Cosman v. Busey Bank

Timothy Cosman, Appellant, v. Busey Bank Appellee.

Case No. 3:20-cv-50298

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS WESTERN DIVISION

May 12, 2021

Honorable Iain D. Johnston

MEMORANDUM OPINION AND ORDER

Timothy Cosman appeals the Bankruptcy Court's decision to grant Busey Bank's ("the Bank") motion for summary judgment as to count II of its adversarial complaint. That count sought a declaration that Cosman debts to Busey Bank are nondischargeable because he induced the Bank into issuing him the loans by filing false financial documents and that the Bank reasonably relied on those falsehoods. The Court affirms the Bankruptcy Court's decision.

I. Background

Between 2014 and 2015, Cosman obtained several loans from Busey Bank.¹ These loans, including refinances and renewals, totaled millions of dollars. As part of these transactions, Cosman filed financial statements claiming that he owned twenty percent of Cosman Farms, LLC, which he claimed was valued at $2,000,000; twenty percent of Cosman Family Limited Partnership, which he claimed wasvalued at $1,000,000; and an itemized list of farming machinery, equipment, and vehicles, which he either overvalued or did not own. In March 2015, he filed another financing statement claiming the same, but with a slight increase in the claimed value of the two businesses.

Cosman then defaulted on the Busey Bank loans and, in June 2016, sought relief under chapter 7 of the Bankruptcy Code. But the financial information Cosman used to obtain those loans was fraudulent. In October 2019, Cosman pleaded guilty and was convicted of bank fraud because of his use of fraudulent information to obtain the Busey Bank loans. The Bank then filed a four-count adversarial complaint in the Bankruptcy Court seeking to declare the loans nondischargeable under 11 U.S.C. § 523(a)(2)(A)-(B), (a)(4), and (a)(6). Count II asked the Court to declare the loans nondischargeable under § 523(a)(2)(B). The Bankruptcy Court granted the Bank's motion as to that count and dismissed the rest. Cosman now appeals. The question on appeal is whether the Bankruptcy Court erred in granting summary judgment to the Bank under § 523(a)(2)(B) when it found no genuine issue of material fact regarding the Bank's reliance on Cosman's fraudulent financial statements.

II. Analysis

The Court reviews the Bankruptcy Court's determinations of law de novo, and its factual findings for clear error. U.S. Bank N.A. v. Vill. at Lakeridge, LLC, 138 S. Ct. 960, 966 (2018) (noting, in a bankruptcy case, that legal conclusions are reviewed de novo); Estate of Cora v. Jarling (In re Jarling), 816 F.3d 921, 924 (7thCir. 2016); Shaw Steel, Inc. v. Morris (In re Morris), 223 F.3d 548, 552 (7th Cir. 2000); Fed. R. Civ. P. 52(a)(6); Fed R. Bankr. P. 7052. Summary judgment is appropriate when no genuine dispute of material fact exists, and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The moving party bears the initial burden to show that no genuine dispute of material fact exists. Id. Then, the nonmovant must present its own evidence showing that a genuine dispute of material fact does exist. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986).

The Court will not engage in a trial on affidavits. Id. at 255 ("The evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor."). But affidavits or declarations based on personal knowledge may be used to support a motion for summary judgment. Fed. R. Civ. P. 56(c)(4). If the nonmovant fails to properly address the movant's assertions of fact, the Court may consider the assertions undisputed and grant the motion if these undisputed facts entitle the movant to judgment as a matter of law. Fed. R. Civ. P. 56(e)(2)-(3).

A. Reasonable Reliance

In count II of its adversarial complaint, the Bank contended that its loans to Cosman were nondischargeable under 11 U.S.C. § 523(a)(2)(B). It contended Cosman had obtained the loans by using fraudulent financial statements on which the Bank reasonably relied. In re Cosman, 616 B.R. 358, 368 (Bankr. N.D. Ill. 2020). That section of the Bankruptcy Code provides that a bankruptcy discharge order does not discharge:

an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . use of a statement in writing that is (i) materially false; (ii) respecting the debtor's or insider'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.

11 U.S.C. § 523(a)(2)(B) (emphasis added). To succeed on its motion for summary judgment, the Bank must show that Cosman made a materially false written statement about his financial condition with the intent to deceive, and that the Bank reasonable relied on that written statement. Fischer Inv. Cap., Inc. v. Cohen (In re Cohen), 507 F.3d 610, 613 (7th Cir. 2007). The Bankruptcy Court granted the Bank's motion for summary judgment on count II. Cosman's appeal challenges only the Bankruptcy Court's determination that the Bank reasonably relied on his fraudulent financial statements. No other element is at issue. Dkt. 14, at 5.

