McClave State Bank v. Jay Stum

BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 1 of 23
NOT FOR PUBLICATION 1
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
_________________________________
IN RE TARA D. STUM and JAY BAP No. CO-20-055
PATRICK STUM, BAP No. CO-20-059
Debtors.
___________________________________
MCCLAVE STATE BANK, Bankr. No. 19-15996
Adv. No. 19-01344
Plaintiff - Appellee - Cross- Chapter 7
Appellant,
v.
OPINION
JAY PATRICK STUM,
Defendant - Appellant -
Cross-Appellee.
_________________________________
Appeal from the United States Bankruptcy Court
for the District of Colorado
_________________________________
Before SOMERS, JACOBVITZ, and LOYD, Bankruptcy Judges.
_________________________________
SOMERS, Bankruptcy Judge.
_________________________________
This unpublished opinion may be cited for its persuasive value, but is not
1
precedential, except under the doctrines of law of the case, claim preclusion, and issue
preclusion. 10th Cir. BAP L.R. 8026-6.
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 2 of 23
Claims of nondischargeability under 11 U.S.C. § 523 2 are notoriously difficult to
prove at trial; and once proved, they are equally difficult to disturb on appeal. They are
highly fact-dependent, and require a bankruptcy court to sift through the testimony and
proffered exhibits, make findings of fact, and then apply the law to the facts. In the
Bankruptcy Court, McClave State Bank claimed the debtor Jay Stum is indebted to it
pursuant to four promissory notes. McClave State Bank then filed a nondischargeability
action based on misrepresentations and omissions in financial statements provided by Mr.
Stum during the parties’ lending relationship.
After a trial on the merits, the Bankruptcy Court concluded Mr. Stum materially
misstated his liabilities and intended to deceive McClave State Bank by omitting debt in
his financial statements. The Bankruptcy Court also concluded that McClave State Bank
actually and reasonably relied on the false liability disclosures, and therefore concluded
Mr. Stum’s debts to McClave State Bank were nondischargeable under § 523(a)(2)(B). Mr.
Stum challenges on appeal the Bankruptcy Court’s conclusions that (1) McClave State
Bank reasonably relied on Mr. Stum’s financial statements and the omission of certain
debt, and (2) Mr. Stum intended to deceive McClave State Bank when he provided the false
financial statements. Because we find no fault in the Bankruptcy Court’s factual findings
under the highly deferential clear-error standard of review, we affirm the judgment of the
Bankruptcy Court.
2
All future references to “Code,” “Chapter,” “Section,” and “§” are to the
Bankruptcy Code, Title 11 of the United States Code, unless otherwise indicated.
2
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 3 of 23
I. Background
Mr. Stum owns 23% of the shares in Thunderbird Livestock and Land, Inc.
(hereinafter “Thunderbird”). Thunderbird is a closely held family corporation. It is a large
operation in the local community in McClave, Colorado—running a sizeable family farm,
a grain storage business, a fuel distribution business, a parts store, and the only convenience
store in the community. The Thunderbird stock is not publicly traded and is highly
restricted in terms of marketability outside the Stum family.
Colby Mick is an agriculture lender with McClave State Bank. McClave State Bank
is located in the same community as Thunderbird, in McClave, Colorado. Mr. Stum first
approached McClave State Bank in early 2017 to refinance his loans from another bank,
but he was denied a loan. Mr. Mick testified that Mr. Stum’s debts were very high
compared to his equity position at that initial inquiry, and McClave State Bank required
him to reduce his debt and make his operation “more cash flowable” 3 in order to get a loan.
Mr. Stum then reduced some of his debt load and leased acres and again requested
credit. Following its standard lending practice, McClave State Bank obtained a financial
statement (dated January 2017), three years of tax returns, a credit report, and a cash flow
statement from Mr. Stum, and met with Mr. Stum both in person and via telephone
concerning his application. 4 Mr. Stum’s financial statement reported a net worth of
$4,534,792, which included 640 acres of farmland valued at $576,000. The January 2017
3
Transcript of Day 1 Trial at 31, in Appellant’s App. at 112.
4
The same process detailed herein for the parties’ first loan was repeated for each
of the subsequent loans.
3
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 4 of 23
financial statement also reported 156 head of livestock, valued at $268,400, and equipment
valued at $495,000. 5 Finally, the financial statement reported Mr. Stum owned 2273 shares
of Thunderbird, with a $1614 value per share, yielding a total value of $3,668,622. 6 The
financial statement reported total liabilities of $645,300, identifying a series of debts owed
by Mr. Stum but not any debt owed by Mr. Stum to Thunderbird.
Mr. Mick compiled a risk rating for the loan request and then took the request to the
Bank’s loan committee for review. In Mr. Mick’s assessment, Mr. Stum had downsized his
operation, eliminated debt, and was current on outstanding loans but did not have a good
credit score. Mr. Stum’s prior three years’ tax returns generally showed negative income.
