Veritex Cmty. Bank v. Osborne (In re Osborne)

951 F.3d 691

In the MATTER OF: John A. OSBORNE, Debtor

Veritex Community Bank, Appellant

v.John A. Osborne, Appellee

No. 19-10479

United States Court of Appeals, Fifth Circuit.

FILED March 10, 2020

Carey Renee McNair, Attorney, Bruce W. Akerly, Akerly Law, P.L.L.C., Coppell, TX, for Appellant.

Sarah Cox, Attorney, Howard Marc Spector, Spector & Cox, P.L.L.C., Dallas, TX, for Appellee.

Before DAVIS, SMITH, and STEWART, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Under the Bankruptcy Code, certain debts may be excepted from discharge. This case centers on 11 U.S.C. § 523(a)(2)(B), the exception for money obtained by means of a fraudulent written statement concerning the debtor’s financial condition. Appellant Veritex Community Bank ("Veritex") filed an adversary proceeding requesting that Appellee Dr. John Osborne’s ("Osborne") debt not be discharged because he furnished the bank a materially false written financial statement. The bankruptcy court found that the statement was indeed false and submitted with the intent to deceive. But the court nevertheless discharged Osborne’s debt, finding that Veritex did not reasonably rely on Osborne’s statement. The district court affirmed, and Veritex now appeals. For reasons set forth below, the bankruptcy court’s finding that Veritex did not reasonably rely on Osborne’s statement is clearly erroneous. We therefore REVERSE the district court’s judgment granting a discharge to Osborne and RENDER judgment in favor of Veritex.

I. BACKGROUND

In June 2012, Osborne, a cardiologist, formed State of the Heart PLLC ("SOTHC"). In need of funding, SOTHC, through Osborne, requested a loan of $500,000 from Veritex, a regional bank in Texas.¹ Osborne and Veritex had no prior relationship. Veritex required Osborne to personally guarantee the loan. As part of the loan application, Osborne and his wife Karen provided David Wood, a commercial loan officer at Veritex, a personal financial statement on August 3, 2012.² The statement required Osborne to notify the bank of any material unfavorable change in his financial condition. Osborne also informed Wood that SOTHC would be leasing a CT scanner. Based on the information Osborne furnished, Veritex loaned SOTHC $500,000 on September 12, 2012, and the Osbornes personally guaranteed it.

On September 10, 2012, two days before the loan closed, Osborne and SOTHC entered into a lease with Phillips Medical Capital, LLC ("PMC").³ Under that agreement, PMC leased $1,000,000 of medical equipment to SOTHC. The Osbornes signed a personal guarantee backing SOTHC’s agreement, but they did not update the financial statement they provided to Veritex to indicate their personal guarantee under the PMC lease.

On July 15, 2013, SOTHC defaulted on its lease with PMC. PMC, SOTHC, and the Osbornes entered into a settlement agreement on July 31, 2013. SOTHC and Osborne failed to make the payments per that agreement, however, and a Pennsylvania court entered a judgment by confession in favor of PMC on October 16, 2013. The judgment determined the Osbornes were liable to PMC for $2,139,988.31, plus an interest rate of eighteen percent.

The Osbornes never informed Veritex of these developments. Instead, in September 2013, Osborne requested that Veritex extend SOTHC’s loan after failing to pay it off when it matured. Veritex agreed to an initial sixty-day extension of the loan upon its expiration on September 12, 2013, so that it could obtain and assess the Osbornes’ and SOTHC’s updated financial information. It requested another personal financial statement from Osborne before deciding to extend the loan. On September 27, 2013, Karen Osborne provided another net worth statement to Veritex in the form of a one-page Excel spreadsheet that listed the Osbornes’ assets and liabilities, with a net worth of $1,533,826. Osborne also provided a more comprehensive set of financial records on SOTHC. The Osbornes’ personal financial statement made no mention of their guarantee of the PMC loan or their subsequent default. When the Pennsylvania court entered judgment against the Osbornes, they did not update their statement to reveal the judgment.

There is no doubt that John Osborne was aware of the submission of the 2013 financial statement, as he discussed the loan with Wood in December. On December 23, 2013, Wood met with the Osbornes and Karen’s father to review the status of the loan and SOTHC’s business operations. At no point in the meeting did Osborne reveal his default on the PMC lease or the judgment rendered against him. While the Osbornes would later provide updated financial statements for SOTHC, they never updated their personal financial statement to reflect the judgment.

