IN RE POWERS

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Docket Number

No. 07-50700 Summary Calendar.

Attorney(S)

R. Glen Ayers, Jr., Langley Banack, San Antonio, TX, William W. Sommers, The Gardner Law Firm, San Antonio, TX, for Appellant. Bradley S. Wilder, Elizabeth Grace Smith, Davis Opper, San Antonio, TX, for Appellee.

Judges

Patrick Errol Higginbotham
Carl E. Stewart
Priscilla Richman Owen

Acts

Bankruptcy — Creditors, The Debtor, And The Estate — Debtor’S Duties And Benefits — Exceptions To Discharge

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Smart Summary

Factual and Procedural Background

Robert E. Powers, Jr. ("Powers") filed a Chapter 7 bankruptcy petition on October 14, 2005. Caremark Inc. ("Caremark"), a creditor, filed an adversary complaint objecting to dischargeability of a debt under 11 U.S.C. § 523 and seeking damages and attorneys' fees under the Texas Theft Liability Act (TTLA). The bankruptcy court, after a trial on the merits, found that Powers committed civil theft under the TTLA and that the act qualified as embezzlement or conversion under § 523. The bankruptcy court denied dischargeability of the debt and awarded damages and attorneys' fees. The district court affirmed the bankruptcy court's judgment. Powers appealed to the Fifth Circuit, which affirmed the judgment.

Underlying facts relevant to the dispute: Powers owned Powers Construction, Inc. ("PCI"), which had been in litigation with Caremark. On April 18, 2001 Caremark mistakenly issued a $633,369.00 check payable to "Powers Construction, Inc." PCI deposited the check on April 23, 2001; the funds were transferred to a PCI money market account that previously had a balance under $7,000. Over subsequent months Powers withdrew and spent nearly all the funds on corporate and personal bills. Caremark demanded return of the funds on January 24, 2002 and later obtained $210,000 back on March 11, 2002; no additional recovery was made before Powers' bankruptcy filing in October 2005.

Legal Issues Presented

Whether the bankruptcy court applied the correct burden of proof in the TTLA claim (preponderance of the evidence vs. clear and convincing evidence).
Whether the evidence presented by Caremark was sufficient to support a finding of liability under the TTLA (i.e., that Powers committed theft under Texas law).
Whether the bankruptcy court permissibly drew an adverse inference from Powers' invocation of the Fifth Amendment and refusal to testify.
Whether the debt to Caremark was non-dischargeable under 11 U.S.C. § 523(a)(4) (embezzlement) and, alternatively, § 523(a)(6) (willful and malicious injury).

Arguments of the Parties

Appellant's (Powers') Arguments

The bankruptcy court applied the incorrect burden of proof for the TTLA claim and should have required clear and convincing evidence rather than a preponderance of the evidence.
The evidence presented by Caremark was insufficient to establish liability under the TTLA and the bankruptcy court relied on impermissible inferences and speculation.
The bankruptcy court erred in drawing an adverse inference from his invocation of the Fifth Amendment and refusal to testify.
Powers challenged the finding of embezzlement and the non-dischargeability determination under § 523(a)(4), arguing lack of entrustment and insufficient direct evidence.

