- Category: Judge Karlin
- Published on 30 August 2012
- Written by Judge Karlin
- Hits: 1802
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
August 29, 2012
Blaine F. Bates
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE LOREN EUGENE ENNIS and
LAUREL JUNE ENNIS,
DONALD PACINI and CARITA
Plaintiffs – Appellants,
LOREN EUGENE ENNIS and
LAUREL JUNE ENNIS,
Defendants – Appellees.
BAP No. CO-12-008
Bankr. No. 10-17075
Adv. No. 10-01458
Appeal from the United States Bankruptcy Courtfor the District of Colorado
Before NUGENT, KARLIN, and HALL , Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
Plaintiffs Donald and Carita Pacini filed an adversary complaint, seeking a
determination that their state court judgment against debtors was non-
dischargeable. In that complaint, the Pacinis alleged that a loan they made to
debtors’ company had been obtained by fraud committed by both debtors while
* This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8018-6.
* Honorable Sarah A. Hall, United States Bankruptcy Judge, United States
Bankruptcy Court for the Western District of Oklahoma, sitting by designation.
they acted in a fiduciary capacity. After they completed the presentation of their
evidence at trial, the bankruptcy court issued a judgment as a matter of law,
holding that the Pacinis had failed to prove their claims. We affirm.
Debtor Loren Ennis (“Ennis”) had been a real estate developer for
approximately ten years, and had successfully completed a number of projects
within Mesa County, Colorado during that time. 2 In 2006, Ennis was involved
with the development of several projects, including one called “Jade Falls.” Jade
Falls was an ambitious undertaking, involving the planned development of a 26acre
property into a 13-acre park, a 1.5-acre lake with waterfalls, and six luxury
homes. 3 It was also the first project Ennis had personally undertaken, although he
had successfully completed approximately 10 other development projects in
partnership with others.
Ennis managed each of his property developments through separate limited
liability companies. 4 He thus owned, or partially owned, a number of LLCs,
which were used to develop different projects. In the case of Jade Falls, that
entity was Ennis Consulting and Investments, LLC (“Ennis LLC”); it was solely
owned by Ennis and his wife, debtor Laurel Ennis. 5 These LLCs frequently
husband’s projects. Id. at 136; 141; 250-51. Her only significant role in
2 Appellants’ Appendix (“Appx.”) at 133, 137.
3 Id. at 145.
4 Id. at 136.
5 Laurel Ennis (“Laurel”) is not a developer, and did not participate in her
connection with Jade Falls was that she was a guarantor on the financing. Id. at
247-49. In addition, she helped name the project. Id. at 255. Laurel did not
participate in any of the Jade Falls loan negotiations, including the one with thePacinis. Id. at 151. This fact was verified by Carita Pacini, who testified that sherelied solely on Loren Ennis’s representations and never spoke to Laurel prior tomaking the loan. Id. at 266-67. It was also admitted at oral argument, whencounsel for the Pacinis forthrightly admitted that their case against her was only“tangential.”
overlapped on projects, and Ennis was not particularly careful about always using
the appropriate LLC account to pay project expenses. For example, Ennis carried
his contractor’s license through Lear Construction, another of his LLCs, and used
Lear as “the construction arm” of his developments. 6 As such, the lines between
Lear and Ennis LLC expenses were not always clear.7
At trial, Ennis described the process of obtaining approval of a planned
development such as Jade Falls. 8 It typically begins with obtaining control of the
land. After the real property is purchased, an outline of the development plan
must be submitted to the governing authorities in order to receive preliminary
approval. This includes drawings of the project and verification that it will meet
all development code requirements. The county’s preliminary approval of the
Jade Falls project was first given in April 2006 and finalized in June 2006.9
Once preliminary approval is obtained, the process for obtaining final
approval begins. The final approval process requires satisfying all controlling
entities, such as county engineers, fire department, etc., that the construction will
meet all codes. Once that is successfully completed, verbal final approval is
given, after which a detailed project plat must be filed. Filing the final plat
requires the developer’s guarantee that it will have sufficient funds to complete
the development. This requires posting a cash bond or a letter of credit from an
As with most of the other projects Ennis had developed, Capital Funding
6 Id. at 169.
7 Ennis testified that in the years before this bankruptcy, he quite often paid
Jade Falls expenses through Lear (id. at 178-79), and that he sometimes paidbusiness credit lines out of his personal account (id. at 171-74).
