UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 08-1646
In re: PETER A. SHARP; JOYCELYN F. SHARP,
Debtors,
------------------------------
COLOMBO BANK,
Plaintiff – Appellant,
v.
PETER A. SHARP; JOYCELYN F. SHARP,
Defendants – Appellees,
and
ROGER SCHLOSSBERG,
Trustee.
Appeal from the United States District Court for the District of
Maryland, at Greenbelt. Deborah K. Chasanow, District Judge.
(8:07-cv-02935-DKC)
Argued: May 12, 2009 Decided: August 14, 2009
Before WILKINSON and KING, Circuit Judges, and HAMILTON, Senior
Circuit Judge.
Affirmed by unpublished per curiam opinion. Senior Judge
Hamilton wrote a concurring opinion.
ARGUED: Stephen Warren Nichols, DECKELBAUM, OGENS & RAFTERY,
CHARTERED, Bethesda, Maryland, for Appellant. Matthew Gernet
Summers, BALLARD, SPAHR, ANDREWS & INGERSOLL, LLP, Baltimore,
Maryland, for Appellees. ON BRIEF: Nelson Deckelbaum,
DECKELBAUM, OGENS & RAFTERY, CHARTERED, Bethesda, Maryland, for
Appellant. Joseph J. Bellinger, BALLARD, SPAHR, ANDREWS &
INGERSOLL, LLP, Baltimore, Maryland, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
By way of adversary proceedings in bankruptcy court,
appellant Colombo Bank (the “Bank”) sought rulings that the debt
obligations of Peter and Joycelyn Sharp on a $500,000 loan were
not subject to discharge. In support thereof, the Bank relied
on two statutory “[e]xceptions to discharge” provided for in
subsections (2)(A) and (2)(B) of 11 U.S.C. § 523(a). After
conducting a trial in 2004, the bankruptcy court ruled against
the Bank, concluding that neither of the asserted exceptions
were applicable, and that the Sharps’ debt obligations were thus
dischargeable. 1 The Bank first appealed to the district court,
which affirmed the rulings of the bankruptcy court. The Bank
has now appealed to this Court and, as explained below, we also
affirm.
I.
A.
On August 20, 2002, and October 28, 2002, respectively,
Joycelyn and Peter Sharp filed separate Chapter 7 bankruptcy
petitions in Maryland. As part of the bankruptcy proceedings,
the Sharps sought discharge of their debt obligations arising
1
Although Joycelyn Sharp was a party in the bankruptcy
court proceedings and secured a favorable judgment, the Bank did
not appeal with respect to her.
3
from a $500,000 loan that the Bank made to them in 1995 (the
“Loan”). The Bank challenged any such discharge, maintaining
that the obligations were nondischargeable in bankruptcy because
the Sharps had made false and fraudulent representations to
obtain the Loan. On November 4, 2002, and March 13, 2003, the
Bank initiated separate adversary proceedings against the
Sharps. As to Peter Sharp, the Bank asserted that his debt
obligation on the Loan was nondischargeable under both
subsection (2)(A) and subsection (2)(B) of 11 U.S.C. § 523(a).
The Bank made the same assertion of nondischargeability as to
Joycelyn Sharp, but relied on subsection (2)(B) only.
B.
Under the Bankruptcy Code, a debtor is entitled to the
discharge of his debt obligations at the conclusion of Chapter 7
bankruptcy proceedings, absent the applicability of a statutory
exception. See 11 U.S.C. § 523(a) (identifying nineteen
statutory exceptions to discharge). In these proceedings, the
Bank contends that Peter Sharp falsely and fraudulently
submitted two documents to the Bank when he applied for the Loan
— a financial disclosure statement, and a title insurance
commitment with an attached title abstract — both of which
concealed a home equity line of credit referred to here as the
“Signet Loan.” The Bank maintains that each of those
4
submissions implicates an exception to discharge specified in
subsections (2)(A) and (2)(B) of § 523(a). 2
Notably, subsection (2)(A) disallows the discharge of a
debt obligation that was obtained by, inter alia, “actual
fraud.” 11 U.S.C. § 523(a)(2)(A). In these proceedings, the
Bank alleged and sought to prove that Sharp had engaged in
actual fraud in securing the Loan. As we recently explained in
Nunnery v. Rountree (In re Rountree), a creditor’s proof of
actual fraud under subsection (2)(A) requires satisfaction of
the elements of common law fraud: “(1) false representation,
(2) knowledge that the representation was false, (3) intent to
deceive, (4) justifiable reliance on the representation, and (5)
proximate cause of damages.” 478 F.3d 215, 218 (4th Cir. 2007);
see also Field v. Mans, 516 U.S. 59, 69 (1995) (explaining that
2
Subsection (2)(A) of § 523(a) provides that Chapter 7
bankruptcy does not discharge a debtor from any debt obligation
obtained by
false pretenses, a false representation, or actual
fraud, other than a statement respecting the debtor’s
. . . financial condition.
