Martin, In re, s. 84-5416

Citation761 F.2d 1163
Decision Date07 May 1985
Docket Number84-5499,Nos. 84-5416,s. 84-5416
Parties12 Collier Bankr.Cas.2d 1129, Bankr. L. Rep. P 70,542 In re Bill J. MARTIN and Brenda K. Martin, Debtors. Bill MARTIN and Brenda Martin, Plaintiffs-Appellants, Cross-Appellees, v. BANK OF GERMANTOWN, Defendant-Appellee, Cross-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

William A. Cohn (argued), Cohn & Kirsch, Memphis, Tenn., for plaintiffs-appellants, cross-appellees.

Richard Winchester (argued), Memphis, Tenn., for defendant-appellee, cross-appellant.

Before KEITH and MARTIN, Circuit Judges, and TAYLOR, District Judge. *

BOYCE F. MARTIN, Jr., Circuit Judge.

In this personal bankruptcy case we are called upon to determine the standards for granting exceptions to discharge when a debtor has misrepresented his financial condition to a creditor under the Code, 11 U.S.C. Sec. 523(a)(2)(B). The bankruptcy court granted the exception to discharge. We affirm.

The debtors in this joint bankruptcy case, Bill J. and Brenda K. Martin, filed a personal financial statement with the Bank of Germantown, Tennessee, on June 15, 1982. The statement listed assets of $247,793 and liabilities of $142,500, for a net worth of $105,293. At the bottom of the statement, just above their signatures, is the following statement:

For the purposes of procuring credit from time to time, I/We furnish the foregoing as a true and accurate statement of my/our financial condition. Authorization is hereby given to the Lender to verify in any manner it deems appropriate any and all items indicated on this statement. The undersigned also agrees to notify the Lender immediately in writing of any significant adverse change in such financial condition.

In early July 1982, the Martins obtained a loan of $2500 from the Bank. This loan was secured by the Martins' bank account and was subsequently satisfied.

On December 30, 1982, the Bank lent Bill J. Martin $2500 on a second note. This is the loan now in question; it was unsecured and carried a floating interest rate two percent above the prime rate. The note stated, "The Undersigned will pay on demand all costs of collection and attorneys' fees, incurred or paid by Bank in enforcing this note."

Martin told the loan officer that he had lost his job, but made no attempt otherwise to correct the June financial statement. The Bank's loan officer testified that he asked Martin if the financial statement was correct and got a positive response. Martin testified that the loan officer did not ask him if anything had changed and the financial statement never came up in their conversation. Martin further testified he expected the loan to be secured by their bank account, as was the first loan.

On March 13, 1983, the Martins filed a joint petition for voluntary bankruptcy under chapter seven. On the attached schedules to the petition they listed approximately $24,000 in assets and $71,000 in liabilities. The Bank was listed as an unsecured creditor in the undisputed amount of $2630.

The Bank timely filed this adversary proceeding to have its debt determined to be excepted from discharge under 11 U.S.C. Sec. 523(a)(2)(B). The Bank also asked for punitive damages and attorney's fees, and the Martins in turn asked for attorney's fees under 11 U.S.C. Sec. 523(d).

The bankruptcy court held that the Bank had met all four elements of section 523(a)(2)(B) by clear and convincing proof. The court found that the financial statement was "replete with materially false statements"; that the Bank would not have made the loan, had it known the truth; that the Bank's reliance on the financial statement was reasonable; and that Martin's intent to deceive should be inferred from the statement's material falsity. The court granted the exception from discharge. However, it applied former Bankruptcy Rule 754 and, applying its equitable discretion, refused to tax either party with costs. The district court affirmed the bankruptcy court's holdings on both counts as not clearly erroneous, and both parties appealed.

