Bogstad, Matter of
| Decision Date | 13 December 1985 |
| Docket Number | No. 85-1392,85-1392 |
| Citation | 779 F.2d 370 |
| Parties | , 13 Collier Bankr.Cas.2d 1282, Bankr. L. Rep. P 70,881 In the Matter of Robert Oneal BOGSTAD, Debtor-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Bruce E. Zito, Mart W. Swenson, S.C., Eau Claire, Wis., for debtor-appellant.
Peter F. Herrell, Jordan, Herrell & Thiel, Eau Claire, Wis., for appellee.
Before CUDAHY and POSNER, Circuit Judges, and SWYGERT, Senior Circuit Judge.
The issue on appeal is whether a debt owed by Robert and Arlene Bogstad to the Production Credit Association of River Falls ("PCA") should be discharged in a voluntary liquidation under Chapter 7 of the Bankruptcy Code ("Code"), 11 U.S.C. Sec. 701 et seq. The bankruptcy court has twice found that it should be and the district court has twice reversed. We now reverse the district court.
Robert and Arlene Bogstad own a farm in Mondovi, Wisconsin. In 1980 their prospective son-in-law, Adam Mock, sought to establish a dairy farming operation on the Bogstad farm. Mock approached PCA for a loan to get his dairy started. Because Mock had no assets and his planned capital expenditures would not provide sufficient security for the loan he sought, PCA would make the loan only if it were co-signed by the Bogstads.
Robert Bogstad met with a PCA loan officer in August 1980 and provided oral information about his assets and liabilities. The loan officer prepared a balance sheet for them, which Robert and Arlene Bogstad both signed on September 12, 1980. On the strength of the Bogstad's net worth, as shown by the balance sheet, PCA loaned Adam Mock $52,225.00.
Adam Mock was not successful as a dairy farmer and in 1983 he filed a petition for voluntary liquidation under Chapter 7 of the Code. After PCA had liquidated its security with Mock, it turned to the Bogstads to collect the balance of the debt. As a result, the Bogstads filed a Chapter 7 petition for voluntary liquidation on March 9, 1983. 1 PCA filed a complaint seeking to have its debt declared nondischargeable under Code section 523(a)(2)(B), 11 U.S.C. Sec. 523(a)(2)(B). This section provides that a debtor will not be discharged of a debt if he has caused to be made or published, with the intent to deceive, a materially false written statement of his financial condition, which a creditor reasonably relied upon in making the loan in question. 2
The bankruptcy judge found that the Bogstads had made false statements in their PCA financial statement but, finding that PCA had not shown the statements to be materially false, he determined that the debt was dischargeable. PCA appealed this order to the District Court for the Western District of Wisconsin. That court reversed, holding that the financial statement was false "beyond a reasonable doubt" and remanding to the bankruptcy court for consideration of the issues of intent to deceive and reasonable reliance.
On remand, the bankruptcy judge held a supplementary hearing and decided that Robert Bogstad, in giving the statement of his finances, had had the requisite intent to deceive but that Arlene Bogstad had not. But he also decided that PCA's reliance on the financial statement was unreasonable and thus again concluded that the debt was dischargeable. PCA appealed again, and the district court, while sustaining the finding that Arlene Bogstad lacked an intent to deceive, reversed the bankruptcy judge on the question of PCA's reliance on the financial statement, finding it reasonable.
It is this last order of the district court that has been appealed to this court. Robert Bogstad contends that the district court erred in finding that PCA's reliance was reasonable and that it also erred in its earlier determination that the balance sheet was materially false. He further asks us to review the determination that he had the requisite intent to deceive. 3
A party who seeks to establish an exception to the discharge of a debt in bankruptcy bears the burden of proof. In re Martin, 698 F.2d 883, 887 (7th Cir.1983); In re Hosking, 19 B.R. 891, 895 (Bankr.W.D.Wis.1982). The standard of proof is one of "clear and convincing evidence." In re Brink, 27 B.R. 377, 378 (Bankr.W.D.Wis.1983); In re Trewyn, 12 B.R. 543, 545-46 (Bankr.W.D.Wis.1981). Thus, in this case, PCA bore the burden of showing by clear and convincing evidence (1) that the Bogstad financial statement was "materially" false; (2) that Robert Bogstad made the statement with intent to deceive; and (3) that PCA "reasonably" relied upon the written statement in making the loan. If it did not prove all three of these things, the debt was properly declared dischargeable by the bankruptcy court. 11 U.S.C. Sec. 523(a)(2)(B). Because we reverse the district court's ruling that the financial statement was materially false, we need not reach the issues raised by the latter two requirements. 4
The bankruptcy court found that there were five false statements on the Bogstad financial statement. These were: (1) listing $11,000.00 in life insurance as an asset although, as a term policy, it had no cash value; (2) listing the barn as a thirty-cow barn although it had only twenty stalls; (3) stating that they owned four automobiles when in fact they owned three; (4) valuing recreational property in northern Wisconsin at premium rather than fair market value; and (5) omitting to include as a liability a debt owed to Clarence Williams (Robert Bogstad's brother-in-law). Bankruptcy Findings of Fact and Conclusions of Law (January 16, 1984), p 28. It is not, however, enough that statements on the balance sheet be proven false. The financial statement as a whole must be materially false, and the burden was on PCA to show this by clear and convincing evidence. In this regard, the bankruptcy court found that PCA had not shown by clear and convincing evidence (1) that the three cars the Bogstads actually owned were worth less than what they claimed for four; (2) that the recreational property was worth less than the $10,000.00 the Bogstads claimed; and (3) that the debt to Clarence Williams, which dated back to 1962, was a legally cognizable debt in 1980. Id. p 29. Most significantly, PCA contended before the bankruptcy court that Robert Bogstad had grossly overvalued his farm when he listed it as worth $100,000.00. The bankruptcy court found that PCA had not proved this by clear and convincing evidence either. Id.
Noting that John Wegmann, the PCA loan officer who had administered the Adam Mock loan, had testified that PCA would have made the loan so long as the Bogstad's net worth was at least $58,105.00 and their asset-equity ratio had been at least .6 or .7, the bankruptcy court concluded that the Bogstad financial statement was not materially false. Id. at paragraphs 21, 32.
The district court reversed, finding "clearly erroneous" several of the bankruptcy court findings and holding the Bogstad balance sheet to be materially false "beyond a reasonable doubt." The district court re-created a balance sheet which it felt conformed to the evidence submitted at trial.
ASSETS
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Bankruptcy Court District Court
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Life insurance None None
Livestock $ 1,200.00 $ 1,200.00
Angus Bull 500.00 500.00
Heifer 750.00 750.00
Vehicles 2,650.00 (three) 2,000.00 (three)
Machinery, Equipment 6,640.00 6,640.00
Farm with Barn 100,000.00 (twenty 60,000.00 (twenty
cows) cows)
10 acres 3,500.00 3,500.00
-----------------------------------------
Total assets $115,240.00 $ 74,590.00
LIABILITIES
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Royal Credit Union $ 12,531.00 $ 12,531.00
Northern Investment 4,000.00 4,000.00
Clarence Williams None 10,000.00
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Total
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