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Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

IN RE: R$ CLARE GERLACH and 

LOIS F. GERLACH, 

Debtors, 

JOHN DEERE COMPANY, 

Plaintiff-Appellant, 

v. 

R. CLARE GERLACH and LOIS F. 

GERLACH, 

Defendants-Appellees. 

MAA ., 7 1QQ{j 

!\OBERT L. HOECKER 

Clerk 

No. 87-2118 

Appeal from the United States District Court 

for the District of Colorado 

(D.C. No. 87-K-383) 

John S. Finn of Nelson & Harding, Denver, Colorado for PlaintiffAppellant. 

Michael J. Guyerson of Rothgerber, Appel, Powers & Johnson, 

Denver, Colorado, for Defendants-Appellees. 

Before LOGAN, SETH, and TACHA, Circuit Judges. 

LOGAN, Circuit Judge. 

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Plaintiff John Deere Company sought a determination in the 

bankruptcy court that the debt owed it by defendant R. Clare 

Gerlach is not dischargeable in the bankruptcy of defendant and 

his wife because it was procured through fraud. The bankruptcy 

court held that the entire debt is dischargeable, and the district 

court affirmed. We reverse and remand for a determination of the 

amount of the debt that is not dischargeable. 

In 1977, defendant and his son formed a corporation to hold a 

John Deere dealership. Pursuant to the dealership arrangement, 

defendant personally guaranteed all of the corporate debts to John 

Deere. Although defendant eventually sold all of his ownership 

interest in the dealership, he remained liable for its debts to 

John Deere. 

John Deere financed, on a secured basis, the machinery and 

equipment that sat on the dealership's lot.for resale, the debt on 

a particular piece of equipment to become due on resale. John 

Deere also gave unsecured credit on open account to the dealership 

for miscellaneous items, such as parts, insurance, advertising, 

and freight charges, requiring monthly payments on this account. 

When the dealership sold a piece of equipment, John Deere would 

also finance the purchaser and give the dealership credit for the 

sale against its debts to John Deere. The dealership could apply 

this credit toward its monthly account payment to John Deere. 

Some time in 1984 the dealership began experiencing financial 

difficulties. In order to meet its monthly payments to John 

Deere, defendant's son, who managed the business, would arrange 

for various parties to enter into purchase contracts for 

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equipment. The credit generated from these contracts allowed the 

dealership to meet its monthly obligations to John Deere, but the 

purchases were, in fact, shams. None of the parties ever intended 

to complete these purported purchases., and the paperwork was often 

submitted for John Deere's approval with seller and purchaser both 

knowing it would be rejected. But John Deere gave the dealership 

immediate provisional credit when the contracts were submitted and 

revoked the credit only when the contracts were rejected. The 

dealership would carefully time the submission of these sham 

contracts so that the provisional credit would satisfy one monthly 

payment and would not be revoked until the subsequent month. 

Thus, the phony contracts had the effect of giving the dealership 

an extra month in which to make the payments represented by the 

provisional credit. Defendant was never involved in the day-today management of the dealership. At his son's request, however, 

he did sign one sham purchase contract submitte~ in June 1985, 

knowing that the effect would be to buy the dealership some time 

in making its payments to John Deere. 

In August 1985, when the dealership missed its monthly 

payment and John Deere discovered the dealership's financial 

problems, the dealership was closed. It has been unable to 

satisfy all of its debts to John Deere. Because defendant 

remained personally liable on the dealership's debts to John 

Deere, that company sought, in defendant's bankruptcy case, to 

have defendant's guaranty liability excepted from discharge as a 

debt obtained through fraud under 11 U.S.C. § 523(a)(2)(A). The 

bankruptcy court held that the entire amount of defendant's debt 

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to John Deere was dischargeable, and the district court affirmed. 

The primary issue on appeal is whether defendant's fraudulent 

conduct allowed the dealership to obtain "money, property, 

services, or an extension, renewal, or refinancing of credit" 

within the meaning of§ 523(a)(2). 

