In the
United States Court of Appeals
For the Seventh Circuit
No. 09-2008
E RNEST J. O JEDA and B EVERLY V. O JEDA,
Defendants-Appellants,
v.
G AIL G OLDBERG ,
Plaintiff-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:08-cv-02808—Joan B. Gottschall, Judge.
A RGUED N OVEMBER 30, 2009—D ECIDED M ARCH 25, 2010
Before K ANNE, R OVNER, and W ILLIAMS, Circuit Judges.
K ANNE, Circuit Judge. Ronald and Gail Goldberg were
creditors of Ernest and Beverly Ojeda. The Goldbergs
executed a short-term, high-interest-rate loan with the
Ojedas in August 1998. Despite being unable to pay the
$600,000 principal when the loan became due, the Ojedas
continued to make monthly interest payments to the
Goldbergs, facilitated by numerous extensions of the
loan’s maturity date. But these interest payments stopped
abruptly in January 2006 and the Ojedas defaulted.
2 No. 09-2008
The Ojedas filed for bankruptcy in February 2006.
As part of the bankruptcy proceedings, Gail filed an
adversary proceeding against the Ojedas, seeking
to have the $600,000 loan declared non-dischargeable
pursuant to 11 U.S.C. § 523(a)(2)(A). In support of her
position, Gail alleged that the Ojedas engaged in fraudu-
lent conduct in conjunction with the extensions of the
loan’s maturity date. The bankruptcy court entered an
order finding that the debt was dischargeable, and that
even if it was non-dischargeable, the amount excepted
from discharge was only the amount of unpaid interest
and attorney’s fees. On appeal, the district court deter-
mined that the bankruptcy court erred in holding the
debt dischargeable and in calculating the amount
excepted from discharge. We affirm the district court’s
decision in both respects.
I. B ACKGROUND
The Goldbergs were in the business of making short-
term, high-risk loans. A mutual friend introduced the
Ojedas to the Goldbergs because the Ojedas were seeking
a $600,000 loan. As a part of the loan application process,
the Ojedas provided the Goldbergs with collateral in the
form of 160,000 Pan American Bank stock shares, valued
at $800,000.1 The Goldbergs took possession of the stock
1
Ernest was the chairman of the board of both Pan American
Bank and Bancshares. The security interest pledged was actually
in shares of Bancshares stock, not Pan American; however,
(continued...)
No. 09-2008 3
certificate, which was registered in Ernest’s name, but
did not file a financing statement with the Illinois
Secretary of State or a notice of stock power or hypothe-
cation agreement with the bank.
The Ojedas also informed the Goldbergs that they
were the sole owners of two entities, Dices Enterprises
and Pelham Enterprises, Inc. The Ojedas owned and
operated a McDonald’s restaurant in Chicago through
Dices Enterprises, while Pelham Enterprises was the
owner of a second McDonald’s restaurant in Chicago.
These McDonald’s restaurants were not used as security
for the loan, but rather were disclosed to the Goldbergs
so that the latter could have a full picture of the Ojedas’
finances.
The Goldbergs executed a loan agreement with the
Ojedas in August 1998, providing the Ojedas with a
$600,000 loan, secured at an annual interest rate of 18%.
Initially, the loan was supposed to be a short-term
“bridge” loan, with the maturity date set at October 6,
1998. At some point, the maturity date was extended
orally to January 6, 2000. After the Ojedas failed to meet
the January maturity date, they delivered to the
Goldbergs a new “collateral note” extending the loan’s
1
(...continued)
because Ernest viewed Pan American Bank and its holding
company, Bancshares, as virtually the same entity, and because
Gail does not raise any issues about the failure to distinguish
between the two, we will use them interchangeably in this
opinion when referring to the stock that secured the loan.
4 No. 09-2008
maturity date yet again, this time until December 1, 2000.
This note continued the pledge and grant of the security
interest in the 160,000 shares to the Goldbergs. In the
interim, due to Pan American’s financial difficulties, on
October 5, 1999, its holding company, Bancshares, entered
into a purchase agreement with JD Financial in which
JD Financial purchased all of Bancshares’ interest in
Pan American Bank. JD Financial thus became the new
holding company for Pan American. Ernest subse-
quently informed Bancshares shareholders (but not the
Goldbergs)2 that incident to the sale, Bancshares had
executed a one-for-one-hundred reverse stock split of
Bancshares common stock, resulting in a reduction of
the Bancshares common stock to 15,000 shares.