Appellee's (Caremark's) Evidence and Position

Caremark presented deposition testimony of PCI's bookkeeper, Tammy Perez, who testified that she showed the mistakenly issued check to Powers before deposit, that Powers did not instruct her to hold or return the check, and that no jobs were pending to justify a payment from Caremark.
Evidence showed the check was deposited, funds were transferred to a money market account, Powers was the sole signatory on account disbursements, and funds were used to pay corporate and personal bills, leaving almost no funds by September 2001.
Caremark argued the facts supported a finding of statutory theft under the TTLA and that the use of the funds constituted embezzlement under federal common law for purposes of § 523(a)(4), rendering the debt non-dischargeable.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In re Nat'l Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000)	Standards of review for bankruptcy appeals: conclusions of law de novo; findings of fact for clear error; mixed questions de novo.	Used to state the appellate standard of review applied to the bankruptcy court's decision.
El Paso Ref. v. Scurlock Permian Corp., 77 S.W.3d 374, 381 (Tex.App. 2002)	When a statute is silent on burden of proof, Texas law applies the ordinary civil standard (preponderance of the evidence).	Supported the court's conclusion that the TTLA requires proof by a preponderance of the evidence.
Ellis County State Bank v. Keever, 888 S.W.2d 790, 792 (Tex. 1994)	General rule in civil cases that the burden of proof is by a preponderance of the evidence.	Reinforced that preponderance is the correct civil standard when statute is silent.
In re Martin, 963 F.2d 809, 813-814 (5th Cir. 1992)	Factual findings of bankruptcy judge are to be credited unless clearly erroneous.	Applied to defer to the bankruptcy court's factual findings unless clearly erroneous.
Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-74 (1985)	Standard that appellate court may not reverse factual findings if the account of evidence is plausible in light of the record as a whole.	Quoted to explain limits on reversal of factual findings by appellate court.
Reed v. State, 717 S.W.2d 643, 645 (Tex.App. 1986)	Under Texas law, the intent to deprive in theft must exist at the time of taking or exchange.	Used to state the timing requirement for intent under Texas theft law.
McGee v. State, 774 S.W.2d 229, 234 (Tex.Cr.App. 1989)	The element of intent for theft may be inferred from surrounding circumstances.	Supported the court's conclusion that intent could be inferred from Powers' conduct and surrounding facts.
Farace v. Indep. Fire Inn. Co., 699 F.2d 204, 210 (5th Cir. 1983)	Fifth Amendment does not forbid adverse inferences against parties to civil actions who refuse to testify in response to probative evidence.	Supported the bankruptcy court's drawing of an adverse inference from Powers' refusal to testify.
Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)	Supreme Court authority recognizing that adverse inferences may be drawn in civil cases from invocation of the Fifth Amendment.	Cited (via Farace) to support the principle allowing adverse inferences in civil proceedings.
hi re Boyle, 819 F.2d 583, 588 (5th Cir. 1987)	Explains the purpose of § 523 discharge exceptions: to reach debts from abuses of fiduciary positions and active misconduct involving property not the debtor's.	Used to describe the scope and intent of § 523(a)(4) as applied to embezzlement and related conduct.
Grogan v. Garner, 498 U.S. 279, 284, 286 (1991)	Dischargeability exceptions under 11 U.S.C. § 523 are matters of federal law; standard of proof is preponderance of the evidence.	Established the federal standard of proof for § 523 claims, cited to justify using preponderance for nondischargeability.
Miller v. J.D. Abranis Inc., 156 F.3d 598, 602 (5th Cir. 1998)	Federal common-law definition of embezzlement: fraudulent appropriation of property by a person to whom the property has been entrusted or into whose hands it has lawfully come.	Applied to find that Powers' use of funds constituted embezzlement under § 523(a)(4).

Court's Reasoning and Analysis

The court proceeded in a sequential analysis consistent with appellate standards. It first stated the applicable standards of review for bankruptcy appeals (de novo for legal conclusions; clearly erroneous for factual findings; de novo for mixed questions), citing In re Nat'l Gypsum Co.

On the burden-of-proof issue, the court analyzed the TTLA's silence regarding burden and applied Texas authorities holding that when a statute is silent the ordinary civil standard (preponderance of the evidence) applies. The court rejected Powers' analogy to exemplary-damages cases because those involve clear statutory language authorizing a heightened standard; the TTLA contains no such language. The court therefore concluded the bankruptcy judge correctly applied the preponderance standard.

Regarding sufficiency of the evidence under the TTLA, the court deferred to the bankruptcy court's factual findings unless clearly erroneous. It summarized the evidence introduced by Caremark: the bookkeeper's deposition showing Powers saw the check and did not instruct return or inquiry, the deposit and transfer to a money market account, the pre-deposit balance under $7,000, Payments from the money market to personal and corporate obligations, and Powers' exclusive authority to draw and sign checks. The court accepted the bankruptcy court's inferences — including that Powers was aware of the deposit and the increased balance — and noted Powers' invocation of the Fifth Amendment in deposition, from which the bankruptcy court drew an adverse inference. The court cited Texas authority that intent to deprive may be inferred from surrounding circumstances and concluded the bankruptcy court's finding that Powers intended to deprive Caremark of the funds was not clearly erroneous. Thus, liability under the TTLA was supported.

