Matter of Coston ( 1992 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 92-4399
Summary Calendar
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IN THE MATTER OF: RODNEY DALE COSTON and
BILLIE KATHERINE COSTON, Debtors.
RODNEY DALE COSTON and
BILLIE KATHERINE COSTON,
Appellants,
versus
BANK OF MALVERN,
Appellee.
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Appeal from the United States District Court
for the Eastern District of Texas
_________________________________________________
(October 30, 1992)
Before KING, DAVIS, and WIENER, Circuit Judges.
WIENER, Circuit Judge:
In this bankruptcy case, Debtors-Appellants Rodney and Billie
Coston (the Costons) appeal two rulings of the bankruptcy
court))one procedural and the other substantive))and the
affirmations of those rulings by the district court, in favor of
Appellee, Bank of Malvern (the Bank). The Costons ask us to
reverse the bankruptcy court's rulings that (1) the Bank timely
filed its motion for non-dischargeability of a loan, and (2) the
loan itself was not a dischargeable debt. Concluding that the
bankruptcy court erred in its determination of non-dischargeability
of the debt, we reverse that court's decision and the subsequent
affirmance thereof by the district court.
I
FACTS AND PROCEDURAL HISTORY
Both of the Costons were employees of American Airlines. They
resided part of the time in Malvern, Arkansas, where Rodney's
family had been long-time residents, and the other part of the time
in Athens, Texas. In Malvern, they purchased a pleasure-boat
manufacturing operation, which became the Coston Corporation. In
furtherance of that business, the Costons took out a series of
loans from the Bank, the first of which))the one here at issue))was
for $175,000.
To obtain the $175,000 loan (and others), the Costons were
required to submit a joint financial statement to the bank. On
that statement, Rodney represented that his account in his
employer's retirement plan was worth $1.2 million (which it was)
and was readily convertible into cash (which it was not). At
several meetings with representatives of the Bank after filing the
statement, Rodney reiterated those representations. The court
found that the bank, in making the loan, relied on Rodney's
representation that the retirement fund was readily convertible to
cash.
By the late 1980s, the Costons had begun to experience
business and financial problems. On January 25, 1989, the Bank and
the Arkansas Development and Finance Authority (ADFA), another the
Coston's Arkansas creditors, filed a petition in the bankruptcy
2
court for the Western District of Arkansas, forcing the Costons
into involuntary bankruptcy. The next day the Costons filed a
voluntary petition in the bankruptcy court for the Eastern District
of Texas. Pursuant to bankruptcy rule 1014(b),1 ADFA filed a
notice of stay with the bankruptcy court in Texas, which notice
informed that court of the requirement that it stay all proceedings
involving the Costons. The court in Texas had already set March 1,
1989, as the date for the first meeting of creditors and was in the
process of setting other deadlines when it was informed of the
stay. Given the pre-existence of the Arkansas proceedings and the
rule 1014(b) stay, the court in Texas cancelled the creditors'
meeting and in essence put the bankruptcy proceedings in Texas on
hold pending disposition by the court in Arkansas of a motion to
determine proper venue.
On May 10, 1989, the bankruptcy court in Arkansas entered an
order dismissing the involuntary petition, effectively
resuscitating the Texas proceeding. The bankruptcy court in Texas
then set the initial meeting of creditors for July 10, 1989.
Within sixty days after this meeting, the Bank filed its "Complaint
Objecting to Discharge" of the $175,000 note. At that point, and
consistently thereafter, the Costons argued that the Bank's
objection to discharge was untimely because it was not filed within
sixty days following the March 1, 1989, meeting,2 even though that
meeting had been cancelled by the bankruptcy court in Texas under
1
BANKR. R. 1014(b) (1988).
2
See BANKR. R. 4004, 4007.
3
the Rule 1014(b) notice of stay from its counterpart in Arkansas.
The bankruptcy court in Texas rejected the Costons' argument
because the Bank's motion had been filed within sixty days after
the July 10, 1989, meeting. The court reasoned that the
requirement to file within sixty days of the March 1, 1989, meeting
had been nullified))not merely postponed and rescheduled))by the
stay notice under rule 1014(b) filed in the bankruptcy court in
Texas.3 The court went on to hold that the $175,000 note was not
dischargeable, explaining that the Costons had (1) submitted
materially false information to the bank to procure the loan, and
(2) the bank had reasonably relied on that information in making
the loan.