8 See id. at 133-35.
9 Id. at 149.
Advisors, LLC (“Capital”) provided the primary lending for Jade Falls. 10 Ennis
LLC purchased the Jade Falls property in June 2005, using $500,000 of a
$650,000 loan from Capital (“Capital Loan”). The Capital Loan was intended to
initiate the project to allow purchase of the property and to provide funding
through county preliminary approval. 11 Capital was secured by a first deed of
trust on the Jade Falls property, a promissory note from Loren and Laurel Ennis
individually, and a lien on the Ennises’ home. 12 Loan proceeds in excess of the
property purchase price were used for initial development costs and interest
payments on the Capital Loan.
In mid-2006, Ennis LLC requested additional funding from Capital to
complete development of Jade Falls. The requested funds would bring the total
principal owed by Ennis LLC to Capital to $1.43 million. Capital agreed to
increase its funding if, among other things, Ennis LLC infused cash into the
project equivalent to 10% of the total debt, or $143,000.13
Plaintiffs Don and Carita Pacini knew the Ennises socially. In 2006, the
couples discussed the local real estate market over dinner. 14 In the course of their
conversation, the Pacinis indicated that they were interested in investing
approximately $100,000 in real estate because the Grand Junction market was
doing so well. 15 Soon thereafter, Ennis phoned Don Pacini about possibly
10 James Simon, Capital’s President, testified that Capital’s professional
relationship with Ennis was good, and that all previous development loans theyhad financed for Ennis had been successfully paid. Id. at 432.
11 Id. at 138.
12 Id. at 146-48.
13 Capital issued a conditional loan proposal to increase Jade Falls’ funding
on August 31, 2006. Id. at 304-06.
14 Id. at 107, 152.
15 Id. at 217.
investing in the Jade Falls project. From his discussions with Ennis, Don Pacini
understood that Capital was requiring a $143,000 investment in order for it to
increase its funding of the Jade Falls project.
The Pacinis agreed to invest $143,000 in Jade Falls. They understood that
their money would be used to obtain additional funding from Capital and, once
that funding was obtained, to develop the project. 16 The Ennises, individually and
as “member/managers” of Ennis LLC, executed a promissory note in favor of the
Pacinis for the $143,000. 17 The note, which provided for both a 10% interest rate
and 20% of the net profits from the Jade Falls project, was secured by a deed of
trust on the Jade Falls property. 18 Prior to making the loan, the Pacinis were
shown the Jade Falls development plans, but they opted to conduct no
independent investigation of the project.19
Because Capital already had the first deed of trust on the Jade Falls
property, all parties intended and expected that the Pacinis’ deed of trust would
take second position. Ennis had previously used Meridian for loan documentation
on other projects, and he suggested that Meridian prepare the paperwork for the
Pacini loan, as well. 20 Both Ennis and Don Pacini expected that Meridian would
record the deed of trust on behalf of the Pacinis. But Meridian did not record the
Pacinis’ deed and, as a result, it was not recorded until approximately eight
months later, on May 15, 2007.21
16 Id. at 220-21.
17 Id. at 19. The note was payable on September 5, 2007, but also contained
an “automatic” one year extension of the maturity date to September 5, 2008.
Id. at 73-76.
Id. at 218-20; 262-65.
Id. at 152.
Id. at 73.
