Blue Skies, Inc. v. James B. Preece

1 The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the
District of Minnesota.
United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
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06-6040/6041MN
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In re: JAMES BRUCE PREECE, 	*
*
Debtor 	*
*
BLUE SKIES, INC.; 	*
KEN SCHOENFELDER; 	*
CENTRAL BOILER, INC., 	*
*
Plaintiffs - Appellees 	* 	Appeal from the United States
* 	Bankruptcy Court for the
v. 	* 	District of Minnesota
*
JAMES BRUCE PREECE, 	*
*
Defendant - Appellant. 	*
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Submitted: February 15, 2007
Filed: March 19, 2007
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SCHERMER, FEDERMAN and VENTERS, Bankruptcy Judges
FEDERMAN, Bankruptcy Judge
Debtor James Bruce Preece appeals from the Bankruptcy Court’s 1 Judgments
that his debts to Ken Schoenfelder, Blue Skies, Inc., and Central Boiler, Inc. are

2 Ken Schoenfelder, also a named plaintiff in the adversary action by Blue
Skies, is the principal of Blue Skies, Inc. Hereafter, they will sometimes be
referred to collectively as “Blue Skies.”
3 Dennis Brazier is the principal of Central Boiler, Inc. Hereafter they will
sometimes be referred to collectively as “Central Boiler.”
2
nondischargeable under 11 U.S.C. § 523(a)(2)(A). For the reasons that follow, we
affirm.
FACTUAL BACKGROUND
Introduction
Debtor Bruce Preece was the sole shareholder, director, and CEO of Helicopter
Flight, Inc. (“HFI”), which had sold new and used helicopters, and was an authorized
dealer of Robinson Helicopter Company’s helicopters. Plaintiffs Blue Skies, Inc.,2
and Central Boiler, Inc.3 each gave funds to HFI for the purpose of purchasing
helicopters but, in each instance, HFI did not supply the helicopter. After the Debtor
filed his Chapter 7 bankruptcy petition, Blue Skies and Central Boiler each filed
adversary actions seeking a determination that the Debtor’s debts to them were
nondischargeable. The cases were consolidated for trial.
Blue Skies
In November 2001, one Richard Stanger entered into a listing agreement with
HFI for the sale of his R44 helicopter. 	Under the listing agreement, HFI was
appointed as sales agent for a period of ninety days to sell Stanger’s helicopter for
$335,000. 	In exchange, HFI was entitled to a 5% commission on the sales price.
HFI’s appointment as sales agent expired on February 20, 2002.

3
HFI was unable to sell Stanger’s helicopter under the listing agreement. 	In
March 2002, after the listing agreement with Stanger expired, the Debtor contacted
Ken Schoenfelder, the principal of Blue Skies, about a transaction involving Stanger’s
helicopter. The Debtor drafted a letter agreement dated March 21, 2002, which he and
Schoenfelder both signed. 	Pursuant to this letter agreement, Blue Skies made a
$260,000 loan to HFI for the express purpose of acquiring Stanger’s helicopter for
resale. The plan was for the Debtor to buy the helicopter from Stanger, and then try
to re-sell it for a higher price, with Blue Skies and HFI sharing the profit.
Under this deal with Blue Skies, on or before May 21, 2002 (which was sixty
days after they entered into the agreement), HFI was supposed to either (i) repay Blue
Skies the $260,000 plus $10,000 and 50% of the profit on sale of the Stanger
helicopter if it sold for more than $304,000, or, (ii) in the event HFI did not sell the
helicopter within sixty days, HFI was to deliver an FAA Aircraft Bill of Sale on the
Stanger helicopter to Blue Skies. In other words, by May 21, 2002, Blue Skies was
to receive either a minimum of $270,000 or ownership of the Stanger helicopter. As
further collateral for the $260,000 loan, the Debtor signed a UCC Security Agreement
granting Schoenfelder a security interest in HFI’s leasehold premises at the Crystal
Airport. However, those premises were already subject to a security interest held by
the Debtor’s mother and, in addition, Blue Skies could not have executed on the
security agreement and taken possession of the premises because of restrictions
concerning ownership and operation of airport property. Hence, this security interest
was probably worthless. Schoenfelder failed to perfect it in any event.
In accordance with the letter agreement, Blue Skies wire transferred $260,000
to HFI on March 22, 2002. However, the Debtor did not use the funds to acquire title
to Stanger’s helicopter, or any helicopter for that matter. Rather, the Debtor testified
that he put the money into HFI’s general operating account and used it for other
purposes. He offered no evidence as to how any of the money was actually spent,
however.