The Costons appealed the bankruptcy court's decision to the
district court, asserting error in the bankruptcy court's rulings
as to timeliness of the Bank's opposition to discharge and as to
the dischargeability of the debt. The district court affirmed
both rulings of the bankruptcy court after which the Costons timely
appealed those issues to this court.
3
One of the Costons' arguments is that the Arkansas
proceeding was "facially invalid" because the Bank wrongly
initiated a joint involuntary petition. The Arkansas bankruptcy
court later dismissed the proceedings and one of the grounds was
the joint character of the petition. Nevertheless, the force of
that court's Rule 1014 stay order, which the Texas bankruptcy
court correctly recognized, cannot seriously be questioned by the
Costons simply because the Arkansas case was later dismissed.
4
II
ANALYSIS
A. Standard of Review
On appeal of a bankruptcy case, reviewing courts))district and
courts of appeals alike))must accept the findings of fact of the
bankruptcy court unless the findings are clearly erroneous.4 Also,
"due regard shall be given to the opportunity of the bankruptcy
court to judge the credibility of witnesses."5 Circuit courts are
guided by the rule that "[s]trict application of the clearly
erroneous rule is particularly important whe[n] the district court
has affirmed the bankruptcy court's findings."6 Matters of law,
however, are reviewed de novo.7
B. Timeliness of the Bank's Motion
Procedurally, the Costons argue that the Bank's failure to
file its objection to discharge of the $175,000 note within sixty
days of the March 1, 1989, scheduled date for the first meeting of
creditors makes that motion untimely. We join the bankruptcy and
district courts in disagreeing with this assertion. The Costons
rely on the strictness of bankruptcy Rule 4007(c), which commands
4
Wilson v. Huffman (In re Missionary Baptist Found. of
America), 818 F.2d 1135, 1142 (5th Cir. 1987); see In re Niland,
825 F.2d 801, 805 (5th cir. 1987).
5
BANKR. R. 8013.
6
Missionary Baptist Found., 818 F.2d at 1142.
7
See Matter of Monning's Dept. Stores, Inc., 929 F.2d 197,
200-01 (5th Cir. 1991).
5
that "[a] complaint to determine the dischargeability of any debt
pursuant to § 523(c) of the Code shall be filed no later than 60
days following the first date set for the meeting of the
creditors."8 The Costons cite no less than twenty-five cases to
this court to inform us of the meaning and rigidity of that phrase.
But not one of those cases))or for that matter any of the cases
cited to the district court))deal with a situation involving a stay
under Rule 1014(b).
Rule 1014(b) mandates:
If petitions commencing cases under the Code are filed in
different districts by or against (1) the same debtor, or
(2) a partnership and one or more of its general
partners, or (3) two or more general partners, or (4) a
debtor and an affiliate, on motion filed in the district
in which the petition filed first is pending and after
hearing on notice to the petitioners, the United States
trustee, and other entities as directed by the court, the
court may determine, in the interest of justice or for
the convenience of the parties, the district or districts
in which the case or cases should proceed. Except as
otherwise ordered by the court in the district in which
the petition filed first is pending, the proceedings on
the other petition shall be stayed by the courts in which
they had been filed until the determination is made.9
In reliance on this rule, the Bank insists, and we agree, that it
did not have to file its motion in the Texas bankruptcy court until
the Arkansas case was terminated and the Rule 1014(b) stay was
lifted. The instant situation is precisely what is comprehended in
Rule 1014(b). Once the notice of stay was recognized by the court
in Texas, that court's proceeding was on hold indefinitely until
the stay was lifted and the proceeding in Arkansas dismissed. Only
8
BANKR. R. 4007(c)(emphasis added).
9
BANKR. R. 1014(b)(emphasis added).
6
when that occurred and a date was set for the initial meeting of
creditors did the sixty days begin to run. In the stay situation,
the new date set by the court is the "first date" under Rule
4007(c); it is not merely a rescheduling of the old pre-stay date.
