Oster v. Clarkston State Bank (In Re Oster) ( 2012 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 12a0331n.06
No. 11-1388 FILED
Mar 26, 2012
UNITED STATES COURT OF APPEALS
LEONARD GREEN, Clerk
FOR THE SIXTH CIRCUIT
In re: CLAUDE OSTER )
)
Debtor. )
)
------------------------------ ) ON APPEAL FROM THE
) UNITED STATES DISTRICT
CLAUDE OSTER, ) COURT FOR THE EASTERN
) DISTRICT OF MICHIGAN
Defendant-Appellant, )
) OPINION
v. )
)
CLARKSTON STATE BANK,
Plaintiff-Appellee.
BEFORE: GUY, COLE, and ROGERS, Circuit Judges.
COLE, Circuit Judge. While seeking to obtain personal and business loans, Claude Oster
provided false statements concerning his financial position and signed documents containing
deceptive information. When he sought bankruptcy protection, Clarkston State Bank, the lender,
asked the bankruptcy court to declare the debt arising from the loans nondischargeable under 11
U.S.C. § 523(a)(2)(B), which excepts from discharge those debts obtained through the use of false
statements. The bankruptcy court determined that Oster’s debts met the statutory requirements for
nondischargeability, which the district court affirmed. We AFFIRM.
No. 11-1388
Oster v. Clarkston State Bank
I. BACKGROUND
Between 2004 and 2005, Claude Oster sought a total of $1,350,000 in personal and business
loans from Clarkston State Bank (“Clarkston”). To help procure these loans, Oster’s personal
accountant Howard Small prepared a series of financial statements. The first balance sheet, prepared
in January 2005, showed marketable securities worth $8,255,000, owned by “Dr. and Mrs. Claude
Oster.” Three other statements were prepared over the next two years, showing similar numbers,
though these subsequent statements all contained a footnote stating that the marketable securities
were “jointly owned.” The personal loan was renewed three times, eventually maturing in
September 2007, while the business loan was set to mature in December 2008.
To obtain these loans, Oster signed several business loan agreements. These agreements
contained language such as “Working Capital Requirements. Maintain Working Capital according
to the following: Marketable security balance to be maintained at 4,000,000.00 to be tested
quarterly” and “Tangible Net Worth Requirements. Maintain a minimum Tangible Net Worth of
not less than $4,000.000.00.” Oster signed these loan agreements, including signing one directly
adjacent to the $4,000,000 figure. A series of computer printouts that displayed Merrill Lynch
account balances was provided to Clarkston. The printouts used a shorthand name for the accounts,
including “Terry-Fayez,” and “Terry-Marsico.” Terry is the first name of Oster’s wife.
When he signed the loan agreements and submitted the financial statements, Oster did not,
in fact, own any interest in the marketable securities. Oster testified that in or around 1994, he
transferred ownership of the marketable securities to his wife after she expressed concern that Oster
was an “impetuous health care entrepreneur” who may put their funds in jeopardy. At the time the
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financial statements were provided to Clarkston, only Terry Oster, who was not a guarantor on any
of the loans, had an interest in the listed marketable securities.
Clarkston demanded payment on the loans and received a judgment of $1,390,329 in Oakland
County (Michigan) Circuit Court on September 24, 2008. Less than three weeks later, Oster sought
relief under Chapter 7 of the Bankruptcy Code. Clarkston filed an adversary proceeding in Oster’s
bankruptcy case, contending that its claim should be declared nondischargeable under 11 U.S.C. §
523(a)(2)(A) & (B). The bankruptcy court found in Oster’s favor on the § 523(a)(2)(A) claim, but
in Clarkston’s favor on the § 523(a)(2)(B) claim. Oster appealed the decision of the bankruptcy
court to the district court, which affirmed the bankruptcy court’s judgment. This appeal followed.
II. ANALYSIS
We review a bankruptcy court’s factual findings for clear error, and its legal conclusions de
novo. XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1447 (6th Cir. 1994).
We extend this deference only to the original bankruptcy court findings, and not to those included
in the decision rendered by the district court, since we are “in as good a position to review the
bankruptcy court’s decision as is the district court.” Id. (internal quotation marks and citation
omitted).
