UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-2262
IN RE: PAUL W. GOODRICH,
Debtor.
SHAWMUT BANK, N.A.,
Plaintiff, Appellant,
v.
PAUL W. GOODRICH,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. A. David Mazzone, U.S. District Judge]
Before
Boudin, Circuit Judge,
Campbell, Senior Circuit Judge,
and Stahl, Circuit Judge.
Michael C. Gilleran with whom Paul M. Tyrrell and Shafner &
Gilleran were on brief for appellant.
Robert H. Quinn with whom Austin S. O'Toole and Quinn and Morris
were on brief for appellee.
July 26, 1993
BOUDIN, Circuit Judge. Shawmut Bank, N.A. asked the
bankruptcy court to rule that the $109,000 debt owed to it by
Paul W. Goodrich is not dischargeable in his Chapter 7
bankruptcy because it was obtained through deliberately false
statements on which the bank relied. The bankruptcy court
held that only $10,000 of the debt was nondischargeable and
the district court affirmed. We conclude that the entire
debt is nondischargeable and remand.
On September 4, 1985, Goodrich signed a promissory note
and credit agreement with Shawmut giving him an unsecured
revolving $100,000 line of credit. This arrangement
reflected his long-standing relationship with the bank and
his partnership in a Boston law firm. Goodrich agreed to pay
periodic finance charges and to repay the outstanding balance
and any accrued interest on demand. He was not asked for a
personal financial statement at the time but agreed to submit
such statements on request. The line of credit was to
expire, and any outstanding principal and interest were
payable, on the anniversary date.
On February 22, 1986, Shawmut increased the line of
credit to $150,000, and then on September 4, 1986, it renewed
the line of credit. On June 24, 1987, Goodrich gave Shawmut
a personal financial statement dated as of December 31, 1986,
which represented that the bank could rely upon it as true
unless given written notice of a change. The line of credit
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was renewed again on September 4, 1987, and again on
September 7, 1988. Prior to the September 4, 1987, renewal,
Goodrich had drawn down and owed $99,000 under the line of
credit. On November 18, 1988, Goodrich drew down an
additional $10,000, making his total debt to Shawmut
$109,000, exclusive of interest.
Thereafter, Goodrich filed for bankruptcy under Chapter
7. Shawmut, on July 8, 1991, began an adversary proceeding
in this bankruptcy objecting to any discharge of Goodrich's
debt to the bank. It claimed that Goodrich in his financial
statement submitted in June 1987 had failed to list $9
million in contingent liabilities and made certain other
material misstatements or omissions. Shawmut invokes 11
U.S.C. 523(a)(2)(B), which provides:
(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-
. . . .
(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[.]
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The bankruptcy court, after an evidentiary hearing,
found in an oral opinion that the financial statement did
contain material falsehoods respecting Goodrich's financial
condition made with intent to deceive; and as these findings
are uncontested on this appeal, we need not elaborate. The
bankruptcy judge also found that Shawmut had proved that it
"would not have renewed the loan had Mr. Goodrich made full
and complete disclosure of these contingent liabilities."
But, the bankruptcy judge continued, this fact does not show
that such a refusal to renew would have meant that Goodrich
would then have repaid the loan (which then stood at
$99,000). The oral opinion concluded:
And so, to that extent, to the extent of
the balance which was outstanding at the
time that they [Shawmut] received and
could have relied upon this financial
statement there was no reliance. The
money was already out the door and would
not come home just because a false
financial statement was given.
The bankruptcy judge then ruled that the bank had proved
reliance upon the false financial statement to the extent
that it had advanced $10,000 after the financial statement
was provided to it and that this amount, together with
pertinent costs, was the amount that would not be discharged
by bankruptcy. On appeal, the district court affirmed in a
memorandum, echoing the reasoning of the bankruptcy judge and
relying specifically upon Danns v. Household Finance Corp.,
558 F.2d 114 (2d Cir. 1977), which we discuss below.
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Although we disagree with the outcome reached by the
bankruptcy judge and the district court, it is only fair to
say that this provision of the Bankruptcy Code, governing
nondischargeability for false statements, has spawned a fair
amount of case law, inter-circuit conflicts and considerable
confusion. The seeming simplicity of section 523(a)(2)(B)
conceals not only a couple of linguistic traps but a lineage
of opaque legislative history. Still, the simple language of
section 523(a)(2)(B) is the starting point for analysis and,
in the end, the basis for our decision.
Reading the statute literally, Shawmut appears to meet
each of its requirements needed to make the $99,000 loan
nondischargeable. The $99,000 loan was a "debt" reflecting a
"renewal . . . of credit"; the renewal was "obtained by . . .
use of a statement in writing"; and the writing was
"materially false," it was related to Goodrich's financial
condition, Shawmut "reasonably relied" on it, and it was made
with intent to deceive. Although the statute bars discharge
only "to the extent" that the renewal was obtained by the
false statement, we think this causation element--also
reflected in the statute's "reliance" requirement--is easily
satisfied here as to the full $99,000.
