FORSYTHE et al v. YELEY et al

Filing 18

ENTRY ON JUDICIAL REVIEW - 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. The Bankruptcy Court's judgment is hereby REVERSED and this cause is REMANDED to the Bankruptcy Court such that it can make a specific finding of fact in regard to the actual amount of money that Yeley fraudulently obtained. Judgment should then be entered in favor of Forsythe and against Yeley for that specific amount pursuant to section 523(a)(2)(A). (See Entry.) Signed by Judge William T. Lawrence on 3/20/2014.(RSF)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
TERRE HAUTE DIVISION
GERALD R. FORSYTHE,

)
)
Appellant/Cross-Appellee, )
)
vs.
)
)
CHRISTOPHER MICHEAL YELEY,
)
)
Appellee/Cross-Appellant. )

Cause No. 2:13-cv-222-WTL-WGH

ENTRY ON JUDICIAL REVIEW
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.
I.

STANDARD

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).
II.

BACKGROUND

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

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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.
III.

DISCUSSION

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-

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year-old agricultural salesman. Yeley concurs with the bankruptcy court’s decision;1 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 Pershing, L.L.C. account and used it for personal expenses.”
Id. at 12. Accordingly, the Court agrees with Forsythe that the bankruptcy judge should have
found any debt obtained by actual fraud pursuant to section 523(a)(2)(A) to be nondischargable.
In finding half of the three million dollars non-dischargeable, the Court recognizes that
the bankruptcy judge was attempting to craft an equitable remedy, realizing that Forsythe may
indeed bear some responsibility in doing “what [he] did with who [he] selected.” Tr. at 213.
However, the Court agrees with Forsythe that at least part of his loss was not attributable to the
inherent riskiness of his investment, but rather to the mishandling and fraudulent conduct of
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He concurs to the extent this Court does not find any of his affirmative defenses to be
warranted.
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Yeley in “us[ing] the Pershing, L.L.C. account as his own personal piggy bank.” Dkt. No. 4-32 at
11, ¶ 26. As noted above, from September 14, 2004, through December 18, 2006, Yeley
withdrew a total of $2,365,939.00 from the Pershing account. See dkt. no. 4-32 at 3-4 (listing
sixteen separate wire transfers in which Yeley withdrew sums of money from the Pershing
account and transferred the amounts to his various personal bank accounts). Yet, the bankruptcy
judge only discharged $1,500,000, and there is no explanation as to how he reached that figure or
if this figure corresponds to the amount that he believes Yeley obtained by his fraudulent
conduct.
Accordingly, this cause must be remanded for further proceedings. On remand, the
bankruptcy judge should make a specific finding of fact as to what amount of money Yeley
obtained by his fraudulent conduct. Once this finding is made, that specific amount should be
found to be non-dischargeable. See Cohen, 523 U.S. at 218 (“Pursuant to section 523(a)(2)(A),
“the share of money, property, etc., that is obtained by fraud gives rise to a nondischargeable
debt.”). Judgment should then be entered in favor of Forsythe and against Yeley for that specific
amount.
B. Discharge of Debt Pursuant to 11 U.S.C § 727
Filing for Chapter 7 bankruptcy gives “an honest but unfortunate debtor” a “fresh start.”
Stamat v. Neary, 635 F.3d 974, 978 (7th Cir. 2011). The bankruptcy code, therefore, grants the
debtor a discharge under most circumstances; however, it also “lists several exceptions that deny
the privilege to dishonest debtors.” Id. Forsythe argued below that three of those exceptions
under section 727 apply to this case. The bankruptcy court disagreed, noting “We don’t have
any 727s here. These aren’t the best pleadings that were filed, but there was no overt effort in
the petitions to mislead anybody or lead them down the road that they shouldn’t go.” Tr. at 211.