This December meeting was illustrative of Veritex’s efforts to conduct its own investigation as it deliberated whether or not to renew the loan. For example, it obtained a credit report on the Osbornes dated October 24, 2013, from a national credit reporting agency. The 712 credit score showed that Osborne’s credit had improved by two points since his previous credit score report in August 2012, and it revealed nothing of the judgment against him. Wood also emailed Karen and her father after meeting in person to confirm the Osbornes’ personal liquidity during the renewal process and to inquire further about their financial statement.

After reviewing both the Osbornes’ and SOTHC’s financial information, Veritex agreed to a second, renewed loan to SOTHC on March 12, 2014, for one year. A month later, on April 21, 2014, SOTHC filed for Chapter 11 bankruptcy. The Osbornes filed for Chapter 7 bankruptcy soon thereafter. Veritex then commenced an adversary proceeding against Osborne, asking that Osborne not be discharged from the debt to Veritex under 11 U.S.C. § 523(a)(2)(B), which prevents a debtor from discharging a debt obtained through a materially false written statement. In its adversary complaint, Veritex argued that before the loan renewal, the Osbornes made no mention of their guarantee of the PMC lease, nor did they ever reveal the default on that lease or the subsequent judgment rendered against them.

The bankruptcy court reviewed Veritex’s initial loan documents and ensuing extension. It found that Osborne did not intend to deceive Veritex when he first applied for a loan without revealing he personally guaranteed a lease for medical equipment, and also that in any event, Veritex did not reasonably rely on Osborne’s statement. As to the renewed loan, the court found that the statement Karen submitted was false and that she intended to deceive Veritex. The court then held that Karen’s intent to deceive could be imputed to Osborne because she acted as his agent. Nevertheless, the court held that Veritex’s reliance was not reasonable, and therefore Osborne was entitled to discharge his debt. The district court affirmed, finding the bankruptcy court’s account of the evidence plausible.⁴ Veritex timely appealed.

II. DISCUSSION

A. Reasonable Reliance

Under 11 U.S.C. § 523(a)(2)(B), a debt is exempted from discharge if it was obtained by (1) a written statement; (2) that is materially false; (3) respecting the debtor’s or an insider’s financial condition; (4) on which the creditor to whom the debtor is liable for such credit reasonably relied; and (5) that the debtor caused to be made or published with the intent to deceive. On appeal, Veritex argues that, contrary to the bankruptcy court’s and district court’s findings, its reliance on Osborne’s materially false written statements was reasonable, and that Osborne’s debt should therefore be exempt from discharge.

The district court’s and bankruptcy court’s conclusions of law are reviewed de novo; the bankruptcy court’s findings of facts are reviewed for clear error.⁵ This court has held that determining the reasonableness of a creditor’s reliance under § 523(a)(2)(B) is a question of fact that the creditor must prove by a preponderance of the evidence.⁶ "When reviewing a bankruptcy court’s factual findings which have been affirmed by the district court, we will reverse ‘only if, considering all the evidence, we are left with the definite and firm conviction that a mistake has been made.’ "⁷ We will not reverse the bankruptcy court if its "account of the evidence is plausible in light of the record viewed in its entirety."⁸

The Supreme Court has repeatedly emphasized that the Bankruptcy Code "limits the opportunity for a completely unencumbered new beginning to the ‘honest but unfortunate debtor.’ "⁹ Consistent with this understanding, Congress intended the "reasonable reliance" requirement of § 523(a)(2)(B) to target creditors acting in bad faith to prevent debtors from discharging debts.¹⁰ Looking to legislative history, the Supreme Court noted that Congress was wary of the "potential of financial statements to be misused not just by debtors, but by creditors who know their bankruptcy law."¹¹ The Court observed that "consumer finance companies frequently collected information from loan applicants in ways designed to permit the companies to later use those statements as the basis for an exception to discharge," such as having debtors list their debts on forms with too little space.¹² Congress, then, wanted to "moderate the burden" on dishonest debtors because "the relative equities might be affected by practices of consumer finance companies, which sometimes have encouraged such falsity by their borrowers for the very purpose of insulating their own claims from discharge."¹³

In In re Coston , we recognized reasonable reliance is determined by the "totality of the circumstances."¹⁴ We set forth three factors, among other things, a bankruptcy court may consider in assessing the reasonableness of a creditor’s reliance under § 523(a)(2)(B).¹⁵ First, the court can look to whether "there had been previous business dealings with the debtor that gave rise to a relationship of trust."¹⁶ Second, the court can consider "any ‘red flags’ that would have alerted an...