By contrast, subsection (2)(B) of § 523(a) provides that Chapter
7 bankruptcy does not discharge a debtor from any debt
obligation obtained by
use of a statement in writing . . . (i) that is
materially false; (ii) respecting the debtor’s . . .
financial condition; (iii) on which the creditor . . .
reasonably relied; and (iv) that the debtor caused to
be made or published with intent to deceive.
5
“operative terms” of subsection (2)(A) are “common-law terms”).
Significantly, subsection (2)(A) does not apply if the disputed
statement is “respecting the debtor’s . . . financial
condition.” § 523(a)(2)(A); see also Blackwell v. Dabney (In re
Blackwell), 702 F.2d 490, 491 (4th Cir. 1983) (discussing scope
of phrase “respecting the debtor’s . . . financial condition”).
Subsection (2)(B), on the other hand, was designed to bar the
bankruptcy discharge of a debt obligation that was induced by a
false written statement of the debtor’s financial condition.
See Field, 516 U.S. at 66. In order to satisfy subsection
(2)(B), a creditor must prove five elements: (1) “use of a
statement in writing,” (2) “that [was] materially false,” (3)
“respecting the debtor’s . . . financial condition,” (4) “on
which the creditor . . . reasonably relied,” and (5) “that the
debtor caused to be made or published with intent to deceive.”
§ 523(a)(2)(B).
These two subsections of § 523(a) were enacted to address
distinct factual situations, and, of importance here, they
differ with respect to the element of reliance — that is, the
extent to which the creditor altered its position because of the
debtor’s misrepresentations. Whereas subsection (2)(A) requires
the creditor to prove “justifiable reliance,” subsection (2)(B)
mandates the more demanding showing of “reasonable reliance.”
See Field, 516 U.S. at 61, 66.
6
C.
Although the Bank initiated separate adversary proceedings
against the Sharps, the bankruptcy court conducted a
consolidated trial on October 4, 2004, at which it received
evidence and heard the argument of counsel. After trial, the
bankruptcy court filed two separate decisions, ruling that the
Bank had failed to satisfy subsections (2)(A) and (2)(B).
First, on April 1, 2005, the court filed a decision rejecting
the Bank’s subsection (2)(B) contention. See Colombo Bank,
F.S.B. v. Sharp (In re Sharp), No. 03-01098 (Bankr. D. Md. Apr.
1, 2005) (“Sharp I”). 3 Thereafter, on September 28, 2007, the
court also rejected the Bank’s subsection (2)(A) contention.
See Colombo Bank, F.S.B. v. Sharp (In re Sharp), No. 03-01098
(Bankr. D. Md. Sept. 28, 2007) (“Sharp II”). 4
1.
In its Sharp I decision, the bankruptcy court made
extensive findings of fact predicated on the trial evidence.
The relevant findings are as follows:
1. On September 25, 1995, the Bank made [the
Loan] to the Sharps in the amount of $500,000 . . . .
As security, the Bank received a mortgage which it
3
Sharp I is found at J.A. 65-73. (Citations herein to
“J.A. ___” refer to the contents of the Joint Appendix filed by
the parties in this appeal.)
4
Sharp II is found at J.A. 163-74.
7
believed was a second priority lien on the Sharps’
residence in Bethesda, Maryland (the “Maryland
Property”) and a second priority lien on a vacation
property located on Kiawah Island, South Carolina (the
“South Carolina Property”).
2. The Bank understood and believed that its lien
on the Maryland Property was second only to a first
priority mortgage in favor of Chase Bank of Maryland
(“Chase”) in the principal amount of $750,000.
Moreover, it is undisputed that the Bank understood
its lien on the South Carolina Property was second to
a first priority mortgage in favor of Prudential Home
Mortgage Company, Inc. (“Prudential”) in the principal
amount of $347,000.
3. Contrary to the Bank’s expectation and belief,
its mortgage on the Maryland Property was in fact in
third position, behind a prior-recorded second
mortgage to secure a home equity line of credit in the
maximum principal amount of $75,000 (the “Signet
Loan”). The Signet mortgage was senior in priority to
the Bank’s mortgage because the former was recorded on
March 6, 1995.