In January, 2007, Ennis LLC obtained a short-term, high interest loan for
Jade Falls from Sam Baldwin, which was also secured by a deed of trust on the
Jade Falls property. 22 From his review of final loan documentation provided by
Baldwin, Ennis discovered that the Pacinis’ deed of trust had not been recorded.23
Ennis immediately contacted Don Pacini to inquire why his deed was not of
record. 24 As a result of Ennis’s call, the Pacinis had their deed recorded
approximately two months later,25 but it was at that point inferior to Baldwin’s.26
The Baldwin loan was subsequently fully paid and that deed of trust released, at
which point the Pacinis’ deed moved into the second position as originally
The Jade Falls project was significantly delayed by numerous engineering
problems. Initially, in June 2005, Ennis hired High Country Engineering (“High
Country”) to provide engineering work on the project. It was the first time Ennis
22 Ennis described Baldwin as a “hard money lender,” who charged 28%
interest on his loan, partly because of Ennis’s need for quick money. Id. at 160.
The Baldwin loan was also short-term, having a maturity date of only six months.
Id. at 159. The high interest rate motivated Ennis to pay this loan as quickly as
he could. Id. at 160.
Starr. But that loan, which was apparently resolved by transfer of Garnet Glen,
23 Id. at 159.
24 Id. at 210, 213.
25 Id. at 216-17.
26 Id. at 241-42. Ennis LLC also subsequently borrowed $300,000 from John
LLC to John Starr in August of 2009 (id. at 407), is not at issue in this appeal.
Id. at 161. One of the Pacinis’ original claims was that they were deceived
into believing that their deed of trust would receive second priority when it did
not. This factual claim was resolved by the bankruptcy court in favor of theEnnises, based on both the trial judge’s positive assessment of Loren Ennis’scredibility and the lack of any harm to the Pacinis, who were only temporarily inthird position. Id. at 288-90. The Pacinis did not argue the trust deed recordingissue on appeal, and it has therefore been waived. See Gen. Elec. Capital Corp.
v. Manager of Revenue (In re W. Pac. Airlines, Inc.), 273 F.3d 1288, 1293 (10thCir. 2001) (issue not raised in appellant’s opening brief is waived).
had used High Country, an “out-of-town” firm, and it did not go well.28
According to Ennis, High Country was inefficient and ineffective, and “had no
idea what they were dealing with,” particularly with respect to the project’s many
water issues. 29 Eventually, Ennis hired a local company, Maverick Engineering
(“Maverick”), to replace High Country on Jade Falls. Maverick was owned by
the son of the county’s planning department head. However, according to Ennis,
Maverick’s owner “had a nervous breakdown and disappeared” in 2007,
ultimately ending up in the hospital. 30 Ennis was then forced to switch to a third
company –Vista Engineering, also a local firm, and it finally completed the
engineering needed for approval of the project.
Because these engineering issues significantly delayed final approval of the
project by the county, Ennis was still negotiating with Capital for additional
funding in September 2007. 31 Ennis was unable to obtain final county approval
until April 2008, and could not record the project plat, or further develop the
property, without a letter of credit from Capital. 32 Ennis testified he expected that
additional funding from Capital would be obtained by year-end when he
negotiated the Pacinis’ loan, and that the engineering delays were the “sole cause”
of his inability to obtain that funding.33
28 Id. at 162.
30 Id. at 163.
31 Capital’s President testified that he was aware of “numerous challenges to
the [Jade Falls] project,” and that Ennis “was always very good about keeping usinformed of the challenges he was having, the time delays he was having, theadditional costs that were involved.” Id. at 445.
32 Id. at 156-57.
33 Id. at 164.
As of June 2006, Ennis LLC had used up all of the Capital Loan funds.34
As a result, interest on the loan was not paid in July or August of that year.
Nonetheless, Capital did not declare the loan to be in default. 35 In an effort to
relieve some financial pressure, Ennis requested a buy-out from his partners in
another real estate venture, which he expected to occur by the end of 2006, but
did not. Ennis was also counting on proceeds from a property sale that was
expected to close in September, but that sale closing was also delayed. Further
complicating matters, in or around September 2006, Lyle Arent (who was Ennis’s
partner in another LLC –LALE Developments) retired. Believing that he could
use proceeds from the property sale he expected to imminently close, Ennis
agreed to loan money to Arent that would allow Arent to postpone using
retirement funds until the next tax year.36
Ennis testified that, although it is a common industry practice for
developers to take a salary, he typically did not do so. 37 Instead, he counted on
profits from sales of his development projects to cover his personal expenses, and
purposefully “staged” projects so that he would periodically receive proceeds.38
However, in late 2006, delay of his anticipated funding sources resulted in Ennis