On a scale of 1 (good) to 7 (bad), Mr. Mick assigned Mr. Stum a risk rating of 1 for debt
to worth ratio, 7 a risk rating of 6 for current ratio, 8 a risk rating of 7 for three-year average
term debt coverage, 9 a risk rating of 2 for loan to collateral, 10 and a rating of 7 for credit
history. Mr. Stum’s average risk rating was 4.6, rounded to 5. McClave State Bank did not
make loans if the overall risk rating exceeded a score of 5. Mr. Mick also assessed Mr.
5
The values for land, livestock, and equipment were the subject of the Bankruptcy
Court trial but are not the subject of appeal. We include them for context concerning the
loans.
6
Mr. Stum’s 2014 tax return noted a sale of 40 shares of Thunderbird stock, at $900
per share, so McClave State Bank knew the value from three years prior had been less.
7
The debt to worth ratio was computed by dividing total liabilities by net worth. A
rating of 1 was very favorable and low risk to the Bank.
8
The current ratio was computed by dividing current assets by current liabilities. A
rating of 6 was unfavorable and high risk.
9
A rating of 7 is very unfavorable and high risk, the worst rating on the Bank’s
scale.
10
The loan to collateral rating indicated the amount of collateral to secure the loan,
and a rating of 2 was favorable and low risk.
4
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 5 of 23
Stum’s ability to repay, which he characterized as poor, and Mr. Stum’s debt service
coverage ratio, which also produced a red flag. Regarding Mr. Stum’s proffered equipment
collateral, Mr. Mick did not rely on Mr. Stum’s valuation of $495,000, and instead assessed
the market value as $354,100. Similarly, regarding the livestock collateral, Mr. Mick did
not accept Mr. Stum’s valuation of $268,400, and instead assessed the market value as
$174,720.
The Thunderbird stock was mentioned only with respect to it providing the
substantial portion of Mr. Stum’s net worth. Mr. Mick testified that in making the loan to
Mr. Stum, McClave State Bank relied heavily on the Thunderbird shares contributing to
Mr. Stum’s net worth, and without that component of his net worth, Mr. Stum would not
have qualified for the loan. Mr. Mick testified that McClave State Bank knew the value of
the Thunderbird shares needed to be discounted because the shares were restricted shares
of a closely held corporation and the value of the shares reported on Mr. Stum’s financial
statements did not include that discount. Mr. Mick further testified that McClave State
Bank knew Thunderbird was “worth millions,” relying in part on the Bank’s general
familiarity with Thunderbird and its ownership. McClave State Bank did not review any
stock certificates for Mr. Stum’s shares in Thunderbird, did not ask for corporate
documentation from Thunderbird, and did not request or review a balance sheet or other
financial information from Thunderbird. Mr. Mick’s justification for this was that McClave
State Bank never made a loan against the shares of Thunderbird stock and was not
providing a loan to Thunderbird.
5
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 6 of 23
McClave State Bank ultimately agreed to extend credit. On July 31, 2017, Mr. Stum
executed a promissory note with McClave State Bank in the original principal amount of
$256,453.44. McClave State Bank obtained a security agreement from Mr. Stum, securing
its loans with Mr. Stum in farm machinery and products, livestock, crops, equipment,
general intangibles, accounts, and accounts receivables. The loan was not secured by the
Thunderbird shares.
About seven months later, on February 26, 2018, Mr. Stum executed a second
promissory note with McClave State Bank in the original principal amount of $75,000. The
same loan committee process was repeated as above, relying on the same documents. Mr.
Mick noted in his assessment of the loan request that Mr. Stum had paid his first loan
throughout the last year.
A March 2018 financial statement provided by Mr. Stum to McClave State Bank
listed an increased net worth of $5,095,042, with the same real estate land value, but this
time reported 474 head of livestock, valued at $438,650, and equipment valued at
$646,348. The March 2018 financial statement again reported Mr. Stum owned 2273 shares
of Thunderbird, with a $1614 value per share, yielding a total value of $3,668,622—the
same as the January 2017 financial statement. The March 2018 financial statement reported
total liabilities of $358,305, again identifying a series of debts owed by Mr. Stum that did
not include any debt owed by Mr. Stum to Thunderbird.
About nine months after his second note, on November 13, 2018, Mr. Stum executed
a third promissory note with McClave State Bank in the original principal amount of
6
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 7 of 23
$63,362.72. McClave State Bank additionally relied on the March 2018 financial statement
when it entered this third note.
In January 2019, McClave State Bank considered a fourth loan for Mr. Stum. Again,
an internal review was performed, but the loan to collateral category risk rating went from
2 to 4, a deterioration of the risk rating. Ultimately a loan was approved. On January 8,
2019, Mr. Stum executed a fourth promissory note with McClave State Bank in the original
principal amount of $55,679.96.
All four notes were secured by Mr. Stum’s inventory, accounts, general intangibles,
equipment, farm products and livestock. Mr. Mick testified that McClave State Bank
followed and relied on the 2017 financial statement, as least in part, when it made all four
loans. In making the four loans, McClave State Bank relied on its standard lending
practices. The Bankruptcy Court found that Mr. Stum never gave McClave State Bank any
reason to distrust his veracity regarding the accuracy of the financial information in the
financial statements or any reason to believe the information Mr. Stum disclosed to
McClave State Bank was false or suspect.
