Mullet, In re

• Decision Date: 01 May 1987
• Docket Number: No. 84-2646,84-2646
• Citation: 817 F.2d 677
• Parties: , 16 Collier Bankr.Cas.2d 1202, Bankr. L. Rep. P 71,799 In re Michael Duane MULLET, Debtor. FIRST BANK OF COLORADO SPRINGS, a state banking corporation, Appellant, v. Michael Duane MULLET, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 677

817 F.2d 677

55 USLW 2702, 16 Collier Bankr.Cas.2d 1202,

Bankr. L. Rep. P 71,799

In re Michael Duane MULLET, Debtor.

FIRST BANK OF COLORADO SPRINGS, a state banking corporation, Appellant, v. Michael Duane MULLET, Appellee.

No. 84-2646.

United States Court of Appeals, Tenth Circuit.

May 1, 1987.

Terence P. Fagan, Spurgeon, Haney & Howbert, Colorado Springs, Colo., for appellant.

Michael Duane Mullet, pro se.

Before McKAY, LOGAN and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); 10th Cir.R. 34.1.8(c). The case, therefore, is submitted without oral argument.

This is an appeal from the district court's affirmance of a final order of the bankruptcy court dismissing the complaint filed by First Bank of Colorado Springs (bank). The bank filed the complaint pursuant to 11 U.S.C. Sec. 523(a)(2) ¹, objecting to the discharge of appellee Mullet's debt to the bank. The bankruptcy court held that any reliance by the bank upon Mullet's allegedly false representations in granting the loan was unreasonable and that the debt was thus dischargeable. The district court affirmed the bankruptcy court's decision. We also affirm.

In October of 1982 Mullet, then 23 years old, met with a commercial loan officer at the bank. Mullet represented that he was new in Colorado Springs and that he was establishing a new business there. Mullet requested an $86,000 loan to obtain a computer for use in his business. The bank granted the loan to Mullet. Mullet, however, made only one interest payment on the loan and defaulted. He later filed his petition in bankruptcy.

The bank filed the complaint in this case pursuant to Sec. 523(a)(2) to prevent the discharge of the loan debt through Mullet's bankruptcy. The bank alleged that the loan had been obtained "by means of a materially false writing and actual fraud." Rec. vol. I at 44. The bankruptcy court held a hearing pertaining to the dischargeability of the debt. At the conclusion of the evidence presented by the bank, Mullet moved to dismiss the complaint on the basis that the bank did not present sufficient evidence to demonstrate that it reasonably relied upon the allegedly false documents or representations.

The bankruptcy court first noted that the standard of reliance under Sec. 523(a)(2)(A) is subjective, and "[i]f the reliance is so unreasonable under the circumstances, then it does not constitute reliance at all." Rec. vol. III at 72. The bankruptcy court then concluded that the bank "has failed to establish that there was any kind of reliance at all on either the financial statement or on the stock certificate," and that the debt was dischargeable. Rec. vol. II at 75.

The bank appealed the discharge of the debt to the district court. The district court affirmed, holding that reliance under both Sec. 523(a)(2)(A) and (B) must be reasonable to prevent discharge of the debt and that the bankruptcy court's conclusion that the bank's reliance was unreasonable was not clearly erroneous. Rec. vol. II at 16-18. The bank then appealed to this court pursuant to 28 U.S.C. Sec. 158(d).

In reviewing the decision of the bankruptcy court, "the district court as well as the court of appeals must accept the factual findings of the bankruptcy court unless they are clearly erroneous." In re Branding Iron Motel, Inc., 798 F.2d 396, 399 (10th Cir.1986). See Bankr.R. 8013; In re Yeates, 807 F.2d 874, 876-77 (10th Cir.1986). See also Anderson v. Bessemer City, 470 U.S. 564, 574-75, 105 S.Ct. 1504, 1512, 84 L.Ed.2d 518 (1985). Because a determination as to the dischargeability of a debt is a core proceeding under 28 U.S.C. Sec. 157(b)(2)(I), the application of the clearly erroneous standard to the bankruptcy court's factual findings is consistent with the Constitution, and Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), does not require the district court to conduct a de novo review of the bankruptcy court's decision. Yeates, 807 F.2d at 877, n. 2; Branding Iron, 798 F.2d at 399 n. 3; In re Reid, 757 F.2d 230, 233-34 n. 5 (10th Cir.1985). However, both the court of appeals and the district court are to review the bankruptcy court's legal determinations de novo. Yeates, 807 F.2d at 877; Branding Iron, 798 F.2d at 399-400.