at least temporarily relying on proceeds from the Pacinis’ loan to cover those
Unfortunately for all parties involved, the Jade Falls project ultimately
34 Id. at 106.
36 Id. at 120. This loan to Arent was ultimately repaid. Id. at 177.
37 Id. at 137.
failed, and Capital foreclosed its lien on the Jade Falls property in 2008. 39 In
December 2008, the Pacinis filed suit against the Ennises in Colorado state court,
based on their personal guarantee, and obtained a judgment against them.40
Thereafter the Ennises filed for Chapter 7 bankruptcy relief, and the Pacinis
timely filed an adversary proceeding against them. In the complaint, the Pacinis
sought a general denial of discharge under 11 U.S.C. § 727(a)(4),41 and nondischargeability
of the debt under § 523(a)(2) and (4). In May 2011, the
bankruptcy court entered summary judgment for the Ennises on the Pacinis’
§ 523(a)(4) fiduciary fraud claim. A trial was then held on the other two causes
of action, false oath under § 727(a)(4) and obtaining money by fraud under
§ 523(a)(4). After completion of the Pacinis’ evidence, the bankruptcy court
granted judgment as a matter of law for the Ennises. The Pacinis moved for a
new trial, arguing only that the evidence satisfied their burden of proof on their
fraud claim. That motion was denied, and the Pacinis appealed.
II. Appellate Jurisdiction
The bankruptcy court’s November 29, 2011, judgment fully resolved the
Pacinis’ complaint, but it did not resolve the counterclaim the Ennises had filed
against the Pacinis alleging violation of the automatic stay. This Court issued an
order to show cause why the appeal should not be dismissed as having been taken
from a non-final order. Shortly thereafter, the parties stipulated to dismissal, with
prejudice, of that counterclaim. In addition, on July 17, 2012, the bankruptcy
court entered an order, nunc pro tunc to November 19, 2011, dismissing the
39 Id. at 148; 212; 442.
40 Id. at 188. The Pacinis did not allege fraud in the state court action.
41 Unless otherwise noted, all further statutory references in this decision will
be to the Bankruptcy Code, which is Title 11 of the United States Code.
counterclaim with prejudice. The jurisdictional issue has thus been resolved.42
On December 12, 2011, the Pacinis timely filed a motion for new trial
pursuant to Rule 59 of the Federal Rules of Civil Procedure. 43 That motion was
denied by the bankruptcy court in a judgment entered on January 24, 2012, and
the Pacinis thereafter timely filed their notice of appeal from the partial summary
judgment, the judgment as a matter of law, and the denial of their Rule 59 motion.
No party has elected to have the appeal heard by the Colorado district court, and
therefore this Court has jurisdiction.44
Issues and Standard of Review
The Pacinis have argued only two issues on appeal:45
Whether summary judgment was appropriately granted as tothe existence of a fiduciary duty. This is a legal issue that is
reviewed de novo.
Whether the bankruptcy court erred in finding that the Pacinishad failed to prove fraud. This issue requires review of thecourt’s factual findings, which are reviewed for clear error.
As a preliminary matter, we note that the Pacinis’ allegations in support of
the non-dischargeability of their claims relate to Laurel Ennis in only the most
tangential way. The Pacinis essentially made no direct allegations of misconduct
against Laurel Ennis, and their brief cites to no evidence in the record of
statements or conduct by her upon which they relied. Instead, the Pacinis’ claims
42 See Wadsworth v. Word of Life Christian Ctr. (In re McGough), 467 B.R.
220, 223 (10th Cir. BAP 2012) (parties’ stipulation, followed by bankruptcy courtorder, to dismiss unlitigated claims cured jurisdictional issue).