The bankruptcy court found that by entering into the phony 

purchase contract, defendant intentionally deceived John Deere 

into granting the dealership provisional credit, and that John 

Deere reasonably relied upon defendant's sham contract in 

extending the provisional credit. Still, the bankruptcy court 

said that John Deere failed to prove that it was damaged in a sum 

certain or in any way by defendant's fraudulent conduct, and the 

district court accepted this finding. John Deere argues that the 

bankruptcy court applied an improper measure of damages, and we 

agree. 

Section 523(a)(2)(A) of the Bankruptcy Code excepts from 

discharge "any debt . for money, property, services, or an 

extension, renewal, or refinancing of credit, to the extent 

obtained by • false pretenses, a false representation, or 

actual fraud." 11 U.S.C. § 523(a)(2)(A) (emphasis added). 

Therefore, not only is a new debt procured through fraud excepted 

from discharge, but old debt which is extended, renewed, or 

refinanced through fraud is also nondischargeable. See Caspers v. 

Van Horne (In re Van Horne), 823 F.2d 1285, 1288-89 (8th Cir. 

1987); 3 Collier on Bankruptcy~ 523.08, at 523-40, & ~ 523.10 

(L. King 15th ed. 1989). 

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An extension, within the meaning of§ 523(a)(2), is "an 

indulgence by a creditor giving his debtor further time to pay an 

existing debt." Takeuchi Mfg. (U.S.), Ltd. v. Fields (In re 

Fields), 44 B.R. 322, 329 (Bankr. S.D. Fla. 1984) (quoting State 

v. Mestayer, 144 La. 601, 80 So. 891, 892 (1919)). The Bankruptcy 

Code, therefore, protects a creditor "who is deceived into 

forbearing from collection without being given an opportunity to 

grant or deny the extension of credite" Id.; cf. Zarate v. 

Baldwin (In re Baldwin), 578 F.2d 293, 295 (lOth Cir. 1978) (debt 

on fraudulently induced settlement agreement is nondischargeable 

because creditor "forwent her right to pursue her claim to 

judgment after trial"). 

Defendant's fraudulent conduct clearly allowed the dealership 

to obtain an extension of credit in the amount of the provisional 

credit John Deere granted the dealership on the phony purchase 

contract defendant signed. 1 Even though, as the bankruptcy court 

emphasized, "such credit was withdrawn when the contract was 

rejected shortly thereafter," I R. 19, defendant's fraudulent 

contract had its intended effect of giving the dealership more 

time in which to pay the amount of the subsequently revoked 

provisional credit. Cf. Bear Stearns & Co. v. Kurdoghlian (In re 

Kurdoghlian), 30 B.R. 500, 502 (Bankr. 9th Cir. 1983) (payment by 

check knowing the check will be dishonored); Wheeling Wholesale 

Grocery Co. v. Piccolomini (In re Piccolomini), 87 B.R. 385, 387-

1 Since defendant was personally liable on the dealership's debts 

to John Deere, it is immaterial that the credit was extended to 

the dealership rather than defendant. See European Am. Bank v. 

Gitelman (In re Gitelman), 74 B.R. 492, 493, 496 (Bankr. S.D. Fla. 

1987); 3 Collier on Bankruptcy~ 523.08[1]. 

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88 (Bankr. W.D. Pa. 1988) (payment with postdated check): Fields, 

44 B.R. at 329 (concealing resale to postpone paying debt due on 

resale) • 

The bankruptcy court cited Colorado law on tortious fraud for 

the proposition that John Deere must prove it was damaged by its 

reliance upon defendant's phony contract. While state fraud law 

may often be helpful by analogy in interpreting the scope of the 

fraud exceptions to discharge, "the dischargeability of a 

fraudulently incurred debt and the measure of damages for the 

underlying fraud are separate and distinct questions." Birmingham 

Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir. 1985). 

