First Nat. Bank of Olathe, Kan. v. Pontow

• Decision Date: 17 April 1997
• Docket Number: No. 96-1893,96-1893
• Citation: 111 F.3d 604
• Parties: , Bankr. L. Rep. P 77,369 FIRST NATIONAL BANK OF OLATHE, KANSAS, Plaintiff-Appellant, v. Thomas M. PONTOW; Ann M. Pontow, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 604

111 F.3d 604

30 Bankr.Ct.Dec. 894, Bankr. L. Rep. P 77,369

FIRST NATIONAL BANK OF OLATHE, KANSAS, Plaintiff-Appellant, v. Thomas M. PONTOW; Ann M. Pontow, Defendants-Appellees.

No. 96-1893.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 18, 1996.

Decided April 17, 1997.

Kristopher C. Kuckelman (argued), Olathe, Kansas, for Appellant.

Robert A. Sims (argued), Des Moines, IA, for Appellees.

Before BEAM, FRIEDMAN ^*, and LOKEN, Circuit Judges.

FRIEDMAN, Circuit Judge.

A bankruptcy court rejected a bank's attempt to bar the discharge of a bankrupt's indebtedness to the bank under § 523(a)(2)(B) of the Bankruptcy Code. The bankruptcy court held that the bank had not established two conditions for denying discharge under that provision: that the creditor had reasonably relied upon false information provided by the debtor, and that the debtor had intended to deceive the bank. The district court affirmed, holding that the bankruptcy court's findings that the bank did not establish reasonable reliance were not clearly erroneous. We affirm.

I.

A. In June 1991 the appellee, Pontow, purchased the majority of the stock of Hal Hardin Apparel, Inc. ("Hardin Apparel"), a clothing manufacturer. Pontow financed the purchase through loans to Hardin Apparel from the appellant First National Bank of Olathe ("the Bank"), which also covered working capital for the business. Initially, the Bank provided $250,000 on an inventory term loan guaranteed by the Small Business Administration ("SBA") and $250,000 on an accounts receivable line of credit ("the A/R loan"). The A/R loan allowed Hardin Apparel to borrow the lesser of $250,000 or eighty percent of eligible accounts receivable, defined as those sixty days or less past due. In October, 1991, the Bank increased the A/R loan limit to $350,000 and in January, 1992 to $500,000, both subject to the eighty percent limitation.

Hardin Apparel executed promissory notes to the Bank for the loans. The notes and loans were secured by security arrangements covering all of Hardin Apparel's assets. Pontow personally guaranteed the foregoing debts of Hardin Apparel.

Each time Hardin Apparel drew on the line of credit, it was required to submit to the Bank a borrowing base certificate ("certificate"). This was a printed one-page form which required Hardin Apparel to provide specified information, including both eligible and ineligible accounts receivable, the amount to be borrowed and comparisons with previous certificates. During the period the financing arrangements were operative, Hardin Apparel submitted certificates to the Bank. Hardin Apparel also submitted with the certificates its balance sheet.

Upon receiving a certificate, a Bank clerk verified the calculations to insure that the loan balance after the draw did not exceed eighty percent of the accounts receivable shown on the certificate. If the loan sought met that standard and the certificate was properly completed, the clerk issued a draw slip. If the loan balance exceeded that percentage or there were other problems, the clerk had to obtain a loan officer's approval to do the draw slip. In the majority of instances, the clerk issued the draw slip without obtaining loan officer approval.

Brian Roby ("Roby"), the loan officer responsible for the Hardin Apparel loan, on four separate occasions approved payments in excess of eighty percent of the accounts receivable shown on the certificate. He did so based on "assurances" by Pontow that the loan balance would not exceed that limit for a significant length of time. Roby also approved loans although the certificates did not reconcile the balance of accounts receivable with that shown on the previous certificate. He also approved loans where the certificate included accounts receivable that were more than sixty days past due and where " on account items" were treated as "eligible accounts receivable," although he was aware that the deviations had the effect of overstating accounts receivable.

Unlike other documents relating to the loans, the Bank did not retain the certificates, either as part of the loan file or elsewhere. Instead, it disposed of them shortly after the loans for which they were filed had been made.

When Hardin Apparel was unable to pay two notes due in May and June 1992, which covered part of the A/R loan, Roby extended the time for payment until July 1, 1992. In granting the extensions, Roby thought that Hardin Apparel's accounts receivable balance was that shown on the certificate. Roby doubted whether an extension would have been granted had he known then that accounts receivable were actually $100,000 less than what was represented on the certificates.

