616 B.R. 358
Bankr. N.D. Ill.2020Background:
- Timothy Cosman obtained multiple large farm loans from Busey Bank in 2014–2015 after submitting financial statements that materially overstated assets, ownership interests, acreage, and a purported $1.5M receivable.
- Cosman never repaid the loans; a civil judgment was entered for the Bank and, following a guilty plea, Cosman was convicted of bank fraud in October 2019 and ordered to pay restitution of $2,963,841.54.
- Busey filed an adversary complaint in the chapter 7 case seeking nondischargeability of the remaining debt under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6) and moved for summary judgment, invoking collateral estoppel from the criminal conviction.
- Cosman opposed, arguing collateral estoppel did not establish all elements (notably reasonable reliance and damages) and raised disputes of fact.
- The court held collateral estoppel established falsity and intent with respect to the written financial statements but did not establish reasonable reliance; nevertheless, on summary judgment the court found Busey’s reasonable reliance proved as a matter of law for § 523(a)(2)(B).
- Judgment was granted excepting $2,963,841.54 from discharge under § 523(a)(2)(B); summary judgment denied on § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6); remaining counts set for trial.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of collateral estoppel from criminal conviction | Cosman’s guilty plea/conviction conclusively establishes falsity, intent, and other elements for nondischargeability claims | Collateral estoppel does not cover all civil elements (e.g., reasonable reliance, damages); plea didn’t admonish effect on bankruptcy | Collateral estoppel applies to falsity and intent for the written statements but not to reasonable reliance or damages because those were not essential to the criminal conviction |
| § 523(a)(2)(B) — materially false written statement, intent, and reasonable reliance | Written financial statements were materially false and made with intent to deceive; bank reasonably relied; therefore debt is nondischargeable | Reliance was unreasonable or inadequately proved; bank should have verified statements; reliance not established by plea | Summary judgment granted: collateral estoppel established falsity and intent; court found Busey’s actual and reasonable reliance established as a matter of law, so debt excepted from discharge under § 523(a)(2)(B) |
| § 523(a)(2)(A) — fraud by false pretenses/representations (other than statements respecting financial condition) | Farm lists and other representations induced loans and are actionable under § 523(a)(2)(A) | Representations primarily concerned financial condition, so § 523(a)(2)(A) inapplicable | Denied: Bank failed to identify misrepresentations outside statements respecting financial condition; § 523(a)(2)(A) summary judgment denied |
| § 523(a)(4) & § 523(a)(6) — larceny, embezzlement, willful and malicious injury | Conviction for bank fraud establishes larceny/defalcation and willful malicious injury, making debt nondischargeable | Criminal conviction didn’t adjudicate intent to permanently deprive or conversion; different elements; factual disputes remain | Denied: collateral estoppel insufficient to establish larceny or willful/malicious injury; claims left for trial (and § 523(a)(6) deemed surplus if § 523(a)(2)(B) applies) |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (1991) (collateral estoppel may apply in bankruptcy nondischargeability proceedings)
- Lamar Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018) (defining statements "respecting" financial condition)
- In re Cohen, 507 F.3d 610 (7th Cir. 2007) (elements required for a § 523(a)(2)(B) claim)
- Klingman v. Levinson, 831 F.2d 1292 (7th Cir. 1987) (four requirements for collateral estoppel)
- In re Morris, 223 F.3d 548 (7th Cir. 2000) (reasonable-reliance standard under § 523(a)(2)(B))
- Mayer v. Spanel Int’l Ltd., 51 F.3d 670 (7th Cir. 1995) (victim of fraud need not conduct exhaustive investigation to establish reliance)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (summary judgment standard)