4
The May 21 deadline passed without the Debtor selling the Stanger helicopter
or paying Blue Skies the $270,000. Then, on May 30, 2002, the Debtor made out an
FAA Aircraft Bill of Sale purporting to transfer ownership of the Stanger helicopter
from HFI to Blue Skies. This Bill of Sale had a transposed serial number. Moreover,
because HFI did not own the Stanger helicopter, the Bill of Sale was meaningless. As
a result, when Schoenfelder attempted to have it registered in Blue Skies’ name, he
was unable to do so. A state court later held that Stanger, and not Blue Skies, owned
the R44 helicopter. Blue Skies ended up with neither the helicopter nor the $270,000.
Central Boiler
Central Boiler had previously purchased a Robinson R22 helicopter through
HFI in 1993. In early 2002, Central Boiler’s president, Dennis Brazier, contacted HFI
about purchasing a new Robinson helicopter, an R44. The parties agreed upon a total
purchase price of $303,414, less an “early payment discount” of $7,000, for a final
price of $296,414. The expected delivery date was April 15, 2002. On February 8,
2002, Central Boiler made a $25,000 deposit and traded in the old R22 for a credit of
$90,000 towards the purchase of the new R44. 	The Debtor memorialized the
agreement by letter dated February 11, 2002. Central Boiler paid the balance of the
sale price, $181,414, by wire transfer to HFI’s account that same day. The parties
agreed that when the old R22 was sold to a third party, $90,000 of the proceeds from
that sale would be earmarked to go to Robinson toward Central Boiler’s purchase of
the R44.
Meanwhile, unbeknownst to Central Boiler, at the end of 2001, Robinson had
informed HFI that, effective December 31, 2001, HFI was no longer a registered
dealer or authorized to sell Robinson helicopters. Central Boiler found out about this
when, on February 19, 2002, Robinson copied Central Boiler on a letter to HFI,
expressly reminding HFI that the dealership agreement had expired on December 31,
and that HFI was no longer authorized to represent itself as a Robinson dealer. The
February 19 letter was written after Robinson became aware that HFI had purported

5
to sell a Robinson R44 helicopter to another person, James Bult, even though HFI was
no longer authorized to sell Robinson helicopters. The letter indicated that Bult had
paid HFI in full for an R44 helicopter, but Robinson had not received any of the funds,
and Bult had not received his helicopter. The letter demanded that any payments HFI
had received for Robinson helicopters be forwarded immediately to Robinson and,
further, that any future payments made by HFI customers be paid directly by the
customer to Robinson. Five parties, including James Bult, Central Boiler, and Dennis
Brazier, were copied on the letter, apparently because Robinson had become aware
that they all had paid HFI for Robinson helicopters.
By the time Central Boiler received this letter, it had already paid HFI in full
for its helicopter. After the February 19, 2002 letter, the Debtor continued to assure
Brazier that, despite the letter, HFI did not have a problem with Robinson, that the
money Central Boiler had paid for its helicopter would go to Robinson, and that
Central Boiler would get its helicopter. That did not happen.
All of the money Central Boiler paid to HFI went into HFI’s general accounts,
and, except for the initial $25,000 deposit, none of it went to Robinson for the
purchase of the R44. 	In addition, HFI sold the traded-in R22 in April 2002 for
$90,000 and deposited those proceeds into its general account. Fifty thousand dollars
of that deposit was immediately set off by the bank while it was in HFI’s account.
Other than that $50,000, the Debtor did not account for any of the rest of the money
Central Boiler paid, other than to say that it went into HFI’s general operating fund
and was used in the business. 	We note that James Bult was not listed as a creditor in
the bankruptcy case, though there is nothing in the record as to whether any of Central
Boiler’s funds were used to take care of his claim.
The Debtor’s Insolvency and Bankruptcy Case
According to the Debtor, HFI suffered dramatically from the September 11,
2001 terrorist attacks. HFI was insolvent at the time of all of the above transactions,

