Bandi v. Becnel (In re Bandi)

• Decision Date: 12 June 2012
• Docket Number: No. 11–30654.,11–30654.
• Citation: 683 F.3d 671,67 Collier Bankr.Cas.2d 1307,56 Bankr.Ct.Dec. 168
• Parties: In the Matter of Stephen John BANDI; Charles Edward Bandi, Debtors. Stephen John Bandi, Appellant, v. Christopher Becnel, Appellee. Charles Edward Bandi, Appellant, v. Christopher Becnel, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

683 F.3d 671

67 Collier Bankr.Cas.2d 1307

56 Bankr.Ct.Dec. 168

In the Matter of Stephen John BANDI; Charles Edward Bandi, Debtors.

Stephen John Bandi, Appellant,

v.Christopher Becnel, Appellee.

Charles Edward Bandi, Appellant,

v.Christopher Becnel, Appellee.

No. 11–30654.

United States Court of Appeals, Fifth Circuit.

June 12, 2012.

Stephen John Bandi, New Orleans, LA, pro se.

Charles Edward Bandi, Metairie, LA, pro se.

Chance Christopher White, LaPlace, LA, Kevin Patrick Klibert, Becnel Law Firm, L.L.C., Reserve, LA, for Appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, PRADO and OWEN, Circuit Judges.

OWEN, Circuit Judge:

The principal question in this appeal is the proper construction of the phrase “respecting the debtor's ... financial condition” as it appears in 11 U.S.C. § 523(a)(2)(A) and (a)(2)(B). Because we agree with the bankruptcy court's interpretation and find no clear error in that court's determination that the debtors obtained an advance of money through actual fraud, we affirm the judgment of the district court.

I

Christopher Becnel is the holder of a $150,000 promissory note executed by Charles Bandi on behalf of RSB Companies, LLC (RSB) and personally guaranteed by Charles Bandi and his brother, Stephen Bandi. When RSB defaulted, Becnel obtained separate judgments in state court against each of the Bandis based on their respective personal guarantees.

Stephen Bandi subsequently filed a voluntary Chapter 7 petition in the United States Bankruptcy Court for the Eastern District of Louisiana. Charles Bandi filed a voluntary Chapter 7 petition in the same court two months later. Becnel commenced adversary proceedings against each debtor, alleging that the debts owed to him were non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(2)(B). Section 523(a)(2)(A) provides that certain debts obtained by false pretenses, a false representation, or actual fraud are nondischargeable but excludes from its coverage “a statement respecting the debtor's ... financial condition.”¹Section 523(a)(2)(B) provides that certain debts obtained by a false “statement in writing ... respecting the debtor's financial condition” are nondischargeable.²

The bankruptcy court consolidated the adversary proceedings for trial. Becnel alleged that both Charles and Stephen Bandi falsely represented that they owned a commercial building on North Causeway Boulevard in Metairie, Louisiana. He further alleged that Stephen Bandi falsely represented that he owned Algiers Riverpoint Condominiums in Algiers, Louisiana, and that he owned a residence on Camp Street in New Orleans, Louisiana. Becnel also alleged that both Charles and Stephen Bandi presented him with a list of RSB's accounts receivable and that this list was fraudulent. Becnel asserted that the Bandis never intended to repay the loan and that Becnel would not have made the loan if he had known the accounts receivable list was falsified or that the Bandis had misrepresented their property ownership.

After a bench trial at which the Bandis cross-examined witnesses but presented no evidence, the bankruptcy court ruled in favor of Becnel, concluding that the debts were non-dischargeable. The court found that the loan of money was acquired by false pretenses, false representations, or actual fraud regarding property ownership. The bankruptcy court accordingly entered judgment against Stephen and Charles Bandi. Stephen Bandi filed a motion to alter or amend the judgment, requesting additional findings of fact, and for a new trial, specifically raising the issue of the proper interpretation of § 523(a)(2)(A) and (a)(2)(B). He noted a split among courts on the interpretation of these sections of the Bankruptcy Code and argued that throughout the case, the bankruptcy court had made contradictory rulings. He asserted that the court diverged after trial from its last pretrial ruling, prejudicing his defense. The bankruptcy court denied Stephen Bandi's motion but commented further on its judgment. The court specifically noted that it previously had not considered Bandi's statutory interpretation argument, but Bandi had not raised it. The bankruptcy court concluded that “a statement respecting the debtor's ... financial condition” must pertain to the overall financial condition of the debtor and that a statement about the status of specific assets was not “a statement respecting the debtor's or an insider's financial condition.”³

The Bandis appealed to the United States District Court for the Eastern District of Louisiana. The district court affirmed. The Bandis have appealed to this court.

