Bonnanzio, In re

• Decision Date: 19 July 1996
• Docket Number: D,No. 1262,1262
• Citation: 91 F.3d 296
• Parties: In re Gloria BONNANZIO, Debtor. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff-Appellee, v. Gloria BONNANZIO, Defendant-Appellant. ocket 95-5030.
• Court: U.S. Court of Appeals — Second Circuit

Page 296

91 F.3d 296

In re Gloria BONNANZIO, Debtor NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA Plaintiff-Appellee, v. Gloria BONNANZIO, Defendant-Appellant.

No. 1262, Docket 95-5030.

United States Court of Appeals Second Circuit.

Argued March 6, 1996.

Decided July 19, 1996.

Caroline Levy, Northport, NY, for Defendant-Appellant.

Lynne A. Bizzarro, Zodda & Bizzarro, Sayville, NY, for Plaintiff-Appellee.

Before: MINER, JACOBS, and CABRANES, Circuit Judges.

JACOBS, Circuit Judge:

Debtor Gloria Bonnanzio appeals from a judgment of the United States District Court for the Eastern District of New York (Gleeson, J.), which reversed the bankruptcy court's decision to discharge her debt to National Union Fire Insurance Company ("National Union"). Bonnanzio had participated in a real estate tax shelter, and defaulted on her debt to the limited partnership. National Union had issued a financial guarantee bond to the partnership, paid on the bond, and won a judgment against Bonnanzio. After Bonnanzio sought protection in bankruptcy, National Union challenged the dischargeability of the debt under 11 U.S.C. § 523(a)(2)(B). Following a bench trial, the bankruptcy court (Ryan, J.) found that National Union failed to make two requisite showings under the statute: (1) that Bonnanzio acted with actual or constructive intent to deceive; and (2) that National Union reasonably relied on the (concededly false) financial statement submitted to National Union on Bonnanzio's behalf by her accountant.

The district court reversed on both grounds, holding (1) that the bankruptcy court's ruling on the issue of intent to deceive was premised on an error of law, that National Union had succeeded in establishing Bonnanzio's constructive intent to deceive, and that in any event the accountant's intent

to deceive should have been imputed to Bonnanzio; and (2) that the bankruptcy court's finding on reliance was clearly erroneous. We conclude that intent to deceive under § 523(a)(2)(B) is an issue of fact that should have been reviewed for clear error, and that the bankruptcy court's finding withstands clear error review. However, we vacate the judgment and remand for possible further fact findings concerning imputed intent, a potentially determinative issue identified by the district court but not considered by the bankruptcy court. Furthermore, while we agree with the district court that the bankruptcy court's determination on reliance was clearly erroneous, the bankruptcy court on remand should determine whether National Union has demonstrated that its reliance was reasonable.

BACKGROUND

The following facts are drawn from the trial transcript and are not disputed.

In 1983, Bonnanzio was looking for investment advice to help her save money for her six-year-old son's college education. She was then a 29-year-old sales representative for Levi Strauss, divorced and living with her parents. In her one year of college, she had taken an economics course, but no course in investments or higher mathematics. One of her clients recommended an accountant named Arthur Berlin for investment advice.

At a meeting in December 1983, Berlin spoke with Bonnanzio for several hours, asked numerous questions about her financial situation and took notes. She told Berlin that she was earning $40,000 to $45,000 per year, and that her only asset was her car. In response to a specific inquiry, Bonnanzio confirmed that her net worth was below $250,000. During this meeting, Berlin suggested that Bonnanzio invest in tax shelters, but he did not explain what a tax shelter was.

Berlin told Bonnanzio he wanted to meet with her again soon, but Bonnanzio explained that she would be out of town for the holidays. Berlin took the address and telephone number at which she could be reached over the holidays and sent her information there about a limited partnership called Northgate Plaza Associates ("Northgate"). Bonnanzio did not read the material. After Bonnanzio returned in January 1984, Berlin called her numerous times and left messages. When he finally reached her, Berlin said they needed to meet quickly to discuss Northgate.

At the second meeting, early in January, Berlin recommended Northgate as a vehicle for financing her son's education. She asked how the tax shelter worked, but did not understand Berlin's explanation. Berlin told her how much Northgate would cost, but Bonnanzio "didn't understand how [she] could get approved for it based on the fact [she] didn't own anything at the time." She expressed this concern to Berlin, but "[h]e didn't seem to think it was a problem." Also at this meeting, Bonnanzio agreed that Berlin would be her accountant and prepare her 1983 income tax returns.