On the Fifth Amendment issue, the court relied on Fifth Circuit and Supreme Court precedent permitting adverse inferences in civil proceedings from a party's refusal to testify in response to probative evidence, and concluded the bankruptcy court was entitled to draw such an inference.

Addressing dischargeability, the court explained the scope of § 523(a)(4) and applied federal common-law definition of embezzlement (fraudulent appropriation of property lawfully obtained). It rejected Powers' argument that embezzlement requires entrustment, noting embezzlement also covers circumstances where property lawfully comes into a person's hands but is then fraudulently appropriated. Given the factual findings (knowledge of the check, failure to return or inquire, spending the funds), the court concluded the bankruptcy court was justified in finding embezzlement and thus nondischargeability under § 523(a)(4). Because it found § 523(a)(4) dispositive, the court did not reach § 523(a)(6).

Holding and Implications

AFFIRMED.

Holding: The Fifth Circuit affirmed the bankruptcy court's judgment finding Powers liable under the Texas Theft Liability Act and holding the debt non-dischargeable under 11 U.S.C. § 523(a)(4) (embezzlement). The bankruptcy court's assessment of damages and attorneys' fees in favor of Caremark was also affirmed.

Implications: The direct effect is that the judgment against Powers — including denial of discharge as to Caremark's debt and the award of damages and attorneys' fees — stands. The court did not set a new precedential rule; the opinion itself is designated unpublished and not precedent under 5th Cir. R. 47.5, and the court explicitly resolved the appeal by applying established standards and authorities to the record before it.

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In the Matter of: Robert E. POWERS, Jr., Debtor. Robert E. Powers, Jr., Appellant, v. Caremark Inc., Appellee.

PER CURIAM:[fn*] [fn*] Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

The Appellant, Robert E. Powers, Jr. ("Powers"), filed for Chapter 7 personal bankruptcy on October 14, 2005. Appellee Caremark Inc. ("Caremark"), one of Powers's creditors, filed an adversary complaint against Powers, objecting to the dischargeability of his debt under 11 U.S.C. § 523 and for damages and attorneys' fees under the Texas Theft Liability Act ("TTLA"), TEX. CIV. PRAC. REM. CODE ANN. § 134.001-.005 (Vernon 2007). After a trial on the merits, the bankruptcy court entered judgment in favor of Caremark. The court found that Powers had committed an act of civil theft violating the Texas Theft Liability Act and that such act qualified as embezzlement or conversion under § 523. Further, the bankruptcy court denied dischargeability of the debt and awarded damages and attorneys' fees against Powers. The district court affirmed the bankruptcy court, and Powers filed the present appeal. Finding no reversible error, we affirm.

Briefly, the facts underlying the adversary complaint are as follows. Powers owned a construction business, Powers Construction, Inc. ("PCI"), that performed a construction job for Caremark prior to April 2001. A dispute arose out of this contract, and the matter was in litigation until April 2001. On April 18, 2001, Care-mark mistakenly issued a check in the amount of $633,369.00, payable to "Powers Construction, Inc." Caremark did not owe PCI this money and there was no existing contractual relationship between Care-mark and PCI other than the one in litigation. The check was received by PCI and was deposited into a corporate bank account on April 23, 2001. PCI's bookkeeper, Tammy Perez, showed the check to Powers before it was deposited, but he did not instruct her to return the check or to hold it, and no one inquired of Caremark as to why the check had been sent. Soon after the check was deposited, the funds were transferred to a money market account maintained by PCI. Prior to the transfer, the balance of the money market account was less than $7,000. Over the next few months, Powers proceeded to withdraw funds from the money market account to pay both personal and corporate bills. By September 4, 2001, almost all the funds received by Caremark had been spent. Caremark did not act on the matter until January 24, 2002, when it made demand upon PCI to return the funds which had been sent by mistake. Caremark also filed suit in state court in an effort to recover the money. Caremark was partially successful and on March 11, 2002, PCI returned $210,000 to Caremark. The litigation continued, but Caremark did not recover any additional funds prior to Powers' filing of bankruptcy in October 2005.