Following the stock split, the Ojedas yet again failed to
pay the remainder of their loan on the December 1, 2000
maturation date. The Ojedas continued, however, to
make monthly interest payments to the Goldbergs for
approximately eighteen months while Ronald and Ernest
negotiated an extension of the now-expired note.3 On
November 1, 2001, Gail and the Ojedas executed another
2
Ronald was at least aware of Pan American’s financial
difficulties because around the time of the bank’s sale, Ronald
wrote to Ernest expressing concern over the bank’s financial
condition and requesting additional guarantees of security.
In response, Ernest agreed to have his two enterprises pro-
vide corporate guarantees as additional security for the loan.
3
The delay in negotiating an extension presumably was due
to Ronald’s concerns over the value of the Pan American stock
and the parties’ efforts to find a mutually agreeable remedy
to Ronald’s concerns.
No. 09-2008 5
written extension in the form of a new secured promissory
note for the principal amount of $600,000. Pursuant to
this agreement, both Pelham and Dices guaranteed the
note, Gail became the sole creditor of the loan, and matu-
rity was set for January 3, 2003. This loan was secured
by the now non-existent 160,000 shares of Bancshares
stock, a fact unknown to the Goldbergs. Under this agree-
ment, neither the Ojedas nor the corporations were re-
stricted from selling or otherwise disposing of their
assets, with the exception of the Bancshares stock.
In what has now become a common recitation, the Ojedas
again failed to pay the principal when the newest loan
matured in January 2003. They did, however, continue
to make monthly interest payments, which Gail con-
tinued to accept. Meanwhile, in 2004, the Ojedas began
looking for a buyer for their McDonald’s restaurants.
Because the Ojedas would face significant capital gains tax
from any sale of the restaurants, they began to look for
a “like-kind” business in which to invest the proceeds
from any sale. In early October 2004, the Ojedas sold
Pelham’s and Dices’s interest in the McDonald’s restau-
rants and used approximately $1.1 million dollars from
proceeds of the sale to pay the restaurants’ outstanding
claims and some of the Ojedas’ creditors. The balance
of the proceeds, approximately $2,300,000, was deposited
into a “Starker trust” pending the investment of those
funds into a like-kind asset. Shortly thereafter, in late
December 2004, the Ojedas negotiated to buy a Joey
Buona’s Pizzeria Grille with the remaining proceeds
from the McDonald’s sales; they purchased the Joey
Buona’s franchise through Pelham.
6 No. 09-2008
The Ojedas made all of the required interest payments
to the Goldbergs until January 2006, when they de-
faulted. The approximate value of the total interest
paid up to that point was $801,000. The Ojedas never
repaid any portion of the principal. Subsequent to the
default, the Joey Buona’s franchise failed in February 2006,
prompting the Ojedas’ voluntary Chapter 7 bankruptcy
petition in January 2007.
Before the bankruptcy court, Gail alleged that the
$600,000 loan should be excepted from discharge
because the Ojedas engaged in fraudulent conduct de-
signed to procure extensions of their loan. Namely,
Gail alleged that her forbearance on the loan was fraudu-
lently induced because the Ojedas never informed the
Goldbergs of the sale of the McDonald’s restaurants,
continued to make interest payments with checks
bearing the McDonald’s account logo, and failed to
inform the Goldbergs of the stock split. The bankruptcy
court found that Gail was not justified in relying on
the Ojedas’ representation of the stock value because of
Ronald’s familiarity with Pan American’s financial trou-
bles, and that Gail was not justified in relying on the
Ojedas’ continued ownership of the McDonald’s restau-
rants because the restaurants did not secure the loan. The
bankruptcy court also found that even if Gail was
justified in relying on the Ojedas’ fraudulent misrepre-
sentations, the amount that was excepted from discharge
included only attorney’s fees and unpaid interest.
On appeal, the district court reversed, finding that
Gail was justified in relying on the Ojedas’ fraudulent
No. 09-2008 7
conduct that led Gail to believe they still owned the Mc-
Donald’s restaurants. The court further found that the
entire debt—$600,000—should be excepted from dis-
charge because Gail was fraudulently induced to
forebear from collecting the entire amount of the loan. The
Ojedas appealed.
II. A NALYSIS
A. Fraudulent Misrepresentations
When reviewing a question that had its origination in
a bankruptcy court, as opposed to in a district court, our
review focuses on the bankruptcy court’s actions. See
In re marchFIRST, Inc., 573 F.3d 414, 416 (7th Cir. 2009).
