951 F.3d 691
5th Cir.2020Background
- Dr. John Osborne formed State of the Heart PLLC (SOTHC) and sought a $500,000 loan from Veritex; Osborne and his wife Karen personally guaranteed the loan.
- Osborne (and Karen) submitted a personal financial statement in Aug. 2012; two days before closing Osborne (and SOTHC) entered a separate equipment lease with Phillips Medical Capital (PMC) that Osborne guaranteed but did not disclose to Veritex.
- SOTHC defaulted on the PMC lease; a settlement failed and a Pennsylvania judgment for over $2.1 million entered against the Osbornes in Oct. 2013; the Osbornes did not disclose this to Veritex.
- In Sept. 2013 the Osbornes sought renewal of the Veritex loan; Karen provided a one-page (unsigned) 2013 personal financial statement that omitted the PMC guaranty/judgment; Veritex obtained credit reports and conducted follow-up inquiries that did not reveal the judgment.
- Veritex renewed the loan in Mar. 2014; SOTHC later filed bankruptcy and Veritex sued in adversary to except Osborne’s debt from discharge under 11 U.S.C. § 523(a)(2)(B) (fraudulent written financial statement).
- The bankruptcy court found the 2013 statement false and Karen intended to deceive (and imputed her intent to Osborne) but concluded Veritex did not reasonably rely; the district court affirmed; the Fifth Circuit reversed, holding Veritex’s reliance was reasonable and rendering judgment for Veritex (debt nondischargeable).
Issues
| Issue | Plaintiff's Argument (Veritex) | Defendant's Argument (Osborne) | Held |
|---|---|---|---|
| Whether Veritex reasonably relied on the Osbornes’ 2013 personal financial statement in renewing the loan | Bank investigated over months, obtained credit report showing no judgment, followed bank protocol in accepting the statement, and reasonably relied on Osborne’s personal guarantee | Statement was stale, unsigned, not on bank form, and SOTHC’s deteriorating finances and other "red flags" made reliance unreasonable | Reliance was reasonable; bankruptcy court’s contrary finding was clearly erroneous; Fifth Circuit reversed and rendered judgment for Veritex |
| Whether Karen’s fraudulent intent in submitting the 2013 statement could be imputed to Osborne under § 523(a)(2)(B) | Karen acted as Osborne’s agent in preparing and submitting personal financials; her intent should be imputed | Statute requires the debtor to have caused the statement; marriage alone doesn't create agency; intent not imputable | Fraud by an agent/partner may be imputed under § 523(a)(2)(B); record supported actual and apparent agency, so intent imputable to Osborne |
| Whether Osborne had intent to deceive when he submitted the Aug. 2012 statement (initial loan) | Bank argued Osborne had duty to update and may have acted recklessly or with intent | 2012 statement was accurate as of its date; Osborne lacked intent to deceive then | Bankruptcy court’s finding that Osborne lacked deceptive intent in 2012 was not clearly erroneous; appellate court affirmed that finding |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (bankruptcy-code discharge standard and policy favoring fresh start for honest debtors)
- Field v. Mans, 516 U.S. 59 (legislative history and limits on creditor practices in relying on financial statements)
- Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (definition and scope of "statement respecting the debtor’s financial condition")
- Coston v. Bank of Malvern (In re Coston), 991 F.2d 257 (5th Cir. en banc) (reasonable reliance under § 523(a)(2)(B) assessed by totality of circumstances)
- Norris v. First Nat’l Bank in Luling (In re Norris), 70 F.3d 27 (5th Cir. 1995) (one obvious error known to bank not a red flag requiring investigation)
- Young v. Nat’l Union Fire Ins. Co. (In re Young), 995 F.2d 547 (5th Cir. 1993) (industry practice to rely on applicant documentation can support reasonable reliance)
- Luce v. First Equipment Leasing Corp. (In re Luce), 960 F.2d 1277 (5th Cir. 1992) (imputing partner/agent fraud for nondischargeability under § 523(a)(2) principles)
- Strang v. Bradner, 114 U.S. 555 (historic precedent permitting imputation of partner fraud under predecessor to § 523)