A. Oster’s § 523(a)(2)(B) Claim
The principal purpose of the Bankruptcy Code is to afford a “fresh start” to the “honest but
unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87 (1991)(internal quotation marks
omitted). The discharge of prepetition debts provided under § 727(b) and the discharge injunction
of § 524(a) effectuate the debtor’s fresh start. See Green v. Welsh, 956 F.2d 30, 33 (2d Cir. 1992)
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(“The protection afforded by the discharge injunction...furthers one of the primary purposes of the
Bankruptcy Code–that the debtor have the opportunity to make a financial fresh start.” (internal
quotation marks omitted)). Some debts, however, are “nondischargeable,” such that the debtor’s
liability continues even after emerging from bankruptcy protection. Section 523 of the Bankruptcy
Code specifies these exceptions, which include, among others, debt obtained through fraud. Section
523(a)(2)(B) addresses debt obtained by certain false statements in writing.
For a debt to be nondischargeable under § 523(a)(2)(B), four conditions must be met: the
debtor must have sought “money, property, services, or an extension, renewal, or refinancing of
credit” by use of a writing (1) “that is materially false;”(2) concerning “the debtor’s or an insider’s
financial condition;” (3) “on which the creditor . . . reasonably relied; and” (4) “that the debtor
caused to be made or published with intent to deceive . . . .” 11 U.S.C. § 523(a)(2). The bankruptcy
court’s factual determinations regarding these four conditions are not to be set aside unless clearly
erroneous. Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1165 (6th Cir. 1985).
Oster raises a number of arguments, though from his briefing it is apparent that he does not
contest that the writings submitted were materially false and concerned his financial condition.
Rather, he argues that the bankruptcy court’s determinations on the third and fourth prongs, reliance
and intent to deceive, respectively, were clearly erroneous. We address each in turn.
1. Clarkston’s Reliance
The majority of the bankruptcy court’s opinion focused on whether Clarkston’s reliance on
Oster’s false statements was reasonable. After considering the totality of the circumstances,
including the nature of the loan approval documents and the value of the marketable securities line
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item on the financial statements, the bankruptcy court concluded that Clarkston “did rely on the false
statements of the debtor and reasonably so.” The district court agreed.
Section 523(a)(2)(B)(iii)’s requirement has been interpreted to require the creditor to prove
that it actually relied on the false statement (reliance in fact), and that such reliance was reasonable.
Field v. Mans, 516 U.S. 59, 68 (1995). This is a higher standard than that of “justifiable reliance,”
the standard for § 523(a)(2)(A) claims. This Court, in a § 523(a)(2)(A) case that was decided prior
to Field, articulated five factors that may affect the reasonableness of a creditor’s reliance:
(1) whether the creditor had a close personal relationship or friendship with the
debtor; (2) whether there had been previous business dealings with the debtor that
gave rise to a relationship of trust; (3) whether the debt was incurred for personal or
commercial reasons; (4) whether there were any “red flags” that would have alerted
an ordinarily prudent lender to the possibility that the representations relied upon
were not accurate; and (5) whether even minimal investigation would have revealed
the inaccuracy of the debtor's representations.
BancBoston Mortg. Corp. v. Ledford (In re Ledford), 970 F.2d 1556, 1560 (6th Cir. 1992). Oster
limits his argument on appeal to claims that the bankruptcy court clearly erred when it determined
that Clarkston actually relied on the false statements and representations, and when it determined that
there were not sufficient “red flags” to put Clarkston on notice that something was amiss.
Oster argues that Clarkston did not rely on the false financial statements because, under
Michigan law, certificates of stock and certain other evidences of indebtedness are held by a married
couple in a joint tenancy in the entireties. So, he claims, Clarkston should have been on notice that
when Oster listed joint assets of eight million dollars in marketable securities, such assets could
never have been seized pursuant to a judgment entered against only one spouse. Even if Clarkston
employees did not actually know the mechanics of Michigan’s entireties law, Oster argues that they
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were constructively on notice and thus could not have reasonably relied on the statements. Oster
asserts this argument for three different reasons: to prove that Clarkston did not in fact rely on the
statements, to show that the statements were not material, and to argue that it was a “red flag” that
should have put Clarkston on notice.
