The Ninth Circuit and the BAP Draw Opposite Conclusions from the Same Testimony

The Ninth Circuit Bankruptcy Appellate Panel habitually writes lengthy opinions with copious analysis of the facts and the law, just in case the appeal goes to the Ninth Circuit and is not well argued or briefed in the circuit court.

Without refuting any of the BAP’s logic, the Ninth Circuit reversed the BAP and rigorously enforced the principle that a trial court’s findings of fact will not be set aside absent clear error.

A Close Case

The case might have gone either way in bankruptcy court. The debtor owned a company that he put in chapter 7. The owner put himself in chapter 7 at roughly the same time.

The controversy revolved around the company’s customer list and lead list. In the company’s schedules, the owner calculated the customer list as worth some $350, or 10 cents per customer, and the lead list as worth about $430, or two cents per lead.

In the owner’s separate case, several creditors objected to the debtor’s discharge under Section 727(a)(4)(A), alleging that he made a false oath in scheduling the lists as worth only $780. Among other evidence, the creditors played a video where the debtor was making a sales pitch to potential customers. In the video, he said his own lists were worth $1 million.

The debtor had psychiatric problems: He had been diagnosed with bipolar disorder and post-traumatic stress disorder. He was taking several medications that, in the words of the BAP, resulted in “bouts of strange behavior including paranoia, forgetfulness, and deep depression.”

At trial in bankruptcy court, the debtor testified that the lists would only have a higher value in his hands, because he had personal relationships with customers and potential customers.

The bankruptcy court decided that the debtor’s testimony about the value of the lists was not credible and that he had grossly undervalued the lists. The bankruptcy court therefore denied the debtor a discharge for making a false oath in the company’s schedules.

The BAP’s Reversal

The BAP reversed in a 30-page, nonprecedential, per curiam opinion.

With regard to the bankruptcy court’s valuation finding, the BAP recited the usual standard that an appellate court may not reverse without having “a definite and firm conviction that a mistake has been committed.”

The BAP noted that the trustee had abandoned the lists, but for reasons other than value.

Examining the trial testimony on both sides, the BAP said there was “no competent or plausible evidence that [the company’s] customer list was worth more in the hands of the chapter 7 trustee than the value scheduled by [the debtor] on [the company’s] schedules.” The panel said it was “left with a definite and firm conviction that a mistake has been committed.”

The BAP decided that the debtor was entitled to a discharge because the bankruptcy court’s conclusion that the debtor had knowingly and fraudulently undervalued the lists was “clearly erroneous.”

The Circuit Reverses the BAP

The Ninth Circuit reversed the BAP in a five-page, nonprecedentential, per curiam opinion on June 25. The panel was composed of Circuit Judges Ronnie B. Rawlinson and N.R. Smith and District Judge Edward R. Korman, sitting by designation from the Eastern District of New York.

The circuit court did not pause to find shortcomings in the BAP’s analysis of the trial record. Instead, the circuit panel said it reviews bankruptcy court decisions “‘without according any deference to the BAP,’” citing Salazar v. McDonald (In re Salazar), 430 F.3d 992, 994 (9th Cir. 2005).

Taking its own look at the bankruptcy court’s findings, the circuit panel said that the trial court’s valuation “finds support in the record and is not illogical or implausible.”

The circuit panel said it was required to give “great deference” to the bankruptcy court’s conclusion that the debtor’s testimony was not credible.

With regard to fraudulent intent, the circuit panel said it was “unable to say” that the bankruptcy court’s finding “was illogical, implausible, or without support in the record.”

What Does This Mean?

Both opinions were nonprecedential. Both focused on the trial record and the bankruptcy court’s conclusions. Both the BAP and the circuit court were trying to make rulings that seemed right to them. The BAP may have been influenced by the debtor’s psychiatric problems, while the circuit court was seemingly bent on discouraging appellate courts from reversing findings of fact.

There is a practice point to be made. Pegging estate assets with a low value is perilous. Importuning a trustee to abandon an asset based on a low scheduled value is a dangerous undertaking. Counsel should carefully scrutinize a debtor’s valuations with an eye toward fending off an objection to discharge.

The bankruptcy court noted that the debtor had not listed the value as “unknown.” Would the bankruptcy court have granted a discharge had the debtor said “unknown?” Or, would listing the value as “unknown” invite the court to believe the debtor was being deceptive?

Let us be thankful that the BAP and circuit opinions were both nonprecedential.

The opinions are linked below:

- Keyword Rockstar Inc. v. Schultz, 19-60031 (9th Cir. June 25, 2020).

- Schultz v. Keyword Rockstar Inc. (In re Schultz), 18-1269 (B.A.P. 9th Cir. June 4, 2019).