By: Donald L Swanson
The opinion out of the U.S. Eleventh Circuit Court of Appeals is OHI Asset (VA) Martinsville SNF, LLC v. Wagner (In re Wagner), Case No. 22-13642 (decided September 11, 2024).
The ultimate issue in Wagner is this: Should an individual Debtor be denied a discharge under § 727(a)(4)(A)?
- Such statute says, “The court shall grant the debtor a discharge, unless . . . the debtor knowingly and fraudulently, in or in connection with the case . . . made a false oath or account.”
But that’s not the main legal issue addressed. The main legal issue in Wagner is:
- What is the proper appellate deference when a bankruptcy court, after trial, issues a ruling based upon witness credibility?
Background
Debtor has a Daughter and divorces her mother.
Back before the troubles began, both financial and marital, Debtor buys a show horse in his own name and registers that horse in the name of his minor Daughter. Debtor continues to pay for the care of the horse and insurance—but moves the insurance into Daughter’s name once she reaches an adult age.
Discussions, pre-bankruptcy and pre-divorce, between Debtor and Wife include such emails as:
- Wife reminding Debtor that alimony cannot be discharged in bankruptcy; and
- Debtor responding with, “my only concern was you keeping hold of as much as possible, and with the bankruptcy, me having as little as possible . . . [my attorney] is working on that.”
In Debtor’s bankruptcy, he does not schedule an interest in the show horse.
A § 727 discharge denial Complaint is filed against Debtor on various grounds, including for “making a false oath” by not disclosing his interest in the show horse.
The Complaint goes to trail. After trial, the Bankruptcy Court rules against the Plaintiff on all counts and grants Debtor a discharge, based upon a finding that the testimony of Debtor, Wife and Daughter is credible.
Plaintiff appeals to the U.S. District Court for Southern Florida—which reverses and denies Debtor’s discharge based, exclusively, on Debtor’s failure to disclose an interest in the show horse.
Appeal to Eleventh Circuit
Debtor appeals to the Eleventh Circuit, which reverses the District Court’s ruling and reinstates the Bankruptcy Court’s grant of Debtor’s discharge, based on this proposition:
- the District Court did not give sufficient deference to the Bankruptcy Court’s findings on the credibility of witnesses.
What follows is a summary of the Eleventh Circuit’s explanation.
Legal Standards
The governing legal standards are:
- a reviewing court must afford substantial deference to findings of fact that are based on the credibility of witnesses at a bench trial;
- during bench trials, only the trial judge can assess the variations in demeanor and tone of voice that bear so heavily on the listener’s understanding of and belief in what is said; and
- thus, a reviewing court may not set aside a finding of fact that is based on the trial judge’s decision to credit the testimony of one or more witnesses, each of whom told a coherent and facially plausible story that is not contradicted by extrinsic evidence.
Support for such legal standards includes the following.
The U.S. Supreme Court explains that a “review under the ‘clearly erroneous’ standard is significantly deferential” because:
- “the factfinder is in a better position to make judgments about the reliability of some forms of evidence than a reviewing body acting solely on the basis of a written record of that evidence,” and
- “Evaluation of the credibility of a live witness is the most obvious example.”
Further, such proposition is codified in Fed.Civ.P. 52(a)(6) and made applicable in bankruptcy by Fed.R.Bankr.P. 7052 & 9014(c):
- “Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge . . . the credibility of the witnesses.”
Such Rule is mandatory in adversary proceedings, and it binds a district court, sitting as a court of review of a bankruptcy court’s judgment.
Applying the Standards
Here, the Bankruptcy Court primarily based its ruling on a credibility determination, to which it was duly entitled deference under Rule 52(a) and precedents.
Rather than deferring to the credibility the Bankruptcy Court accorded the witnesses’ testimony, the District Court weighed the evidence anew and made its own factual findings:
- such endeavor is not authorized by a reviewing court of the Bankruptcy Court’s decision.
The District Court concluded that Debtor possessed the requisite fraudulent intent in making a false oath in this bankruptcy case, based on:
- Debtor’s email correspondences;
- the timing when Debtor changed the named insured on the horse’s insurance policy to Daughter; and
- Debtor’s retention of proceeds from the horse.
However, the Bankruptcy Court, after listening to the testimony of Debtor, Wife, and Daughter at trial, found their testimony to sufficiently rebut the presumption that Debtor omitted the horse with a fraudulent intent—they all believed the horse was Daughter’s property.
The Bankruptcy Court found Debtor’s email to Wife about minimizing assets and transferring the horse’s insurance policy did not contradict their testimony or support a finding of fraudulent intent.
It also found that Daughter’s prior minor status, coming of age, and going off to college (instead of having a full time job), supports and explains the actions Debtor took.
Deference Required
The Bankruptcy Court—as the trial court—was best suited to appreciate the nuances of the witnesses’ demeanor.
Deference here is particularly appropriate because proving or refuting fraudulent intent depended on the Bankruptcy Court’s credibility determination.
Because the Bankruptcy Court’s view of these facts was logical, plausible, and supported by the record, the District Court misapplied the clearly erroneous standard in substituting its view of the evidence for the Bankruptcy Court’s.
- A bankruptcy court finding that is “plausible” in light of the full record—even if another is equally or more so—must govern.”
At the Circuit Court of Appeals
“Because we [the Eleventh Circuit] sit as a second court of review, we review ‘the bankruptcy court’s judgment anew, employing the same standard of review’ as the district court.”
In this case, the Bankruptcy Court did not clearly err in determining that Debtor was entitled to discharge because he did not knowingly and fraudulently make a false oath in his bankruptcy case.
So, “we REVERSE the district court’s order and AFFIRM the bankruptcy court’s order of discharge. REVERSED.”
Conclusion
In re Wagner is a reminder of the respective roles of the bankruptcy courts as trial courts and their appellate overseers.
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