business he had never formed a business before he went to my client to borrow money for that purpose likely require his financial statement because that is what they wanted to base the business judgment to loan the money he had no prior business a social connection with my client the business failed it was a term notable one year the business filed bankruptcy apple leave out bankruptcy my client going to focus on the nd financial statement although we do there was we do believe that there were grounds to deny just charge based on the st the key here my main question for you is how do you overcome the clearly court identified certain factors which the court the bankruptcy court is going to be looking at with respect to whether the reliance was we were there prior business dealings were there any red flags that would alert a reasonably prudent lender to possibility that the representations were not accurate whether minimal investigation would have revealed the in accuracies up the represent here's the problem the bankruptcy court required my client who essentially go through its  the the business defaulted on the second least agreement and his guarantee was called and they went ahead and got an interest of the consent judgment in the believe the pennsylvania court none of this was disclosed ringback in connection with the  financial statement and mr wood testified at trial that this would have been a very important factor with respect to whether or not he would have relied on the financial statement to support other data that he presented to the commit to secur loan we're talking about here is reasonable reliance the bar for reasonable reliance has been set and has been noted by the court is a very low hurdle to meet there is no evidence that the appellat here in that phase when the bankruptcy judge raised issues with respect to red flags here's what he focused on one was why did the bank except a financial statement was that was relied upon by mr wood in terms of formulating his his recommendation to the committee you don't have to have a writing that is signed and you don't have to have a writing that is in the bank for mr wood testified a to b does not require anything further than reliance upon a financial statement in writing of the debtor all right and so for the court to essentially add an element to the analysis of reasonable lines based on an independent exhaustive demonstration with respect to the underlying finances of the business was a step beyond what the courts have required with respect to what is reasonable reliance if i might draw the court's attention to the colston decision out of this court we've cited this in the brief it's probably the primary princip case in this area from this court at least not on point per se but it but that which the court speaks to the issue of reasonable reliance on the court in that case relied on the case of lansford which i believe is out of the th circuit six or apologize of the court this court adopted the position and i quote we cannot credit a debtor's argument that reliance on the financial statement was not reasonable because the lender failed to verify the information in the financial state particularly when the debtors financial statement is clearly false on its face i pause there judge nelms found the statement to be false in it was presented with the intent to deceive my client right the court goes on the debtor knew that it was false yet the debtor do that was was when made because the debtor knew prior to the time of submitting the written financial statement that he had added two  now probably three million dollars fixed judgment against him and he didn't disclose it didn't it wasn't something that my client could have readily obtained through reasonable inquiry within its own records was something  school i would deny that that's one thing the record but the bank never knew that there had been a judgment d placed against us and this is a state court judgment and i'm not sure what if there's a credit report in the record i apologize i i'm not sure if that would have shown up and  he's giving the financial state with the bank and asked for an updated financial statement were a year later now from the original financing the banks and i want to see what your financial picture is we're relying upon that you are a primary guarantor of this  it's the st time i've ever seen or read it a decision which said i know you have a financial statement and i know it spoke to be truthful and accurate in you're able to rely upon it but i'm going to say that you've got to go beyond  be of the bankruptcy code so one of our concerns particularly as to the nd financial statement is the bankruptcy court kalu found that it was a statement in writing that it was a statement with which for with respect to the financial condition of the debtor it was published to to the bank and found that it was published with the intent to deceive because what it was materially false because we demonstrated my all but by evidence that he adding new factors ok to the to the test a reasonable reliance that this court has set out in adopted in holston and it an independent verification on the part of the creditor creditor and i believe i cited in in our brief but that the creditor should be allowed to rely upon the financial statement as provided the creditor does not have to go beyond that and check it out or subject it to cross examine this court has held on many times that only the on its debt or is entitle to it just the bankruptcy court clearly good morning this is a case where the bank had the information the kreder had the information about the financial situation of the debtors business and had sufficient information in its records that should have alerted it to the fact that the financial statement submitted by the debtor the nd one was inaccurate for example their nine hundred and twenty seven dollars financial statement was submitted and an assistant or a secretary at the bank pointed out to mr the bank officer that it had no contingent liabilities on it including the debt owed to the guarantee on that particular loan was pointed out by a secretary to the bank's officer and he read to accept it anyways so that right there is a sufficient red flag that should have warned the bank to do further investigation and that's what the bankruptcy court now might have got material with a new market well it's an obvious inconsistency on the face of the document yes you know about it but if you're looking for a complete makes you should make you wonder what else is missing and then as the bankruptcy court went on there were other things that should have made them ask for more information there is for example an email in the record between the bank's representative and the  needing to see updated financial information from the debtor in hopes that the person with the situation will prove that's in december after the september owners been extended and before the april new will in december the bank was aware that they needed to see improvement in the financial situation of the of the debtor but from april they did not ask for any updated financial information testimony that that would have been i did for consideration there's no evidence and no statements in the record from either bank officer that they would have refused to make the loan had they knew about the can they default judgment there's a statement from the officer sayin he would have recommended to the committee that they pursue collection and it