We review the decision of the bankruptcy court "under the same standards applied by the district court hearing the appeal from bankruptcy court; conclusions of law are reviewed de novo, findings of fact are reviewed for clear error, and mixed questions of fact and law are reviewed de novo." In re Nat'l Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000).

On appeal, Powers first argues that the bankruptcy court utilized the wrong burden of proof in finding him liable under the TTLA. He argues that the bankruptcy court should have applied the "clear and convincing evidence" standard, rather than the less onerous standard of "preponderance of the evidence." This argument is without legal support. The TTLA provides victims of a theft, as defined in various sections of the Texas Penal Code, with a civil action to recover damages, fees, and costs from the thief. The statute itself is silent with regard to the burden of proof that should be applied. Under Texas law, that silence "mitigates in favor of applying the same burden of proof as any other civil action" — the preponderance of the evidence standard. El Paso Ref. v. Scurlock Permian Corp., 77 S.W.3d 374, 381 (Tex.App. 2002); see also Ellis County State Bank v. Keever, 888 S.W.2d 790, 792 (Tex. 1994) (holding that the general rule in civil cases is that the burden of proof is by a preponderance of the evidence). Powers attempts to draw an analogy to cases in which exemplary damages are sought. However, in those circumstances, clear statutory language permits the application of the clear and convincing standard. See El Paso Ref., 77 S.W.3d at 381 ("[T]he clear and convincing standard is mandated only in circumstances where clear statutory language permits its application."). Here, as just discussed, there is no such statutory authorization. Further, the nature of cases brought under the TTLA do not present any unique reasons justifying departure from this standard. Cases under the TTLA raise no issues of constitutional magnitude, nor do they implicate loss of life or liberty as in a criminal theft case. See id. at 382. The bankruptcy judge was correct in applying the preponderance of the evidence standard.

Second, Powers argues that the evidence presented by Caremark was not sufficient to support a finding of liability under the TTLA. The factual findings of the bankruptcy judge, affirmed by the district court, are to be credited by this Court unless clearly erroneous. In re Martin, 963 F.2d 809, 813-814 (5th Cir. 1992). Under this standard, if the bankruptcy court's "account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as a trier of fact, it would have weighed the evidence differently." Id. at 814 (quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).

The TTLA imposes liability on anyone who commits theft, as defined by the Texas Penal Code. TEX. CIV. PRAC. REM. CODE ANN. § 134.002, .003 (Vernon 2007). Under Texas law, a person commits the offense of theft if he unlawfully exercises control over property with the intent to deprive the owner of its use. TEX. PENAL CODE ANN. § 31.01, .03 (Vernon 2007). The intent to deprive contemplated under § 31.03 must exist at the time of taking or exchange. See Reed v. State, 717 S.W.2d 643, 645 (Tex.App. 1986).

