephen A. Palmacci ("creditor"), filed an Adversary Proceeding

pursuant to

(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 (Vaughn, J.) directed a verdict in

favor of debtor, holding that the debt was dischargeable in

bankruptcy. For the reasons discussed below, the bankruptcy

court's decision is affirmed. Factual Background

At an auction held on September 26, 1991, debtor purchased a

condominium development known as "The Chase Project" for

$144,000. Debtor placed $5,000 on deposit, with payment due in

full in forty-five days. Unable to raise enough capital on his

own, debtor solicited funds from outside investors, including

creditor.

On November 7, 1991, creditor invested $75,000 in The Chase

Project. Although there was no written agreement between

creditor and debtor, creditor alleges that his investment was

made on the condition that: (1) the funds invested would be held

in trust, to be used for the development of The Chase Project;

and (2) the debtor would invest $75,000 of his own money in the

proj ect.

On November 11, 1991, a trust was created and certificates

of beneficial interest were issued to the investors, including

creditor. All investments were subseguently placed into the

trust, including creditor's $75,000 investment.

By December 11, 1991, debtor had contributed approximately

$18,000 of his own funds into the trust. On January 13, 1992,

2 debtor secured a second mortgage on his home and deposited an

additional $57,000 into the trust.

Shortly thereafter, debtor prepared a brochure and business

proposal, which was distributed to all the investors in the

project. The proposal stated that the project would have

original investment capital of $250,000. The proposal also

stated that the profit from the project would be $254,000.

The project did not succeed, and on May 12, 1995, debtor

filed a Chapter 7 bankruptcy petition. Creditor filed an

Adversary Proceeding pursuant to

(a)(2)(A),

claiming that debtor induced him to invest in the project through

false representations. Specifically, creditor alleged that

debtor represented, in reckless disregard of the truth, that the

funds invested would be placed in a trust and that debtor would

put $75,000 of his own money into the project. Creditor further

alleged that debtor made these representations with the intent to

deceive, and that creditor had justifiably relied on debtor's

false representations to his detriment.

The bankruptcy court held that creditor's reliance on the

fact that a trust would be created was not justified because at

the time of his investment the creditor did not know any ofthe

3 terms of the trust. Moreover, the court held that creditor did

not sustain his burden of proving that debtor represented, in

reckless disregard of the truth, that he would invest $75,000 of

his own money.

Standard of Review

On appeal, a district court reviews a bankruptcy court's

legal determinations de novo. In re G .S .F . Corp.,

(1st Cir. 1990). Findings of fact, however, are accorded

much greater deference. A district court will not disturb a

bankruptcy court's factual findings unless they are clearly

erroneous. Briden v. Foley,

(1st Cir. 1985).

A factual finding is clearly erroneous when, although there is

evidence to support it, the reviewing court, after consideration

of all evidence before it, is left with the definite and firm

conviction that a mistake has been made. In re McIntyre,

(D.N.H. 1986) .

4 Discussion

A. Reckless Disregard of the Truth

Creditor argues that the bankruptcy court erred in finding

that debtor did not make representations in reckless disregard of

the truth in order to induce creditor to invest in The Chase

Project. Creditor's argument focuses on two basic

representations — the alleged representation that debtor would

personally invest $75,000, and the representations made in the

Business Proposal concerning total investment and profit. The

bankruptcy court's rulings were based upon its factual findings

in this particular case. As noted above, a district court will

not disturb findings of fact unless they are clearly erroneous.

The bankruptcy court found that debtor's representation

regarding his own investment was not made in reckless disregard

of the truth. Although creditor argues that debtor knew, at the

time the representation was made, that he did not have the

necessary eguity to invest $75,000 into the project, the argument

is not supported by the evidence of record. Debtor testified

that he believed that he had sufficient eguity in his home to

invest $75,000 into the project. Moreover, debtor testified that

he believed that he had, in fact, made a personal investment of

5 $75,000. In light of that evidence, the bankruptcy court's

factual finding was supported, and this court is certainly not

left with a firm conviction that the bankruptcy court erred.

Therefore, the court's finding is not clearly erroneous and will

be upheld.

Creditor also alleges that debtor represented, in reckless

disregard of the truth, that $250,000 would be invested in the

project and that each investor would profit from their

investments. The court found that the creditor had not met his

burden of proof on this issue. That factual finding, too, is

supported by evidence in the record. Debtor testified that

$250,000 in cash was, in fact, invested into the project.