Sometime before January 30, 1984, Berlin told Bonnanzio that she would have to pay $2,600 in order to participate in the Northgate deal. She did not have the money, but Berlin loaned it to her. Presumably in his role as her accountant, Berlin also contacted her employer and raised the number of withholding allowances on her W-4 form by claiming 45 dependents, which resulted in a $300-per-week increase in Bonnanzio's take-home pay. On January 30, 1984, Bonnanzio met Berlin at the Manhattan offices of Rothschild Reserve International, Inc. ("Rothschild"), the broker-dealer handling the Northgate private placement. There, Berlin assured Bonnanzio that her interest in Northgate could be readily sold if her marital or job status changed. Bonnanzio signed her name to blank forms, including a blank credit application. She also signed a promissory note to pay Northgate $73,663 over six years. At trial, Bonnanzio testified that she did not know she was signing a credit application, that she trusted Berlin, and that she did not intend to deceive anyone in connection with Northgate. After the Rothschild meeting, Berlin filled out the signed credit application using false information that vastly exaggerated Bonnanzio's income and assets.

On February 8, 1984, Rothschild sent Bonnanzio's documents to National Union for bonding. National Union's role in the private At National Union, Bonnanzio's documents were probably reviewed by an employee named Gina Grossman, who handled Rothschild investors. Grossman did not testify at trial. On March 23, 1984, National Union approved Bonnanzio's application and issued a bond guaranteeing the obligations owed by Bonnanzio (and 21 other investors) to Morsemore Federal Savings and Loan Association ("Morsemore"), the bank to which Northgate negotiated Bonnanzio's promissory note.

placement was to guarantee payment to the bank that was financing Northgate, in the event that investors defaulted. The bonds that National Union issued to the bank covered groups of investors in bulk.

That same month, Bonnanzio received her first bill from Morsemore, demanding $2,300. Unable to pay, and getting worried, Bonnanzio asked Berlin to extricate her from Northgate. Berlin responded that she would have to pay him $1,800 for him to sell her partnership unit at a discount; later, he offered to sell the unit for $1,000. Bonnanzio accepted neither proposal, possibly because she lacked the funds to extricate herself, and retained the partnership unit.

When Bonnanzio defaulted on the promissory note, National Union paid her obligations, and contacted Bonnanzio to collect. She wrote a letter to National Union's counsel dated October 22, 1984, in which she explained that Berlin had persuaded her to participate in Northgate; that she could not afford the investment; and that she wanted to end her involvement in Northgate. In 1985, National Union sued Bonnanzio in New York state court, and, on August 27, 1991, National Union won a judgment for $152,712.80.

On May 1, 1992, Bonnanzio filed a petition under Chapter 7 in the United States Bankruptcy Court for the Eastern District of New York, seeking in part to discharge her debt to National Union. Thereafter, National Union began an adversary proceeding seeking to have its judgment excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(B). The case was tried in October 1994. The bankruptcy court found that National Union had failed to show (1) that Bonnanzio had acted with actual or constructive intent to deceive, or (2) that National Union had reasonably relied on Bonnanzio's credit application. In a decision dated March 18, 1994, the bankruptcy court discharged National Union's debt.

National Union appealed to the district court, which heard argument on March 17, 1995. The district court reversed, and Bonnanzio appeals.

DISCUSSION

National Union sued Bonnanzio under 11 U.S.C. § 523(a)(2)(B), which provides:

A discharge ... does not discharge an individual debtor from any debt--

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--

(B) use of a statement in writing--

(i) that is materially false;

(ii) respecting the debtor's ... financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive[.]

A creditor suing under § 523(a)(2)(B) must prove each element by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991); In re Furio, 77 F.3d 622, 624 (2d Cir.1996). "Exceptions to dischargeability are narrowly construed," Furio, 77 F.3d at 624 (internal quotation marks omitted), an approach that implements the " 'fresh start' policy of the Bankruptcy Code," Grogan, 498 U.S. at 286, 111 S.Ct. at 659.

The fact findings of the bankruptcy court are reviewed by the district court for clear error, and the conclusions of law are reviewed de novo. See Fed. R. Bankr.P. 8013. Our "review of an appeal from the bankruptcy court to the district court is plenary." Furio, 77 F.3d at 624.

A. Intent to Deceive.

The bankruptcy court found...