4. In connection with the loan negotiations,
[Peter Sharp submitted a financial disclosure
statement to the Bank] consisting of two pages on a
Bank of Maryland form, purporting to describe Mr.
Sharp’s assets and liabilities as of December 12,
1994. The principal assets listed were ownership of
First Charter Title Corporation (“First Charter”)
(valued at $3 million), the Maryland Property (valued
at $1.3 million) and the South Carolina Property
(valued at $525,000). The principal liabilities
disclosed were the first mortgages on each of the
Maryland and South Carolina properties (in the
principal amounts of $748,000 and $367,000,
respectively). The Signet Loan, which had not yet
been made in December 1994, was not disclosed.
. . . .
6. It is undisputed that the disclosure did not
mention the Signet Loan which, as mentioned, had not
yet been made. The question is whether presentation
of a December 1994 disclosure in March or April 1995,
8
after the Signet Loan had been made, was a fraudulent
misrepresentation. Mr. Sharp testified (i) he
believed the Signet mortgage had not been recorded
because the line of credit had not yet been drawn and
(ii) he verbally disclosed the Signet line of credit
and his understanding that it was not yet recorded to
[Bank Chairman] Fernebok. In his deposition, Mr.
Fernebok denies that Mr. Sharp made any such
disclosure. Unfortunately, no evidence was submitted
by either side with respect to Signet’s loan practices
at the time, which probably would have resolved the
issue. The Court is required, then, to rely on its
assessment of Mr. Sharp’s testimony. After careful
consideration, the Court finds that [the] testimony
was not credible.
7. Also undisputed is that, in connection with
the Loan closing, Mr. Sharp’s company, First Charter,
supplied to the Bank a title insurance commitment
dated September 11, 1995, to which was attached a
title abstract with respect to the Maryland Property.
Further, it is undisputed that this title abstract did
not reflect the Signet mortgage, which had been
recorded in March 1995. Mr. Sharp explained that this
happened because the title abstract had been prepared
in January [1995], at which time the Signet mortgage
had not yet been recorded. The Court cannot and does
not believe that a professional title insurance agent
— and this was, after all, Mr. Sharp’s main business
at the time — would issue a title insurance commitment
in September based on title work performed in January
unless, as the Bank contends, it was a deliberate act
of nondisclosure. This is clinching proof that Mr.
Sharp misled the Bank and that he deliberately
furnished a stale financial disclosure and a stale
title abstract which he knew did not reflect the
Signet Loan and mortgage.
8. [Two days] after the closing, [the Sharps
executed] an affidavit certifying to the Bank that the
December 1994 financial disclosure was a full and fair
description of the Sharps’ financial condition as of
the closing. . . . Plainly the affidavit was
misleading, but the Court finds that . . . the Bank
obviously did not rely on the affidavit to its
detriment, as the Loan had already been funded.
9
9. Moreover, the Bank failed to establish that
Mr. Sharp’s pre-funding nondisclosure of the Signet
Loan was material. Rather, as evidenced by the [Bank
Chairman’s] credit memorandum, 5 it appears [the
Chairman] was “hot” to make th[e] [L]oan because he
hoped to develop a banking relationship with Mr. Sharp
whereby First Charter would channel escrow closing
funds through the Bank. Moreover, the primary credit
underwriting criterion for approving the [L]oan, as
reflected in [the Bank Chairman’s] deposition, was Mr.
Sharp’s valuation of First Charter at $3 million. It
does not appear of record that [the Bank Chairman]
made any effort to verify that valuation, which in
hindsight proved to be greatly overstated. The second
credit underwriting criterion was Mr. Sharp’s
expectation of $370,000 in commissions for brokering
two loan transactions, which were the principal
anticipated source of repayment of the Loan (hence its
having only a one year term). It does not appear of
record that [the Bank Chairman] made any effort to
“due diligence” those commissions, which apparently
failed to materialize. The security furnished by the
mortgages was thus only the third credit underwriting
criterion and the Bank’s analysis was that there was a
combined $800,000 equity cushion in the Maryland and
South Carolina Properties. In other words, the Bank’s
loss was caused by the parties’ shared mistaken
evaluations of Mr. Sharp’s ability to repay the [L]oan
from income and/or the value of his business and the
value of the properties pledged as collateral. In
this context, the Bank has not demonstrated that an
undisclosed $75,000 second mortgage, sandwiched
between a $750,000 first and a $500,000 third, was
material.