Section 523 employs two different types of reliance: reasonable and justified. Justifiable reliance requires a lesser showing than reasonable reliance. Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752, 1763 n.6 (2018). Section 523(a)(2)'s text "plainly heightens the bar to discharge when the fraud at issue was effectuated" through a written financial statement. Id. at 1763. "Under the justifiable reliance standard, a creditor has no duty to investigate unless the falsity of the representation would have been readily apparent." Ojeda v. Goldberg, 599 F.3d 712, 717 (7th Cir. 2010). This presents a subjective inquiry into the "circumstances of a particular case and the characteristics of a particular plaintiff." Id.

In contrast, the reasonable reliance test is objective. Although it is assessed on a case-by-case basis, In re Bonnett, 895 F.2d 1155, 1157 (7th Cir. 1989), it does not involve an subjective inquiry into the creditors lending policies and practices, In re Garman, 643 F.2d 1252, 1256 (7th Cir. 1980). Furthermore, courts do not second guess the creditor's lending decisions. In re Morris, 223 F.3d at 553. Instead, federal courts determine whether the creditor's reliance on the debtor's fraudulent financial statement was reasonable under the circumstances. Field v. Mans, 516 U.S. 59, 63 (1995) (defining reasonable reliance as "what would be reasonable for a prudent man to do under those circumstances"). Although creditors are not generally required to conduct investigations into every potential agreement, In re Morris, 223 F.3d at 554, they cannot blindly ignore evidence of deceit, that to a reasonably prudent creditor, would throw up a red flag. In re Bonnett, 895 F.2d at 1157; accord Veritex Cmty. Bank v. Osborne (In re Osborne), 951 F.3d 691, 699 (5th Cir. 2020). But even though reasonable reliance is a heightened burdened for creditors, it "cannot be said to be a rigorous requirement, but rather is directed at creditors acting in bad faith." In re Morris, 223 F.3d at 553 (quoting Bank One, Lexington, N.A. v. Woolum, 979 F.2d 71, 76 (6th Cir. 1992)).

Here, the Bankruptcy Court analyzed the affidavits and the lending agreements and found that "[t]here is nothing on the face of the financial statements that would have alerted the Bank that the debtor was misrepresenting his financial condition or that there was a need for further investigation." In re Cosman, 616 B.R. at 370-71. The Bankruptcy Court analyzed the evidence anddetermined that no red flags existed. With no red flags, reasonable reliance did not require the Bank to investigate further. Cosman contends that this was error.

Cosman cites to Waugh Real Estate Holdings, LLC v. Daecharkhom (In re Daecharkhom), 481 B.R. 641 (Bankr. D. Nev. 2012). Dkt. 14, at 9. But that case is not persuasive. First, it is a case from a Ninth Circuit district court. See Camreta v. Greene, 563 U.S. 692, 709 n.7 (2011) (district court decisions are not precedential). Second, and most important, that case seems to suggest that justifiable reliance and reasonable reliance require the same analysis and that reasonable reliance requires a subjective inquiry. Id. at 648-49 (noting in the opening statement that the plaintiff must prove "that the reliance was reasonable or justifiable (elements 5 or 6)" and then explaining that the Court "must particularly consider the subjective effect of those circumstances upon the creditor"). At least in this Circuit, that is simply not true. The Seventh Circuit has been clear that the reasonable reliance test is objective: it asks whether the reasonably prudent lender would have relied on the debtor's false statements. In re Morris, 223 F.3d at 553. Thus, a subjective inquiry into the thoughts of the loan officer that approved the loans is not enough to satisfy this objective reasonable person standard.

Relying on Hurston v. Anzo (In re Anzo), 562 B.R. 819 (Bankr. N.D. Ga. 2016), Cosman contends that his fraudulent statements regarding his interests in Cosman LLC and Cosman Family Limited Partnership should have been a red flag and, therefore, the Bank could not have reasonably relied on those statements without further investigation. Dkt. 14, at 12. But citation to In re Anzo is notpersuasive. First, that case comes from a district court in Georgia, and is not binding on this Court. Camreta, 563 U.S. at 709 n.7. Second, the In re Anzo facts occurred in the middle of the "deep recession" of 2008 and 2009. In re Anzo, 562 B.R. at 833. Unlike here, that case also presented multiple red flags that should have prompted further inquiry. Id. at 834. At bottom, that case says nothing...