43 Made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy
28 U.S.C. § 158(b)-(c); Fed. R. Bankr. P. 8001.
45 Because the Pacinis did not assert on appeal any error with respect to their
§ 727 false oath claim, they have waived that claim. See, e.g., Gen. Elec. CapitalCorp. v. Manager of Revenue (In re W. Pac. Airlines, Inc.), 273 F.3d 1288, 1293(10th Cir. 2001) (issue not raised in appellant’s opening brief is waived).
against Laurel Ennis are solely based on the alleged conduct of her husband. This
is simply insufficient to establish any non-dischargeability claims against
Laurel. 46 We therefore affirm the bankruptcy court’s denial of the Pacinis’ claims
in Laurel’s favor.
A. Summary Judgment on Fiduciary Status (§ 523(a)(4))
“We review the grant of a summary judgment motion de novo,
applying the same standards as the district court. Summary judgmentis appropriate when there is no genuine issue as to any material factand ... the movant is entitled to judgment as a matter of law. We
view all evidence and draw reasonable inferences therefrom in the
light most favorable to the nonmoving party. We may affirm the[bankruptcy] court’s decision for any reason supported by therecord.”47
The bankruptcy court granted the Ennises’ motion for summary judgment
on the Pacinis’ § 523(a)(4) claim. Section 523(a)(4) provides, in pertinent part,
that a Chapter 7 discharge does not discharge a debt “for fraud or defalcation
while acting in a fiduciary capacity[.]” 48 “The existence of a fiduciary
relationship under § 523(a)(4) is determined under federal law,” but state law is
also relevant to the inquiry. 49 A party relying on § 523(a)(4) is required to show,
by a preponderance of the evidence, that there is both a fiduciary relationship
between the parties and a defalcation by the debtor in the course of that
46 See, e.g., Hartwig v. Markley (In re Markley), 446 B.R. 484, 488 (Bankr.
D. Kan. 2011) (fraud by one spouse is not automatically imputed to the otherspouse for non-dischargeability purposes). We also note that, during oralargument of this appeal, upon direct questioning by the panel, the Pacinis’counsel admitted that they were not pursuing a claim against Laurel for fiduciarydefalcation, and were only “very tangentially” pursuing a claim against her forfraud. Counsel was unable to point to any evidence in the record during oralargument to support this claim against Laurel, and we have been unable to find
47 Mosier v. Callister, Nebeker & McCullough, 546 F.3d 1271, 1275 (10th
Cir. 2008) (citations and internal quotation marks omitted).
48 The Pacinis did not allege either embezzlement or larceny, the other
§ 523(a)(4) grounds for non-dischargeability.
49 Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir. 1996).
relationship. 50 Well-established jurisprudence in the Tenth Circuit construes a
§ 523(a)(4) fiduciary relationship narrowly; that relationship “exists only where a
debtor has been entrusted with money pursuant to an express or technical trust.”51
The Pacinis do not claim a technical trust, which is imposed by statute,
exists. Instead, they rely solely on their assertion of an express trust. An express
trust is one that is “intentionally entered into by the parties,” and “may involve a
formal declaration of trust or a situation where the intention of the parties to form
a trust relationship may be inferred by the surrounding facts and circumstances.”52
Significantly, neither a general duty of confidence and trust, nor an unequal
balance of power in the relationship, is sufficient. 53 And under Colorado law,
creation of an express trust requires unequivocal and unambiguous language or
conduct. 54 Finally, this Court has previously noted that relationships defined as
“fiduciary” in non-bankruptcy contexts frequently do not satisfy the fiduciary
capacity requirement of § 523(a)(4).55
The Pacinis assert that the nature of their relationship with the Ennises was
fiduciary, as opposed to merely commercial, relying almost entirely on a
50 Antlers Roof-Truss & Builders Supply v. Storie (In re Storie), 216 B.R. 283,
286 (10th Cir. BAP 1997). Determination of the existence of a fiduciary duty is“a legal, rather than a factual, finding.” In re Young, 91 F.3d at 1373.
51 Sawagerd v. Sawaged (In re Sawaged), CO-10-058, 2011 WL 880464, at *3
(10th Cir. BAP Mar. 15, 2011) (internal quotation marks omitted).