The bank offered evidence from a bank official that the
$99,000 loan would "probably" not have been renewed in either
1987 or 1988 if the true financial liabilities of Goodrich
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had been set forth in the financial statement he submitted;
that the bank relied upon the financial statement in its
renewal of the loan; and that the omission of material
information was a "substantial factor" in causing the
renewal. This evidence, presumably, led to the bankruptcy
court's finding that "the bank has demonstrated by a
preponderance of the evidence that they [sic] would not have
renewed the loan had Mr. Goodrich made full and complete
disclosure . . . ."
The evidence amply supports the finding. Likelihoods
are about all that can be expected where the question is what
the bank would have done five years ago if faced with a
disclosure that did not occur. Indeed, there is case law
that supports the view that it is enough if the misstatement
or omission is a "substantial factor" in the decision to make
or renew a loan. In re Gerlach, 897 F.2d 1048, 1052 (10th
Cir. 1990) (collecting cases). After all, if a financial
statement is materially false and intended to deceive, then a
showing that the creditor "relied" upon it arguably requires
no more than that the creditor took it into account and gave
it weight. Here, the bankruptcy court's explicit finding
already quoted makes fine distinctions unnecessary.
Although each of the statutory requirements of section
523(a)(2)(B) is thus satisfied, Goodrich remarkably enough
does have two decent arguments in his favor. The first is
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that some courts have read into the statute yet another
requirement, not reflected in its explicit language, that the
creditor show that it was damaged by the false statement.
See Norton, Bankruptcy Law and Practice, 27.41, at pt. 27,
p. 76 & n.22 (1991) (collecting cases); cf. In re Siriani,
967 F.2d 302 (9th Cir. 1992) (limited damage requirement).
Damage is easily shown where the bank lends money after
receiving a false statement and in reliance upon it. But in
the case of a renewal of an earlier untainted loan, it is
possible that the bank would have called the loan if accurate
information had been furnished on renewal and yet been unable
to collect a penny before bankruptcy.
This possibility appears to be what the bankruptcy judge
had in mind when he said of the $99,000 that "[t]he money was
already out the door and would not come home just because a
false financial statement was given." Although the
bankruptcy judge used the phrase "no reliance" immediately
before making this statement, a later passage suggests that
he meant that the bank had not--so far as the $99,000 was
concerned--"relied to its detriment." In other words, the
bank relied on the false statement in renewing the loan (the
judge had already so found), but--in the judge's view--the
bank had not shown that the reliance caused the ultimate
loss.
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The bank on appeal zealously contests this "finding" of
no detriment. It asserts that Goodrich's financial statement
on renewal showed that he had over $800,000 in cash, bank
deposits and marketable securities. It follows, says
Shawmut, that the bank could have collected the money by
calling the loan or by insisting that securities or real
property interests of Goodrich be pledged to secure the loan.
In any event, Shawmut argues, there is no requirement that it
show detriment in the sense of ultimate loss; reasonable
reliance on the false statement in renewing the loan is
enough.
We agree with Shawmut that the only detriment that need
be shown is the renewal of the loan. To be sure, it would
not be absurd to require, in addition, that the bank show
that it could--or even would--have collected on the loan
prior to bankruptcy but for the renewal. Some courts have
done so. The nondischargeability provisions are frequently
construed in favor of debtors. 3 Collier on Bankruptcy
523.05A (15th ed. 1993) (collecting cases). Further, one
could argue that if the bank was not ultimately harmed by the
renewal, it should not be able to improve its situation in
the bankruptcy proceeding based on the happenstance that the
renewal was based on a false statement.
The difficulty is that including this further
requirement of actual damage is a policy choice. There is no
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indication in the statutory language that Congress made such
a choice, and the evidence from legislative history is
inconclusive. The statute is quite detailed in its
conditions for nondischargeability. Had Congress wished to
add "damage" as an element, it could easily have done so,
especially since some of the decisions favoring this
requirement were issued before the elaboration and
reenactment of section 523(a)(2)(B) in 1978. Congress, as we
shall see, actually had some knowledge of case law construing
the predecessor section when it adopted its new version.
If it considered the matter at all, Congress could
easily have concluded on policy grounds that a damage
requirement was not appropriate. The debtor, by hypothesis,
has caused the trouble by making a materially false statement
with intent to deceive and the creditor has reasonably relied
upon the statement in renewing the loan. Congress could have
thought that making the bank shoulder the further burden of
proving that it could have collected the loan prior to
bankruptcy--a matter of solvency on which the debtor has most
of the information--was not a proper addition to the
compromises reflected in section 523(a)(2)(B).
The legislative history of section 523(a)(2)(B) is
invoked at some length by both sides, and it does in fact
discuss the case in which a loan is renewed. We find the
discussion tangled, if not contradictory, but note that it
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lends some support to Shawmut by stressing that "[t]he amount
of the debt made nondischargeable on account of a false
financial statement is not limited to `new value' extended
when a loan is rolled over." H. Rep. No. 595, 95th Cong.,
1st Sess. 129-30 (1977). The problem is that the question
here is when, and on what conditions, is the "old money" made
nondischargeable, and on that issue the same legislative
history may be more confusing than helpful. Id.1
In all events, even if Congress never considered the
point one way or the other, the outcome is the same.