This argument fails. While true that Mich. Comp. Laws § 557.151 states that “bonds [and]
certificates of stock . . . shall be held by such husband and wife in joint tenancy,” that same law also
states that this presumption may be overcome if “therein expressly provided . . . .” When Oster
presented a financial statement showing that he had over $8,000,000 in marketable securities, and
then also signed a loan agreement stating that he would maintain at least $4,000,000 in marketable
securities, it was entirely reasonable for Clarkston to believe that those assets were not held as
entireties property.1 While Michigan affords such property a presumption of being included as part
of a tenancy in the entireties, the presumption is not absolute, and Oster’s own acts suggested
otherwise.
Further, Michigan did not make it explicitly clear that brokerage accounts, which were at
issue here, were within § 557.151’s ambit until 2007—three years after the initial loan agreement’s
execution. See Zavradinos v. JTRB, Inc., No. 268570, 2007 WL 2404612 (Mich. Ct. App. Aug. 23,
2007). In response, Oster argues that the brokerage accounts at issue contained stock and bond
1
Oster argues that the loan agreement was a “covenant,” rather than a “representation,” to
hold more than four million dollars in marketable securities. For our purposes, this is irrelevant.
Rather, the loan agreement’s language is probative as to whether Clarkston’s reliance on the financial
statements, coupled together with the covenant/representation, was reasonable. A loan officer
reviewing the financial statements, and then the loan agreement, would reasonably conclude that
Oster had access to marketable securities in the requisite amount.
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holdings, and that § 557.151 was therefore clearly applicable even before the Michigan Court of
Appeals decided Zavradinos. Be that as it may, adopting Oster’s contention would run afoul of our
earlier pronouncement that the reasonable reliance provision of § 523(a)(2)(B) is not a “rigorous
requirement” but one that is “directed at creditors acting in bad faith.” Martin, 761 F.2d at 1166.
There is no semblance of bad faith here on Clarkston’s part, nor does Oster allege as much.
The only other argument that Oster puts forth as to why Clarkston’s reliance was
unreasonable is that there were inconsistencies between the marketable securities information on the
financial statements and the Merrill Lynch statement printouts. This, Oster argues, was a “red flag”
that triggered Clarkston’s duty to investigate. The bankruptcy court determined that the account
names could have been construed as “some kind of a shorthand designation for the account[s] rather
than a statement of precise legal ownership . . . . [t]hey are quite casual or even colloquial in their
presentation.” The district court noted that Oster’s counsel “conceded at oral argument on
February 1, 2011, that the full account statements were not introduced into evidence at the
bankruptcy proceeding. Therefore, the bankruptcy court’s failure to take the full account statements
into consideration cannot be clearly erroneous.”
In response, Oster argues, without more, that the printouts “clearly did not support” the
conclusion that the securities were jointly owned. While this is true, the printouts also fail to clearly
support the idea that the accounts were not jointly owned, which is the relevant question when
conducting clear-error review. Oster further argues that because the printouts did not provide
support for Clarkston’s interpretation of the financial statements, Clarkston was under an obligation
to further investigate Oster’s financial position.
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Such an argument relies entirely upon hindsight analysis, and ignores the clear language of
§ 523(a)(2)(B), which asks whether the creditor reasonably relied on the statements. If Clarkston
was already suspicious of whether Oster had access to the marketable securities and then received
the account printouts, its failure to investigate would be more troubling. But, at the time that it made
the decision to lend funds, Clarkston had no reason to believe that Oster lacked access to the
marketable securities. The bankruptcy court did not err, clearly or otherwise, in determining that
Clarkston actually and reasonably relied upon the false statements and loan agreements.
2. Oster’s Intent
The bankruptcy court, after determining that Oster knew the misrepresentations in the loan
agreements and the figures in the financial statements to be false, inferred “from that knowledge
[Oster’s] intent to deceive the bank.” The district court agreed, noting that “the evidence indicates
that [Oster] knew he was submitting documents to Clarkston that misrepresented his individual net
worth.” Oster contends that Clarkston’s failure to provide evidence of his deceptive intent precluded
the bankruptcy court from finding that Oster’s actions met the intent requirement articulated in
§ 523(a)(2)(B)(iv). He further argues, without support from any case law, that because he neither
saw nor provided the financial statements to Clarkston, and because he did not read the contents of
the loan agreements, he did not know the statements to be untrue.