Mr. Stum testified that his prior lenders requested financial statements in connection
with his loan applications similar to what McClave State Bank requested, and neither of
the prior lenders requested that he provide information to prove the value of his
Thunderbird shares.
Shortly after the fourth loan, Mr. Stum and Mr. Mick discussed a potential
additional loan, but this time secured by Mr. Stum’s Thunderbird shares. Mr. Stum then
submitted two additional financial documents—a balance sheet from Thunderbird dated as
7
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 8 of 23
of January 23, 2019, and a new personal financial statement dated February 28, 2019. Mr.
Stum’s loan request was not approved, and no additional loan was made. The Thunderbird
balance sheet generally confirmed Mr. Stum’s stock shares 11 but also revealed to McClave
State Bank—for the first time—that Mr. Stum had a note payable to Thunderbird in the
amount of $283,180.21. The debt owed by Mr. Stum to Thunderbird arose from a loan by
Thunderbird to Mr. Stum prior to 2017. Pertinent here, the February 2019 financial
statement then reported a far decreased net worth, but again did not disclose the debt owed
by Mr. Stum to Thunderbird.
The testimony about Mr. Stum’s debt to Thunderbird was, at best, not clear. The
Bankruptcy Court characterized Mr. Stum’s testimony about the debt as follows:
During his examination he acknowledged that he was a borrower from
Thunderbird. But then, after he acknowledged that he’s a borrower and he
owed money to Thunderbird during the testimony, then he turned around and
denied that he owed $283,180 to Thunderbird.
But then he was impeached with his own deposition testimony in
which he clearly acknowledged that he owed Thunderbird $283,180, and that
the amount was loaned to him by Thunderbird about 10 years ago.
And later, still, during questioning by his counsel, the Debtor denied
that he owed money to Thunderbird, and this was the reason. Quote,
“Because it was a debt that was taken over by Thunderbird with some land,
therefore when Thunderbird took over the land the debt went with it,” end
quote. That was the explanation.
The Court finds that the Debtor’s testimony is convoluted, confusing,
contradictory, uncorroborated, and basically meaningless. 12
11
The January 2019 Thunderbird balance sheet reported Mr. Stum owned 2078
shares of Thunderbird, now valued at $1034 per share—much closer to the 2014 tax return
figure for shares actually sold—yielding a total value of $2,148,282. The difference in the
number of shares from prior reports—195—was explained by a note that the shares were
in the process of being sold back to Thunderbird. That sale ultimately did not close.
12
Transcript of Telephonic Oral Ruling Following Trial at 46-47, in Appellant’s App. at
440-41.
8
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Mr. Stum’s father (Linly Stum) testified “yes and no” when asked if Mr. Stum owed
the debt. 13 Ultimately, the Bankruptcy Court found, “based on the Thunderbird Financial
Statement, and at least some testimony from Linly Stum, and the Debtor acknowledging
the existence of the debt owed to Thunderbird, at least sometimes,” 14 that Mr. Stum owed
$283,100 to Thunderbird at the time he submitted his financial statements to McClave State
Bank but failed to disclose the debt.
The Bankruptcy Court found that Mr. Stum failed to disclose his guarantees of
Thunderbird debt to Rabo-Agri Finance on his financial statements given to McClave State
Bank. Mr. Stum executed two loan guarantees with that creditor on June 28, 2017, and on
September 8, 2018 executed a third guarantee. The June 2017 guarantees were given only
one month prior to Mr. Stum’s first loan with McClave State Bank, and the September
2018 guarantee was given only two months prior to Mr. Stum entering his third loan with
McClave State Bank.
About eight months after Mr. Stum entered his fourth loan with McClave State
Bank, on August 14, 2019, Mr. Stum filed an individual chapter 12 bankruptcy petition.
Mr. Stum’s case was jointly administered with a case filed by his wife and then converted
to chapter 7. 15 At filing, Mr. Stum reported on his Schedule B he had a 23% interest in
13
Transcript of Day 1 Trial at 98, in Appellant’s App. at 179.
14
Transcript of Telephonic Oral Ruling Following Trial at 47, in Appellant’s App.
at 441. The conclusion Mr. Stum owes the debt to Thunderbird is not challenged on appeal.
15
Mr. Stum defaulted on his repayment obligations, and McClave State Bank filed
a state court civil action and a receiver was appointed in June 2019. Mr. Stum’s spouse
(Tara Stum) then filed a chapter 7 petition in July 2019. McClave State Bank very quickly
sought relief from stay, and then Tara Stum filed a motion to convert her case to chapter
12. The day before the hearing on the motion for relief from stay in the Tara Stum case, on
9
BAP Appeal No. 20-55 Docket No. 54 Filed: 12/01/2021 Page: 10 of 23
Thunderbird, the interest was “subject to shareholder buyback provision,” 16 and the current
value was zero. Mr. Stum also reported the debt to Thunderbird on his Schedules.
Through motions for relief from stay, McClave State Bank collected and liquidated
some of its collateral. Additionally, McClave State Bank filed an adversary complaint
objecting to the dischargeability of the debt owed by Mr. Stum under § 523(a)(2)(B) and §
523(a)(4). 17 Mr. Stum conceded he is indebted to McClave State Bank under the four
promissory notes detailed above but contested nondischargeability. The Bankruptcy Court
conducted a trial on the claims under § 523(a)(2)(B) and § 523(a)(4).
