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In re Berman-Smith

United States Court of Appeals, Fifth Circuit

December 16, 2013

In the Matter of: IRIS BERMAN-SMITH; CHARLES R. SMITH, Debtors
v.
C. DAVID GARTLEY; HARVEY E. GARTLEY, Appellants Cross-Appellees CHARLES R. SMITH, Appellee Cross-Appellant

Appeals from the United States District Court for the Western District of Texas

Before KING, BENAVIDES, and DENNIS, Circuit Judges.

PER CURIAM

C. David Gartley and Harvey E. Gartley filed this adversary proceeding in bankruptcy court against their former business partner, Debtor Charles R. Smith and his wife and Co-Debtor, Iris Berman-Smith. Over the course of the bankruptcy proceedings, the bankruptcy court determined that Smith, but not Berman-Smith, was liable to the Gartleys for fraud, that the damages arising out of his liability amounted to approximately $2.7 million, and that the debt from these damages was nondischargeable under 11 U.S.C. § 523(a)(2) & (4). Smith appealed to the district court, and the district court vacated the decision of the bankruptcy court and remanded the case because it found the factual findings and legal conclusions insufficient for review. The bankruptcy court issued written findings of fact and conclusions of law, and Smith again appealed. The district court affirmed most of the bankruptcy court's decision but vacated and remanded in part for a recalculation of the damage award and nondischargeable debt amount. The Gartleys timely appealed to this court. Because the district court did not have jurisdiction to hear Smith's appeal, we dismiss this appeal for lack of jurisdiction, vacate the decision of the district court, and remand to the district court with instructions to dismiss the appeal to that court for lack of jurisdiction.

I. Factual & Procedural Background

Charles R. Smith and Kenneth Martin formed Mediacom, L.L.C., and induced C. David Gartley and Harvey E. Gartley to invest in the company by misrepresenting their finances, business plan, and prior accomplishments at another (insolvent) company. The Gartleys eventually realized the extent of Smith's deception and filed a lawsuit (with Mediacom) in Texas state court against Smith and others alleging, inter alia, fraud. The Gartleys and Mediacom settled the lawsuit with Smith and Martin, but the settlement ultimately collapsed, prompting the Gartleys and Mediacom to file a second state court lawsuit on August 25, 2003, alleging the same claims.

Ten days before the trial date in the second state court action, Smith and his wife, Berman-Smith, filed for bankruptcy under Chapter 7. On September 7, 2007, the Gartleys, but not Mediacom, initiated in bankruptcy court the adversary proceeding which is the subject of this appeal, objecting to the discharge of debts under 11 U.S.C. § 523(a)(2)(A)–(B) and (a)(4). The Gartleys' amended complaint included eight claims: (1) common law and statutory fraud; (2) violation of the Texas Theft Liability Act; (3) misappropriation of funds; (4) violation of the Texas Security Act; (5) civil conspiracy; (6) breach of contract; (7) indemnity and contribution; and (8) objection to discharge under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), and (a)(4).

On January 21, 2009, following a bench trial, the bankruptcy court announced its findings of fact and conclusions of law orally at a hearing ("2009 Findings"). It found for the Gartleys on Counts One, Six, and Eight as to Smith only, and for Smith and Berman-Smith on Counts Two, Three, Four, Five, and Seven. On April 22, 2009, the bankruptcy court entered a final judgment to that effect.

Smith timely appealed the judgment of the bankruptcy court to the United States District Court for the Western District of Texas. In March 2011, the district court held that it could not "conduct a meaningful review based on the fact findings and conclusions of law" issued by the bankruptcy court. The district court vacated the judgment of the bankruptcy court and remanded the case for additional fact-finding and legal analysis.

On remand, the bankruptcy court issued additional written findings of fact and conclusions of law ("2012 Additional Findings"), addressing the Gartleys' claims and Smith's defenses. The order incorporated the 2009 Findings and held, in part, that Smith was liable for common law fraud and fraud by omission and that the Gartleys suffered $2, 657, 000 in damages from Smith's fraudulent misrepresentations. However, unlike the 2009 Findings, the bankruptcy court no longer held Smith liable for Count Six, breach of contract. The bankruptcy court further concluded in the 2012 Additional Findings that the Gartleys' judgment against Smith constituted nondischargeable debt under 11 U.S.C. § 523(a)(2)(A) & (B). The next day, on February 17, 2012, the bankruptcy court entered a separate Final Judgment in favor of the Gartleys against Smith for the reasons stated in the 2009 Findings and the 2012 Additional Findings. The judgment was for $2, 657, 000, plus interest, and it stated that the damage award was nondischargeable under 11 U.S.C. § 523(a)(2) & (a)(4).

On March 19, 2012, thirty days after the bankruptcy court entered its final judgment, Smith appealed to the district court a second time. The district court affirmed the decision in part and "vacated and remanded for proceedings to determine the judgment debt based on fraud only." The Gartleys timely filed the present appeal, and Smith timely cross-appealed.[1] In their reply, the Gartleys argued for the first time that the district court lacked jurisdiction to hear the second appeal from the bankruptcy court because Smith had not filed a timely notice of appeal. Smith filed a letter brief in opposition, arguing that the district court had jurisdiction to hear the appeal.

II. Standard of Review

We review de novo a district court's determination that a bankruptcy court had jurisdiction over a dispute. Bass v. Denney (In re Bass), 171 F.3d 1016, 1021 (5th Cir. 1999). Jurisdiction may not be waived, and federal appellate courts have a special obligation to consider not only their own jurisdiction, but also that of the lower courts. See Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986); Filer v. Donley, 690 F.3d 643, 646 (5th Cir. 2012). ...


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