Creditor's expert, a certified public accountant, confirmed

debtor's testimony. Further, creditor's own testimony clearly

indicates that he understood the Chase project to be a high risk

investment. Creditor testified that regardless of the numbers

presented in the business proposal, he knew that he might not

profit, and in fact, that he may lose money on the deal. Thus,

the record on appeal amply supports the factual finding of the

bankruptcy court.

6 B. Scienter

Creditor contends that the bankruptcy court relied solely on

debtor's testimony of honest intent when determining whether his

representations were made with the intent to deceive. Creditor

argues that the bankruptcy court erred by not considering

circumstantial evidence relevant to the representations.

In ruling upon the issue of intent to deceive, the

bankruptcy court explicitly stated that creditor had not met his

burden of proof. In establishing intent to deceive, creditor

bore the burden of persuasion. In re Simpson,

(Bankr. N.D. Iowa 1983). Because proof of intent is always

difficult to obtain, creditor could present evidence of the

surrounding circumstances from which intent may be inferred.

However, evidence of surrounding circumstances must be sufficient

to lead a court to find debtor's self-serving statement

inconsistent and unbelievable. In re Matter of Van Horne, 823

F .2d 1285, 1288 (8th Cir. 1987).

Implicit in the bankruptcy court's finding that creditor did

not meet his burden of proof is a finding that creditor did not

present sufficient evidence of the surrounding circumstances to

raise an inference of intent to deceive. Thus, the bankruptcy

7 court could have relied on debtor's statement of honest intent,

particularly where debtor's testimony was consistent and the

court found his testimony to be credible. The bankruptcy court's

factual finding that debtor did not possess the requisite intent

to deceive was not based upon an improper refusal to consider

circumstantial evidence, nor was it clearly erroneous, and thus,

it cannot be disturbed.

C. Justifiable Reliance

Creditor also argues that the bankruptcy court failed to

rule on the issue of whether creditor justifiably relied upon the

debtor's representation that he would invest $75,000 of his

personal funds into the project. This argument is neither

persuasive nor supported by the record.

Where an allegation of false representation has been made,

creditor has the burden to prove all three elements, that is,

creditor must prove that: (1) debtor made a false representation

with reckless disregard of the truth; (2) the representation was

made with the intent to deceive; and (3) the creditor justifiably

relied on the representation. The bankruptcy court found that creditor failed to meet his

burden to show that debtor stated, bn reckless disregard of the

truth, that he would invest $75,000, or that he made that

representation with the intent to deceive. Since creditor did

not satisfy either the first or second prong of the test, it was

unnecessary for the bankruptcy court to address the third prong —

whether creditor justifiably relied on debtor's representation.

D. Expert Testimony

Finally, creditor argues that the bankruptcy court

improperly restricted the testimony of creditor's expert, a

certified public accountant, to matters related to creditor's

initial investment.

Whether to admit or reject expert testimony is committed to

the sound discretion of the trial court. U.S. v. Valle,

(1st. Cir. 1995); Int'l Adhesive Coating Co., Inc. v.

Bolton Emerson Int'l,

(1st Cir. 1988) .

Typically, the trial court enjoys great latitude in respect to

such discretionary judgments. See, e.g.. Allied Int'l, Inc. v.

Int'l Longshoremen's Ass'n, Inc.,

, 40 (1st Cir.),

cert, denied,

(1987); U.S. v. Wilson,

,

9 517 (1st Cir. 1986). The trial court's determinations will not

be disturbed absent a clear abuse of that discretion. Valle, 72

F .3d at 214.

Although evidence of subsequent conduct may have reflected

the debtor's state of mind at the time of creditor's initial

investment, generally subsequent conduct is only properly

considered when the conduct is part of an overarching scheme or

pattern of misrepresentations. Matter of Raining,

(Bankr. D. Del. 1990); In re Woolley,

(Bankr. E.D. Va. 1991). No such overarching scheme or pattern

was alleged or proved in this case. Therefore, the bankruptcy

court properly limited the expert's testimony to the creditor's

initial investment.

Conclusion

Upon careful review of the record and the applicable legal

authorities, the findings and rulings of the bankruptcy court are

affirmed in all respects. Judgment shall be entered accordingly.

10 SO ORDERED.

Steven J. McAuliffe United States District Judge

September 26, 1996

cc: Dorothy Silver, Esq. Alan I. Cantor, Esq. Richard B. Erricola George Vannah

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