On the § 523(a)(2)(B) claim, the Bankruptcy Court concluded McClave State Bank
proved Mr. Stum omitted his $283,180 debt to Thunderbird on his financial statements,
inflating his net worth. 18 The Bankruptcy Court concluded a major reason McClave State
August 14, 2019, Mr. Stum filed his chapter 12 bankruptcy petition. About a month later,
the Bankruptcy Court granted a motion to convert to chapter 12 in the Tara Stum case, and
then both Stum cases were jointly administered from that point. McClave State Bank filed
a motion for relief from stay to proceed against Mr. Stum, which was granted in November
2019. Shortly thereafter, in December 2019, both Stum cases were converted (or
reconverted for Tara Stum) to chapter 7.
16
Stipulated Facts for Trial at 3, in Appellant’s App. at 65.
17
Originally, McClave State Bank also objected to the entry of a discharge under
§ 727(a)(4) and (5) and objected to dischargeability under § 523(a)(2)(A), but it amended
its complaint and proceeded to trial on only the claims under § 523(a)(2)(B) and
§ 523(a)(4).
18
The Bankruptcy Court rejected McClave State Banks’s additional alleged false
statements by Mr. Stum. McClave State Bank argued five alleged false statements or
omissions: (1) Mr. Stum’s valuation of the Thunderbird stock, (2) Mr. Stum’s valuation of
his machinery and equipment, (3) Mr. Stum’s valuation of his livestock, (4) Mr. Stum’s
valuation of his real property, and (5) Mr. Stum’s omission of the debt to Thunderbird. The
Bankruptcy Court found McClave State Bank failed to prove the asset values in the
financial statements were materially false, so McClave State Bank’s § 523(a)(2)(B) claim
based on false asset valuations failed.
10
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Bank approved each loan was because of its internal collateral valuation, but that the net
worth computations and debt load were additional bases. The Bankruptcy Court then
additionally found that Mr. Stum’s omission was material; McClave State Bank actually
relied on the financial statements in making each loan; it was reasonable for McClave State
Bank to rely on those financial statements; and Mr. Stum’s repeated omission of the debt
was intentionally done, with intent to deceive. The Bankruptcy Court concluded McClave
State Bank established the elements required to prove nondischargeability of its claim
under § 523(a)(2)(B).
Regarding the claim under § 523(a)(4), the Bankruptcy Court concluded McClave
State Bank did not carry its burden of proof. The Court entered judgment for McClave
State Bank on its claim under § 523(a)(2)(B) and for Mr. Stum on the Bank’s claim under
§ 523(a)(4), reserving the question of fees and costs. 19
19
Judgment at 1-2, in Appellant’s App. at 383-84. After entry of judgment and the
filing of Mr. Stum’s notice of appeal, the parties filed a Stipulated Motion to Correct
Judgment, suggesting the Judgment incorrectly stated the amount due and owing on Mr.
Stum’s debt to McClave State Bank. The Bankruptcy Court entered an Order and Amended
Stipulated Judgment Pursuant to Stipulation of the Parties. Appellant’s App. at 392-94.
The total principal, interest, and late fees owed through October 1, 2020 was stipulated to
be $288,320.06. Again, fees and costs were not included in the total. Stipulated Motion to
Correct Judgment at 1-2, in Appellant’s App. at 389-90; Order and Amended Stipulated
Judgment Pursuant to Stipulation of the Parties at 2, in Appellant’s App. at 393.
No party raised the issue of whether the Bankruptcy Court had authority to modify
the Judgment when the Stipulated Motion to Correct Judgment was filed while the appeal
was pending. See Fed. R. Civ. P. 60(a) (appellate court leave required to correct clerical
mistakes, oversights, or omissions in judgment after appeal has been docketed and while
appeal is pending); Fed. R. Bankr. P. 8008 (process for indicative rulings when a party files
a motion in the bankruptcy court for relief that the court lacks authority to grant because of
an appeal that has been docketed and is pending). Regardless, the amount of the judgment
against Mr. Stum is not at issue in this appeal.
11
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Mr. Stum appeals the judgment against him on the § 523(a)(2)(B) claim, challenging
two factual findings by the Bankruptcy Court: (1) that McClave State Bank reasonably
relied on his financial statements and the omission of the Thunderbird debt, and (2) that
Mr. Stum intended to deceive McClave State Bank when he provided the false financial
statements. McClave State Bank then filed a cross-appeal, preserving its right to argue the
Bankruptcy Court erred in its factual finding that it had not proved Mr. Stum’s valuation
of his Thunderbird stock was a false statement. 20
McClave State Bank did not appeal the entry of judgment against it on the claim
under § 523(a)(4), and the Court will not, therefore, detail that claim further. In addition,
because we conclude the Bankruptcy Court should be affirmed on its judgment for
McClave State Bank on the claim under § 523(a)(2)(B) based on the omission of the
Thunderbird debt from Mr. Stum’s financial statements, we need not discuss the cross-
appeal.