would have been a possibility that the loan would have been extended for a possibility that the loan wouldn't have been extended is not the same thing as we absolutely would not have extended the low there were other items for consideration after all when they're looking at the financials of this cardiology practice in the spring of two thousand and fourteen they acknowledge that the cardiology practice isn't making any money and it's being funded by the debtors personal loans to the business and that they're going not going to be able and they got credit ok they got a credit score but they still extended alone in the light of significant information suggesting that they shouldn't they still apparently decided to rely on a seven month old financial statement by april even though they knew on the face of the documents submitted about the party ology practice that there was a problem there were that was what the bankruptcy court thought was that there was evidence in the record that showed that the debtor was funding the businesses existence they were huge shareholder loans something on the order of seven one hundred million dollars in shareholder loans those were that was the red flag those were the red flags that the bankruptcy court considered to be toward literally just a minimal amount of cross reference there's an inconsistency in the profit and loss of the statement that would have reflected there was something amiss there's the lack of continuing liabilities on the banks on the financial state financial state of you know back in september the state of the heart financials are updated there's significant red flags here and there and within their own conversations the banks and conversations they acknowledge the lack of ability to support the debt based on that  statement so if you're relying on a statement that you know is inadequate and you know reflects an inability to support the debt how is that a reasonable reliance you the problem short i'm to say if you betes debt and then it clearly states that there is no contingent liabilities including the guarantee of this particular note so the bank is aware that there is a problem the bank is acknowledging that the guarantor lacks the ability to support the debt that the guarantor is essentially supporting this business and can see courts and the cop congress did not intend for creditors to essentially make risky loans and expect the bankruptcy courts and these courts to bail them out when they put their hands in the sand and ignore obvious inconsistency is an obvious red flag this is not a situation where the bank or the court the bank needed to go out and do a thorough independent investigation and verification it is a question of literally comparing documents and asking a few questions the bankruptcy court for example pointed out that the difference in the profit and losses should have triggered an investigation and a couple of questions to the borrower or to the osbournes why is this profit and loss down on the accrual basis and this profit and loss was don on a cash basis that's a simple question right there on the face of the documents that was the bankruptcy courts position and there is evidence in the record to support all of the bankruptcy courts finding just because there is some evidence to the contrary does not mean of course that all groupie no not not as a general rule but i think there has to come a time in every case that you read where there is a situation like this one where the debt the debtor prevails in a five hundred and twenty three to be type action it is because the creditor was where and had knowledge and had issues that put it on notice facts that put it on notice to make it suggest that you should do a little bit of tariff occasion again we're not expecting predators to go out and run you know extensive background checks and hire private investigators but if you have the information in your possession if the in accuracies and inadequacies of a statement are pointed out to you and you would knowledge that in writing should you then be and i don't think that there's any evidence that this was a reasonably prudent case to rely on in april we're talking about a seven month old financial statement in a business that's clearly failing why would you as a lender not request a pin financials after tax returns things like that from your guarantor it is clear by april that they are aware that not only does the business not have the ability to support the debt doesn't have the ability to support that and yet they renew that loan for five that sounds like assumption of the risks it was a risky loan from the beginning and they chose to make it in spite of the red flags and that's why the bankruptcy court ruled in favor of the it's a it's a low standard reasonable reliance that's how little this predator did to protect itself is that it didn't even meet the low standard of reasonable reliance it didn't cross reference its own database its own documents and was nothing enough evidence to support that in fact there's plenty of evidence supporting that it was a reasonable finding under the circumstances reasonable people could disagree about the bankruptcy courts conclusion but as long as there is some evidence in the record to support  thank you very briefly with respect to your statement as smith of on clearly erroneous yes there are facts that need to be reviewed based on the clearly erroneous standard however we would submit that judge m essentially applied an improper legal proposition with respect to the scope of what is reason recognized as and the reliance he added you must make an independent investigation into that the intially of the financial statement that as a matter of law was incorrect and therefore all of the things that he found as i pointed out that the red flags were improper the not only do they not are they not supported by the evidence but they're not required as a matter of law as judge davis and as you stated it's our belief that congress did not intend to creditors such as my client to d independently verify every fact matter specifically the term reasonably relied as it appears in section five hundred and twenty three a to be was as even counsel noted and you noted your honor was intended to prevent creditors from requesting false financial statements from debtors for the purpose of using them to object to just well that's how we'll have here we have a financial statement which we want to basically find to port to loan money to a debtor never in our wildest dreams and there's no evidence suggest otherwise would we would we believe that this debtor was going to file bankruptcy the legislative history of section five hundred and twenty three dollars does not indicate any alternative scenario that any alternative scenario should be protected an unscrupulous debtor who intentionally mislead the creditor with false financial statements should have their deception excused by imposing an affirmative duty upon the creditor to conduct a thorough investigation for every memo doesn't have an analysis behind it each is says there may be some problems we don't know what that is there's no testimony with respect to that but we will we do know is this judge gnome xfce said is this financial tape statement was materially false he said it was presented with the intent to deceive my client my client could never have known that they would have to have hired some outside agency to search all state records across the united states to determine if there was