Miller, In re

• Decision Date: 05 December 1994
• Docket Number: No. 93-4933,93-4933
• Citation: 39 F.3d 301
• Parties: 32 Collier Bankr.Cas.2d 854, 26 Bankr.Ct.Dec. 395, Bankr. L. Rep. P 76,226 In re Arthur R. MILLER and Janet E. Miller, Debtors. EQUITABLE BANK, Plaintiff-Appellee, v. Arthur R. MILLER, and Janet E. Miller, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 301

39 F.3d 301

32 Collier Bankr.Cas.2d 854, 26 Bankr.Ct.Dec. 395,

Bankr. L. Rep. P 76,226

In re Arthur R. MILLER and Janet E. Miller, Debtors EQUITABLE BANK, Plaintiff-Appellee, v. Arthur R. MILLER, and Janet E. Miller, Defendants-Appellants.

No. 93-4933.

United States Court of Appeals Eleventh Circuit.

Dec. 5, 1994.

Charles R. Throckmorton, Miami, FL, for appellants.

Bruce D. Fischman, Craig B. Sherman, Sherman & Fischman, P.A., Miami, FL, for appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before KRAVITCH and BIRCH, Circuit Judges, and HOEVELER ^*, Senior District Judge.

KRAVITCH, Circuit Judge:

Appellants Dr. Arthur Miller and Janet Miller, husband and wife, appeal from the district court's ruling that their debt to appellee Equitable Bank was non-dischargeable in bankruptcy. For the reasons stated below, we REVERSE and REMAND.

I.

Soon after appellee Equitable Bank commenced operation in 1987, one of its vice-presidents contacted appellant Dr. Arthur Miller and convinced him to begin a financial relationship with the bank. At that time, Miller, a radiologist by profession, had substantial real estate holdings as well as an ownership interest in several automobile dealerships, including Isuzu and Suzuki franchises.

Dr. Miller submitted to Equitable tax returns and a financial statement, co-signed by his wife Janet Miller, ¹ which represented their net worth at over $5,000,000.00. Equitable subsequently granted the Millers a $150,000.00 loan, unsecured by collateral. In 1988, the Millers applied for and were granted an additional $100,000.00 line of credit on an unsecured basis. It is undisputed that the Millers repaid both of these loans in a timely fashion.

During 1989 and 1990, Equitable granted the Millers three more loans--which remain outstanding--after the Millers submitted updated financial statements. These financial statements were deficient in two important, related respects. First, they were incomplete in that they omitted any specific reference to considerable financial liabilities. Most significantly, the Millers failed to list somewhat over $1,500,000.00 in promissory notes which the Millers had executed between 1986 and 1989, some in their own names and others through "Miller Suzuki." Although all of these notes were issued prior to the Millers' submission of their 1989 and 1990 financial statements, none of these transactions were listed on the statements. Dr. Miller did, however, type the word "NET" underneath the estimated values of the Millers' auto franchises; similarly, he left blank the spaces titled "amount mortgage or lien." Equitable also alleges that the Millers failed to list on their statements a Personal Guaranty to World Omni Financial Corporation in the amount of $2,500,000.00, apparently akin to a secured line of credit.

A second, related deficiency on the statements was that Dr. Miller's estimates as to the values of several of the businesses, particularly the Suzuki and Isuzu franchises and a company called "Miller Equipment," were much greater than the values ultimately indicated on the Millers' bankruptcy schedule and tax returns for 1989 and 1990. On the 1990 financial statement, Dr. Miller estimated the net worth of his Isuzu franchise to be $450,000.00--the Millers' purchase price--but his 1990 tax return indicated a 1990 operating loss of $455,281.00, and negative retained earnings of nearly $1,000,000.00; he estimated the Suzuki franchise's net worth at $150,000.00, although it had negative retained earnings in 1990 of over $1,300,000.00; and he estimated the value of Miller Equipment at $500,000.00, although it had negative retained earnings of $81,994.00.

By 1990, the poor performance of the Millers' auto and jeep franchises was creating an enormous drain on their finances. Dr. Miller attempted to deal with the businesses' financial distress by selling the Millers' Bal Harbour, Florida home and liquidating his pension fund, placing over $2,500,000.00 in proceeds into his failing auto franchises. In addition, in February 1991, Dr. Miller attempted a partial workout with the Millers' largest creditor, his medical partner Dr. Sylvan Sarasohn. Sarasohn held two promissory notes against Miller Suzuki totalling $1,105,000.00. In exchange for cancellation of these notes, Miller transferred nine properties to Sarasohn.

On November 1, 1991, the Millers filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Southern District of Florida. Equitable filed a proof of claim for $653,823.33 based on the Millers' unpaid loans, and argued that the Millers' debt to it was non-dischargeable under 11 U.S.C. Sec. 523(a)(2)(B) and 11 U.S.C. Sec. 727(a)(2)(A). The bank alleged, inter alia, that the Millers' deficient financial statements and their transfer of property to Sarasohn both were designed to defraud Equitable of funds owed to it.