5
Before consummating the Loan, the Bank’s Chairman, Joel
Fernebok, generated an undated internal credit memorandum
recommending that the Loan be made “based on Mr. Sharp’s ability
to generate funds thru [First Charter] and the equity in his
homes.” J.A. 396. The Fernebok credit memorandum explained
that First Charter expected to close on two major transactions
in the first quarter of 1996, and thereby garner $370,000 in
commissions. The memorandum also reflected that Sharp had a net
worth of $3,987,700, primarily from his ownership of First
Charter. It indicated that the Bank is “also benefiting from
the operating and escrow accounts of [First Charter].” Id.
10
10. Finally, the Court cannot find that the Bank
reasonably relied on Mr. Sharp’s misrepresentation.
The uncontroverted testimony was that the Bank made no
independent investigation of the Sharps’ title. The
primary purpose of a title report is to verify the
borrower’s representations as to the state of title.
In the Court’s view, a lender relies on a title report
supplied by the borrower at its peril.
Sharp I 4-8 (citations and footnotes omitted). After announcing
its findings of fact in Sharp I, the bankruptcy court ruled that
the Bank had failed to satisfy the requirements of subsection
(2)(B). More specifically, the court found that the Bank had
failed to prove two essential elements of subsection (2)(B) —
materiality and reasonable reliance. 6
2.
On April 11, 2005, ten days after the Sharp I decision was
rendered, the Bank sought reconsideration thereof, requesting
the bankruptcy court to also assess the Bank’s subsection (2)(A)
contention. On September 12, 2005, the bankruptcy court granted
6
In its Sharp I decision, the bankruptcy court determined,
with respect to materiality and reasonable reliance, that
[(1)] the Bank has not demonstrated that, in the
context of the overall loan transaction, Mr. Sharp’s
misrepresentations were material to its decision to
make the Loan; and [(2)] any such reliance was not
reasonable, as the Bank failed to obtain a title
report from a disinterested third party.
Sharp I 9.
11
the Bank’s reconsideration request and, on September 28, 2007,
issued its Sharp II decision. 7
In Sharp II, the bankruptcy court disposed of the
subsection (2)(A) issue and adhered to the Sharp I findings of
fact. Relying on these findings, the court made additional
findings that “the Bank has conclusively established three of
the five elements” of subsection (2)(A) — that Sharp (1) made
false representations to the Bank; (2) knew such representations
to be false; and (3) made the misrepresentations intending to
deceive the Bank. Sharp II 7. Nevertheless, the court found
that the Bank had failed to prove the other two essential
elements of subsection (2)(A) — justifiable reliance and
proximate cause. See id. at 8.
On the issue of justifiable reliance, the bankruptcy court
explained that the Bank’s reliance on Sharp’s misrepresentations
was not justified “[g]iven the lack of history between these
parties, the irregularity of these documents and the
sophistication of the plaintiff.” Sharp II 10. The court then
7
Although the Bank had not pursued its subsection (2)(A)
contention at trial, the bankruptcy court decided to address
this issue because it was raised in the Bank’s adversary
complaint. In its reconsideration request, the Bank did not
seek reconsideration of any of the factual findings made in
Sharp I, and the Bank conceded that its subsection (2)(A)
contention could be resolved on the existing record.
12
identified “several factors” that should have placed the Bank on
notice that Sharp’s representations were suspect:
• “[T]he Debtor produced a stale title report
prepared by a company under his control”;
• “The Bank . . . was ‘hot’ to do this deal with
the Debtor in the hopes of garnering future
business”; and
• “The Bank had no history with the Debtor and no
past relationship of trust and confidence upon
which it could rely.”
Id. “Instead of being prudent,” the court explained, “the Bank
appears to have been more focused on possible future returns and
seemingly ignored the fact that, by the time the Loan closed,
the financial disclosure was nine months old and the title
report was eight months old.” Id. As a result, the bankruptcy
court ruled in Sharp II that the Bank had not proven the
essential element of justifiable reliance. 8
D.
On October 5, 2007, the Bank appealed both Sharp I and
Sharp II — with respect to Peter Sharp only — to the district
8
The bankruptcy court also concluded in Sharp II that
Sharp’s misrepresentations with respect to the Signet Loan were
not a proximate cause of the Bank’s loss. Rather, the Bank’s
“primary credit underwriting criterion was the value of Mr.
Sharp’s business, followed by the value of the commissions he
was expecting.” Sharp II 11. Thus, the court explained, “the
omission of a single $75,000 mortgage when compared to a
business that was valued at $3,000,000 and expected commissions
in the amount of $370,000” was simply “not determinative.” Id.
