Above-All Transportation, Inc. v. Fraher

Case Type:
Case Status:
BAP NO. MB 16-026 (1st Circuit, Feb 21,2017) Not Published
The Panel Affirms the bankruptcy court's ruling in favor of Shannon Fraher on the count brought under 1 U.S.C. 523(a)(2)(A).
Procedural context:
Above All Transport brought an adversary proceeding against co-debtors Shannon and Richard Flaher seeking either a judgment denying their discharge under 11 U.S.C. 727(a)(4)(A) or (a)(5), or alternatively, ruling any debt they owed Above All was nondischargeable under 11 U.S.C. 523(a)(2)(A) or (a)(6). The parties filed a joint pretrial statement where agreed that the issues of law to be litigated were: Plaintiff (i) Whether the Debtors are entitled to a Discharge; and (ii) Whether the SMA corporate veil should be pierced; Defendant: (1) Whether both Defendants intentionally harmed the Plaintiff; and (2) Whether the Plaintiff suffered substantial harm and loss of property due to the Plaintiff. The trial was held and the parties did not ask for closing arguments or file post trial briefs. The bankruptcy court announced its decision from the bench ruling in favor of Shannon Flaher in all counts, and against Mr. Richard Flaher on count III. The court granted a relief from stay in favor of Above All to proceed in the state court against Mr. Flaher. Above All Transport appeals the bankruptcy court's finding in favor of co-debtor Shannon Flaher, in a chapter 13 case, on the count it brought under 11 US.C. 523(a)(2)(A). The panel first addressed the principles in assaying bankruptcy appeals as to the facts that absent extraordinary circumstances, it is apodictic that legal theories not squarely addressed and litigated below cannot be raised for the first time on appeal. Therefore, the issues raised before trial court without developed argumentation are considered waived. Also explained that failure to list an issue in the statement of issues and/or to brief the issue with reasoned arguments may also result in waiver. The panel also cited extensive case law where the appellate courts has exercised its discretion and grant relief from waiver based upon a non exhaustive list of factors as: (1) whether the failure to raise the issue has deprived the appellate court of useful fact-finding, or whether the facts have been sufficiently developed and the issue was of a purely legal nature; (2) whether the omitted argument raises an issue of constitutional magnitude; (3) whether the argument was highly persuasive and failure to reach it would threaten a miscarriage of justice; (4) whether considering the issue would cause prejudice or inequity to the adverse party; (5) whether the failure to raise the issue was inadvertent and provided no tactical advantage; and (6) whether the issue implicates “matters of great public moment.” and stated that in the Joint Pre-Trial Statement, Above-All claimed the only legal issue remaining to be litigated was whether “the SMA corporate veil should be pierced." and, It did not list imputed or actual fraud. At trial, Above-All did not specify which of three prongs it considered applicable and did not raise the issue of imputed fraud. the Panel concluded that was evident that Above-All never provided in its complaint, in the Joint Pre-Trial Statement, in its opening statement, at trial, in its statement of issues, or in its appellate briefs developed arguments that pertain to the theories which it urges the Panel to apply—imputed and actual fraud. And, under the First Circuit standards applicable to waiver, they were constrained to conclude that Above-All has waived the theories of imputed and actual fraud. Also added that the appeal did not present issues of constitutional magnitude or matters of great public moment, therefore will not exercise their discretion and grant relief from waiver.
In February 2014 and pursuant to an asset sale agreement, the Frahers sold to Above-All Trasposrtation, Inc. most of the assets of SMA Transportation, Inc. The sale agreement provided, inter alia, that SMA, Ms. Fraher, and Mr. Fraher would not compete in any manner with Above-All for a specified period of time after the sale. Prior to the filing of the bankruptcy case, Above-All filed suit against SMA and Mr. Fraher in state court alleging that both during and after his employment at Above-All and despite the provisions of the sale agreement, Mr. Fraher continued to run SMA and provided services to the customers Above-All acquired from SMA. On April 28, 2014, and May 21, 2014, the state court entered orders enjoining SMA, Mr. Fraher, and Ms. Fraher from competing with Above-All. in the adversary proceeding within the bankrtupcy case, Above All asserted that the Frahers “fraudulently induced [Above-All] to enter into the Sale Agreement, to make payment in the amount of Sixty Thousand and 00/100 ($60,000.00) Dollars thereunder, to employ Fraher and pay him a salary while diverting both SMA and Above[-]All business to their own benefit, constituting fraud and deceit." With respect to that count, the Frahers answered that they had fully disclosed SMA's assets prior to the sale and that they disputed Above-All had suffered damages. For an affirmative defense, Ms. Fraher asserted Above-All had failed to state a claim against her. At atrial Above-All recited the facts and claimed that because the Frahers diverted business after they signed the sale agreement, Above-All did not receive the benefit of its bargain. Mr. Fraher testified how he and Ms. Fraher decided to start SMA and subsequently when and why they decided to sell it to Above-All. He offered that any livery service SMA provided after the sale would simply have been doing a favor for a friend. Ms. Fraher testified that despite being the sole officer, director, and shareholder of SMA and the sole signator on its bank accounts, she did not take an active role in the operation of SMA. She testified she had no idea about Mr. Fraher's activities after he stopped working for Above-All. Ruling against Mr. Flaher on count III the bankruptcy court first cited the definition of actual fraud that Justice Thomas cited in his dissent in Husky Int'l Elec., Inc. v. Ritz, 136 S.Ct. 1581, 1593 (2016) (Thomas J., dissenting) (explaining actual fraud “[c]onsists of any deceit, artifice, trick, or design involving direct and active operation of the mind used to circumvent and cheat another."), then, cited to the evidence demonstrating that after the parties signed the sale agreement, Mr. Fraher operated SMA in violation of the non-compete provisions of the sale agreement. It ruled that Mr. Fraher's indebtedness was nondischargeable and that that the amount of the debt should be adjudicated in state court. The only statement of issues listed by Above All in its appeal was: Whether the bankruptcy court erred in ruling in favor of Ms. Fraher on Count III of the complaint. in tis brief on appeal Above All argued that the court should have imputed Mr. Flaher's fraudulent intent to Ms. Flaher and that intent to deceive can be established by proving reckless indifference to or a reckless disregard of the truth. also requested that the totality of the circumstances standard be taken into account in the determination.
Deasy, Tester and Finkle

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