473 (10th Cir. BAP 1997) (many non-bankruptcy fiduciary relationships do not
52 Id. (internal quotation marks omitted).
53 In re Young, 91 F.3d at 1371-72.
54 Morgan v. Wright, 399 P.2d 788, 790-91 (Colo. 1965).
55 Employers Workers’ Comp. Ass’n v. Kelley (In re Kelley), 215 B.R. 468,
satisfy In re Young’s narrow view of § 523(a)(4)). See also In re Evans, 161 B.R.
474, 477 (9th Cir. BAP 1993) (broad general definition of fiduciary relationshipinapplicable to dischargeability determinations).
California case, In re Nassbridges. 56 In Nassbridges, a bankruptcy court
determined that the relationship between investors and an investment broker was
fiduciary for purposes of § 523(a)(4), despite a contractual provision to the
contrary, and also without evidence of a clear intent to create such a relationship.
The factual basis behind this determination was that, although the debtor broker
specifically represented to plaintiffs that their investments would be used to
purchase gold, they were instead used to purchase highly leveraged gold futures.
Both plaintiffs and their primary contact at debtor’s investment firm believed that
only gold bullion had been purchased with their account, based partly on company
statements that described their holdings as “gold bar .999.”
Although the Pacinis do not, and cannot, deny that the fund transfer they
made to Ennis LLC was a “loan,” they attempt to characterize that transfer as
more of an “investment,” analogizing their situation to the one in Nassbridges.57
But Nassbridges is neither factually nor legally relevant to the Pacinis’
§ 523(a)(4) claim. First, Nassbridges, a California bankruptcy decision, holds no
precedential value in this Circuit, but more importantly, it is simply inconsistent
with the specific requirements for proving the existence of a § 523(a)(4) fiduciary
relationship that were articulated by the Tenth Circuit Court of Appeals well over
56 Dimichele v. Nassbridges (In re Nassbridges), 434 B.R. 573 (Bankr. C.D.
Ca. 2010), aff’d, 464 B.R. 494, 2011 WL 3244396 (9th Cir. BAP July 15, 2011).
57 The Pacinis argue that their contractual right to share in profits from Jade
Falls created a “special duty to ensure the Jade Falls project would besuccessful.” Appellants’ Opening Brief at 9. Their argument on this point
evolved from essentially an analogy to an investment relationship, in response to
the summary judgment motion in the bankruptcy court (Appx. at 79), to
something more akin to re-characterization of the entire transaction, on appeal
(Appellant’s Opening Brief at 9). Although we have elected to address thisargument on its merits, we view it as perilously close to a “new” argument raisedon appeal, which we would not ordinarily consider. See In re Cozad, 208 B.R.
495, 498 (10th Cir. BAP 1997) (appellate court should not consider issues notproperly raised before the trial court).
a decade ago, in In re Young.58 Moreover, as a factual matter, the Pacinis’ loan
was a simple commercial transaction that does not rise to the level of a
§ 523(a)(4) fiduciary relationship, rather than an investment as in Nassbridges.
The fact the borrower is entitled to share in the profits of the project for the
specific loan does not magically create a fiduciary relationship that involves an
Accordingly, since the material facts regarding the transaction at issue were
uncontested, summary judgment on this issue was appropriate.
B. Judgment on Fraud Count (§ 523(a)(2)(A))
After the Pacinis completed presentation of their evidence at trial, the
bankruptcy court sua sponte granted judgment as a matter of law in favor of the
debtors on the Pacinis’ § 523(a)(2)(A) claim. 59 This statute provides that a debt
obtained by “false pretenses, a false representation, or actual fraud” is not
discharged in bankruptcy. In order to obtain a judgment of non-dischargeability,
a debt holder must prove that “[t]he debtor made a false representation; the debtor
made the representation with the intent to deceive the creditor; the creditor relied
on the representation; the creditor’s reliance was reasonable; and the debtor’s
representation caused the creditor to sustain a loss.”60
Only the first two of these elements are at issue, and we review the
58 91 F.3d at 1371 (§ 523(a)(4) requires: 1) a fiduciary relationship, defined
as entrusting money to the debtor pursuant to an express or technical trust; and 2)
fraud or defalcation committed in the course of that relationship).