Powers argues that the bankruptcy court's finding of liability was erroneous because it was based on impermissible inferences and speculation. We disagree. Caremark presented both direct and circumstantial evidence to the bankruptcy court. It introduced the deposition of Tammy Perez, the bookkeeper of PCI. Perez testified that she showed the Care-mark check to Powers and discussed it with him before depositing it in the bank account; that Powers did not direct Perez to hold the check or to contact Caremark about the check; and that no jobs were pending that would justify the receipt of a payment from Caremark. From this evidence, the bankruptcy court inferred that Powers was aware that, absent intervention, the Caremark check would be deposited into the corporate checking account and then transferred from the corporate checking account to the money market account. In the months following the deposit of the Caremark check, Perez prepared monthly financial reports and reviewed them with Powers. From this evidence, the bankruptcy court inferred that Powers knew of the $7,000 balance in the money market account prior to the deposit of the Caremark check and that he later saw the balance of his money market account increase to over $600,000 the next month. After the money was transferred to the money market account, many bills, both corporate and personal, were paid out of the money market account, which, but for the Caremark deposit, would have lacked sufficient funds for those payments. The evidence showed that Powers was the only individual with the authority to draw checks on that account and that he signed every check for every payment made from the account. Powers did not testify at trial, but he was deposed by Caremark in connection with the adversary proceeding. During the deposition, when questioned about the Caremark check, he declined to answer questions and invoked his Fifth Amendment rights against self-incrimination. The bankruptcy judge drew an adverse inference from Powers' failure to testify. The bankruptcy judge concluded that, by spending the money in the money market account, which Powers knew did not belong to him or PCI, Powers was unlawfully appropriating property within the meaning of the Texas Penal Code.

We cannot agree with Powers that the bankruptcy court's judgment was based in conjecture or speculation. Texas courts have held that the element of intent, for the crime of theft, can be inferred from the surrounding circumstances. See McGee v. State, 774 S.W.2d 229, 234 (Tex.Cr.App. 1989). Given Powers' knowledge of the check, his failure to hold the check or contact Caremark, his knowledge that no money was due from Caremark, and his expenditure of the funds, the bankruptcy court's conclusion that Powers intended to deprive Caremark of the funds, and thus committed theft, does not constitute clear error. Therefore, the assessment of liability under the TTLA was correct.

Powers also argues that the bankruptcy court erred in drawing a negative inference from his failure to testify on the grounds of self-incrimination. This argument is without merit. The bankruptcy court was entitled to draw an adverse inference from Powers' assertion of his Fifth Amendment rights and refusal to testify at trial. See Farace v. Indep. Fire Inn. Co., 699 F.2d 204, 210 (5th Cir. 1983) (stating the prevailing rule that "the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them." (citing Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976))).

Third, Powers disputes the decision of the bankruptcy court granting Care-mark's objection to the dischargeability of the debt. The bankruptcy court found that the debt in favor of Caremark fell within two different categories of non-dischargeability: embezzlement (§ 523(a)(4)) and willful and malicious injury (§ 523(a)(6)).

Under § 523(a)(4), a debt for "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" may not be discharged in bankruptcy. This discharge exception "was intended to reach those debts incurred through abuses of fiduciary positions and through active misconduct whereby a debtor has deprived others of their property by criminal acts; both classes of conduct involve debts arising from the debtor's acquisition or use of property that is not the debtor's." hi re Boyle, 819 F.2d 583, 588 (5th Cir. 1987). The issue of non-dischargeability is a matter of federal law. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The standard of proof for the dischargeability exceptions found in 11 U.S.C. § 523(a) is the usual and customary preponderance of the evidence standard. id. at 286, 111 S.Ct. 654.

Under federal common law, embezzlement is defined as the "fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come." Miller v. J.D. Abranis Inc., 156 F.3d 598, 602 (5th Cir. 1998). Powers first argues that there could be no embezzlement because he was not entrusted with Caremark's property. Embezzlement, however, is not limited to situations in which one person is entrusted with the property of another. It also applies where, as here, a person lawfully obtains property, but then fraudulently appropriates it for his or her own use. Id. Second, Powers again argues that Care-mark presented no direct evidence of embezzlement and that the bankruptcy court's decision rested solely on improper inferences. This argument too is unper suasive. As discussed above, the bankruptcy judge's determination that Powers" intended to misappropriate the Caremark funds was not based in conjecture, but rather on the undisputed evidence presented to him. Given the evidence presented, the bankruptcy judge was justified in finding that Powers' utilization of the funds received from Caremark constituted embezzlement. Accordingly, the debt was non-dischargeable pursuant to § 523(a)(4).

Having found that the debt was not dischargeable pursuant to § 523(a)(4), the Court does not need to address the alter;. native basis for dischargeability, § 523(a)(6).

For the foregoing reasons, the judgement is AFFIRMED.