Broyles, Matter of, 94-1831

• Decision Date: 13 June 1995
• Docket Number: No. 94-1831,94-1831
• Citation: 55 F.3d 980
• Parties: , Bankr. L. Rep. P 76,527 In the Matter of G. David BROYLES; Emily Broyles, Debtors. CITIZENS BANK OF MARYLAND, Plaintiff-Appellant, v. G. David BROYLES; Emily Broyles, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 980

55 F.3d 980

27 Bankr.Ct.Dec. 497, Bankr. L. Rep. P 76,527

In the Matter of G. David BROYLES; Emily Broyles, Debtors CITIZENS BANK OF MARYLAND, Plaintiff-Appellant, v. G. David BROYLES; Emily Broyles, Defendants-Appellees.

No. 94-1831.

United States Court of Appeals Fourth Circuit.

Argued March 8, 1995.

Decided June 13, 1995.

ARGUED: John Sears Simcox, Simcox & Barclay, Annapolis, MD, for appellant. James J. Fitzgibbons, Thomas H. Price, III, P.A., Silver Spring, MD, for appellees.

Before ERVIN, Chief Judge, NIEMEYER, Circuit Judge, and SPROUSE, Senior Circuit Judge.

Affirmed by published opinion. Senior Judge SPROUSE wrote the opinion, in which Chief Judge ERVIN joined. Judge NIEMEYER wrote a concurring opinion.

OPINION

SPROUSE, Senior Circuit Judge:

We review the district court's judgment affirming the bankruptcy court's allowance of the discharge of a debt incurred by personal guarantors of a corporate indebtedness. David Broyles and Emily Broyles, his wife, were indebted to Citizens Bank of Maryland (Citizens) as guarantors of commercial loan notes executed by corporations of which they were principal stockholders. Citizens contended below and argues here that Sec. 523(a)(2)(B) of the Bankruptcy Code bars discharge of the debt because the Broyles induced the bank to rely on two of their personal financial statements that were materially false. Holding that Citizens had not met its burden of showing reliance on those personal financial statements, the bankruptcy court ruled that the debt was dischargeable. Concluding that the bankruptcy court's factual findings were not clearly erroneous, the district court affirmed that ruling. We agree with the district court and likewise affirm.

I

Aside from the conclusory testimonial assertions of reliance by Jerry Shearer, Citizens' vice president and primary trial witness, the essential facts are undisputed. The Broyles were principal stockholders of three corporations: Haass & Broyles Excavators, Inc., Haass Equipment Rental, Inc., and EMI Excavation, Inc. Since the early 1970s, the corporations borrowed periodically from Citizens Bank. Typically, the loans were evidenced by commercial loan notes executed by both the corporations and the Broyles. Generally, the Broyles signed both as officers of the corporations and as personal guarantors. Citizens routinely received annual personal financial statements from David Broyles.

Continuing this financial pattern, the three corporations jointly borrowed $800,000 from Citizens on September 7, 1989, a debt that ultimately generated the litigation involved in this appeal. At that time, the corporations executed a note in the amount of $500,000, repayable over a five-year term. Additionally, they obtained a line of credit for $300,000, signing a note due on demand or on September 7, 1990.

David executed these two notes on behalf of Haass & Broyles Excavators, Inc. and Haass Equipment Rental, Inc. Emily signed as an officer of EMI Excavation, Inc. Both the Broyles signed as guarantors.

Testimony before the bankruptcy court established that the two loans, in effect, restructured approximately $600,000 of preexisting debt and provided an additional $200,000 in new credit. Although prior loans from Citizens had been unsecured, the new $500,000 term loan was secured by "various pieces of construction equipment with an appraisal value of not less than $667,000."

Before finalizing the loan, Citizens sent a commitment letter to the Broyles. The letter required that both David and Emily personally guarantee the loans, but did not say that a personal financial statement was needed. However, prior to executing the Loan Guaranty Agreement, David submitted to Citizens a signed statement reflecting his financial condition as of January 1, 1989. It is unclear from the record whether Citizens required this statement and, if so, why it accepted a statement dated eight months before the loan. On this January 1989 financial statement, David represented that he owned certain real estate which, in fact, was owned by EMI Excavation. David possessed only 9% interest in EMI while Emily owned 55% interest.

