In the Matter of: STEPHEN JOHN BANDI; CHARLES EDWARD BANDI, Debtors. STEPHEN JOHN BANDI, Appellant, v. CHRISTOPHER BECNEL, Appellee. CHARLES EDWARD BANDI, Appellant, v. CHRISTOPHER BECNEL, Appellee.
No. 11-30654
United States Court of Appeals for the Fifth Circuit
June 12, 2012
Before REAVLEY, PRADO, and OWEN, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge:
The principal question in this appeal is the proper construction of the phrase “respecting the debtor‘s . . . financial condition” as it appears in
Christopher Becnel is the holder of a $150,000 promissory note executed by Charles Bandi on behalf of RSB Companies, LLC (RSB) and personally guaranteed by Charles Bandi and his brother, Stephen Bandi. When RSB defaulted, Becnel obtained separate judgments in state court against each of the Bandis based on their respective personal guarantees.
Stephen Bandi subsequently filed a voluntary Chapter 7 petition in the United States Bankruptcy Court for the Eastern District of Louisiana. Charles Bandi filed a voluntary Chapter 7 petition in the same court two months later. Becnel commenced adversary proceedings against each debtor, alleging that the debts owed to him were non-dischargeable pursuant to
The bankruptcy court consolidated the adversary proceedings for trial. Becnel alleged that both Charles and Stephen Bandi falsely represented that they owned a commercial building on North Causeway Boulevard in Metairie, Louisiana. He further alleged that Stephen Bandi falsely represented that he owned Algiers Riverpoint Condominiums in Algiers, Louisiana, and that he owned a residence on Camp Street in New Orleans, Louisiana. Becnel also alleged that both Charles and Stephen Bandi presented him with a list of RSB‘s accounts receivable and that this list was fraudulent. Becnel asserted that the Bandis never intended to repay the loan and that Becnel would not have made the loan if he had known the accounts receivable list was falsified or that the Bandis had misrepresented their property ownership.
After a bench trial at which the Bandis cross-examined witnesses but presented no evidence, the bankruptcy court ruled in favor of Becnel, concluding that the debts were non-dischargeable. The court found that the loan of money was acquired by false pretenses, false representations, or actual fraud regarding property ownership. The bankruptcy court accordingly entered judgment against Stephen and Charles Bandi. Stephen Bandi filed a motion to alter or amend the judgment, requesting additional findings of fact, and for a new trial, specifically raising the issue of the proper interpretation of
The Bandis appealed to the United States District Court for the Eastern District of Louisiana. The district court affirmed. The Bandis have appealed to this court.
II
We apply the same standard of review to the bankruptcy court‘s decision as the district court applied.4 The meaning of
In a Chapter 7 bankruptcy proceeding, many of a debtor‘s debts are discharged.6 However, there are a number of exceptions.7 At issue here are the exceptions to discharge set forth in
Some debts for value obtained by means of a fraudulent statement are dischargeable under
The Bandis contend that all of their alleged fraudulent statements and false representations were “statement[s] respecting [their] financial condition” within the meaning of
We begin our analysis with the words chosen by Congress. The word “statement” modified by the phrase “respecting the debtor‘s or an insider‘s financial condition” appears in both
[t]he House Report on the Act suggests that Congress wanted to moderate the burden on individuals who submitted false financial statements, not because lies about financial condition are less blameworthy than others, but 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.18
We conclude that the phrase “a statement respecting the debtor‘s or an insider‘s financial condition” as used in
We find support for construing “financial condition” in
The Tenth Circuit similarly looked to the definition of “insolvent” in
We recognize, as did the Tenth Circuit, that there is a split among various courts as to the correct interpretation of
The Eighth Circuit has construed
The Bandis cite our court‘s en banc decision in AT&T Universal Card Services v. Mercer (In re Mercer), 246 F.3d 391 (5th Cir. 2001) (en banc).37 They correctly acknowledge that this decision does not resolve the issues presented by their appeal. The primary questions before our court in Mercer were “whether credit card use (card use) constitutes a representation of intent to pay the loan thereby obtained (intent to pay); and, if so, whether the issuer may justifiably rely on it.”38 We set forth the elements
The bankruptcy court found implicitly if not explicitly that the misrepresentations made by the Bandis regarding ownership of a commercial building, a condominium development, and a residence were intended to convey the impression that the two brothers owned valuable real property and that their personal guarantees of a loan to RSB would be backed by some measure of wealth. These statements fell far short, however, of representing the Bandis’ respective net worths or representing their respective “bank balance[s].”45 The Bandis did not make any representations regarding their overall financial condition and consequent ability to pay. Ownership of specific assets does not mean that the assets are unencumbered or that other debts or liabilities of the owner do not exceed the value of the assets.
