United States District Court, S.D. Indiana, Terre Haute Division
GERALD R. FORSYTHE, Appellant/Cross-Appellee,
CHRISTOPHER MICHEAL YELEY, Appellee/Cross-Appellant.
ENTRY ON JUDICIAL REVIEW
WILLIAM T. LAWRENCE, District Judge.
This cause is before the Court on an appeal by Gerald Forsythe and a cross-appeal by Christopher Yeley. Forsythe appeals the bankruptcy court's order discharging $1, 500, 000 of Yeley's debt. Yeley appeals the bankruptcy court's findings of fact and conclusions of law and its failure to consider his affirmative defenses. For the reasons set forth below, the bankruptcy court's judgment is REVERSED.
Under 28 U.S.C. § 158(a), the district courts of the United States have jurisdiction to hear appeals from final judgments, orders, and decrees of the bankruptcy courts. On appeal from the bankruptcy court, the district court may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree, or remand the case for further proceedings. Fed.R.Bankr.P. 8013. The district court conducts a de novo review of questions of law, e.g., Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004), but findings of fact are not set aside unless clearly erroneous and "due regard [must] be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed.R.Bankr.P. 8013. A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. E.g., Kovacs v. United States, 614 F.3d 666, 672 (7th Cir. 2010).
Forsythe is a businessman from Chicago, Illinois who knew Yeley, an agricultural salesman, though purchasing seed and chemicals for his farming property. On or about July 6, 2004, Forsythe and Yeley entered into an oral agreement to purchase stock for Cabela's Inc., a sporting goods company that was getting ready to complete its initial public offering ("IPO"). Forsythe agreed to provide the funds to purchase the stock, and Yeley purchased it through his brokerage account at Pershing, L.L.C. They agreed that at some time later the stock would be sold and they would share equally in the profits. They also agreed that Forsythe could demand the return of his funds at any time and that the funds would not be used for any purpose other than to purchase the stock.
Thereafter, Forsythe borrowed the funds from his company, Indeck Energy Services ("Indeck"), and sent a check payable to Pershing for three million dollars. On or about July 9, 2004, the check was deposited by Yeley into his account at Pershing. Shortly after he deposited the check, Yeley began transferring the funds to his own personal bank accounts, using, as the bankruptcy court described, Forsythe's "money as [if] it was [Yeley's] own piggy bank." Tr. at 211. In all, from September 14, 2004, through December 18, 2006, Yeley withdrew a total of $2, 365, 939.00 from the Pershing account. Yeley also used part of the money to buy stock in a different company and sold numerous shares of Cabela's stock at a loss.
Toward the end of 2006, Forsythe notified Yeley that he needed to repay his loan by the end of the year. On or about November 1, 2006, Forsythe requested that Yeley sell enough of the stock to repay him his original investment of three million dollars. Yeley tendered a check payable to Forsythe drawn on an Old National Bank account in the amount of three million. He asked Forsythe to hold the check until sufficient funds were available; however, the funds never became available and the check was never honored.
In February 2007, Forsythe filed suit against Yeley, his former spouse, and Pershing in Illinois state court alleging breach of contract and conversion. On January 19, 2012, Yeley filed for Chapter 7 bankruptcy protection. The bankruptcy court conducted a trial on March 13, 2013, and entered its judgment in favor of Forsythe and against Yeley in the amount of $1, 500, 000 on May 8, 2013. While it denied Forsythe's objection to Yeley's discharge under 11 U.S.C § 727, it did find $1, 500, 000 of the debt to be non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2), (4), and (6). Both parties timely appealed.
Forsythe appeals on two separate grounds. He first argues that the bankruptcy court erred under 11 U.S.C. § 523(a)(2)(A) in not compensating him for his entire three million dollar loss. His second argument is that the bankruptcy court erred by not denying the discharge pursuant to 11 U.S.C. §§ 727(a)(3), (4), and (5). Yeley also filed an appeal arguing that the bankruptcy court erred in its findings of fact and conclusions of law, as well as erred in not considering his affirmative defenses. Their arguments will be addressed, in turn, below.
A. Compensation for the Entire Loss
The bankruptcy court found that Forsythe met his burden pursuant to 11 U.S.C. §§ 523(a)(2), (4), and (6); however it found only $1, 500, 000 of the three million dollars to be nondischargeable. The court did so due to the inherent risk Forsythe took when he made an investment in an IPO and the risk he took in making this agreement with Yeley, a twenty-nine-year-old agricultural salesman. Yeley concurs with the bankruptcy court's decision; however, Forsythe, citing Cohen v. de la Cruz, 523 U.S. 213 (1998) argues that it was an error for the bankruptcy court to reduce the amount of loss once fraud, under section 523(a)(2)(A), was established.
In Cohen, the Supreme Court held that "[t]he most straightforward reading of § 523(a)(2)(A) is that it prevents discharge of any debt' respecting money, property, services, or... credit' that the debtor has fraudulently obtained[.]" Cohen, 523 U.S. at 218 (citing Field v. Mans, 516 U.S. 59, 61, 64 (1995)). Forsythe, therefore, argues that the amount of debt Yeley fraudulently obtained should be discharged. While the bankruptcy judge found that "there was no fraud on the onset of the arrangement, " Dkt. No. 4-32 at 12, it also correctly noted that "actual fraud is not limited to misrepresentation, but may encompass any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another." Id. at 14; see also McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (noting that "actual fraud is broader than misrepresentation."). The Court agrees that Yeley "engage[d] in fraudulent conduct when he took the money from the ...