In September 1990, the three corporations jointly renewed the $300,000 line of credit they had obtained the year before. In August 1990, in connection with the application for the extension, Shearer requested an updated financial statement from the Broyles. At that time, David was hospitalized, recovering from a heart attack. Emily, who had never before prepared a financial statement, "updated" the 1989 personal financial statement, for the most part simply copying information from it onto a new form. Although she added a piece of property valued at $80,000 to the assets column and added the $58,000 mortgage on that property and a $9,000 car loan to the liabilities column, Emily did not include $766,434 she and David owed Emily's parents for stock they had purchased from them a year earlier, nor did she include the value of that stock. She also did not indicate that the obligation to her parents, which required monthly payments of $6,166.90, was then six months in default.

While still in the hospital, David added his signature to Emily's on the 1990 statement, without reviewing the document. On behalf of the corporations, the Broyles also signed a new note dated September 7, 1990. Citizens renewed the $300,000 line of credit for a period of eight months.

In early 1991, both the $500,000 term note and the renewed $300,000 line of credit went into default for nonpayment. Citizens filed an action in Maryland state court to collect on the debts, both against the three corporations as makers and against the Broyles as guarantors. Shortly thereafter, David and Emily, together with two of the corporations, Haass & Broyles Excavators, Inc. and Haass Equipment Rental, Inc., filed for voluntary bankruptcy. In 1993, Citizens obtained a Maryland judgment against EMI, the lone non-bankrupt maker, for moneys owed on both the term note and the line of credit. ¹ Citizens initiated this action in the United States Bankruptcy Court, seeking to obtain a declaration that the amounts assessed in the EMI judgment were non-dischargeable against the Broyles under Sec. 523(a)(2)(B) of the Bankruptcy Code. ² Citizens argued that discharge should be barred because the Broyles had falsified their financial statements, specifically by representing that David owned the EMI real estate and by omitting the $766,434 debt to Emily's parents.

After a bench trial, the bankruptcy court dismissed Citizens' complaint. The court had no trouble finding the Broyles' financial statements to be materially false written descriptions of their financial condition published, at least in part, with the intent to deceive. It concluded, however, that to successfully bar a discharge, a creditor must establish all four elements of Sec. 523(a)(2)(B) and that the bank had not demonstrated its reliance upon the contents of the Broyles' financial statements in advancing the 1989 loans or extending the line of credit in 1990.

II

We agree with the bankruptcy court's analysis of the statute. See In Re Rotman, 133 B.R. 843, 844 (S.D.Tex.1991) ("The language of Sec. 523(a)(2)(B) is explicit; reasonable reliance is one of four criteria each of which must be met for a discharge to be denied based on this exception."); In Re Spilotros, 117 B.R. 691, 692-93 (M.D.Fla.1990) ("All elements, including reasonable reliance, must be proven by Plaintiff for a debt to be declared nondischargeable pursuant to 11 U.S.C. Sec. 523(a)(2)(B)."); In re Bush, 696 F.2d 640, 644 n. 4 (8th Cir.1983) ("If an objecting creditor fails to prove every element contained in Sec. 523(a)(2)(B) of the Bankruptcy Code of 1978, the debt in question is dischargeable.").

The sole issue, then, is whether the bankruptcy court clearly erred in finding that Citizens did not rely upon the Broyles' financial statements. In re Morris Communications NC, Inc., 914 F.2d 458, 467 (4th Cir.1990) (court of appeals reviews bankruptcy court's factual findings for clear error); Bankruptcy Rule 8013. ³ Under the clearly erroneous standard, a reviewing court will not reverse "simply because it is convinced that it would have decided the case differently." Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985). A finding of fact is clearly erroneous only when the reviewing court "is left with the definite and firm conviction that a mistake has been committed." Id. (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948)). "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Id. at 574, 105 S.Ct. at 1511.

Applying this standard to the bankruptcy court's findings, we cannot say that the court was clearly erroneous.

A. The Broyles' 1989 Financial Statement

The bankruptcy court based its finding that Citizens had not relied upon the Broyles' 1989 financial statement on several factors. Initially, it noted that the commitment letter from Citizens to the Broyles "was conditioned only upon the approvals being personally guaranteed" by David and Emily. That letter made no mention of a personal financial statement.

Next, the court found that, even without the personal guarantee, the arrangement was beneficial to Citizens. The restructuring replaced a non-term loan with a term loan and supplanted an unsecured obligation with one secured by nearly $700,000 of corporate collateral. From this, the court concluded that Citizens had "sufficient incentive to make these loans for business reasons only, without relying upon the ... net worth of the guarantors."

The bankruptcy court also premised its conclusion on Citizens' 1989 loan submission sheet, essentially an internal memorandum summarizing the loan and the debtors' finances. This document indicated that the rationale for approving...