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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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,. 

.. P JLED 

UNITED STATES COURT OF APPEAiaited Sit~ Court ~f Api,eals Tenth Clrru1t 

EM KAY, 

JERSEY, 

v. 

JERRY L. 

Grandeza 

FOR THE TENTH CIRCUIT 

INC. ; VILLAGE BANK OF NEW ) 

) 

) 

Plaintiffs-Appellees, ) 

) 

) 

) 

MIZE, doing business as ) 

Ranch, ) 

) 

Defendant-Appellant. ) 

ORDER AND JUDGMENT * 

NOV 6 1990 

ROBERT L. HOECKER 

Clerk 

No. 89-5093 

(D.C. No. 88-C-258-E) 

( N . D. Okla . ) 

Before McKAY, McWILLIAMS, and EBEL, Circuit Judges. 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed . . R. App. P. 

34(a); 10th Cir. R. 34.1.9. 

submitted without oral argument. 

The case is therefore ordered 

Appellant Mr. Mize was the debtor in a bankruptcy proceeding 

under Chapter 7. Appellees Em Kay, Inc., and Village Bank of New 

Jersey instituted an adversary proceeding pursuant to 11 u.s.c. 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppal. 10th Cir. R. 

36.3. 

Appellate Case: 89-5093 Document: 010110047554 Date Filed: 11/06/1990 Page: 1 
- S 523 to preclude Mr. Mize from discharging a debt. After an 

evidentiary hearing, the bankruptcy court entered findings of fact 

and conclusions of law on the record and ruled in favor of Mr. 

Mize. Em Kay and Village Bank appealed to the district court, 

which entered an order on May 1, 1989, reversing the bankruptcy 

court. Mr. Mize now appeals. We reverse the district court and 

remand for further proceedings. 

The record shows that in late 1982, Mr. Mize, on behalf of 

Excalibur Energy Corp. and/or Excalibur Petroleum Co. (jointly, 

Excalibur), began negotiating with Mr. Kraselnick, the owner of Em 

Kay, Inc., to form a joint venture to construct a pipeline to 

transport natural gas in Tennessee. During the negotiations, Mr. 

Mize indicated that Excalibur needed money for some of its other 

operations, so Mr. Kraselnick introduced him to officers of 

Village Bank for the purposes of securing a loan. In addition to 

being a majority shareholder in Village Bank through his interest 

in Em Kay Holding, Inc., Mr. Kraselnick was on the Board of 

Directors of the bank. 

In January of 1983, the Board voted to loan Excalibur 

$400,000. The loan was secured by certain oil and gas leases and 

oil field equipment, and was personally guaranteed by Mr. Mize. 

Although Mr. Kraselnick did not vote on the loan, he did 

participate in discussions with the Board about the collateral for 

the loan immediately prior to the Board's vote. Excalibur 

subsequently defaulted on the loan and in November of 1983, 

Village Bank obtained a judgment in state court against Mr. Mize 

for the balance of the loan. In December of 1984, Em Kay bought 

2 

Appellate Case: 89-5093 Document: 010110047554 Date Filed: 11/06/1990 Page: 2 
.. the judgment from the bank and attempted to collect on it. In 

July of 1985, Mr. Mize filed bankruptcy. 

In their adversary proceeding, Em Kay and Village Bank 

asserted that the debt represented by the judgment was 

nondischargeable under 11 u.s.c. S 523(a)(2)(A) and (B). 1 

Subsections 523(a)(2)(A) and (B) provide: 

(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 --

(A) false pretenses, a false representation, 

or actual fraud, other than a statement 

respecting the debtor's or an insider's 

financial condition; 

(B) use of a statement in writing 

(i) that is materially false; 

(ii) respecting the debtor's 

insider's financial condition; 

or an 

(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 .... 

Exceptions to discharge are construed narrowly. Driggs v. 

Black (In re Black), 787 F.2d 503, 505 (10th Cir. 1986). A 

creditor seeking an exception to discharge under subsection 

523(a)(2)(A) must prove that "the debtor obtained the money 

1 Since Village Bank sold the judgment 

what interest Village Bank still has 

prevent Mr. Mize from discharging. 

3 

to Em Kay, it is unclear 

in the debt it seeks to 

Appellate Case: 89-5093 Document: 010110047554 Date Filed: 11/06/1990 Page: 3 
through representations which the debtor either knew to be false 

or made with such reckless regard for the truth as to constitute 

willful misrepresentation;" that the debtor did so with an "intent 

to deceive;" and that the creditor "actually relied on the false 

representation, and that its reliance was reasonable." First 

Nat'l Bank of Red Bud v. Kimzey (In re Kimzey), 761 F.2d 421, 423 

(7th Cir. 1985). A creditor seeking an exception to discharge 

under subsection 523(a)(2)(B) must prove each of the elements 

enumerated in the statute. In re Bonnett, 895 F.2d 1155, 1156 

(7th Cir. 1989). Under either subsection, the creditor must prove 

each of the elements by clear and convincing evidence. In re 

Black, 787 F.2d at 505, 506; see also First Bank of Colo. Springs 

v. Mullet (In re Mullet), 817 F.2d 677, 680 (10th Cir. 1987)("An 

exceptionally strong showing that a debtor has made false 

representations will not excuse a creditor's failure to 

demonstrate reasonable reliance on those representations."). 