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Forsythe thus appeals this determination. The Court turns its analysis to section 727, keeping in
mind that “[i]n bankruptcy, exceptions to discharge are to be construed strictly against a creditor
and liberally in favor of the debtor.” Stamat, 635 F.3d at 979.
1. False Oath
Forsythe first argues that Yeley should not be granted a discharge pursuant to 11 U.S.C. §
727(a)(4). This section provides that no discharge should be granted if
the debtor knowingly and fraudulently, in or in connection with the case—made a
false oath or account; presented or used a false claim; gave, offered, received, or
attempted to obtain money, property, or advantage, or a promise of money,
property, or advantage, for acting or forbearing to act; or withheld from an officer
of the estate entitled to possession under this title, any recorded information,
including books, documents, records, and papers, relating to the debtor’s property
or financial affairs[.]
In order for this section to apply, Forsythe must prove: “(1) the debtor made a statement under
oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor
made the statement with fraudulent intent; and (5) the statement related materially to the
bankruptcy case.” Stamat, 635 F.3d at 978.
Essentially, on appeal, Forsythe argues that Yeley provided conflicting testimony,
continuously changed his story, and therefore, has “zero credibility.” Forsythe Brief at 33.
However, this directly contradicts what the bankruptcy judge, who personally witnessed the
testimony, observed:
And I think that everybody here that dad [sic] tried to tell the truth. I mean, I
don’t know that I have anybody that was a—was not telling the truth. The issue
of credibility, look at the amount of paper we have here. Look at the amount of
lawyer time. People see things all from a little different angle.
Tr. at 213. “Whether a debtor made a false oath within the meaning of § 727(a)(4) is a question
of fact,” In re Lindemann, 375 B.R. 450, 469 (Bankr. N.D. Ill. 2007), and deference is given to
trial judges’ credibility determinations. See Carnes Co. v. Stone Creek Mechanical, Inc., 412
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F.3d 845 (7th Cir. 2005) (“We also afford great deference to the trial court’s assessment of
witness credibility; indeed, we have stated that a trial court’s credibility determination ‘can
virtually never amount to clear error.’”) (quoting Lac Du Flambeau v. Stop Treaty AbuseWisconsin, Inc., 41 F.3d 1190, 1194 (7th Cir. 1994)). The bankruptcy judge was clearly in a
better position to judge Yeley’s credibility. Accordingly, the Court does not find any clear error
in regard to its denial of Forsythe’s section 727(a)(4) objection.
2. Failure to Maintain Adequate Books and Records
Forsythe next argues that Yeley should have been denied a discharge pursuant to 11
U.S.C. § 727(a)(3). This section provides that no discharge should be granted if “the debtor has
concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information,
including books, documents, records, and papers, from which the debtor’s financial condition or
business transactions might be ascertained, unless such act or failure to act was justified under all
of the circumstances of the case[.]” Forsythe argues that Yeley: 1) failed to file tax returns; 2)
failed to disclose interests in businesses; 3) failed to provide documentation of his financial
affairs and refused to answer discovery requests; and 4) cannot document the dissipation of large
sums of money.2 The Seventh Circuit has stated with regard to this section that “[r]ecords need
not be kept in any special manner, nor is there any rigid standard of perfection in record-keeping
mandated by § 727(a)(3).” Matter of Juzwiak, 89 F.3d 424, 428 (7th Cir. 1996). The Court sees
no error committed by the bankruptcy judge in concluding that Forsythe’s objection pursuant to
this section should be denied. The bankruptcy judge noted that “[t]hese aren’t the best pleadings
that were filed, but there was no overt effort in the petitions to mislead anybody or lead them
down the road that they shouldn’t go.” Tr. at 211. Accordingly, the Court sees no reason to
2