The Bandis’ false statements and misrepresentations were not “statement[s] respecting [their] financial condition within the meaning of
IV
The Bandis contend that the bankruptcy court erred in finding that their alleged representations were false and in finding justifiable reliance by Becnel. We review findings of fact for clear error,46 and there was no clear error based on the record before us.
Becnel and Stephen Bandi had a close personal relationship. When they were initially introduced, and thereafter as their friendship strengthened, Stephen Bandi told Becnel that there were re-building and development opportunities in the New Orleans area following Hurricane Katrina. Becnel
The evidence regarding representations by Charles Bandi is not as extensive as that regarding his brother, but we cannot say that the bankruptcy court clearly erred in finding that Charles Bandi made false representations on which Becnel relied. On the day that the promissory note was executed, Becnel and his wife, who was also Becnel‘s attorney in this transaction, met Stephen and Charles Bandi at a commercial building that Charles Bandi said he and his brother had just purchased. At the signing of the note, Becnel gave the Bandis two checks to fund the loan, one of which was post-dated three days after the date of this meeting and the other of which was post-dated six days after the meeting. At that meeting, Charles Bandi gave the Becnels a “tour” of the commercial building, representing that he and his brother owned it and had just moved their offices into it. As of the date of these representations by Charles Bandi, Becnel had not funded the loan because the checks he delivered were not
The evidence is weakest with respect to whether the Bandis had intent to deceive. During closing argument, Stephen Bandi argued that he never intended for Becnel to rely on the status of his properties and that he never intended to deceive Becnel or his wife. As the bankruptcy court noted, however, the Bandis did not present any evidence to counter Becnel‘s proof, and the bankruptcy court noted that the result might have been different if the Bandis had testified or offered any other evidence. However, they did not, and the bankruptcy court did not clearly err.
V
The Bandis argue that the bankruptcy court changed its construction of “a statement respecting the debtor‘s . . . financial condition” over the course of the adversary proceedings. The Bandis contend that they were under the impression throughout trial that the bankruptcy court had adopted an interpretation of
Although the bankruptcy court‘s statements at hearings on pretrial motions are at times confusing, it is clear that the bankruptcy court never definitively ruled before trial on the proper interpretation of “a statement respecting the debtor‘s . . . financial condition.” It appears as if Stephen Bandi, who is not an attorney, was making inartful attempts to raise the issue both
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For the foregoing reasons, the judgment of the district court affirming the judgment of the bankruptcy court is AFFIRMED.
Notes
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — . . .
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor‘s or an insider‘s financial condition;
(B) use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor‘s or an 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; . . . .
(32) The term “insolvent” means-
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity‘s debts is greater than all of such entity‘s property, at a fair valuation, exclusive of-
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity‘s creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title;
(B) with reference to a partnership, financial condition such that the sum of such partnership‘s debts is greater than the aggregate of, at a fair valuation—
(i) all of such partnership‘s property, exclusive of property of the kind specified in subparagraph (A)(i) of this paragraph; and
(ii) the sum of the excess of the value of each general partner‘s nonpartnership property, exclusive of property of the kind specified in subparagraph (A) of this paragraph, over such partner‘s nonpartnership debts; and
(C) with reference to a municipality, financial condition such that the municipality is-
(i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or
(ii) unable to pay its debts as they become due.
We hold that such false statements are those that purport to present a picture of the debtor‘s overall financial health. Statements that present a picture of a debtor‘s overall financial health include those analogous to balance sheets, income statements, statements of changes in overall financial position, or income and debt statements that present the debtor or insider‘s net worth, overall financial health, or equation of assets and liabilities. However, such statements need not carry the formality of a balance sheet, income statement, statement of changes in financial position, or income and debt statement. What is important is not the formality of the statement, but the information contained within it-information as to the debtor‘s or insider‘s overall net worth or overall income flow.