We do not require proof of the debtor’s subjective intent to satisfy our inquiry under this
prong. In this Court, § 523(a)(2)(B)(iv) is met if “the debtor either intended to deceive the Bank or
acted with gross recklessness . . . .” Martin, 761 F.2d at 1167 (emphasis added); see also First Nat.
Bank of Centerville, TN v. Sansom, 142 F.3d 433, at *2 (6th Cir. 1998) (unpublished) (“In applying
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the holding of Martin, this court has also held that gross recklessness is sufficient to establish an
intent to deceive and to satisfy § 523(a)(2)(B)(iv).”) (internal quotation marks and citation omitted).
“It is not uncommon that intent to deceive must be established by circumstantial evidence and by
way of inference.” Thorp Credit, Inc. v. Carmen (In re Carmen), 723 F.2d 16, 19 (6th Cir. 1983)
(Wellford, J., dissenting).
At a minimum, Oster’s actions—signing a loan agreement directly adjacent to the marketable
securities requirement, seeking a loan under his own name when he knew that only his spouse had
an interest in the securities, and permitting his accountant to provide financial statements to
Clarkston that Oster did not review–amount to gross recklessness. See, e.g., Bank One, Lexington,
N.A. v. Woolum (In re Woolum), 979 F.2d 71, 74 (6th Cir. 1992) (affirming the bankruptcy court’s
finding of gross recklessness when the debtor failed to include a guaranty obligation of $388,000 in
his financial statements for a $225,000 loan). If we were to adopt Oster’s position, borrowers would
be encouraged to submit statements and to sign loan agreements without having reviewed them,
knowing that they could always claim a defense of ignorance if they sought to have their debt
discharged.
But even had Oster not acted with gross recklessness, other evidence in the record supports
the conclusion that Oster purposefully deceived Clarkston. The bankruptcy court had before it the
affidavit of Donald Bolton, a Clarkston employee, in which he stated that
Claude Oster represented to me verbally that he personally had liquid assets in excess
of $4 million to support his request for loans from the Bank totaling $1.35 million.
He gave me financial statements, prepared by his accountant, which reflected over
$8 million in marketable securities held jointly with his wife. I reviewed these
statements with him . . . .
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(emphasis added). Oster asserts that it was improper for the bankruptcy court to rely on the affidavit
because Bolton did not begin working at Clarkston until 2006, two years after the first loan
originated. But, it appears that the discussions referred to in Bolton’s depositions were about the
2007 renewal, not the original 2004 loan request. Neither the bankruptcy nor district court
considered this direct evidence, but we may affirm on any grounds supported by the record. See
Lawrence v. Chancery Ct. of TN, 188 F.3d 687, 691 (6th Cir. 1999). Because § 523(a)(2) applies
to both the original loan request and any “extension, renewal, or refinancing,” this misrepresentation
to Bolton would be strongly probative of Oster’s subjective intent to deceive.
Taken as a whole, the record supports the bankruptcy court’s factual findings that Clarkston
satisfied § 523(a)(2)(B)(iv). It was not clear error for the bankruptcy court to conclude that Oster,
an experienced businessman who had transferred assets out of his control to keep them from
creditors, was either grossly reckless or had the requisite intent to deceive when he submitted the
false financial statements or signed the loan agreements.
B. Oster’s Evidentiary Claim
Oster argues that Bolton’s affidavit was clearly unreliable evidence, and the bankruptcy court
erred in relying upon it for proof of Clarkston’s reliance. Because Bolton was not employed by
Clarkston when the original loans were made, Oster insists that his affidavit should have been given
limited import. We review a bankruptcy court’s evidentiary determinations for an abuse of
discretion. U.S. Bank Nat. Ass’n v. U.S. E.P.A., 563 F.3d 199, 210 (6th Cir. 2009).
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As already mentioned, when Bolton’s affidavit is read in conjunction with his deposition
testimony, it becomes clear that Bolton was speaking of the renewal process, not the loan origination
process. Even if this were not the case, any error made by the bankruptcy court would be harmless.
Our decision relies upon Bolton’s affidavit for only the alternative finding that Oster acted with
intent to deceive. If we were to ignore the affidavit, we would still find no clear error in the
determination that Oster acted with at least gross recklessness.
III. CONCLUSION
For the foregoing reasons, the judgment of the district court is AFFIRMED, and the debt
owed by Oster to Clarkston is nondischargeable under 11 U.S.C. § 523(a)(2)(B).
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