13
court. Seven months later, on May 5, 2008, the district court
affirmed the bankruptcy court’s rulings. See Colombo Bank,
F.S.B. v. Sharp, No. 8:07-cv-02935 (D. Md. May 5, 2008) (the
“District Court Opinion”). 9
In rejecting the Bank’s subsection (2)(B) contention, the
district court concluded that the bankruptcy court had not erred
in ruling in Sharp’s favor on the reasonable reliance issue.
The district court explained, inter alia, that the Bank’s
reliance on the financial disclosure statement “was not
reasonable,” in that Sharp had submitted “irregular[]” documents
to the Bank, and the Bank had “failed to conduct a very basic
investigation into the status of the title.” District Court
Opinion 20. 10
In rejecting the Bank’s subsection (2)(A) contention, the
district court ruled that the bankruptcy court did not err in
finding that the Bank had not justifiably relied on Sharp’s
misrepresentations in the title insurance commitment and
9
The District Court Opinion is found at J.A. 292-311.
10
The district court also ruled that the bankruptcy court
did not err in deeming Sharp’s misrepresentations to be
immaterial. The district court agreed with the bankruptcy court
that such misrepresentations were immaterial because,
“[a]lthough a third mortgage would have diminished the value of
the collateral and depleted the available sources for repayment,
under the circumstances of this case, the relatively small
Signet loan was not likely to have influenced the Bank’s
decision.” District Court Opinion 17.
14
attached title abstract. The district court explained that,
“[e]ven if the parties had a preexisting depository
relationship, the nature of the relationship was not of the sort
that could support the Bank’s blind reliance on Sharp’s
assertions.” District Court Opinion 12. In so ruling, the
district court accepted the bankruptcy court’s findings with
respect to the credit memorandum prepared by Bank Chairman
Fernebok. According to the district court, the Fernebok credit
memorandum “supports the finding that the Bank was interested in
developing a profitable relationship with First Charter,” and
the Bank’s eagerness “very well could have affected its judgment
and thoroughness in reviewing Mr. Sharp’s loan file.” Id. at
13. 11
The Bank has filed a timely notice of appeal, and we
possess jurisdiction pursuant to 28 U.S.C. § 1291.
II.
11
On the proximate cause issue, the district court ruled
that the bankruptcy court had not erred in finding that Sharp’s
misrepresentations were not a proximate cause of the Bank’s
loss. The district court explained that, in light of the Bank’s
failure to verify Sharp’s title on the Maryland Property, plus
the nature of other pertinent lending factors — such as the
value of First Charter, Sharp’s net worth, and his expected
commissions — the bankruptcy court had not erred in finding that
the omission of the Signet Loan from the title insurance
commitment and abstract was not a proximate cause of the Bank’s
loss. See District Court Opinion 14-15.
15
Where, as here, a district court acts as a bankruptcy
appellate court, “our review of [its] decision is plenary.”
Bowers v. Atlanta Motor Speedway, Inc. (In re Se. Hotel Props.
Ltd.), 99 F.3d 151, 154 (4th Cir. 1996). In such a
circumstance, “we review the bankruptcy court’s decision
independently.” Banks v. Sallie Mae Servicing Corp. (In re
Banks), 299 F.3d 296, 300 (4th Cir. 2002). Thus, we review for
clear error the findings of fact made by the bankruptcy court,
and we assess de novo its conclusions of law. See Deutchman v.
IRS (In re Deutchman), 192 F.3d 457, 459 (4th Cir. 1999). In
analyzing whether a bankruptcy debtor is entitled to relief
under a statutory exception from discharge, “we traditionally
interpret the exceptions narrowly to protect the purpose of
providing debtors a fresh start.” Foley & Lardner v. Biondo (In
re Biondo), 180 F.3d 126, 130 (4th Cir. 1999).
III.
We are satisfied to dispose of this appeal by addressing
only the Bank’s reliance contentions and the bankruptcy court’s
rulings thereon. Although Sharp’s behavior was entirely
reprehensible, such behavior does not — in the absence of
sufficient proof of the reliance elements — render his debt
obligations on the Loan nondischargeable under either subsection
(2)(A) or (2)(B). The two reliance issues presented by
16
subsections (2)(A) and (2)(B) implicate separate levels (or
degrees) of reliance. Subsection (2)(A) required the Bank to
show “justifiable reliance,” which implicates a “less demanding”
standard of proof than the “reasonable reliance” mandated by
subsection (2)(B). Field v. Mans, 516 U.S. 59, 61, 66 (1995).