After a bench trial, the bankruptcy court held the Millers' debt to be dischargeable under both Sec. 523(a)(2)(B) and Sec. 727(a)(2)(A). The district court reversed, concluding that the bankruptcy court's findings on both grounds were clearly erroneous. The Millers appeal from the district court's order.

II.

Under 11 U.S.C. Sec. 523(a)(2)(B), a debt is non-dischargeable in bankruptcy where it was obtained by a writing: (1) that is materially false; (2) respecting the debtor's or an insider's financial condition; (3) on which the creditor to whom the debt is liable for such money, property, services, or credit reasonably relied; and (4) that the debtor caused to be made or published with the intent to deceive. The objecting creditor has the burden of proving each of these elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). If any one of these elements is not met, the debt is dischargeable. Moreover, courts generally construe the statutory exceptions to discharge in bankruptcy "liberally in favor of the debtor," and recognize that " '[t]he reasons for denying a discharge ... must be real and substantial, not merely technical and conjectural.' " In re Tully, 818 F.2d 106, 110 (1st Cir.1987) (quoting Dilworth v. Boothe, 69 F.2d 621, 624 (5th Cir.1934)); see also Boyle v. Abilene Lumber, Inc. (Matter of Boyle), 819 F.2d 583, 588 (5th Cir.1987). This narrow construction ensures that the "honest but unfortunate debtor" is afforded a fresh start. Birmingham Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir.1985); see also Caspers v. Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987) ("[E]vidence presented must be viewed consistent with congressional intent that exceptions to discharge be narrowly construed against the creditor and liberally against the debtor, thus effectuating the fresh start policy of the Code."). We confine our analysis in this case to the district court's reversal of the bankruptcy court's finding that the fourth element under 11 U.S.C. Sec. 523(a)(2)(B), "intent to deceive," was not met.

Whether a debtor in bankruptcy acted with the requisite "intent to deceive" under Sec. 523(a)(2)(B) is an issue of fact, and the bankruptcy court's findings as to this issue are reviewed by both the district and appellate courts under the clearly erroneous standard. See Matter of Martin, 963 F.2d 809, 814 (5th Cir.1992); In re Liming, 797 F.2d 895, 897 (10th Cir.1986); In re Long, 774 F.2d 875, 877-78 (8th Cir.1985); see also Birmingham Trust, 755 F.2d at 1477 (applying clearly erroneous standard to bankruptcy court's finding of "reckless disregard of truth" under Sec. 523(a)(2)(A)). "Because a determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debtor, deference to the bankruptcy court's factual findings is particularly appropriate." In re Burgess, 955 F.2d 134, 137 (1st Cir.1992) (citing Williamson v. Fireman's Fund Ins. Co., 828 F.2d 249, 252 (4th Cir.1987)); see also Martin, 963 F.2d at 814; see generally Bankruptcy Rule 8013. ²

The district court therefore acts as an appellate court in reviewing a bankruptcy court's factual findings. To ensure proper deference to the bankruptcy court, we in turn must review de novo a district court's holding that a bankruptcy court's factual findings were clearly erroneous. See In re Sublett, 895 F.2d 1381, 1384 (11th Cir.1990) (" '[A]s the second court of review,' this Court's review of the district court's decision is entirely de novo.") (quoting Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987)).

A bankruptcy court may look to the totality of the circumstances, including the recklessness of a debtor's behavior, to infer whether a debtor submitted a statement with intent to deceive. "Reckless disregard for the truth or falsity of a statement combined with the sheer magnitude of the resultant misrepresentation may combine to produce the inferrence [sic] of intent [to deceive]." In re Albanese, 96 B.R. 376, 380 (Bankr.M.D.Fla.1989) (citations omitted); see also Florida Nat'l Bank v. Gordon, 91 B.R. 135, 138 (Bankr.N.D.Fla.1988); Brigadier Homes v. Hert, 81 B.R. 638, 641 (Bankr.N.D.Fla.1987); Matter of Archer, 55 B.R. 174, 179-80 (Bankr.M.D.Ga.1985). ³

The bankruptcy court in this case determined, based largely on Dr. Miller's testimony, that the Millers did not act with an intent to deceive in omitting the promissory notes from their financial statements and/or overvaluing their assets. The court found that their failure to list the promissory notes occurred because they "netted [the notes] ... against the value of the assets." The bankruptcy court further found that "[i]n [Dr. Miller's] view, it was a reasonable thing to do, to state the values on the net basis as he did ... even though an accountant might have ... done it somewhat differently." The court concluded that under the circumstances, Dr. Miller "had some reasonable basis for what were the assets," and "some...