II. Jurisdiction and Standard of Review
“With the consent of the parties, this Court has jurisdiction to hear timely-filed
appeals from ‘final judgments, orders, and decrees’ of bankruptcy courts within the Tenth
Circuit.” 21 A bankruptcy court’s order resolving all claims asserted in an adversary
20
Regarding the ultimate value to be assigned to the Thunderbird stock, the
Bankruptcy Court concluded only that the value was not zero at the time Mr. Stum provided
his financial statements, as alleged by McClave State Bank.
21
Straight v. Wyo. Dep’t of Transp. (In re Straight), 248 B.R. 403, 409 (10th Cir.
BAP 2000) (quoting 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1)).
12
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proceeding is a final order for purposes of 28 U.S.C. § 158. 22 Mr. Stum timely filed a notice
of appeal from the Bankruptcy Court’s judgment. 23 No party elected for this appeal to be
heard by the United States District Court pursuant to 28 U.S.C. § 158(c). Accordingly, this
Court has jurisdiction over this appeal.
The ultimate determination of whether a debt is nondischargeable pursuant to § 523
is a legal question reviewed de novo. 24 However, this appeal involves the sufficiency of
the evidence at the Bankruptcy Court, or determinations of intent, and those findings are
reviewed under a clear-error standard. 25 Under the clear-error standard, this Court defers
to facts found by the Bankruptcy Court, unless those factual findings are “without factual
support in the record” or, “after examining all the evidence, we are left with a ‘definite and
firm conviction that a mistake has been made.”’ 26 In addition, if the Bankruptcy Court’s
22
Adelman v. Fourth Nat’l Bank & Tr. Co, N.A., of Tulsa (In re Durability, Inc.),
893 F.2d 264, 266 (10th Cir. 1990) (concluding that a bankruptcy court order resolving an
adversary proceeding is a final order).
23
As noted above, the question of fees and costs was reserved, but “[w]hether the
claim for attorney’s fees is based on a statute, a contract, or both, the pendency of a ruling
on an award for fees and costs does not prevent, as a general rule, the merits judgment from
becoming final for purposes of appeal.” Ray Haluch Gravel Co. v. Cent. Pension Fund of
Int’l Union of Operating Eng’rs & Participating Emps., 571 U.S. 177, 179 (2014).
24
United States v. Victor, 121 F.3d 1383, 1386 (10th Cir. 1991) (citing In re
Grynberg, 986 F.2d 367, 369 (10th Cir. 1993)) (interpreting § 523(a)(1)(A)).
25
DSC Nat’l Properties, LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (10th
Cir. BAP 2012) (The bankruptcy court’s findings of fact, including findings regarding
intent, are reviewed for clear error.).
26
In re Johnson, 477 B.R. at 168 (quoting Cobra Well Testers, LLC v. Carlson (In
re Carlson), No. 06-8158, 2008 WL 8677441, at *2 (10th Cir. Jan. 23, 2008)
(unpublished)).
13
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factual findings are premised on “improper legal standards or on proper ones improperly
applied,” those findings are not entitled to clearly-erroneous review. 27
III. Analysis
A. Standards of Law Governing § 523(a)(2)(B)
Section 523(a)(2)(B) states:
(a) A discharge under section 727 . . . 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 . . . 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[.]
Section 523 exceptions to discharge “are narrowly construed, and because of the fresh start
objectives of bankruptcy, doubt as to the meaning and breadth of a statutory exception is
to be resolved in the debtor’s favor.” 28 A creditor bears the burden of proving
nondischargeability under § 523(a) by a preponderance of the evidence. 29
27
Id. (quoting Sender v. Johnson (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1267,
1268 (10th Cir. 1996)).
28
Id. (internal alterations and quotations omitted). The exception to discharge found
in § 523(a)(2)(B) “is in keeping with the basic policy animating the Code of affording relief
only to an honest but unfortunate debtor.” Lamar, Archer & Cofrin, LLP v. Appling, 138
S. Ct. 1752, 1758 (2018) (internal quotations omitted).
29
Grogan v. Garner, 498 U.S. 279, 290–91 (1991).
14
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As noted above, Mr. Stum does not challenge on appeal the Bankruptcy Court’s
findings that he owed the debt to McClave State Bank, that he made a materially false
statement in writing to McClave State Bank by failing to disclose his debt to Thunderbird
on his financial statements, or that the omission of the debt was respecting his financial
condition. On appeal, Mr. Stum challenges only the findings that McClave State Bank
reasonably relied on his financial statements with the omitted debt when it made the loans
and that he intended to deceive McClave State Bank when he provided the financial
statements.
B. Reasonable Reliance
The Supreme Court interprets § 523(a)(2)(B) as “requir[ing] not only reasonable
reliance but also reliance itself.” 30 The Bankruptcy Court found that McClave State Bank
showed both actual reliance and that its reliance was reasonable.
Regarding actual reliance, in the Tenth Circuit, a creditor need not rely exclusively
on a false financial statement; partial reliance is enough. 31 The fraudulent financial
statement need only be “a substantial factor in the creditor’s decision.” 32 Even then, partial
reliance on a false financial statement is adequate “even if the financial statement is not the
most substantial factor.” 33
30
Field v. Mans, 516 U.S. 59, 68 (1995).