Facially, this ruling may appear to contradict the wording of
Rule 4007(c). But, in light of Rule 1014(b), no other result is
sensible or possible. The Bank cannot be penalized because it did
not comply with a filing deadline of a court whose proceedings had
been stayed. To suggest that even though the court's proceedings
on the Costons' case had been stayed under Rule 1014(b), its filing
deadline under Rule 4007(c) continued to run is ludicrous. We
reject this procedural contention by the Costons.
C. Non-Dischargeability of the $175,000 Note
Substantively, the Costons argue that they were wrongfully
denied discharge of the $175,000 note under § 523 of the bankruptcy
code. The bankruptcy court properly noted that there are four
elements needed to deny a discharge: (1) a statement in writing
that is materially false; (2) that concerned the debtor's financial
condition; (3) the creditor's reasonable reliance on that
statement; and (4) the debtor's intent to deceive when the
statement was published.10
It is clear from the record, as the bankruptcy court found,
that the statement was (1) in writing, (2) materially false (the
asset had been improperly placed in the liquid assets column of the
10
See 11 U.S.C. §523 (a)(2)(B).
7
form), (3) concerned with the debtor's financial condition, and (4)
made by the debtor with the intent to deceive.11 Like the district
court before us, however, we have a problem with the question of
the reasonableness of the Bank's reliance on the Coston's statement
that the $1.2 million retirement fund was readily convertible to
cash. We readily acknowledge that this case presents a close call
as to whether the reliance of the bank was reasonable. If we were
constrained by the clear error standard on this issue (as the
Costons wrongly assert we are))albeit such an assertion is against
their interest), there is no doubt that we would have to affirm.
We are not, however. Although reliance is an issue of fact,
reasonableness is an issue of law; and we conclude here that in
view of all of the Bank's activities in connection with this
matter, its reliance on the statement without seeking verification
simply was not commercially reasonable. We take additional comfort
in the knowledge that public policy favors discharge.12
We review de novo the determination of objective
reasonableness of the bank's reliance. In In re Jordan, we stated
that "[t]he reasonableness of reliance [under § 523] is a
11
The bankruptcy court stated: "I do not find Mr. Coston's
testimony about his lack of knowledge about his retirement
account credible. . . . I believe that he listed the retirement
account in this specific location . . . to make it look much
better than it was . . . ." We are bound by this finding. See
BANKR. R. 8013.
12
See Perez v. Campbell, 402 U.S. 637, 648 (1971)(discussing
the overarching desire to grant a "fresh start" in bankruptcy).
8
conclusion of law, which we review accordingly."13 It is clear that
in matters relating to questioning the applicability of the
discharge, all parts of an exception must be construed in view of
the strong presumption in favor of granting discharge.14
The district court relied on several factors in concluding
that the bankruptcy court had not erred in finding the Bank's
reliance reasonable. These included: (1) the Bank was small and
relatively unsophisticated; (2) the board members were personally
familiar with Rodney's family (we note that although the district
court stated that the officers of the Bank knew Rodney and had
participated in other loans with him, the bankruptcy court had
found that "it is clear that Rodney was not a regular customer of
the bank"); (3) the Bank had done business with the person from
whom the Costons were buying the business; (4) the president of the
Bank personally met with Rodney and discussed all aspects of the
financial statement; and (5) it was not obvious from the listing of
retirement benefits in the Costons' financial statement that
further investigation might be required to ascertain whether such
benefits were readily convertible to cash.
13
927 F.2d 221, 225 (5th Cir. 1991)(citing In re Bonnet, 73
B.R. 715, 721 (C.D. Ill. 1987), and In re Martz, 88 B.R. 663(Bankr. E.D. Pa. 1988)).
14
See Perez, 402 U.S. at 648; In re Foreman, 906 F.2d 123,
127-28 (5th Cir. 1990)(stating that "'[i]n determining whether a
particular debt falls within one of the exceptions to section
523, the statute should be strictly construed against the
objecting creditor and liberally construed in favor of the
debtor'" (quoting 3 COLLIER ON BANKRUPTCY ¶ 523.05A)); see also In
re Jacox, 115 B.R. 218, 221 (Bankr. D. Neb. 1988)(stating that
courts must look with a critical eye at creditor's proof of
objective reasonableness of claimed reliance).