II

We apply the same standard of review to the bankruptcy court's decision as the district court applied.⁴ The meaning of § 523(a)(2) is a question of law that we consider de novo.⁵

In a Chapter 7 bankruptcy proceeding, many of a debtor's debts are discharged.⁶ However, there are a number of exceptions.⁷ At issue here are the exceptions to discharge set forth in § 523(a)(2)(A) and (a)(2)(B). While the general purpose of the bankruptcy code is for debtors to obtain a “fresh start,” that policy has limits, and § 523(a)(2)(A) and (a)(2)(B) are intended to protect victims of fraud.⁸

Some debts for value obtained by means of a fraudulent statement are dischargeable under § 523(a)(2), and others are not. Debt for property or other value obtained by fraud is broadly rendered nondischargeable by § 523(a)(2)(A), but that subsection carves out certain debt that follows a transfer of value or extension of credit obtained by “a statement” regarding the debtor's “financial condition” and makes that debt dischargeable.⁹ However, certain other debt that follows a transfer of value or extension of credit obtained by “a statement” regarding the debtor's “financial condition” is rendered nondischargeable by § 523(a)(2)(B).¹⁰ Under this subsection, if a statement respecting the debtor's or an insider's financial condition is in writing, materially false, reasonably relied upon by the creditor, and the debtor made the statement with intent to deceive, the debt obtained by the fraud is not discharged.

The Bandis contend that all of their alleged fraudulent statements and false representations were “statement[s] respecting [their] financial condition” within the meaning of § 523(a)(2)(A) and therefore that the debt owed to Becnel should be discharged. None of their alleged statements or representations to Becnel meet the requirements of § 523(a)(2)(B), they contend, and therefore, they argue, the debt owed to Becnel is not rendered non-dischargeable under that subsection. We must determine whether representations that one or both of the Bandis owned particular pieces of real property constituted “statement[s] respecting [the Bandis'] financial condition.”¹¹

We begin our analysis with the words chosen by Congress. The word “statement” modified by the phrase “respecting the debtor's or an insider's financial condition” appears in both § 523(a)(2)(A) and (a)(2)(B).¹² The Supreme Court has described these two subsections as “two close statutory companions barring discharge,” the first of which pertains to fraud “not going to financial condition” and the second of which pertains to “a materially false and intentionally deceptive written statement of financial condition upon which the creditor reasonably relied.”¹³ The question before the Supreme Court in the case in which this statement was made was the level of reliance required by § 523(a)(2)(A) when actual fraud had been employed by the debtor.¹⁴ The Court held that the applicable standard was common-law justifiable reliance rather than “reasonable reliance,” even though “reasonable reliance” is the standard expressly set forth in § 523(a)(2)(B).¹⁵ But in the course of its examination of the interplay between § 523(a)(2)(A) and § 523(a)(2)(B), the Court gave at least some insight into the meaning of “a statement respecting the debtor's ... financial condition.” At one juncture, the Court equated such a statement with a statement by a debtor about his “bank balance.”¹⁶ In then explaining why Congress would choose the common-law standard of justifiable reliance for actual fraud under § 523(a)(2)(A) while expressly requiring “reasonable reliance” on written financial statements under § 523(a)(2)(B), the Court seemed to equate a “statement” about “financial condition” with what is commonly understood as something akin to a balance sheet or bank balance. The Supreme Court had considered the legislative history of § 523(a)(2)(B) regarding “the peculiar potential of financial statements to be misused not just by debtors, but by creditors who know their bankruptcy law.”¹⁷ The Court further explained,

[t]he House Report on the Act suggests that Congress wanted to moderate the burden on individuals who submitted false financial statements, not because lies about financial condition are less blameworthy than others, but because the relative equities might be affected by practices of consumer finance companies, which sometimes have encouraged such falsity by their borrowers for the very purpose of insulating their own claims from discharge. ¹⁸

We conclude that the phrase “a statement respecting the debtor's or an insider's financial condition” as used in § 523(a)(2) was meant to embody terms commonly understood in commercial usage rather than a broadly descriptive phrase intended to capture any and all misrepresentations that pertain in some way to specific assets or liabilities of the debtor. The term “financial condition” has a readily understood meaning. It means the general overall financial condition of an entity or individual, that is, the overall value of property and income as compared to debt and liabilities. A representation that one owns a particular residence or a particular commercial property says nothing about the overall financial condition of the person making the representation or the...