31
First Nat’l Bank v. Cribbs (In re Cribbs), No. 05-6225, 2006 WL 1875366, at *3
(10th Cir. July 7, 2006) (unpublished); Cent. Nat’l Bank & Tr.t Co. v. Liming (In re
Liming), 797 F.2d 895, 897 (10th Cir. 1986) (under § 523(a)(2)(B), a creditor need not
“rely exclusively” on a false financial statement).
32
John Deere Co. v. Gerlach (In re Gerlach), 897 F.2d 1048, 1052 (10th Cir. 1990).
33
In re Cribbs, 2006 WL 1875366, at *3.
15
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The Bankruptcy Court found that McClave State Bank actually relied on Mr. Stum’s
January 2017 financial statement in making all of the loans, and that McClave State Bank
additionally relied on the March 2018 financial statement to make the third and fourth
loans. 34 The Bankruptcy Court found that Mr. Stum’s liabilities played a “key part” in the
approval process of the loans because McClave State Bank analyzed Mr. Sum’s net worth,
the debt to worth ratio, the average term debt coverage, and the debt service coverage ratio,
and all of those depended on an accurate listing of liabilities. As Mr. Stum notes, McClave
State Bank also relied on additional information, especially collateral values and its
security coverage, but the Bankruptcy Court did not clearly err by finding the false
liabilities were a substantial factor in McClave State Bank’s lending decision. As the Tenth
Circuit has noted, “[a] lender easily can rely on a financial statement and a security interest
in making a loan.” 35 The record adequately supports a finding that a higher debt load would
have caused a less favorable analysis of Mr. Stum’s loan applications; Mr. Mick testified
McClave State Bank would not have made the loans had it known about the $283,100 debt
to Thunderbird. 36 The record supports that testimony: An increased debt load was a concern
of McClave State Bank, Mr. Stum was right at the limit of the bank’s risk limit, and
additional debt would have put Mr. Stum over that limit.
34
The Bankruptcy Court found that McClave State Bank did not rely on the
February 2019 financial statement in making any loans because McClave State Bank
received that financial statement after it had already made all of the loans.
35
In re Liming, 797 F.2d at 898 (noting also, “Such reliance is justified; as the facts
demonstrate here, ‘excess’ security can vanish rapidly”).
36
The Bankruptcy Court candidly noted Mr. Mick’s testimony on this point was
self-serving and convenient, but the Bankruptcy Court ultimately found Mr. Mick credible
and credited his testimony.
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The next question is the reasonableness of McClave State Bank’s reliance. 37
Reasonableness is an objective question, 38 and the line of reasonableness can be tricky to
place. The Tenth Circuit has stated:
“The standard of reasonableness places a measure of responsibility upon a
creditor to ensure that there exists some basis for relying upon debtor’s
representations. The reasonableness of a creditor’s reliance will be evaluated
according to the particular facts and circumstances present in a given case.”
In evaluating a creditor’s reliance on a false financial statement, a court may
not substitute its judgment for the business judgment of the creditor in
deciding to make the loan. Further, the debtor’s dishonesty will not excuse a
creditor’s unreasonable reliance on a false financial statement. 39
The reasonableness evaluation is fact driven. 40 In making this inquiry, courts must consider
“the creditor’s standard lending practices, the standard in the creditor’s industry, and the
surrounding circumstances at the time the debtor applies for credit.” 41 When looking at the
circumstances at the time the debtor applies for credit, courts must consider “whether there
are any ‘red flags’ in the application, whether there was an ongoing business relationship,
37
Of course, “[w]hether the claimed partial reliance is actual, however, is not
necessarily distinct from the reasonableness inquiry, as ‘reasonableness goes to the
probability of actual reliance.’” In re Cribbs, 2006 WL 1875366, at *3 (quoting Field, 516
U.S. at 76).
38
Ins. Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1117 (3d Cir. 1995) (“The
reasonableness of a creditor’s reliance under § 523(a)(2)(B) is judged by an objective
standard, i.e., that degree of care which would be exercised by a reasonably cautious person
in the same business transaction under similar circumstances.”).
39
Leadership Bank, N.A. v. Watson (In re Watson), 958 F.2d 977, 978 (10th Cir.
1992) (quoting First Bank v. Mullet (In re Mullet), 817 F.2d 677, 679 (10th Cir. 1987)
(internal citations omitted), abrogated in part by Field v. Mans, 516 U.S. 59 (1995)).
40
In re Mullet, 817 F.2d at 679 (The reasonableness of a creditor’s reliance will be
evaluated according to the particular facts and circumstances present in a given case.”).
41
In re Cribbs, 2006 WL 1875366, at *4.