Regardless of the requisite degree of reliance, however, both of
the reliance elements are factual issues, and the bankruptcy
court’s findings of fact may not be set aside on appeal unless
they are clearly erroneous. See Lentz v. Spadoni (In re
Spadoni), 316 F.3d 56, 58 (1st Cir. 2003) (justifiable
reliance); Apte v. Japra (In re Apte), 96 F.3d 1319, 1324 (9th
Cir. 1996) (justifiable reliance); Citizens Bank of Md. v.
Broyles (In re Broyles), 55 F.3d 980, 983 (4th Cir. 1995)
(reasonable reliance); Guske v. Guske (In re Guske), 243 B.R.
359, 362 (8th Cir. 2000) (justifiable reliance). As explained
below, the bankruptcy court did not clearly err in finding that
the Bank’s reliance on Sharp’s misrepresentations was neither
justified nor reasonable.
A.
With the clear error standard of review in mind, we turn
first to the bankruptcy court’s finding — made with respect to
subsection (2)(A) — that the Bank was not justified in relying
on Sharp’s misrepresentations in the title insurance commitment
and attached title abstract that was submitted in support of the
17
Loan application. 12 To satisfy the justifiable reliance element,
a creditor must first prove that it actually relied on the
debtor’s misrepresentations. See Field, 516 U.S. at 68. After
establishing actual reliance, the creditor is obliged to
demonstrate that such reliance was justified. Justifiable
reliance implicates a subjective standard and “is a matter of
the qualities and characteristics of the particular plaintiff,
and the circumstances of the particular case, rather than of the
application of a community standard of conduct to all cases.”
Id. at 71 (citing Restatement (Second) of Torts § 545A cmt. b
(1976)).
The justifiable reliance element of subsection (2)(A) does
not normally give rise to a duty to investigate. Indeed, the
Supreme Court has explained that a creditor “is justified in
relying on a representation of fact ‘although he might have
ascertained the falsity of the representation had he made an
investigation.’” Field, 516 U.S. at 70 (quoting Restatement
12
As explained supra, the bankruptcy court found in Sharp
II that the Bank’s reliance on the title insurance commitment
and attached title abstract was not justified “[g]iven the lack
of history between these parties, the irregularity of these
documents and the sophistication of the plaintiff.” Sharp II
10. “Instead of being prudent,” the court explained, “the Bank
appears to have been more focused on possible future returns and
seemingly ignored the fact that, by the time the Loan closed,
the financial disclosure was nine months old and the title
report was eight months old.” Id.
18
(Second) of Torts § 540 (1976)); see also Foley & Lardner v.
Biondo (In re Biondo), 180 F.3d 126, 135 (4th Cir. 1999)
(characterizing justifiable reliance as a “minimal standard”).
Nevertheless, such “[j]ustifiability is not without some
limits.” Field, 516 U.S. at 71. Notably, a creditor is not
entitled to “‘blindly rel[y] upon a misrepresentation the
falsity of which would be patent to him if he had utilized his
opportunity to make a cursory examination or investigation.’”
Id. (quoting Restatement (Second) of Torts § 541 cmt. a (1976)).
As the Supreme Court has explained, a duty to investigate
can arise when the surrounding circumstances give rise to red
flags that merit further investigation. See Field, 516 U.S. at
72. This analysis turns on “‘an individual standard of the
[creditor’s] own capacity and the knowledge which he has.’” Id.
(quoting W. Page Keeton et al., Prosser & Keeton on Torts § 108
(5th ed. 1984)). Thus, when the circumstances are such that
they should warn a creditor that he is being deceived, he cannot
justifiably rely on the fraudulent statements without further
investigation.
Under the trial evidence, the bankruptcy court’s finding
that the Bank did not justifiably rely on Sharp’s
misrepresentations in the title insurance commitment and
attached title abstract was not clearly erroneous. As the court
recognized, several red flags placed the Bank on notice “that
19
something was amiss” and that it should investigate further.
Sharp II 10. First and foremost, Sharp’s company, First
Charter, provided the Bank with the title insurance commitment,
to which it attached the stale title report. And, although
Sharp also provided his financial disclosure statement to the
Bank, the bankruptcy court specifically found that it was also
stale — dated eight months prior to the Loan closing in
September 1995. Indeed, the financial disclosure statement was
characterized by the bankruptcy court as “irregular[],” in that
it consisted of two pages on a Bank of Maryland form, rather
than on a Colombo Bank form. Id.; see also Sharp I 5.