4 Fed. R. Bankr. P. 8001(a).
6
but, the Debtor says, he and his family continued to infuse large amounts of personal
funds into HFI, in an attempt to “resurrect” the company. The Debtor estimates that
these contributions from his family totaled over $600,000. 	Again, he offered no
evidence as to how these funds were used. In any event, these contributions are not
relevant to the question of whether he intended to defraud the Plaintiffs.
On June 12, 2002, Security Bank obtained an Order for Seizure against HFI for
all of HFI’s inventory, accounts, equipment, and certain helicopters in HFI’s fleet.
The Debtor filed a voluntary Chapter 7 petition on July 11, 2003. 	Blue Skies and
Central Boiler filed adversary actions seeking determinations of nondischargeability
under § 523(a)(2), (4), and (6). The court entered Judgments in favor of each of the
Plaintiffs, finding the Debtor to be personally responsible for HFI’s debts to them, and
finding the debts to be nondischargeable under (a)(2); therefore, it did not need to
decide the (a)(4) and (a)(6) questions. The Debtor appeals.
DISCUSSION
Procedural Issue on Appeal
Blue Skies points out that the Debtor’s brief was untimely and requests that we
disregard it. 	Federal Rule of Bankruptcy Procedure 8001(a) provides that “[a]n
appellant’s failure to take any step other than timely filing a notice of appeal does not
affect the validity of the appeal, but is ground only for such action as the district court
or bankruptcy appellate panel deems appropriate, which may include dismissal of the
appeal.”4 While “[f]iling deadlines serve an important judicial function and tardiness
shall not be taken lightly,” if the appellee’s prejudice is not of such a degree that the
reviewing court should not reach the merits, the reviewing court can consider the

5 See Frank Seitzinger Farms, Inc. of Iowa v. Waller, 67 B.R. 869, 871 (D.
S.D. 1986).
6 First Nat’l Bank of Olathe v. Pontow (In re Pontow), 111 F.3d 604, 609
(8th Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir.
1997); Fed. R. Bankr. P. 8013.
7 In re Jones, 31 F.3d 659, 662 (8 th Cir. 1994).
8 Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84
L.Ed.2d 518 (1985).
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untimely brief.5 In this particular instance, we find that any prejudice to Blue Skies
and Central Boiler in considering the Debtor’s brief is minimal. Blue Skies’ request
that we disregard the Debtor’s brief is, therefore, DENIED.
Standard of Review
The BAP reviews findings of fact for clear error, and legal conclusions de
novo.6 “A bankruptcy court’s finding concerning intent is a factual finding subject
to the clearly erroneous rule.”7 A finding is clearly erroneous when the reviewing
court is “left with the definite and firm conviction that a mistake has been
committed.”8
The Debtor’s Personal Liability for HFI’s Debts
The Debtor does not appeal the bankruptcy court’s finding of personal liability
for 	HFI’s 	corporate 	debts, 	under 	piercing 	the 	corporate 	veil 	or 	any 	theory.
Accordingly, we do not address it here.

9 11 U.S.C. § 523(a)(2)(A).
10 516 U.S. 59, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995).
11 Id. 516 U.S. at 70-72, 116 S. Ct. at 443-44.
12 In re Ophaug, 827 F.2d 340 (8 th Cir. 1987), as supplemented by Field v.
Mans, 516 U.S. 59, 116 S.Ct. 437(1995); In re Moen, 238 B.R. 785, 790 (B.A.P.
8 th Cir. 1999).
8
Nondischargeability Under § 523(a)(2)(A)
Section 523(a)(2)(A) provides an exception from discharge for any debt “for
money, property, services, or an extension, renewal, or refinancing of credit, to the
extent obtained by . . . false pretenses, a false representation, or actual fraud, other
than a statement respecting the debtor’s or an insider’s financial condition.” 9
In Field v. Mans,10 the United States Supreme Court held that § 523(a)(2)(A)
encompasses common law misrepresentation or actual fraud.11 To prove actual or
common law fraud, a creditor must prove, by a preponderance of the evidence, the
following:
(1) the debtor made a false representation;
(2) at the time the representation was made the debtor knew it was false;
(3) the debtor subjectively intended to deceive the creditor at the time he made
the representation;
(4) the creditor justifiably relied upon the representation;
and
(5) the creditor was damaged.12
In his brief, the Debtor argues only that the bankruptcy court erred with regard
to the third element - intent to defraud. “As a general rule, an appellate court may

