FENNELL v. DONNAN

Filing 10

ORDER re 1 Bankruptcy Appeal affirming decision of the Bankruptcy Court. Ordered by U.S. District Judge CLAY D LAND on 01/21/2014. (CGC)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
ATHENS DIVISION
VALERIE V. FENNELL,

*

Appellant,

*

vs.

*

JAMES M. DONNAN, III,

*

Appellee.

CASE NO. 3:13-CV-107 (CDL)

*
O R D E R

Appellant
bankruptcy

Valerie

court

that

V.
her

Fennell

appeals

the

ruling

claim

asserted

in

the

of

the

bankruptcy

proceeding of Appellee James M. Donnan, III was dischargeable.
Mrs. Fennell’s late husband, Dr. Stephen S. Fennell, invested
money in a venture called GLC Limited after he learned about GLC
from Donnan.

GLC raised capital from private investors like

Donnan and Dr. Fennell, and the investors were told that their
investments were funding the purchase of inventory that had been
presold at a high profit margin or that their investments were
funding the purchase of close-out seasonal goods that would be
stored and sold the next season.
scheme,
unpaid.

and

when

it

collapsed,

GLC devolved into a Ponzi
Dr.

Fennell

remained

largely

Dr. Fennell died, and Mrs. Fennell is the executor of

his estate.

Donnan filed for bankruptcy, and Mrs. Fennell filed

a complaint on behalf of Dr. Fennell’s estate objecting to the

dischargeability of the estate’s $427,500 claim against Donnan.
The claim was later reduced to $310,617.

The crux of Mrs.

Fennell’s claim is that Donnan fraudulently induced Dr. Fennell
to invest in GLC.

After a trial, the bankruptcy court dismissed

Mrs. Fennell’s complaint to deny discharge of debt, finding that
Donnan did not act with intent to deceive Dr. Fennell.
Fennell now appeals that decision.

Mrs.

As discussed below, the

Court affirms the bankruptcy court’s order.
DISCUSSION
The Court has jurisdiction over this appeal pursuant to
28 U.S.C. §

158(a)

because

the

bankruptcy

court’s

order

dismissing Mrs. Fennell’s complaint to except her claim from
discharge was a final order.

The Court reviews the bankruptcy

court’s conclusions of law de novo.

E.g., Piazza v. Nueterra

Healthcare Physical Therapy, LLC (In re Piazza), 719 F.3d 1253,
1260 (11th Cir. 2013).

The Court must accept the bankruptcy

court’s findings of fact “unless clearly erroneous.”
Bankr. P. 8013.

Fed. R.

“A factual finding is clearly erroneous only

when th[e] Court, after reviewing all of the evidence, is left
with the definite and firm conviction that a mistake has been
committed.
omitted).
manifest

Piazza, 719 F.3d at 1273 (internal quotation marks
“Such a conviction arises only when there has been a
disregard

of

right

quotation marks omitted).

and

reason.”

Id.

(internal

When reviewing the factual findings

2

for clear error, “due regard shall be given to the opportunity
of

the

bankruptcy

witnesses.”

court

to

judge

the

Fed. R. Bankr. P. 8013.

credibility

of

the

“Because a determination

concerning fraudulent intent depends largely upon an assessment
of the credibility and demeanor of the debtor, deference to the
bankruptcy

court’s

appropriate.”

factual

findings

is

particularly

Equitable Bank v. Miller (In re Miller), 39 F.3d

301, 305 (11th Cir. 1994) (internal quotation marks omitted).
Mrs. Fennell contends that her claim is not dischargeable
for three reasons.

First, she asserts that her claim is not

dischargeable

11

under

U.S.C. §

523(a)(2)(A)

because

Donnan

obtained the investments from Dr. Fennell by “false pretenses, a
false

representation,

§ 523(a)(2)(A).

or

actual

fraud.”

11 U.S.C.

Second, Mrs. Fennell argues that her claim is

not dischargeable under 11 U.S.C. § 523(a)(4), which provides
that a debt incurred through embezzlement is not dischargeable.
Third, she contends that her claim is not dischargeable under 11
U.S.C. §

523(a)(6)

because

Donnan

committed

a

“willful

and

malicious injury” when he obtained Dr. Fennell’s investments.
11 U.S.C. § 523(a)(6).

The bankruptcy court determined that

Mrs. Fennell failed to carry her burden on all three issues.
Therefore, this appeal presents three issues: (1) whether the
bankruptcy court erred in determining that Donnan did not commit
fraud within the meaning of 11 U.S.C. § 523(a)(2)(A) because he

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did not have the requisite intent to deceive; (2) whether the
bankruptcy court erred in finding that Donnan did not embezzle
funds from Dr. Fennell; and (3) whether the bankruptcy court
erred

in

finding

that

Donnan

did

not

commit

a

willful

and

malicious injury.
After reviewing the record and with the benefit of oral
argument, the Court finds that the bankruptcy court’s factual
findings

were

conclusions

not

were

clearly

erroneous

supported

by

and

its

legal

established

well

that

law.

Specifically, there is no clear error in the bankruptcy court’s
factual finding that Donnan was not a partner in GLC, which was
operated

by

timeframe.

Greg

Crabtree

and

his

wife

during

the

relevant

There is no clear error in the bankruptcy court’s

factual findings that Donnan’s role was limited to raising funds
for the inventory transactions and that Crabtree, not Donnan,
was

solely

transactions.

responsible

for

the

underlying

inventory

Consequently, it was not clearly erroneous for

the bankruptcy court to find that insufficient evidence existed
to

impute

Crabtree’s

scheme to Donnan.

running

of

an

alleged

fraudulent

Ponzi

Similarly, the Court finds no clear error in

the bankruptcy court’s factual finding that Donnan was not aware
of the GLC Ponzi scheme and did not knowingly participate in it,
and thus Donnan did not act with intent to deceive Dr. Fennell.