The bank first contends that the bankruptcy court erred in requiring that the bank's reliance upon Mullet's representations be reasonable in order to block the discharge. The bank argues that, while Sec. 523(a)(2)(B) requires reasonable reliance on the written statement, Sec. 523(a)(2)(A) imposes no reasonableness standard on the reliance concerning Mullet's false representations that were not in writing. We disagree.

Section 523(a)(2) is the successor to Sec. 17(a)(2) ² of the Bankruptcy Act, 11 U.S.C. Sec. 35(a)(2), and it only slightly modified Sec. 17(a)(2). S.Rep. No. 95-989, reprinted in 1978 U.S. Code Cong. & Ad. News 5787, 5864. "Cases interpreting section 17(a)(2) developed two judicial glosses. First, because direct proof of actual reliance is difficult, actual reliance may be proven by circumstantial evidence of reliance. Second, actual reliance must be reasonable." In re Kreps, 700 F.2d 372, 375 (7th Cir.1983) (citations omitted). Section 17(a)(2) thus required a finding that the creditor actually relied upon the false representations, "[a]nd of course such reliance must be reasonable." Carini v. Matera, 592 F.2d 378, 381 (7th Cir.1979) (dealing with false representations other than written statements regarding financial condition).

We conclude that this standard of reasonableness required under Sec. 17(a)(2) should continue to be imposed on claimed reliance pertaining to Sec. 523(a)(2)(A). Other courts of appeals have also concluded that reliance under Sec. 523(a)(2)(A) must be reasonable. See In re Hunter, 780 F.2d 1577, 1579 (11th Cir.1986); In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985). This standard of reasonableness places a measure of responsibility upon a creditor to ensure that there exists some basis for relying upon the debtor's representations. Of course, the reasonableness of a creditor's reliance will be evaluated according to the particular facts and circumstances present in a given case.

The loan officer in charge of Mullet's loan testified that he relied on Mullet's written financial statement in granting the loan. Rec. vol. III at 50-51. This reliance is covered by Sec. 523(a)(2)(B), which contains an express requirement that the reliance be reasonable. The loan officer also stated that he relied on oral representations made by Mullet, specifically that the stock pledged as collateral was listed on the New York Stock Exchange. Rec. vol. III at 11-12, 23-24. This reliance is covered by Sec. 523(a)(2)(A) and, as noted above, also must be reasonable. Thus, the bankruptcy court properly required that the bank's reliance upon Mullet's representations be reasonable in order to prevent discharge pursuant to Sec. 523(a)(2).

The bank next asserts that, even if reasonableness is required to prevent discharge of a debt, such requirement is outweighed by Mullet's deceit. The bank essentially requests us to adopt an approach whereby the debtor's dishonesty is weighed against the unreasonableness of the creditor's reliance. We decline.

"Exceptions to discharge are construed narrowly, and the burden of proving that a debt falls within a statutory exception is on the party opposing discharge." In re Black, 787 F.2d 503, 505 (10th Cir.1986). The bank must thus prove each element necessary to prevent discharge pursuant to Sec. 523(a)(2)(A): the debtor made a false representation or willful misrepresentation; the representation was made with the intent to deceive the creditor; the creditor relied on the representation; the creditor's reliance was reasonable; and the creditor sustained a loss as a result of the debtor's representation. Hunter, 780 F.2d at 1579; Kimzey, 761 F.2d at 423. Because the bank must prove both false representation and reasonable reliance, there is simply no need to weigh these factors against each other. An exceptionally strong showing that a debtor has made false representations will not excuse a creditor's failure to demonstrate reasonable reliance on those representations. Moreover, to the extent consideration of the degree of the debtor's dishonesty is deemed necessary, such consideration is adequately taken into account in determining the existence of each of the elements outlined above.

The bank also contends that, even if reasonable reliance is required as an independent element under both parts of Sec. 523(a)(2), the bank has made a prima facie case of such reasonable reliance. We disagree.

As noted earlier, Mullet, who was 23 years old at the time, came into the bank and requested an $86,000 loan. The bank asked for and obtained an unaudited financial statement from Mullet. Rec. vol. III at 10, plaintiff's Ex. 1. The bank also obtained a credit report on Mullet, which indicated that he was current on several loans and credit accounts. Rec. vol. III at 10, defendant's Ex. C. Although several outstanding loans which Mullet had not disclosed on his financial statement appeared on the credit report, the bank did nothing to investigate the reasons for the discrepancies between the financial statement and credit report. Rec. vol. III at 47-49.

The loan officer in charge of the loan to Mullet testified that the bank, in making the loan to Mullet, relied on parts of the financial statement as it pertained to sources of repaying the loan. Rec. vol. III at 50-51. Specifically, the loan officer testified that the bank was relying on Mullet's representation that he had a $130,000 certificate of deposit in a Swiss bank which could be used to...