59 See bankruptcy court’s oral ruling, beginning at Appx. at 284. As noted
previously, the court also granted debtors judgment on the Pacinis’ false oathclaim, which they elected not to appeal.
60 In re Young, 91 F.3d at 1373. The “reasonable” reliance element set forth
in Young was modified by the United States Supreme Court to “justifiable”
reliance in Field v. Mans, 516 U.S. 59, 74-75 (1995).
bankruptcy court’s fact findings as to those elements for clear error.61
A finding of fact is clearly erroneous if it is without factual supportin the record or if the appellate court, after reviewing all theevidence, is left with a definite and firm conviction that a mistakehas been made. Review of a case under the clearly erroneousstandard is significantly deferential, requiring a definite and firmconviction that a mistake has been committed. When findings arebased on determinations regarding the credibility of witnesses, Rule52(a) [Fed. R. Bankr. P. 7052] demands even greater deference to thetrial court’s findings; for only the trial judge can be aware of thevariations in demeanor and tone of voice that bear so heavily on thelistener’s understanding of and belief in what is said.62
At trial, the Pacinis asserted two factual bases for their allegation of
§ 523(a)(2)(A) fraud: 1) they were deceived into believing that their deed of trust
would receive second priority when it originally did not; and 2) they were falsely
told that their loan would be used only to obtain a new loan from Capital and to
develop Jade Falls. The first of these factual claims was resolved by the
bankruptcy court in favor of the Ennises based on both Loren Ennis’s credibility
and the lack of any harm to the Pacinis by their deed of trust having temporarily
been in third position. 63 The Pacinis have not pursued the trust deed issue on
appeal, and it has therefore been waived.64
As to the second issue, the record supports the Pacinis’ assertion that the
loan proceeds were used for a number of Ennis’s financial needs that were not
directly related to the Jade Falls development. But the totality of the evidence
overwhelmingly supports the bankruptcy court’s determination that most of those
61 Copper v. Lemke (In re Lemke), 423 B.R. 917, 919 (10th Cir. BAP 2010)
(bankruptcy court’s findings regarding required elements of § 523(a) claims arefactual determinations reviewed for clear error).
62 Mathai v. Warren (In re Warren), 350 B.R. 628, *5 (10th Cir. BAP 2006),
aff’d, 512 F.3d 1241 (10th Cir. 2008) (internal quotation marks and footnotesomitted).
63 See Appx. at 288-90.
64 See Gen. Elec. Capital Corp. v. Manager of Revenue (In re W. Pac.
Airlines, Inc.), 273 F.3d 1288, 1293 (10th Cir. 2001) (issue not raised inappellant’s opening brief is waived).
uses resulted from financial pressures and delays that Ennis did not reasonably
foresee when the loan was made.65
For example, Ennis testified that a number of significant delays were
caused by problems with his project engineers, and also that he had expected to
receive funds from other sources (including a partnership buyout in a different
project and the sale of some completed houses) within the first few months of the
Pacini loan, which did not materialize. As a result, Ennis did use some of the
Pacini funds, at least temporarily, to cover expenses unrelated to Jade Falls,
including personal expenses.66
Clearly, Ellis was not a skilled accountant. He owned, or partially owned,
a number of LLCs, which he used to develop different projects. These LLCs
frequently overlapped on projects, and the accounting of project expenses
sometimes became murky. For example, Ennis carried his contractor’s license
through Lear Construction, another of his LLCs, and used Lear as “the
construction arm” of his developments. But the lines between Lear and Ennis
65 It can fairly be argued that when the Pacini loan was made, Ennis was
already facing some financial pressures and knew he would need to use the loanproceeds to at least temporarily relieve them. For example, Ennis’s immediateuse of the proceeds to make a loan to Lyle Arent was likely anticipated by Enniswhen the Pacini loan was made, and was not technically an “authorized” use ofthat money. However, the bankruptcy court found from the evidence at trial thatEnnis intended to (and did) replace funds that he used for expenses other than forJade Falls, and thus did not have a fraudulent intent. Based on all the evidence,
we cannot conclude that this finding is clearly erroneous.