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The Court also finds no reversible error based on a de novo
review of the bankruptcy court’s legal conclusions.

First, the

bankruptcy court did not err in finding that Mrs. Fennell had
not established a claim under 11 U.S.C. § 523(a)(2)(A), which
requires, among other things, that
statement

with

the

purpose

and

“the debtor made a false

intention

of

deceiving

the

creditor [and] the creditor relied on such false statement.”
Johannessen v. Johannessen (In re Johannessen), 76 F.3d 347, 350
(11th

Cir.

created

by

1996).
an

dischargeable,
argument.

Though

investment
the

Mrs.

in

bankruptcy

a

Fennell
Ponzi

court

argues

scheme

is

correctly

that

a

debt

per

se

non-

rejected

that

In support of her argument, Mrs. Fennell cites cases

that stand for the proposition that if a person runs a Ponzi
scheme, then the existence of the Ponzi scheme is sufficient to
prove the person’s intent to defraud.

See, e.g., Barclay v.

Mackenzie (In re AFI Holding, Inc.), 525 F.3d 700, 704 (9th Cir.
2008) (finding that debtor who pleaded guilty to indictment that
alleged elements of Ponzi scheme had intent to defraud); Bauman
v. Bliese (In re McCarn’s Allstate Fin., Inc.), 326 B.R. 843,
850-51 (Bankr. M.D. Fla. 2005) (same).

But Mrs. Fennell did not

point to any cases holding that the mere existence of a Ponzi
scheme establishes actual fraud on the part of someone who was
not aware of the scheme.

This Court does not suggest that the

existence of an alleged Ponzi scheme is irrelevant, but the

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bankruptcy

court

knowledge

of

knowledge

of

fundamental

correctly

the

nature

the

to

analyzed

of

the

fraudulent

determining

the

scheme.

scheme

the

(or

extent

of

Donnan’s

Assessing

Donnan’s

lack

dischargeability

thereof)
of

the

was
claim

because, as the bankruptcy court noted, “a debt may be excepted
from

discharge

when

positive fraud.”

the

debtor

personally

commits

actual,

Hoffend v. Villa (In re Villa), 261 F.3d 1148,

1151 (11th Cir. 2001); accord Schweig v. Hunter (In re Hunter),
780 F.2d 1577, 1579 (11th Cir. 1986) (“In order to preclude the
discharge of a particular debt . . . a creditor must prove . . .
the

debtor[’s]

positive

fraud

. . . .”),

abrogated

on

grounds by Grogan v. Garner, 498 U.S. 279, 291 (1991).

other
As

discussed above, the bankruptcy court, after hearing testimony
from a number of witnesses, concluded that Donnan did not act
with intent to deceive Dr. Fennell.
court

did

not

err

in

dismissing

Therefore, the bankruptcy

Mrs.

Fennell’s

claim

under

11 U.S.C. § 523(a)(2)(A).1
The bankruptcy court also did not err in finding that Mrs.
Fennell had not established a claim under 11 U.S.C. § 523(a)(4),
which provides that a debt for money obtained by embezzlement is
not dischargeable.

It is undisputed that “[e]mbezzlement is the

fraudulent appropriation of property by a person to whom such
1

Mrs. Fennell also appears to argue that Donnan committed securities
fraud, but she withdrew her request to add a securities law violation
claim to her complaint before the bankruptcy court.
Therefore, that
argument cannot be considered on this appeal.

6

property has been entrusted, or into whose hands it has lawfully
come.”

Wilson Family Foods, Inc. v. Brown (In re Brown), 457

B.R. 919, 926 (Bankr. M.D. Ga. 2011).

There is no clear error

in the bankruptcy court’s factual finding that Dr. Fennell’s
investments were deposited into GLC’s accounts and were never in
Donnan’s possession.

Because Donnan never had possession of Dr.

Fennell’s funds, the bankruptcy court correctly dismissed Mrs.
Fennell’s claim under 11 U.S.C. § 523(a)(4).
Finally, the bankruptcy court did not err in finding that
Mrs.

Fennell’s

Section
malicious

claim

523(a)(6)
injury

dischargeable.

under

provides

11

U.S.C. §

that

by

the

debtor

11

U.S.C. §

a
to

debt

523(a)(6)
“for

another

523(a)(6).

failed.

willful

entity”
“[A]

and

is

not

debtor

is

responsible for a ‘willful’ injury when he or she commits an
intentional act the purpose of which is to cause injury or which
is substantially certain to cause injury.”
(In

re

Jennings),

670

F.3d

1329,

Maxfield v. Jennings

1334

(11th

Cir.

2012)

(alteration in original) (internal quotation marks omitted).

As

with the bankruptcy court’s other factual findings, there was no
clear

error

in

the

bankruptcy

court’s

factual

finding

that

Donnan did not knowingly participate in the GLC Ponzi scheme.
Therefore, the bankruptcy court did not err in concluding that
Mrs. Fennell’s claim did not arise from a willful and malicious
injury.

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CONCLUSION
For the reasons previously explained, the Court affirms the
bankruptcy court’s order dismissing Mrs. Fennell’s complaint to
deny discharge of debt.

IT IS SO ORDERED, this 21st day of January, 2014.
S/Clay D. Land
CLAY D. LAND
UNITED STATES DISTRICT JUDGE

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