Bankr. L. Rep. P 71,506
In re George H. PHILLIPS and Helen Phillips, Debtors.
John C. COMAN and Violet L. Coman, Plaintiffs-Appellants,
v.
George H. PHILLIPS and Helen Phillips, Defendants-Appellees.
No. 85-3570.
United States Court of Appeals,
Sixth Circuit.
Argued April 18, 1986.
Decided Nov. 3, 1986.
Stanley Green (argued), Straghan, Green, Miller, Ilender & Hobt, Cleveland, Ohio, for plaintiffs-appellants.
Page C. Schrock, III (argued), Wadsworth, Ohio, Giegel & Schrock, for defendants-appellees.
Before KRUPANSKY and WELLFORD, Circuit Judges, and PECK, Senior Circuit Judge.
PER CURIAM.
Upon the filing of a voluntary petition in bankruptcy by defendants-appellees George and Helen Phillips, plaintiffs-appellants John and Violet Coman instituted this action to have the Phillips' debt to them of $17,500.00 declared nondischargeable under 11 U.S.C. Sec. 523(a)(2). The Comans now appeal from the district court's judgment affirming the bankruptcy court's decision that the debt was dischargeable. For reasons set forth below, we reverse the judgment of the district court.
John Coman had known George Phillips for twenty-five years at the time the debt arose in January 1981. The Comans had also visited the Phillips' farm annually to attend functions organized by a church group to which they both belonged. Phillips asked Coman for a loan for his grinding business located on the farm. Coman told Phillips that he would loan money only if it would be well secured and repaid within one year. Phillips gave Coman a mortgage on his farm which was valued at approximately $2,000 per acre. Coman requested the Phillips' deed so that he could prepare the mortgage instrument. Phillips gave Coman the original deed which described the property as including 117 acres. Phillips did not tell Coman that he had conveyed away all but 47 acres through eight separate transactions. Moreover, the 47 acres were encumbered by a first mortgage of $67,890 held by the Federal Land Bank and a second mortgage of $25,209 held by the Production Credit Association of Medina. Although Coman was a vice-president for special claims at a bank and a nonpracticing attorney, he did not conduct a title search due to his long personal relationship with the Phillips. He also testified that he would not have extended the loan had he known the truth.
At trial both George and Helen Phillips testified that they understood the purpose of the mortgage deed. George Phillips also testified that he was aware that Coman knew that the farm had 117 acres at one time; he never told Coman about the land sales and reduced acreage. Phillips testified that homes had been built on the property sold and that those homes were visible from his property. He also noted that no new roads were built for the houses, and that he never had more than fifty acres under cultivation at any one time. Finally, Phillips admitted that around October 26, 1980, he executed a personal financial statement to a financial institution indicating more accurately that he owned a fifty-acre farm.
The bankruptcy court stated that in order to prevail on their claim, the Comans had to establish that they reasonably relied on the Phillips' false representations. The bankruptcy court found that the Comans' reliance on the deed description alone was unreasonable and that they had been remiss in not investigating the property description further. The issue on appeal is whether the bankruptcy court erred in holding the Comans to this standard of reasonableness, and whether on these facts the reliance was unreasonable.
11 U.S.C. Sec. 523(a)(2)(A)1 provides:
(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt-- ...
(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by--
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition....
It is established that in order to except a debt from discharge under Sec. 523(a)(2)(A) the creditor must prove that the debtor obtained money through a material misrepresentation that at the time the debtor knew was false or made with gross recklessness as to its truth. The creditor must also prove the debtor's intent to deceive. Moreover, the creditor must prove that it reasonably relied on the false representation and that its reliance was the proximate cause of loss. In re Kimzey,
The precise contours and meaning of reasonable reliance under Sec. 523(a)(2)(A) have been less than clear. This is due to the legislative history of Sec. 523(a)(2) which states in relevant part:
[U]nder section 523(a)(2)(A) a creditor must prove that the debt was obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. Subparagraph (A) is intended to codify current case law e.g., Neal v. Clark, 95 U.S. [5 Otto] 704 [
1978 U.S. Code Cong. & Ad. News 5787, 6453.
Because subparagraph (A) and (B) are deemed mutually exclusive and because (A) fails to make reasonable reliance an explicit requirement, unlike (B), some courts have adopted the view that reasonable reliance should not be required under Sec. 523(a)(2)(A). See, e.g., In re Sobel,
We believe that the critical factor in evaluating cases involving the issue of reasonable reliance under Sec. 523(a)(2)(A) is to accord "a construction of the [Bankruptcy Act that] is consonant with equity, and consistent with the object and intention of Congress in enacting a general law by which the honest citizen may be relieved from the burden of hopeless insolvency" (emphasis added). Neal,
In finding that the Comans did not reasonably rely on the false representation of acreage in the deed, both the bankruptcy court and district court relied principally on cases which involved the negligence of commercial lending institutions or title companies in failing to investigate "red flags" which indicated that the debtor's representations were not accurate. See, e.g., In re Kisich,
The bankruptcy court, as affirmed by the district court, having found the element of reasonable reliance lacking, did not consider the other elements necessary for nondischargeability under Sec. 523(a)(2)(A). Because the relevant facts are not seriously disputed and readily satisfy the elements for nondischargeability, we conclude that the interests of judicial economy will be best served by prescribing a course of action similar to that decreed by the Seventh Circuit in Garman, supra, and reverse judgment and remand the case for entry of a judgment in favor of the Comans. In doing so, we note the Phillips' admission that they understood the purpose of a mortgage deed and that they knew the deed description was inaccurate. On these facts, it can be inferred that the Phillips knowingly made a materially false representation. At a minimum this misrepresentation was made with gross recklessness as to its truth and with the knowledge that it would induce the Comans to make the loan; this fulfills the necessary element of intent to deceive. See Martin,
Accordingly, the judgment of the district court is reversed and the case is remanded to the district court with instructions to remand the case to the bankruptcy court for entry of judgment in favor of the Comans on the ground that in the circumstances disclosed by this record the Phillips' debt was not properly dischargeable in bankruptcy.
Notes
Although the Comans did not specify whether they based their complaint on Sec. 523(a)(2)(A) or Sec. 523(a)(2)(B), we agree with the bankruptcy court and district court that Sec. 523(a)(2)(B), which applies only to false written statements regarding the debtor's financial condition, would not apply to a deed