A bankruptcy court applies a preponderance of the evi-
dence standard when making dischargeability deter-
minations under § 523(a). In re Hudgens, 149 F. App’x 480,
484-85 (7th Cir. 2005). We subject the bankruptcy court’s
decision to the same standard of review as does a district
court. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir.
2004). Thus, we apply a clear error standard to the bank-
ruptcy court’s factual findings, and review its resolutions
of legal questions de novo. MarchFIRST, 573 F.3d at 416.
Justifiable reliance is a mixed question of law and fact
and is reviewed for clear error. See In re Apte, 96 F.3d 1319,
1324 (9th Cir. 1996) (reviewing for clear error a justifiable
reliance determination made in a bankruptcy court pro-
ceeding); cf. In re Rovell, 194 F.3d 867, 870-71 (7th Cir.
1999) (finding that reasonable reliance is a mixed question
of law and fact reviewed for clear error).
8 No. 09-2008
In order for a creditor to receive an exception from
discharge under 11 U.S.C. § 523(a)(2)(A), a creditor must
show that (1) the debtor made a false representation or
omission, (2) that the debtor (a) knew was false or made
with reckless disregard for the truth and (b) was made
with the intent to deceive, (3) upon which the creditor
justifiably relied. See In re Scarlata, 979 F.2d 521, 525
(7th Cir. 1992); In re Mayer, 173 B.R. 373, 377 (N.D. Ill.
1994).4 We take each element in turn.
Both the bankruptcy court and the district court found
that the Ojedas made false representations with the
intent to deceive in their actions involving the Bancshares
stock and the McDonald’s restaurants. We agree with
the bankruptcy court’s factual findings in this regard, so
the first two elements merit little discussion.
More problematic is the third element, justifiable reli-
ance. The bankruptcy court found that Gail’s reliance
was unjustified with regard to both the Bancshares stock
and the McDonald’s restaurants. Justifiable reliance is a
less demanding standard than reasonable reliance; it
4
Although these cases discuss reasonable reliance, the Supreme
Court modified that test in Field v. Mans, 516 U.S. 59, 71 (1995),
when it held that a creditor’s reliance need only be justifiable,
even if unreasonable, to pass muster under § 523(a). In re Bero,
110 F.3d 462, 465 (7th Cir. 1997). Therefore, although the case-
law predating 1995 focuses on the existence of reasonable
reliance, justifiable reliance is now the correct standard, and
any references in this opinion to pre-1995 case law should be
read as incorporating the new standard.
No. 09-2008 9
requires only that the creditor did not “blindly [rely] 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.” Field, 516 U.S. at
71 (internal quotation marks omitted). Under the
justifiable reliance standard, a creditor has no duty to
investigate unless the falsity of the representation
would have been readily apparent. Id. at 70-71. But the
justifiable reliance standard is not an objective one.
Rather, it is determined by looking at the circumstances
of a particular case and the characteristics of a particular
plaintiff. Id. at 71-72.
Looking to this particular plaintiff, the bankruptcy court
concluded that Gail, acting alone, was not justified in
relying on any actions taken by the Ojedas. In fact, Gail
personally did not rely on the Ojedas at all because she
had such limited interaction with them. The bank-
ruptcy court therefore examined whether Gail could
claim justifiable reliance on the basis of actions taken by
her husband, Ronald, acting as her agent.
After an extensive discussion of Ronald’s background
in lending as a successful venture capitalist and in
business as a wireless communications operator, the
bankruptcy court concluded that although Ronald (and
thus Gail) relied on the Ojedas’ continued ownership
of the stock shares, this reliance was unjustified. The
court determined that while Ronald was aware of Pan
American Bank’s troubles and tried to remedy his con-
cerns by accepting corporate guarantees from Dices and
Pelham as the basis for a loan extension, he failed to
10 No. 09-2008
request updated financial information from the com-
panies. The court concluded that given Ronald’s business
background, his awareness of Pan American’s troubles
should have alerted him to the need to make the cursory
examination required of a creditor who asserts justifiable
reliance. We find no clear error in this determination.
But where the bankruptcy court went wrong was that
it incorrectly determined that Gail, acting through
Ronald, was unjustified in relying on the Ojedas’ asserted
continued ownership of the McDonald’s restaurants.