The party seeking an exception from discharge under section 523(a)(2) has the burden of proof by clear and convincing evidence. E.g., In re Forester, 28 Bankr. 249, 250-51 (Bankr.W.D.Mo.1983); In re Jones, 3 Bankr. 410, 412 (Bankr.W.D.Va.1980). In the period from December 24, 1982, the effective date of the judgment in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), to August 1, 1983, the effective date of the new Bankruptcy Rules, the bankruptcy court's findings were reviewable de novo by the district court. White Motor Corp. v. Citibank, 704 F.2d 254, 263, 267 app. (6th Cir.1983). The new rules, however, accord the findings of a bankruptcy judge the same deference given the findings of a district judge: "Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Bankruptcy Rule 8013. The new rules supersede the interim rule discussed in White Motor, at least where jurisdiction is not affected. In re Morrissey, 717 F.2d 100, 104-05 (3d Cir.1983).

The new Bankruptcy Rules are applicable to pending cases "except to the extent that in the opinion of the court their application in a pending proceeding would not be feasible or would work injustice." Order of the Supreme Court, 461 U.S. 975 (Apr. 25, 1983) (prescribing rules). Although the bankruptcy court decision was rendered before the new rules took effect, and the district court decision afterwards, we see no reason not to apply a "clearly erroneous" standard to this case. This case deals only with dischargeability, a traditional bankruptcy issue, rather than with "peripheral, non-traditional bankruptcy issues," White Motor, 704 F.2d at 263, so the Fourth Circuit's holding that the "clearly erroneous" standard cannot constitutionally be applied to peripheral issues has no bearing here. See 1616 Reminc Ltd. Partnership v. Atchison & Keller Co., 704 F.2d 1313, 1318 (4th Cir.1983). We see no injustice in this application.

Although the debtor has enumerated ten different questions presented on appeal, most of these are simply whether specific findings of the bankruptcy court were clearly erroneous. The statute at issue, 11 U.S.C. Sec. 523, reads in relevant part:

Sec. 523. Exceptions to discharge

(a) A discharge under section 727, 1141, or 1328(b) of this title 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 or an insider'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.

There can be no doubt here that the financial statement furnished the Bank was materially false and that it was in respect to the debtor's financial condition. It is only the third and fourth elements that are in question.

The Bank clearly placed at least partial reliance on the Martins' asserted net worth of more than $100,000 in making the December 1982 loan of $2500. The bankruptcy court made an unchallenged finding that the Bank would not have made the loan if it had known the truth. The debtor argues, however, that the Bank's reliance was unreasonable because the Bank did not adequately investigate his financial condition.

The reasonableness requirement was intended to incorporate prior case law into the current Bankruptcy Act. S.Rep. No. 989, 95th Cong., 2d Sess. 78, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5864; H.R.Rep. No. 595, 95th Cong., 1st Sess. 364 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6320. As such, it cannot be said to be a rigorous requirement, but rather is directed at creditors acting in bad faith. See In re Garman, 643 F.2d 1252, 1256 (7th Cir.1980) (holding that reasonableness is circumstantial evidence of actual reliance), cert. denied, 450 U.S. 910, 101 S.Ct. 1347, 67 L.Ed.2d 333 (1981). Congress was, however, concerned that creditors use, when feasible, "other sources of information, such as credit bureau reports, to verify the accuracy of the list of debts." H.R.Rep. No. 595, supra, at 130, reprinted in 1978 U.S.Code Cong. & Ad.News at 6091.

Initially the Bankruptcy Court should make its determination of reasonableness considering all the facts and circumstances of the case, including the size of the loan. Here the loan was small, especially when compared to the purported net worth of $100,000; the Bank had prior business dealings with the Martins, leading them to believe them reliable; and the Bank did in fact obtain a credit report. We cannot say on these facts alone that the Bank unreasonably failed to make an adequate investigation of the Martins' financial condition.

The Martins make a further defense against the denial of discharge by arguing that they did not make or publish the financial statement with intent to deceive the Bank. The standard, however, is that if the debtor either intended to deceive the Bank or acted with gross recklessness, full discharge will be denied. See In re Matera, 592 F.2d 378, 380 (7th Cir.1979) (per curiam); In re Houtman, 568 F.2d 651, 655-56 (9th Cir.1978). That is, the debtor must have been under some duty to provide the creditor with his financial statement; but full discharge may be disallowed if the debtor either intended the statement to be false, or the statement was grossly reckless as to its truth.

The bankruptcy court found that the financial statement was materially false when first submitted to the Bank on June 15, 1982, and continued to be false at the time of the second loan, December 30,...

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