The bankruptcy court found that Mr. Mize made false oral 

representations to Village Bank "with the intention and purpose of 

deceiving the creditor," R. Vol. II, Doc. 33 at 183, and that Mr. 

Mize submitted false personal and corporate financial statements 

to the bank "for the purpose of inducing the bank to make this 

loan," id. at 181. The court concluded, however, that Em Kay and 

Village Bank failed to prove by clear and convincing evidence that 

these "lies and misstatements and the falsities were the reasons 

that said loan was made," i.e., that Village Bank actually relied 

on the misrepresentations and false financial statements in making 

the loan. Id. at 185. 

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, 

In support of its conclusion, the bankruptcy court said: 

Why was said loan approved? From the evidence 

presented it is obvious to this Court that Mr. Potter 

[the president of Village Bank] approved the loan only 

at and because of the suggestion of Mr. Kraselnick. 

That Mr. Bartolotta [a board member of Village Bank] 

only approved the loan by virtue of the suggestion and 

influence of Mr. Kraselnick. 

The fraud that we are dealing with here, and 

evidence is conclusive concerning said fraud, is really 

the fraud perpetrated upon Mr. Kraselnick by Mr. Mize in 

inducing Mr. Kraselnick to use his influence to allow 

Mr. Mize to acquire this loan. I believe the evidence 

is clear that but for the unenforceable guarantee of Mr. 

Kraselnick, this loan would not have been made. 

Further, but for the fact that Mr. Kraselnick was 

effectively 80 percent owner of the bank and thus had 

substantial influence over the Board of Directors, and 

thus was effectively the employer of said Board of 

Directors, allow him to influence said Board of 

Directors wherein they succumbed to said influence and 

thus made the loan. 

Id. at 182-83. 

Based on the bankruptcy court's finding that Mr. Mize 

defrauded Mr. Kraselnick, Em Kay and Village Bank ~rgued on appeal 

to the district court that "there is no missing element of 

reliance in this case." R. Vol. I, Doc. 8 at 8. They asserted 

that a misrepresentation under section 523(a)(2) need not be 

communicated directly to the creditor by the debtor, but can be 

passed through others, R. Vol. I, Doc. 8 at 9, and concluded: 

"sufficient reliance on Mize's fraud by Em Kay and Village Bank 

was established because it was established, and found by the 

Court, that Em Kay and Village Bank relied upon Kraselnick and 

Mize had also defrauded Kraselnick. The alleged missing element 

of reliance was not missing because of the flow through fraud from 

Mize to Kraselnick to the Appellants," id. at 10. 

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,> 

. ., In its review of the bankruptcy court's order, the district 

court concluded that the bankruptcy court's findings of fact were 

not clearly erroneous, but that its legal conclusions based on 

those facts were erroneous. The district court set forth a 

"survey" of the bankruptcy court's findings, and concluded: "The 

facts as stated by the Bankruptcy Court leave no doubt that the 

Board made its decision in reliance on the false information 

presented by Mize." R. Vol. I, Doc. 11 at 4. 

In reviewing an appeal of a core proceeding in the bankruptcy 

court, both the district court and the court of appeals "must 

accept the factual findings of the bankruptcy court unless they 

are clearly erroneous," and should review the bankruptcy court's 

legal conclusions de novo. · Branding Iron Motel, Inc. v. Sandlian 

Equity, Inc. (In re Branding Iron Motel, Inc.), 798 F.2d 396, 

399-400 and n.3 (10th Cir. 1986); see also Bankr. R. 8013. 

Furthermore, "the district court may not accept the findings of 

the bankruptcy court and then go on to make additional findings 

having the effect of contradicting the conclusions of the 

bankruptcy court." In re Neis, 723 F.2d 584, 589 (7th Cir. 1983). 

In its review of the bankruptcy court's order, the district 

court erred in three respects. First, it summarized the 

bankruptcy court's findings in such a way as to suggest that the 

bankruptcy court found that Village Bank's Board of Directors 

relied to some extent on the false information given it directly 

by Mr. Mize in approving the loan, and then used that finding to 

support its conclusion that Mr. Mize's debt was not dischargeable. 

The bankruptcy court, however, did not make any finding as to 

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,> 

whether the Board relied in part on the false information directly 

given the bank by Mr. Mize; it only found that the bank would not 

have approved the loan "but for" the Board's reliance on Mr. 

Kraselnick's "unenforceable guarantee." R. Vol. II, Doc. 33 at 

183. 