Although the bankruptcy court found that the sale of the
restaurants coupled with the continued use of the Dices
checks containing the McDonald’s information was
designed fraudulently to create an impression of con-
tinued ownership, it ultimately concluded that because
Gail had no security interest in the McDonald’s restau-
rants, she could not justifiably rely on the Ojedas’ contin-
ued ownership of them. But we agree with the district
court that the bankruptcy court’s conclusion reflected a
standard more akin to reasonable reliance than to justifi-
able reliance. And in this case, the controlling standard
is justifiable reliance, which is less demanding than the
reasonable reliance standard.
Even if the Goldbergs acted unreasonably, they did not
act unjustifiably. As the district court noted, in this
inquiry Ronald’s particular business savvy is only
relevant to the extent that he was aware of evidence of a
potential falsity. Unlike the situation with the Bancshares
stock, there is no evidence that Ronald was alerted to the
sale of the McDonald’s restaurants. As the Supreme Court
No. 09-2008 11
held in Field, creditors have no duty to investigate if they
are unaware of a potential falsity. See 516 U.S. at 70-71.
Ronald’s business background alone did not trigger a
duty to perform a “cursory” investigation of the McDon-
ald’s restaurants, which he still justifiably believed were
owned by the Ojedas. The Ojedas’ continued use of the
checks bearing the McDonald’s information lends
further credence to this determination. Unless he
possessed outside information, there was no con-
ceivable way that Ronald could have been alerted to the
sale when the Ojedas continued to give the impression
that the sale never occurred. But there is no evidence
that Ronald did possess outside information, as he did in
the case of the stock shares. And although Gail did not
hold a security interest in the restaurants, Dices and
Pelham were both guarantors of the note. The sale of the
McDonald’s restaurants materially affected their finan-
cial statuses, thereby implicating their abilities to
perform their obligations as guarantors. If nothing else,
Gail could certainly rely on Dices’ and Pelham’s owner-
ship of the restaurants in assessing their abilities to
satisfy their obligations. For all of these reasons, we
find that Gail, acting through Ronald, was justified in
relying on the Ojedas’ asserted continued ownership of
the McDonald’s restaurants. The bankruptcy court clearly
erred in reaching the opposite conclusion.
B. Amount Excepted
Because we find that Gail was justified in relying on the
Ojedas’ misrepresentations with regard to the McDonald’s
12 No. 09-2008
ownership, we must determine what amount is excepted
from discharge. This is a legal question, and our review is
de novo, In re Birkenstock, 87 F.3d 947, 951 (7th Cir. 1996)
(“We exercise plenary review over the bankruptcy and
district courts’ legal interpretations of the Bankruptcy
Code, including the exceptions to discharge.”), but we
are mindful of the fact that “ ‘exceptions to discharge are
to be constructed strictly against a creditor and liberally
in favor of the debtor,’ ” In re Morris, 223 F.3d 548, 552
(7th Cir. 2000) (quoting Scarlata, 979 F.2d at 524).
However, we must address a preliminary matter that is
a question of first impression in this court: we have not
yet had occasion to determine whether a fraudulently
induced forbearance constitutes an extension or renewal
of credit for purposes of § 523. We now hold that a fraudu-
lently induced forbearance does constitute an extension
or renewal. Black’s Law Dictionary defines an “extension”
as “[t]he continuation of the same contract for a specified
period,” or “[a] period of additional time to take an
action, make a decision, accept an offer, or complete a
task.” Black’s Law Dictionary 622 (8th ed. 2004). It defines
a “renewal” as “[t]he re-creation of a legal relationship or
the replacement of an old contract with a new contract,
as opposed to the mere extension of a previous relation-
ship or contract.” Id. at 1322. We think it is abundantly
clear that a fraudulently induced forbearance fits
squarely within these definitions,5 and note that other
5
However, we make no determination regarding in which
category, extension or renewal, a fraudulently induced for-
(continued...)
No. 09-2008 13
circuits have reached the same conclusion. See In re Biondo,
180 F.3d 126, 132-33 (4th Cir. 1999); In re Campbell, 159 F.3d
963, 966 (6th Cir. 1998); Field v. Mans, 157 F.3d 35, 43 (1st
Cir. 1998); In re Gerlach, 897 F.2d 1048, 1050 (10th Cir. 1990).