9
The district court concluded by quoting the In re Jordan
opinion and stating that although the Bank's practices might not
have been the most prudent, they were not unreasonable. Albeit
without great enthusiasm, we reach the opposite legal conclusion.
Given the closeness of the decision, we are ultimately swayed by
the strong presumption favoring discharge.15
In In re Jordan, we determined that a bank had reasonably
relied on financial data submitted to it by the debtor, and we
affirmed the refusal of discharge on that and other grounds. The
essence of the In re Jordan decision, however, was that there were
no "red flags" that should have alerted the bank to the need to
investigate the information submitted to it.
The In re Jordan court contrasted the facts of that case with
the facts of In re Mullet,16 in which reliance on the unverified
statements of the debtor was found not to be reasonable. The
Mullet case involved a young, unproven bank customer and "'there
were inconsistencies in his representations, [and] minimal
investigation and verification would have uncovered the falsity of
the representations.'"17 In In re Jordan, as in the instant case,
there were no inconsistencies in the information submitted. Unlike
In re Jordan, however, the Costons' main asset (an allegedly liquid
retirement fund) was obviously suspicious. The instant case does
not contain the same overt flags as the Mullet case))i.e., glaring
15
See In re Foreman, 906 F.2d at 127-28.
16
817 F.2d 677 (10th Cir. 1987).
17
Jordan, 927 F.2d at 226 (quoting Mullet, 817 F.2d at 681).
10
inconsistencies in the submitted forms))yet it does contain a
significant factor that should have been))and shortly thereafter
became))a red flag: whether the retirement fund was truly a liquid
asset.
As the Bank belatedly learned, one simple procedure))a single
phone call to American Airlines))would have provided all of the
uncomplicated and unequivocal information needed to determine that
in fact the asset was not liquid. We are not so much convinced by
our view of what a prudent banker would do to verify a financial
statement as much as we are convinced by what the Bank did on the
occasion of subsequent advances it made to the Costons. On the
event of the second loan, the bank found a need to verify the
liquidity of the asset. We do not understand how reasonable
practice on the second loan requires verification and yet
reasonable practice on the first loan, when the liquidity was not
verified, allows non-verification.
The bankruptcy court held that, as the Bank knew about the
illiquidity when it made the second and subsequent loans, its
reliance on the financial statement was unreasonable and the loans
were not excepted from discharge. We fail to see how, as a matter
of law, such a minor bit of diligence))calling American Airlines))
could become a reasonable procedure between the first and second
loans. When a significant liquid asset is an employee's account in
a pension plan and the employee is obviously under retirement age,
even a small town banker personally familiar with all the players
knows or should know to "cut the cards." A reasonable banker
11
simply would not rely so extensively on the liquidity of such an
asset without verification.
We hold that the Bank was not reasonable in thus relying on
the listing of Rodney's account in the retirement fund as the main
source of the borrower's liquidity. This was demonstrated by the
Bank's own subsequent act of verifying liquidity))actually, the
lack of liquidity))in connection with the second loan. We
therefore conclude as a matter of law that the $175,000 loan was
subject to discharge and that the bankruptcy court erred in
excepting it under § 523.
III
CONCLUSION
The bankruptcy and district courts admittedly made close calls
concerning the reasonableness of the Bank's reliance on the
liquidity of the retirement plan account. Although we too
acknowledge that the issue is a close one, we conclude that, in
view of the Bank's subsequent behavior and the suspicious nature of
the asserted liquidity of the asset, reliance on the borrowers'
statement without so much as making a single telephone call to
verify liquidity simply was not reasonable. Therefore, although we
agree with the bankruptcy and district courts that the Bank's
motion for denial of discharge was timely, we determine that the
question of discharge was wrongly decided and we thus reverse the
decision of the bankruptcy and district courts on that issue and
render a judgment discharging the Costons' remaining debt to the
12
Bank.
REVERSED and RENDERED.
13