This argument is better addressed with Forsythe’s objection to discharge pursuant to
section 727(a)(5).
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disrupt the bankruptcy judge’s conclusion that discharge was not warranted pursuant to section
727(a)(3).
3. Failure to Explain the Loss
Finally, Forsythe argues that Yeley should not be granted a discharge pursuant to 11
U.S.C. § 727(a)(5) which provides that no discharge should be granted if “the debtor has failed
to explain satisfactorily, before determination of denial of discharge under this paragraph, any
loss of assets or deficiency of assets to meet the debtor’s liabilities[.]” Forsythe correctly
explains the burden of proof in his brief:
First the objecting party has the burden of proving that the debtor at one time
owned substantial and identifiable assets that are no longer available to his
creditors. Second, if the party objecting to discharge meets this burden, then the
burden shifts to the debtor to provide a satisfactory explanation for the loss.
Forsythe Brief at 30. The bankruptcy judge found that Forsythe “did not meet the burden of
proof in showing that the discharge should be denied pursuant to Section 727(a)[(5)].” Dkt. No.
4-32 at 12. Forsythe glosses over his burden in his brief, arguing instead that “Yeley has failed
or refused to explain what he did with the $3,000,000.00.” Forsythe Brief at 23.
The Court is a bit perplexed by Forsythe’s argument in that he only argues that Yeley has
failed to account for the three million dollars that belonged to Forsythe. In other words,
Forsythe does not argue that Yeley owned other substantial assets for which he failed to explain
their current unavailability. True that Yeley funneled a large portion of Forsythe’s three million
dollars into his personal bank accounts, but this money was never his to “own,” and further, this
fraudulent conduct has already resulted in these amounts being non-dischargeable. The Court,
therefore, does not find that Forsythe has met his burden to show that Yeley owned other
substantial and identifiable assets that are now no longer available to pay back the debt he owes
to Forsythe. On appeal, Forsythe only argues that Yeley did not explain what he did with the
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three million dollars that belonged to Forsythe. Accordingly, the Court finds no error with the
bankruptcy court’s denial of Forsythe’s section 727(a)(5) objection.
C. Findings of Fact and Conclusions of Law
Turning now to the merits of Yeley’s appeal, his first argument is that the findings of fact
and conclusions of law were made in error—he argues that the written findings of fact and
conclusions of law, taken from Forsythe’s counsel, are contrary to what the bankruptcy court
announced orally from the bench and relied on in making its determination that “[w]e don’t have
any 727s here.” Tr. at 211. Specifically, Yeley takes issue with Findings of Fact numbers 18-25.
As Yeley notes, these allege various “material and false actions” that Yeley committed that may
justify a discharge pursuant to section 727. Yeley Brief at 19. Inasmuch as the Court has agreed
with the bankruptcy court that non-dischargeability pursuant to sections 727(a)(3), (4), and (5) is
not warranted in this case, the Court need not further address Yeley’s argument.
D. Yeley’s Affirmative Defenses
Finally, Yeley argues that the bankruptcy court erred in its failure to address his
affirmative defenses. For the reasons explained below, the Court finds that none of Yeley’s
defenses are applicable to this case, and accordingly, the bankruptcy court did not err in denying
his affirmative defenses.
1. The Statute of Frauds
Yeley first argues that under Illinois law, the statute of frauds bars enforcement of the
oral agreement entered into by Forsythe and himself because it was not to be completed in less
than a year. See 740 Ill. Comp. Stat. 80/1 (2013). Under Illinois law, “[t]he test for determining
whether the statute of frauds applies to a contract is whether the contract is capable of being
performed within one year of its formation, not whether such occurrence is likely.” Robinson v.