Congress enacted a detailed statute without an explicit
damage requirement. In the face of conflicting policies for
and against, there is no warrant for the court to add such a
requirement. Accordingly, there is no need here to weigh the
bank's evidence or disturb the bankruptcy judge's conclusion
that there was no detriment, in the sense he used the term,
so far as the $99,000 is concerned. Instead we hold that
detriment or damage in that sense is not required for
nondischargeability. Accord In re Gerlach, 897 F.2d 1048
(10th Cir. 1990). To the extent that the Ninth Circuit is in
1Just as the House Report is on balance helpful to
Shawmut, so there are floor statements (quoted below) that
are marginally helpful to Goodrich. This floor language does
use the phrase "relied to his detriment," as the bankruptcy
judge did in this case; but the phrase was used only in the
context of discussing the special problem of In re Danns, and
we decline to read it as a general gloss on the statute,
which contains no such words.
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disagreement, see In re Siriani, we prefer to follow In re
Gerlach for the reasons already set forth.
Yet there is more to be said. The district court, in
affirming the bankruptcy court, used some of the same
reasoning but also invoked a different argument, renewed by
Goodrich in this court, by relying upon Danns v. Household
Finance Corp., 558 F.2d 114 (2d Cir. 1977). Danns is a
curious case decided under the predecessor to section
523(a)(2)(B) which used largely similar language. There the
debtor secured a new loan from a finance company based on
false statements; and the question was whether this false
statement also rendered nondischargeable an earlier untainted
loan that the finance company consolidated with the new one
simply because state law forbad the company from having two
loans to the same debtor.
The Second Circuit ruled in a very brief opinion that
"there was no evidence that the original loan was renewed in
reliance on the false representations," but instead it was
renewed and consolidated because of the state law. 558 F.2d
at 116. Thus, said the court, the renewal was not "a true
extension of the original loan; the record does not show that
[the original loan] . . . would have fallen due sooner had it
not been for the refinancing." Id. The court concluded that
"the only credit extended in reliance on Danns'
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misrepresentation was the additional amount loaned," and only
this new cash was nondischargeable. Id.
We have devoted this space to describing Danns because
Congress, in adopting section 523(a)(2)(B) in the following
year, may be taken to have endorsed it by name. After the
bill emerged from a House-Senate Conference Committee,
Section 523(a)(2)(B) was explained to both the House and
Senate in the following terms:
In many cases, a creditor is required
by state law to refinance existing credit
on which there has been no default. If
the creditor does not forfeit remedies or
otherwise rely to his detriment on a
false financial statement with respect to
existing credit, then an extension
renewal, or refinancing of such credit is
nondischargeable only to the extent of
the new money advanced; on the other
hand, if an existing loan is in default
or the creditor otherwise reasonably
relies to his detriment on a false
financial statement with regard to an
existing loan, then the entire debt is
nondischargeable under section
523(a)(2)(B). This codifies the
reasoning expressed by the second circuit
in In re Danns, 558 F.2d 114 (2d [C]ir.
1977).
124 Cong. Rec. 24, 32399 (1978) (statement of Rep. Edwards),
124 Cong. Rec. 25, 33998 (1978) (statement of Sen.
DeConcini). We do not find this general language very
helpful in resolving the present case--there was no state law
here requiring refinancing and, while the $99,000 loan was
not "in default," Goodrich's debt to Shawmut was repayable on
demand. Further, we regard the floor discussion more as an
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attempt to explain and approve Danns than as a general gloss
on the statute.
Nevertheless, the floor statements are pretty good
evidence that Congress approved of Danns and, on that
assumption, it is appropriate to measure our case against the
rationale of Danns. The Second Circuit's holding was framed
as an interpretation of the "reliance" requirement that is
explicit in the statute. The court said that the finance
company did not "rely" on the false statement in continuing
the original loan because the old loan was not up for renewal
at the time of the new loan, and the old loan was
consolidated and renewed solely because of New York's "one
loan" law. Danns may have depended also on the court's sense
of fairness. After all, whatever the causal relationship
between the false statement and the renewal of the old loan,
it was sheer accident--a twist of New York law--that the old
untainted loan was renewed rather than left alone.
By contrast, Goodrich's loan expired in September 1987,
and then again in September 1988, unless renewed. It was the
bank that called for the financial statement prior to the
September 1987 renewal, presumably because it had an interest
in managing the line of credit and the $99,000 loan. So far
as appears, the later draw down of $10,000 more, which
occurred in late 1988, was not an issue when the bank
accepted the false financial statement and considered it in
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renewing the loan in 1987. Here, the evidence showed that
the bank did "rely" on the false statement in renewing a loan
that would otherwise have fallen due. Accordingly, we think
that Danns is distinguishable in both letter and spirit.
We therefore vacate the judgment of the district court
and remand to the bankruptcy court with directions to include
the $99,000 original loan in the amount of debt deemed
nondischargeable, together with the later $10,000 loan whose
status is undisputed. The question of what costs and fees
are appropriately due to Shawmut is not before us, and we do
not address it.
It is so ordered.
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