Section 523(a)(2), by its terms, only requires an objecting 

creditor to prove an extension of credit was "obtained by" fraud 

. for the debt to be excepted from discharge. 

Several courts go beyond the plain meaning of the statute and 

preclude discharge only to the extent an objecting creditor can 

prove damages--reduction in the ultimate recovery on the debt 

caused by forbearance. ~' Muleshoe State Bank v. Black, 77 

B.R. 91, 92-93 (N.D. Tex. 1987): Goodnow v. Adelman (In re 

Adelman), 90 B.R. 1012, 1022-24 (Bankr. D.S.D. 1988): First Bank 

(N.A.) v. Eaton (In re Eaton), 41 B.R. 800, 803 (Bankr. E.D. Wis. 

1984): cf. F & M Marquette Nat'l Bank v. Richards (In re 

Richards), 81 B.R. 527, 530-31 (Bankr. D. Minn. 1987) (affirmative 

defense). But we will not adopt such a requirement, because "the 

plain language of the statute suggests that dischargeability is an 

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'all or nothing' proposition." Birmingham Trust, 755 F.2d at 

1477. 2 

In the bankruptcy court, there was evidence that not only did 

2 Some courts hold that the 1984 amendments to § 523(a)(2), 

Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. 

No. 98-353, § 454(a)(l), 98 Stat. 333, 375-76, invalidate the 

Birmingham Trust interpretation. ~' Muleshoe, 77 B.R. at 92; 

Adelman, 90 B.R. at 1022-23. We believe that the 1984 amendments, 

at least in the context of this case, reinforce and make more 

explicit the distinction between tort damages and dischargeability. Compare 11 U.S.C.A. § 523(a)(2) (1979) (debt "for 

obtaining" an extension of credit by fraud is nondischargeable) 

with 11 U.S.C.A. § 523(a)(2) (Supp. 1989) (debt for extension of 

credit is nondischargeable "to the extent obtained by" fraud). 

Our opinion in the instant case is not in conflict with 

Central Nat'! Bank & Trust Co. v. Liming (In re Liming), 797 F.2d 

895, 898 (lOth Cir. 1986). In Liming we held that fraud in the 

procurement of the initial loan was carried over into the renewed 

loan. The loan was thus held nondischargeable despite the bank's 

renewal of the loan under nonfraudulent conditions. In the 

instant case, we hold that use of fraud to obtain an extension of 

a debt originally procured nonfraudulently also renders the debt 

nondischargeable. Consistent application of contract law theory 

on whether extension or renewal of a debt constitutes a novation 

does not reconcile these two holdings, but both are fully 

supported by the legislative history of§ 523(a)(2): 

"The amount of the debt made nondischargeable • is 

not limited to 'new value' when a loan is rolled over. 

If an initial loan is made subject to a false financial 

statement and new money is advanced under a subsequent 

loan that is not made under conditions of fraud or false 

pretenses, then only the initial amount of the loan made 

on the original financial statement is invalidated and 

excepted from discharge. On the other hand, where the 

original financial statement is made under nonfraudulent 

conditions and the entire loan in addition to new money 

is advanced under a subsequent false financial 

statement, the entire loan is made under fraudulent 

conditions." 

H.R. Rep. No. 595, 95th Cong., lst Sess. 129-30 (1977), reprinted 

in 1978 u.s. Code Cong. & Admin. News 6090-91; see also 3 Collier 

on Bankruptcy ,, 523.10, at 523-67. Although this is legislative 

history of the 1978 version of the Code, there is no reason to 

conclude that the 1984 amendments were anything but technical and 

cosmetic. We have found no legislative history reflecting that 

Congress intended to significantly alte~ the rights and obligations of creditors and debtors governed by this section. 