Importantly, the bankruptcy court also found that the Bank — a
sophisticated entity — had no previous relationship of trust or
confidence with Sharp upon which it could rely. Finally, as
Chairman Fernebok’s credit memorandum strikingly revealed, the
Bank was “hot” to make the Loan and focused on the possibility
of future business from Sharp and First Charter, which Fernebok
believed the Loan would create. See Sharp II 10. In these
circumstances, the bankruptcy court was entitled to find — as it
did — that the Bank should have investigated further. As a
result, the bankruptcy court’s finding of justifiable reliance
with respect to subsection (2)(A) was not clearly erroneous. 13
13
Sharp also contends on appeal that subsection (2)(A) is
(Continued)
20
B.
We turn finally to the reasonable reliance issue, an
essential element of subsection (2)(B) that “must be met for a
discharge to be denied.” In re Broyles, 55 F.3d at 983
(internal quotation marks omitted). In Sharp I, the bankruptcy
court found against the Bank on the reasonable reliance issue,
ruling that the Bank’s reliance on Sharp’s misrepresentations in
the financial disclosure statement was not reasonable. 14
As heretofore explained, the reasonable reliance assessment
required by subsection (2)(B) imposes a more demanding standard
than that applicable to the issue of justifiable reliance. See
Field, 516 U.S. at 61, 66. First of all, reasonable reliance —
like justifiable reliance — requires actual reliance. See id.
at 68 (“Section 523(a)(2)(B) expressly requires not only
reasonable reliance but also reliance itself . . . .”). In
addition to evaluating actual reliance, a court must objectively
inapplicable, because the title insurance commitment and title
abstract together constitute a statement respecting his
financial condition. Because Sharp’s debt obligation is
dischargeable in any event, however, we need not reach or
address this contention.
14
As explained supra, the bankruptcy court found that the
Bank’s reliance on the financial disclosure statement was not
reasonable, because “[t]he uncontroverted testimony was that the
Bank made no independent investigation of the Sharps’ title” and
“a lender relies on a title report supplied by the borrower at
its peril.” Sharp I 8.
21
assess the circumstances to determine whether the creditor
exercised “that degree of care which would be exercised by a
reasonably cautious person in the same business transaction
under similar circumstances.” Ins. Co. of N. Am. v. Cohn (In re
Cohn), 54 F.3d 1108, 1117 (3d Cir. 1995) (assessing factors such
as creditor’s standard practices in evaluating credit-
worthiness, industry standards for evaluating credit-worthiness,
and circumstances surrounding debtor’s credit application); see
also In re Morris, 223 F.3d 548, 554 (7th Cir. 2000); Coston v.
Bank of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir.
1993). In reviewing the circumstances surrounding a debtor’s
loan application, a court should assess whether “red flags” were
raised that should have alerted the lender to the possibility of
inaccurate representations; whether there were previous business
dealings with the debtor that gave rise to a relationship of
trust; and whether a minimal investigation by the lender would
have revealed the inaccuracies. See In re Cohn, 54 F.3d at
1117.
Put succinctly, on the trial evidence, the bankruptcy
court’s reasonable reliance finding was not clearly erroneous.
First, the circumstances surrounding Sharp’s loan application
should have “alerted an ordinarily prudent lender to the
possibility that the information [reflected thereon was]
inaccurate.” In re Cohn, 54 F.3d at 1117. Indeed, the red
22
flags that rendered the Bank’s reliance unjustified — the stale
and irregular documents, the parties’ lack of a prior
relationship of trust or confidence, the Bank’s sophistication,
and its eagerness to establish a depository relationship with
Sharp — are also relevant to the reasonable reliance inquiry.
Second, the Bank failed to perform a title search with respect
to the Maryland Property, despite the fact that the “primary
purpose of a title report is to verify the borrower’s
representations as to the state of title.” Sharp I 8. Such a
title search would have required minimal effort and most
assuredly would have revealed the Signet Loan. Viewing these
circumstances objectively, we are simply unable to conclude that
the bankruptcy court’s reasonable reliance ruling was clearly
erroneous. 15
IV.
Pursuant to the foregoing, we are constrained to affirm the
judgment under challenge in this appeal.
AFFIRMED
15
Because the Bank failed to prove the reliance elements of
subsections (2)(A) and (2)(B), it is unnecessary for us to
address the proximate cause element of subsection (2)(A) and the
materiality element of subsection (2)(B).
23
HAMILTON, Senior Circuit Judge, concurring specially:
I concur in the judgment and in Parts I, II, and III(b) of
the court’s opinion. I write separately to state that I would
affirm the district court’s entry of summary judgment in favor
of Peter Sharp (Sharp) with respect to the Bank’s § 523(a)(2)(A)
claim on a different ground.
I would affirm the judgment below with respect to the
Bank’s § 523(a)(2)(A) claim on the authority of Blackwell v.