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and whether further investigation would have revealed inaccuracies in the debtor’s
application.” 42
Regarding the reasonableness of McClave State Bank’s reliance, the Bankruptcy
Court again appropriately weighed the evidence. Importantly, McClave State Bank relied
on its standard lending practices. There were red flags—literally, Mr. Mick flagged in red
areas of heightened concern. Mr. Stum had a poor credit score, a poor debt service coverage
ratio, and a poor ability to repay. Mr. Stum was a poor overall risk rating and came in just
at the minimum standards McClave State Bank would consider for entering a lending
relationship. But, as the Bankruptcy Court noted, there was no evidence of any basis for
the bank to question Mr. Stum’s financial statements. There were no discrepancies, no
inconsistencies, and no indication to McClave State Bank that Mr. Stum was lying or
concealing his liabilities or other financial information. 43 Mr. Stum never gave McClave
State Bank any reason to believe his financial statements were false, and the debt to
Thunderbird was not a matter of public record.
42
Id.43
See, e.g., In re Watson, 958 F.2d at 980 (“[T]here was nothing in the financial
statement which should have alerted the Bank that further investigation was necessary. The
financial statement did not contain any inconsistent information nor did it contain any
noticeable discrepancies which would have alerted the Bank that the financial statement
might be inaccurate or incomplete.”). Mr. Stum argues McClave State Bank was or should
have been aware that he “was not sophisticated in matters of accounting” and some
additional inquiry should have been made into his representations on his financial
statements on that basis. Appellant’s Br. at 13. But a debtor need not be an accountant to
make simple disclosures about his debt load.
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Importantly, the Bankruptcy Court did not substitute its business judgment for that
of McClave State Bank. 44 The Bankruptcy Court concluded reasonableness was a close
question. This Court agrees. With the benefit of hindsight now available to us, would we
have asked for a balance sheet from Thunderbird in 2017, at the beginning of the parties’
relationship, not in 2019 at the end? If the Bank’s collateral to support loan approval had
been Mr. Stum’s Thunderbird shares, then it would have been reasonable to pursue the
valuation of those shares more thoroughly. Such inquiry as to the shares’ value may have
uncovered the Thunderbird debt. But here, the issue is the Bank’s reliance on Mr. Stum’s
debt load, and inquiry into Thunderbird would not reasonably have been part of that
analysis. The Thunderbird shares were not collateral for the loans, and there was no
indication of a debt to Thunderbird in any way. Thunderbird was a well-known family
business in the community, and Mr. Mick knew the Thunderbird shares were a significant
part of Mr. Stum’s net worth. But McClave State Bank primarily looked to Mr. Stum’s
land, equipment, and livestock for collateral, and relied on Mr. Stum’s net worth to
determine his creditworthiness only in the face of his poor credit score. Under the facts and
circumstances present here, we conclude the Bankruptcy Court did not clearly err in
placing the line of reasonableness on the side of McClave State Bank.
44
In re Watson, 958 F.2d at 978 (“a court may not substitute its judgment for the
business judgment of the creditor in deciding to make the loan”); see also Sec. Nat’l Bank
& Tr. of Norman, Okla. v. Watson (In re Watson), 956 F.2d 279, (10th Cir. Feb. 18, 1992)
(unpublished) (“The issue of reasonableness presented under § 523(a)(2)(B) is not whether
it was reasonable for the Bank to have loaned Debtor $28,000, but whether it was
reasonable for the Bank to have relied upon Debtor’s financial statements in making that
loan.”).
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C. Intent to Deceive
Section 523(a)(2)(B) requires that the debtor make the false statement at issue “with
intent to deceive.” The Tenth Circuit has characterized this as a “knowing” intent to
deceive, but “the requisite intent may be inferred from a sufficiently reckless disregard of
the accuracy of the facts.” 45 In other words, “[i]t must be shown that the debtor’s alleged
false statement in writing was either knowingly false or made so recklessly as to warrant a
finding that the debtor acted fraudulently.” 46 Furthermore, intent to deceive is a “subjective
inquiry” and can be “inferred from the totality of the circumstances.” 47
45
Driggs v. Black (In re Black), 787 F.2d 503, 506 (10th Cir. 1986), abrogated in
part on other grounds by Grogan v. Garner, 498 U.S. 279 (1991). The Tenth Circuit
perhaps softened this a couple of months after its statement in In re Black when it stated in
In re Liming, 797 F.2d at 897, that “a statement need only be made with reckless disregard
for the truth to make the underlying debt nondischargeable under § 523(a)(2)(B).” This
Court has also stated: “Intent to deceive may be inferred from the totality of the
circumstances, including a reckless disregard for the truth.” In re Cribbs, 327 B.R. 668,
673 (10th Cir. BAP 2005), aff'd, 2006 WL 1875366. But we continue to believe “[a] finding
of reckless disregard should be very narrowly interpreted because a misrepresentation is
fraudulent only if the maker ‘knows or believes the matter is not what he represents it to
be.’” Id. (quoting Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225 B.R. 778, 787 (10th
Cir. BAP 1998)). Carelessness does not “rise to the level of reckless disregard for the truth
or intent to deceive.” Blue Ridge Bank & Tr. Co. v. Cascio (In re Cascio), 342 B.R. 384,
2005 WL 4001131, at *3 (10th Cir. BAP Aug. 4, 2005) (unpublished).
46
4 Collier on Bankruptcy ¶ 523.08 (Richard Levin & Henry J. Sommer eds., 16th
ed.).