66 Ennis also testified that, although it is common in the development industry
for developers to take a salary, he typically did not do so. Instead, he counted onprofits from the sale of his development projects to cover his personal expenses,
and he “staged” his projects for that purpose. Appx. at 137. Ennis’s use of loan
proceeds to temporarily cover personal expenses, when taking a salary easilycould have been a legitimate project cost, supports the bankruptcy court’sdetermination that he was not acting with fraudulent intent, especially given hiscredible testimony that he only used the loan proceeds in this way because hisother income sources were delayed.
LLC expenses were not always clear. 67 Ennis quite often paid expenses of Jade
Falls through Lear, and sometimes paid business credit lines out of his personal
account. 68 But such accounting inconsistencies do not necessarily equate with
The Pacinis’ primary complaint is that their money was not used
exclusively for Jade Falls expenses. Although this may have been the parties’
general intent and the Pacinis’ personal expectation, the loan documentation
places no such conditions on Ennis LLC’s use of the loan proceeds. 69 In any
event, the bankruptcy court found, even assuming the loan proceeds were to be
used solely for development of Jade Falls, that was “substantially” what
Significantly, a promise to act in the future is only fraudulent if it is made
with a present intention not to perform. 71 As such, the Pacinis had a duty to
establish at trial that Ennis did not intend to perform under the terms of the
parties’ contract at the time it was executed. It was this requirement that the
bankruptcy court found that the Pacinis failed to establish. We agree.
The fact, without more, that Ennis at times used Pacini loan proceeds for
things other than Jade Falls expenses does not satisfy the Pacinis’ burden for at
least two reasons. First, their agreement did not limit the use of proceeds to Jade
on its obtaining $143,000 from an outside source, it did not specify how those
67 Id. at 169; see also supra nn. 6-7.
68 Appx. at 171-74, 178-79.
69 Although Capital conditioned extension of additional funds to Ennis LLC
funds, once obtained, were to be used.
70 This determination took into account that some, if not all, of the money
used for non-Jade Falls expenses was “repaid or came back into” the Ennis LLCaccount. Appx. at 291-92. For example, the $21,000 Arent loan was repaid by
LALE. Id. at 177.
71 Roberts v. Wells Fargo AG Credit Corp., 990 F.2d 1169, 1172 (10th Cir.
Falls expenses. Second, the fact Ennis subsequently used some of the proceeds
for other projects does not alone establish that Ennis did not intend to comply
with the parties’ agreement when the deal was made.
While the Pacinis clearly disagree with the bankruptcy court’s
determinations of fact regarding Ennis’s intent, they have done little to establish
that those findings are clearly erroneous. Instead, they largely direct this Court
only to the evidence that they believe supports their position, rather than showing
how, in light of all of the evidence, the bankruptcy court’s findings are clearly
erroneous. Since “[i]t is the appellant’s burden to demonstrate why the
bankruptcy court’s findings of fact are clearly erroneous,”72 their failure to
explain how the bankruptcy court’s determinations are clearly erroneous is fatal.
The Pacinis rely heavily on the legal precept that intent may be (and often
can only be) proven by circumstantial evidence. It is clear, however, that the
bankruptcy court relied heavily on its assessment of the witnesses’ credibility,
and this Court is required to give “due regard” to such assessments by the fact
finder. 73 The appellants have simply failed to convince this Court that those
assessments are not supported by the evidence.
The bankruptcy court properly found, as a matter of law, that the Pacinis
did not establish the existence of a fiduciary relationship. Furthermore, because
the bankruptcy court’s finding that Loren Ennis had no intent to mislead the
Pacinis at the time they executed the loan is well supported by the evidence, it is
not clearly erroneous. We AFFIRM.
72 In re Paige, 439 B.R. 786, 792 (D. Utah 2010), aff’d, 685 F.3d 1160 (10th
73 Fed. R. Bankr. P. 8013.
- << Prev