Finding Gail’s forbearance within the ambit of § 523, we
must determine the extent to which this forbearance
was induced by false pretenses, as that will determine
the amount excepted from discharge. Section 523 provides:
(a) A discharge under . . . this title does not dis-
charge 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 represen-
tation, or actual fraud, other than a statement
respecting the debtor’s or an insider’s financial
condition . . . .
In determining whether a forbearance is fraudulently
induced, the creditor must prove that “ ‘[1] it had valuable
collection remedies at the time of the misrepresentation,
[2] it did not exercise those remedies based upon the mis-
representation, and [3] that the remedies lost value during
the extension period.’ ” In re Kucera, 373 B.R. 878, 885
(Bankr. C.D. Ill. 2007) (quoting In re Beetler, 368 B.R. 720,
730-31 (Bankr. C.D. Ill. 2007)). The bankruptcy court
made a factual finding that Gail failed to establish the
5
(...continued)
bearance best fits. Instead, we recognize that a forbearance
could be considered an extension, renewal, or both, depending
on the circumstances of a given case.
14 No. 09-2008
third element—that her collection remedies lost value
during the time of the forbearance. We review the bank-
ruptcy court’s finding of fact for clear error. MarchFIRST,
573 F.3d at 416.
We find that Gail’s collection remedies lost value as a
result of the forbearance.6 In 2004, the Ojedas owned the
McDonald’s restaurants and Dices and Pelham. When
they sold the McDonald’s restaurants, they grossed more
than $5 million in profits. These funds were available in
2004, but in 2006, the funds had been invested into the
then-failing Joey Buona’s. The second mortgage that the
Ojedas took out on their home had also been invested
into the Joey Buona’s, so it was no longer available to Gail.
Clearly, the Ojedas possessed valuable assets in 2004
that they no longer possessed in 2006. Additionally, the
Ojedas were not involved in bankruptcy proceedings,
meaning that Gail could have collected on the loan in
2004 and presumably would have received more than she
will now as a creditor in bankruptcy. This evidence
establishes that Gail had valuable collection remedies,
6
We also address the Ojedas’ contention at oral argument that
Gail must enumerate specifically her damages. Such a require-
ment is absent entirely from the test. Instead, in determining
the amount of damages, Gail need only prove that she had
valuable collection remedies at the time of the fraud, she did
not exercise those remedies because of the Ojedas’ misrepresen-
tation, and those remedies are no longer as valuable as
they were when the fraudulent representation was made.
See supra.
No. 09-2008 15
which had lost substantial value by 2006. Gail has proven
a prima facie case for fraudulently induced forbearance.
Now that we have determined that Gail’s forbearance
was induced by false pretenses, we may finally reach the
question of the amount excepted from discharge. The
initial loan to the Ojedas was not procured by fraud. We
must instead consider what amount of the extension
was procured by fraud. Because the statute provides
that an extension is non-dischargeable “to the extent”
that it is obtained by a false representation, the question
for us is what portion of the forbearance is directly attribut-
able to the false representation. See In re Christensen, Bankr.
No. 04-B-17486, 2005 WL 1941231, at *5 (Bankr. N.D. Ill.
Aug. 12, 2005).
The bankruptcy court determined that because the
original loan amount—$600,000—was obtained honestly,
none of that amount could be subjected to discharge.
Instead, only the unpaid interest and attorney’s fees
were non-dischargeable. The district court, however, held
that because Gail was induced by false pretenses to
forebear on the entire loan, the entire loan amount was
non-dischargeable despite the fact that the initial loan
was procured honestly. Our review of the amount
subject to discharge when an extension of credit but not
an original loan is procured by fraud is de novo. Birkenstock,
87 F.3d at 951.
We agree with the district court. Although the initial
loan involved no fraud, Gail forbore from collecting the
entire debt, and this forbearance was directly attributable
to the Ojedas’ fraudulent inducement. Had Gail chosen
16 No. 09-2008
to collect on the loan, she would have been entitled to the
full amount. Because she instead chose to forbear on
the entire loan, we find that same amount non-
dischargeable.
III. C ONCLUSION
The bankruptcy court clearly erred by finding that Gail
was unjustified in relying on the Ojedas’ misrepresenta-
tions about the McDonald’s restaurants and by finding
that Gail did not establish a claim for fraudulently
induced forbearance. Additionally, the bankruptcy court
committed an error of law in finding that only
the unpaid interest and attorney’s fees were non-dis-
chargeable. Accordingly, the judgment of the district
court is A FFIRMED.
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