13 United States v. Simmons, 964 F.2d 763, 777 (8th Cir. 1992) (citing
United States v. Olano, 934 F.2d 1425, 1439 (9th Cir. 1991)). The Debtor did raise
justifiable reliance and proximate cause in his “Statement of Issues” but did not
discuss how the court erred in so finding. In any event, the Plaintiffs justifiably
relied on the Debtor’s misrepresentations.
14 In re Moen, 238 B.R. at 792.
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review only the issues specifically raised and argued in an appellant's brief.”13
Therefore, we will only consider whether the Plaintiffs established the Debtor’s intent
to defraud. Since a debtor’s mental state is difficult to prove, fraudulent intent may
be proved by direct or circumstantial evidence.14 The Debtor asserts that this case is
nothing more than a typical business failure or breach of contract case. He says he
was merely attempting to keep his failing business afloat, and the bankruptcy court
erred in concluding otherwise.
As shown, the Debtor had been advised in December 2001 that Robinson was
terminating his dealership. 	Nevertheless, he continued to represent himself as
authorized to sell Robinson helicopters. Further, even after receiving the February 19,
2002 letter, he told Dennis Brazier that the letter was simply due to Robinson’s policy
changes brought on by its quick growth. He said the relationship between HFI and
Robinson was fine, and the letter was, in effect, meaningless. He assured Brazier that
Central Boiler was going to receive its new Robinson helicopter, even though HFI was
no longer authorized to sell them and HFI had not paid Robinson for it.
Indeed, the Debtor expressly told each of the Plaintiffs that he was using their
respective funds to purchase a specific helicopter, but failed to do so. 	With Blue
Skies, the Debtor represented to Schoenfelder that HFI was buying the Stanger
helicopter. 	With Central Boiler, the Debtor represented to Brazier that he was
acquiring the particular Robinson R44 that Central Boiler had ordered, and that even
the proceeds from the sale of the trade-in R22 would be “earmarked” for that
purchase.

10
The Debtor argues that he was not able to use these funds to purchase those
helicopters because he had to pay others to keep the business open. But the record
contains ample evidence to support the bankruptcy court’s finding that these
transactions involved more than merely keeping the business afloat. 	As the
bankruptcy court found, the Debtor had to have obtained these funds knowing that
they would not be available to purchase the helicopters he promised the Plaintiffs to
purchase.
For example, as to Blue Skies, during the three-month period that HFI had held
the Stanger helicopter on the consignment-type listing agreement, the best offer HFI
received was $245,000. Despite that, the Debtor then entered into the transaction with
Blue Skies whereby, in order to merely break even, HFI would have to sell the Stanger
helicopter for at least $270,000. 	Although the Debtor had been in the helicopter
business for many years, he represented to Schoenfelder that he could sell it for that
amount, and perhaps significantly more than that. Further, despite his representations
to Schoenfelder that he was going to use Blue Skies’ funds to purchase the Stanger
helicopter, the Debtor took no steps whatsoever to actually make the purchase from
Stanger. 	He even took steps to hide the situation after the money was gone by
tendering the fake Bill of Sale to Blue Skies. 	The bankruptcy court did not err in
concluding that the Debtor intended to defraud Blue Skies through this transaction.
Similarly, 	with 	regard 	to 	Central 	Boiler, 	the 	Debtor 	made 	express
representations that he was going to purchase a specific helicopter on Central Boiler’s
behalf, but then used the money for other purposes. Other than the $50,000 that was
set off by the bank, the Debtor had no explanation whatsoever as to where Blue Skies’
money went, nor did he present any evidence that he had taken any steps to actually
acquire Central Boiler’s helicopter, other than placing the initial order for it. HFI even
sold Central Boiler’s trade-in but did not use those funds to buy Central Boiler’s new
helicopter, despite the Debtor’s admission that he had agreed to earmark those funds
for that purpose. 	And, again, the Debtor took proactive steps to hide the fraud by

11
reassuring Brazier that everything was fine after he received Robinson’s February 19
letter stating that HFI was no longer authorized to sell Robinson helicopters.
CONCLUSION
In sum, the record supports the bankruptcy court’s conclusion that the Debtor
entered into agreements with the Plaintiffs knowing that he would not be able to
comply and with the intent to defraud. 	Accordingly, the bankruptcy court’s
Judgments in favor of Blue Skies, Inc., Ken Schoenfelder, and Central Boiler are
AFFIRMED.
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