Dabney, 702 F.2d 490 (4th Cir. 1983) and Engler v. Van
Steinburg, 744 F.2d 1060 (4th Cir. 1984). Under these
precedents, Sharp’s misrepresentations in his loan application
documents and the title abstract as to the encumbered status of
the Maryland property constituted statements respecting his
financial condition, and thus, plainly fall outside the scope of
11 U.S.C. § 523(a)(2)(A). In relevant part, such statutory
section provides that a Chapter 7 debtor cannot discharge a debt
obligation obtained by “false pretenses, a false representation,
or actual fraud, other than a statement respecting the debtor’s
. . . financial condition.” Id. (emphasis added).
In Blackwell, the debtor had guaranteed loans to his
corporation, Studio-1, which guarantee obligations the debtor
sought to discharge in bankruptcy. Blackwell, 702 F.2d at 491.
The creditor testified that she relied on misrepresentations by
the debtor that the business “‘was growing’” and was a “‘top-
24
notch company’” that was “‘just blooming’” and other similar
statements. Id. at 492. Of relevance in the present appeal, we
held the creditor could not invoke § 523(a)(2)(A) to avoid
discharge, because all of the debtor’s oral misrepresentations
“were essentially statements concerning the financial condition
of Studio-1,” and therefore, fell outside the scope of
§ 523(a)(2)(A). Blackwell, 702 F.2d at 492.
In Engler, the debtor, during loan negotiations with the
creditor, had falsely stated that the property he offered as
security for the loan was completely unencumbered. Engler, 744
F.2d at 1060. We held that the creditor could not prevail upon
his § 523(a)(2)(A) claim, because the debtor’s false statement
that he owned the property free and clear of other liens “is a
statement respecting his financial condition,” and therefore,
fell outside the scope of § 523(a)(2)(A). Engler, 744 F.2d at
1061. Notably, in Engler, we specifically rejected the concept
that “a statement respecting the debtor’s financial condition
means a formal financial statement, such as a typical balance
sheet or a profit and loss statement, and not a statement that
specific collateral is owned free of other encumbrances.” Id.
at 1060. In so rejecting, we reasoned as follows:
Concededly, a statement that one’s assets are not
encumbered is not a formal financial statement in the
ordinary usage of that phrase. But Congress did not
speak in terms of financial statements. Instead, it
referred to a much broader class of statements--those
25
“respecting the debtor’s . . . financial condition.”
A debtor’s assertion that he owns certain property
free and clear of other liens is a statement
respecting his financial condition. Indeed, whether
his assets are encumbered may be the most significant
information about his financial condition.
Id. at 1060-61.
Under Blackwell and Engler, Sharp’s misrepresentations in
his loan application documents and the title abstract as to the
encumbered status of the Maryland property constituted
statements respecting his financial condition, and thus, plainly
fall outside the scope of § 523(a)(2)(A). On this basis alone,
I would affirm the district court’s affirmance of the bankruptcy
court’s entry of judgment in favor of Sharp with respect to the
Bank’s § 523(a)(2)(A) claim.
The Bank contends that the Supreme Court’s decision in
Field v. Mans, 516 U.S. 59, 71 (1995) overruled Blackwell and
Engler by holding the phrase “a statement respecting the
debtor’s or an insider’s financial condition,” as found in
§ 523(a)(2)(A), pertained only to classic financial statements.
The Bank’s contention is without merit.
The Supreme Court granted certiorari in Field solely “to
resolve a conflict among the Circuits over the level of reliance
that § 523(a)(2)(A) requires a creditor to demonstrate.” Field,
516 U.S. at 63. Ultimately, the Court held “that § 523(a)(2)(A)
requires justifiable, but not reasonable, reliance.” Field, 516
26
U.S. at 74-75. While some reasoning by the Court in Field to
explain this holding can arguably be extrapolated to support the
narrow interpretation of the financial condition phrase the Bank
espouses, such a situation falls far short of constituting
Supreme Court precedent upon which we can solely rely to hold
that Blackwell and Engler are no longer good law. Until the
Supreme Court or an en banc panel of this court overrules the
holdings of Blackwell and Engler, they remain good law, and I
would rely upon them to resolve the Bank’s § 523(a)(2)(A) claim
presently before us. See McMellon v. United States, 387 F.3d
329, 334 (4th Cir. 2004) (en banc) (concluding “that when there
is an irreconcilable conflict between opinions issued by three-
judge panels of this court, the first case to decide the issue
is the one that must be followed, unless and until it is
overruled by this court sitting en banc or by the Supreme
Court”).
27