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defendant's spurious contract allow the dealership to postpone its 

account payment for a month, it also allowed the dealership to 

continue obtaining unsecured credit from John Deere during that 

ensuing month. A John Deere employee testified that if the 

dealership had not been able to meet its monthly account payment, 

John Deere either would have required cash on delivery for all 

shipped parts or would have discontinued shipments and closed the 

dealership, as it did when it discovered the dealership's 

precarious financial condition. III R. 35-37. On remand, if the 

bankruptcy court accepts this testimony as true, it also should 

treat new unsecured credit John Deere extended to the dealership 

in the month following submission of defendant's fraudulent 

contract as debt "obtained by" defendant's fraud. Cf. 

Kurdoghlian, 30 B.R. at 502 (fraudulently submitting bad checks to 

cover deficit in secuities trading account allowed debtor to 

continue trading and incurring debt); European Am. Bank v. 

Gitelman (In re Gitelman), 74 B.R. 492, 493-94 (Bankr. S.D. Fla. 

1987) (fraudulent scheme not only allowed debtors to pay down 

their line of credit, but induced lender to renew and increase 

line); Green v. Southern Poultry Co., 275 Ala. 138, 152 So. 2d 

685, 687 (1963) (fraudulently submitting bad check to satisfy old 

debt induced seller to ship more goods 

extended after that following month 

attributable to defendant's fraudulent 

frauds of defendant's son. 

on credit). 

apparently 

contract but 

was 

to 

Credit 

not 

other 

The bankruptcy court also found that John Deere failed to 

prove damages in a "sum certain." I R. 19. "Exceptions to 

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discharge are construed narrowly," therefore, "[a] creditor 

seeking to have a debt declared nondischargeable . . • must prove 

that it comes within the statute by clear and convincing 

evidence." Driggs v. Black (In re Black), 787 F.2d 503, 505 (lOth 

Cir. 1986). However, the debtor rehabilitation policy which 

motivates these rules is "applicable only to honest debtors." 

Jennen v. Hunter (In re Hunter), 771 F.2d 1126, 1130 (8th Cir. 

1985). 

If a creditor can prove by clear and convincing evidence that 

the debtor obtained credit through fraud, the court should declare 

the debt nondischargeable in an amount which it can reasonably 

estimate as obtained by the fraud. Cf. Restatement (Second) of 

Torts S 912 & comment a (1979) (burden of proof of existence of 

tort damages is same as for all other elements of cause of action, 

but need only prove amount of damages "with as much certainty as 

the nature of the tort and the circumstances permit"). And a debt 

is "obtained by" fraud if the fraud is a substantial factor in the 

creditor's decision. Lincoln First Bank, N.A. v. Tomei (In re 

Tomei), 24 B.R. 204, 206 (W.D.N.Y. 1982) (citing First Nat'l Bank 

v .. Clancy (In re Clancy), 279 F. Supp. 820, 822. (D. Colo. 1968), 

aff'd, 408 F.2d 899 (lOth Cir.), cert. denied, 396 U.S. 958 

(1969)); see Central Nat'l Bank & Trust Co. v. Liming (In re 

Liming), 797 F.2d 895, 897-98 (lOth Cir. 1986) (partial reliance 

is sufficient); cf. Restatement (Second) of Torts S 546 & comment 

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~ 

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b (1977) (reliance is sufficient if fraud was substantial factor 

in plaintiff's decision).3 

REVERSED and REMANDED for a determination of the amount of 

defendant's guaranty debt to John Deere that was obtained through 

defendant's fraud. 

3 John Deere also argues that the bankruptcy court should have 

considered another sham contract as evidence of defendant's fraud. 

The bankruptcy court refused to consider this contract as evidence 

of fraud, because defendant's son forged defendant's signature on 

the contract "without knowledge, agency or authority by his 

father." I Ro 17. John Deere argues in the alternative either 

that defendant's conduct represented fraud by nondisclosure or 

that defendant's son had authority to sign the contract on his 

behalf. The bankruptcy court was of the opinion that the evidence 

did not support either of these theories, and we cannot conclude 

that these findings are clearly erroneous. 

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