47
In re Cribbs, 327 B.R. at 673-74; see also Carini v. Matera, 592 F.2d 378, 380
(7th Cir. 1979) (“Indeed, where, as here, a person knowingly or recklessly makes a false
representation which the person knows or should know, will induce another to make a loan,
intent to deceive may logically be inferred.”). Regarding “reckless disregard for the truth”
supporting an intent to deceive under § 523(a)(2)(A), the Tenth Circuit BAP concluded:
“Reckless disregard for the truth, therefore, is a subjective state of mind—the speaker
makes the statement without caring whether the representation is true or false—which must
be distinguished from failing to exercise the care and competence of a reasonable and
prudent person before representing the fact as true.” DSC Nat’l Props., LLC v. Johnson (In
re Johnson), 477 B.R. 156, 171 (10th Cir. BAP 2012).
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The Bankruptcy Court concluded there was no direct evidence that Mr. Stum
intended to deceive McClave State Bank with his financial statements. But there was
evidence Mr. Stum knew he was required to accurately disclose his liabilities and knew or
should have known his debt load was important to McClave State Bank. Mr. Stum had just
been turned away from McClave State Bank because of his debt. The debt to Thunderbird
was not insignificant in size in relation to the amounts borrowed and Mr. Stum’s overall
financial picture. The Bankruptcy Court also found it significant that Mr. Stum omitted not
only his debt to Thunderbird, but also his guarantees to Rabo Agri-Finance. Those
guarantees were given at almost the same time Mr. Stum was taking out loans with
McClave State Bank. The evidence supports the Bankruptcy Court’s conclusion Mr. Stum
intentionally or with reckless disregard for the truth repeatedly withheld material
information concerning his debt load, knowing McClave State Bank was concerned about
his debt load. 48
Mr. Stum argues the Bankruptcy Court erred by not accepting his proffered
explanation for omitting the debt: that he believed the financial statements were accurate
because “he believed the [Thunderbird] debt had been taken over by Thunderbird with
some land and that when Thunderbird took over the land, the debt went with it.” 49 Mr.
Stum also points to the testimony from his father who, at best, equivocated on whether the
48
See Columbia State Bank, N.A. v. Daviscourt (In re Daviscourt), 353 B.R. 674,
685 (10th Cir. BAP 2006) (finding intent to deceive where the debtor “made numerous
false representations and regularly held back material information”).
49
Appellant’s Br. at 19 (citing Transcript of Day 1 Trial at 191-92, in Appellant’s
App. at 272-73).
21
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debt existed. But an unsupported assertion of honest intent cannot overcome ‘“the natural
inferences from admitted facts.’” 50 As noted in the factual recitation above, the testimony
about the existence of the debt was “convoluted, confusing, contradictory, uncorroborated,
and basically meaningless.” 51 Mr. Stum asserts he had an honest intent, but the Bankruptcy
Court weighed the evidence and found Mr. Stum knew he was required to accurately
disclose his liabilities, conceded the information he provided was supposed to be true and
accurate and that McClave State Bank would rely on it, was keenly aware of the importance
of his debt load to the Bank, knew the “large and material debt” to Thunderbird existed,
and also omitted other debts through his omission of his guarantees. All these findings are
supported by the record and support the conclusion that Mr. Stum either intended to deceive
McClave State Bank or acted with reckless disregard for the truth. The Bankruptcy Court
weighed the totality of the evidence, the credibility of the witnesses, and came to the
conclusion that Mr. Stum “offered no credible or cogent explanation for why the debt was
omitted.” 52 This Court defers to a bankruptcy court’s opportunity “to judge the credibility
of the witnesses.” 53 The Bankruptcy Court observed the witnesses first-hand and is in the
best position to determine each witness’s credibility. The Bankruptcy Court did not clearly
50
Cent. Nat’l Bank & Tr. Co. v. Liming (In re Liming), 797 F.2d 895, 897 (10th Cir.
1986) (quoting 3 Collier on Bankruptcy ¶ 523.09[5][b], at 523-62 (15th ed.)).
51
Transcript of Telephonic Oral Ruling Following Trial at 47, in Appellant’s App.
at 441.
52
Transcript of Telephonic Oral Ruling Following Trial at 82, in Appellant’s App.
at 476.
53
Blue Ridge Bank & Tr. Co. v. Cascio (In re Cascio), 342 B.R. 384, 2005 WL
4001131, at *2 (10th Cir. BAP Aug. 4, 2005) (unpublished) (citing Pierce v. Underwood,
487 U.S. 552, 558 (1988)).
22
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err in its conclusion Mr. Stum withheld information concerning the debt to Thunderbird
with an intent to deceive.
IV. Conclusion
Given the “significantly deferential” clear error standard of review, 54 we affirm the
decision of the Bankruptcy Court regarding McClave State Bank’s § 523(a)(2)(B) claim
based on the written false representation respecting Mr. Stum’s financial condition.
Because of this affirmance, McClave State Bank’s cross-appeal is moot. The Bankruptcy
Court’s judgment is affirmed.
54
First Nat’l Bank v. Cribbs (In re Cribbs), 327 B.R. 668, 673 (10th Cir. BAP 2005)
(noting the “significantly deferential” standard of review for bankruptcy court’s factual
findings concerning intent and reasonable reliance).
23