In June, 1992, Pontow and his accountant told Roby that Hardin Apparel needed an additional $200,000 loan to survive the fall 1992 season. Roby recommended to the bank's loan committee that it approve both the additional $200,000 loan, to be guaranteed by the SBA, and renewal of the $500,000 A/R loan. The SBA, however, refused the guarantee.

Roby, realizing that Hardin Apparel would not survive the season without some infusion of money, resubmitted both requests to the loan committee, which approved them. When Roby submitted the request he was "generally" aware of Hardin Apparel's accounts receivable as represented on the certificates. The note covering the additional $200,000 was due on September 15, 1992 but was extended to April 1, 1993. When Roby extended the due date he was aware of and claimed to have relied upon the accounts receivable balance as stated in the certificates and the balance sheets for that time period.

In December 1992, Pontow and his accountant advised the Bank that Hardin Apparel would not survive the winter, unless it merged with another company and received another $200,000 loan. The Bank refused to lend any more money without a guarantee by the SBA, which the SBA refused to make. The Bank called the loans on February 4, 1993.

Shortly thereafter, the parties met to discuss liquidation of the collateral, and the accountant provided Roby with a balance sheet listing the accounts receivable at $318,272. Roby wanted to know why that amount was so much lower than the accounts receivable shown on recent certificates, but Pontow refused to explain the discrepancy.

What had occurred was that Hardin Apparel repeatedly had overstated its accounts receivable by (1) delaying the recording of payments received from those accounts, and (2) including in accounts receivable those that were between sixty to ninety days overdue, although under its agreement with the Bank eligible accounts receivable were limited to those no more than sixty days past due. These overstatements originally began because Hardin Apparel's bookkeeper and her clerk were too busy timely to record payments on accounts receivable. At some point Pontow instructed the clerk to exclude from accounts receivable only those ninety days or more past due. He told the clerk and the bookkeeper that the reason for doing that was to overstate accounts receivable so that Hardin Apparel would have sufficient cash flow. The Bank's expert witness, an accountant, testified that from June 17, 1992 until December, 1992 (with the exception of the August 31, 1992 balance sheet), the certificates and balance sheets overstated Hardin Apparel's accounts receivable by at least $200,000.

B. In October, 1993, Pontow filed in the United States Bankruptcy Court for the Southern District of Iowa a voluntary petition under Chapter 7 of the Bankruptcy Code. The Bank filed a complaint in the bankruptcy court seeking, among other things, a determination that Pontow's obligation under his guaranty of Hardin Apparel's loans was not dischargeable under 11 U.S.C. § 523(a)(2)(B). The amended complaint alleged that between April 1, 1992 and February 10, 1993 Pontow "induced" the Bank "to make, extend, renew, and make further advances on the loans" to Hardin Apparel by submitting to the Bank "statements that overstated the balance of Hal Hardin Apparel, Inc.'s accounts receivable," on which the Bank "reasonably relied and which were made or published by ... Pontow with the intent to deceive, all within the meaning of 11 U.S.C. § 523(a)(2)(B)."

After an evidentiary hearing, the bankruptcy court ¹ held that the Bank had not established that Pontow's indebtedness to it was not dischargeable. Ruling from the bench, the bankruptcy court found that the certificates contained false statements "regarding the financial condition of the debtor or the debtor's business," but that the Bank had not relied upon those statements in extending the loans. The court stated that "the certificates were in fact, just a means by which a request for money based on the line of credit would be accomplished." The court further found that if the Bank had relied upon the statements in the certificates, "the reliance is not reasonable." Finally, the bankruptcy court found that the Bank had not established that Pontow had made the false statements "with the intent to deceive" the Bank.

On the Bank's appeal, the United States District Court for the Southern District of Iowa ² affirmed. The court held that the bankruptcy court's findings that the Bank had failed to prove that it had relied upon Hardin Apparel's financial statements and the certificates, and that any reliance the Bank placed upon them was unreasonable, were not clearly erroneous. It stated that "[e]vidence supported the bankruptcy court's conclusion that the borrowing base certificates were merely a means to request funds be advanced under a line of credit." The court ruled that because it "finds substantial evidence supports the bankruptcy court's decision that the Bank did not prove two essential elements in section 523(a)(2)(B)," it was unnecessary to decide whether the bankruptcy court correctly found that Pontow did not intend to deceive the Bank.

II.

Section 523(a)(2)(B) of the Bankruptcy...