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BDO Seidman, LLP, 854 N.E.2d 767, 772 (Ill. 2006). Certainly, Forsythe’s promise to pay
money and Yeley’s contemporaneous promise to purchase Cabela’s stock was capable of being
performed within one year. The Court, therefore, finds no error in the bankruptcy’s court
conclusion that this affirmative defense was inapplicable.3
2. Lack of Standing
Yeley next argues that Forsythe lacks standing to challenge the dischargeability of the
claim because “he is not the proper party to seek recovery of the funds[.]” Yeley Brief at 29. He
argues this because “the evidence at trial demonstrated conclusively that the investment in this
case was made by Indeck Energy.” Id. In order “[t]o have standing to object to a bankruptcy
order, a person must have a pecuniary interest in the outcome of the bankruptcy proceedings.
Only those persons affected pecuniarily by a bankruptcy order have standing to appeal that
order.” In re Cult Awareness Network, Inc., 151 F.3d 605, 607 (7th Cir. 1998). The Court agrees
with the bankruptcy court that Forsythe has standing to challenge the order as he has a pecuniary
interest—three million dollars—that is affected by the order.
While true that the check sent to Yeley was drawn on Indeck’s account, it is clear that
Forsythe obtained a loan from Indeck, which he paid back at the end of 2006. See Tr. at 164-65.
Accordingly, he is now the proper party whose pecuniary interest is at stake. Further, Yeley
wrote a three million dollar refund check payable to Forsythe at the end of 2006, listed Forsythe
as a creditor on his bankruptcy filings, and, at trial, argued that part of the reason he handled the
money in the way he did was because he had a right to perform a setoff against Forsythe. This

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Forsythe also directs the Court to two other explanations why the statute of frauds does
not preclude enforcement of the oral contract: (1) the defense may not be asserted to perpetuate
a fraud; and (2) partial performance bars application of the defense. The Court notes that both of
these reasons are additional support for its conclusion that the statute of frauds defense is
inapplicable to this case.
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belies any claim now made by Yeley that Forsythe has no standing to challenge the
dischargeability order.
3. Unclean Hands, Illegality, and Estoppel
With respect to his illegality defense, Yeley makes a general allegation that “one
interpretation of the evidence in this case would be that Forsythe or Indeck was precluded by law
or securities regulations from investing in an IPO and this explained secrecy [sic] which Debtor
was asked to keep.” Yeley Brief at 30. This is pure speculation which does not satisfy Yeley’s
burden of proof. See e.g., Employer Ins. of Wausau v. Titan Intern., Inc., 400 F.3d 486, 490 (7th
Cir. 2005) (noting that illegality is an affirmative defense, “and of course defendants have the
burden of proving affirmative defenses.”). Yeley certainly has not produced any evidence
supporting this allegation. See Yeley Brief at 30 (“The evidence was presented and denied by
Forsythe.”).
Finally, Yeley argues that had Forsythe taken “a more active, visible role in such a large
transaction[,]” the outcome would have been different. Yeley Brief at 30. It appears that Yeley
is arguing that it is Forsythe’s fault he lost his money because he did not adequately supervise
Yeley. Therefore, Forsythe has “unclean hands” and/or is estopped from asserting his claim for
nondischargeability. However, as Yeley himself noted in a motion made with the bankruptcy
court below, “it will be necessary to introduce proof of the factual basis which he has alleged for
these defenses[.]” Dkt. No. 4-23 at 7. Yeley has failed to direct the court to any factual—or
legal—support in his appeal. Simply alleging that Forsythe could have done more is certainly
not enough to warrant a total preclusion from recovery. Accordingly, the Court finds no error in
the bankruptcy court’s determination that Yeley failed to meet his burden of proof on his
illegality, unclean hands, and estoppel defenses.

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IV.

CONCLUSION

The Bankruptcy Court’s judgment is hereby REVERSED and this cause is
REMANDED to the Bankruptcy Court such that it can make a specific finding of fact in regard
to the actual amount of money that Yeley fraudulently obtained. Judgment should then be
entered in favor of Forsythe and against Yeley for that specific amount pursuant to section
523(a)(2)(A).
SO ORDERED: 03/20/2014

_______________________________
Hon. William T. Lawrence, Judge
United States District Court
Southern District of Indiana

Copies to all counsel of record via electronic communication

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