Neither subsection 523(a)(2)(A) nor (B) requires a creditor 

to prove that it relied exclusively on the debtor's false 

representations or false financial statement in making the 

decision to extend credit to the debtor; partial reliance on the 

false information is sufficient. See John Deere Co. v. Gerlach 

(In re Gerlach), 897 F.2d 1048, 1052 (10th Cir. 1990)(subsection 

523(a)(2)(A)); Central Nat'l Bank & Trust Co. of Enid v. Liming 

( In re Liming), 797 F. 2d 895, · 897-98 ( 10th Cir. 1986) ( subsection 

523(a)(2)(B)). Therefore, since the bankruptcy court made no 

finding as to whether the Board relied in part on the false 

information given it directly by Mr. Mize in approving the loan, 

the bankruptcy court should address the issue on remand. 

Second, the district court concluded that "the Board made its 

decision in reliance on the false information presented by Mize," 

R. Vol. I, Doc. 11 at 4, based on the legal premise that 

"[l]iability . for misrepresentations is not necessarily limited to 

the person with whom the misrepresentation deals," and the fact 

that "[t]he Bankruptcy Court found that both the Board members of 

Village Bank and Kraselnick were defrauded by Mize," id. 

We agree with the underlying legal premise that under 

subsections 523(a)(2)(A) and (B), the debtor need not give the 

false information directly to the creditor, but may pass it 

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., 

through others with the intent or reasonable expectation that it 

will reach the creditor and that the creditor will rely on it. 

See Restatement (Second) of Torts § 531 (1977); 2 cf. Bell v. 

Stafos (In re Stafos), 666 F.2d 1343, 1345-47 (10th Cir. 

1981)(affirming denial of discharge under former section 32(c)(3) 

where debtor furnished false financial statement to industry 

credit reporting agency which, based on the false information, 

published credit rating for debtor on which creditor relied in 

extending credit), cert. denied, 456 U.S. 1007 (1982); In re 

Solari Furs, 263 F. Supp. 658, 663-65 (E.D. Mo. 1967)(same). 

We disagree, however, with the district court's apparent 

determination that the bankruptcy court's findings of fact were 

sufficient to support a legal conclusion that the fraud Mr. Mize 

perpetrated on Mr. Kraselnick passed through to the Board so that 

the Board's reliance on Mr. Kraselnick's "suggestion and 

influence" and "unenforceable guarantee," R. Vol. II, Doc. 33 at 

182, 183, was actually "reliance on the false information 

presented by Mize," R. Vol. I, Doc. 11 at 4. Although the 

bankruptcy court found that Mr. Mize defrauded Mr. Kraselnick and 

it 

2 

found that the Board relied on Mr. Kraselnick's statements and 

Section 531 provides: 

One who makes a fraudulent misrepresentation is subject 

to liability to the persons or class of persons whom he 

intends or has reason to expect to act or refrain from 

action in reliance upon the misrepresentation, for 

pecuniary loss suffered by them through their 

justifiable reliance in the type of transaction in which 

he intends or has reason to expect their conduct to be 

influenced. 

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influence in approving the loan, the bankruptcy court did not make 

a third finding linking the other two, i.e., that in making the 

statements upon which the Board relied, Mr. Kraselnick functioned 

as a conduit through which Mr. Mize's misrepresentations flowed to 

the bank. Without this additional finding, the district court's 

conclusion cannot be supported. Since the bankruptcy court did 

not address the issue of whether Mr. Kraselnick acted as a conduit 

for Mr. Mize's fraud, on remand it should do so. 

Finally, after determining that the Board relied on the false 

information presented by Mr. Mize, the district court further 

erred by not remanding the action to the bankruptcy court to 

determine whether such reliance was reasonable. See In re Mullet, 

817 F.2d at 679 (creditor must prove reasonable reliance under 

subsection 523(a)(2)(A)); In re Bonnett, 895 F.2d at 1156 

(creditor must prove reasonable reliance under subsection 

523(a)(2)(B)); but see Thul v. Qphaug (In re Ophaug), 827 F.2d 

340, 343 (8th Cir. 1987)(subsection 523(a)(2)(A) does not require 

a creditor to prove his reliance is reasonable). On remand, if 

the bankruptcy court finds that the Board relied on the 

misrepresentations of Mr. Mize in approving the loan, whether 

those misrepresentations were made directly to the Board or were 

made through Mr. Kraselnick, it must then determine whether such 

reliance was reasonable under the particular facts and 

circumstances of the case. See In re Mullet, 817 F.2d at 679. 

In summary, on 

determine whether 

remand the bankruptcy court should 

the Board relied in part on the 

first 

false 

information given it directly by Mr. Mize in approving the loan. 

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,. 

If the court determines the Board did rely on this information, 

then it must determine whether the Board's reliance was 

reasonable. If the bankruptcy court determines that the Board did 

not rely on the information given it directly by Mr. Mize in 

approving the loan, then the court must determine whether Mr. 

Kraselnick was a conduit for Mr. Mize's fraud so that the Board's 

reliance on Mr. Kraselnick's "suggestion and influence" and 

"unenforceable guarantee" actually was reliance on Mr. Mize's 

fraud. If the court determines that Mr. Mize's fraud was passed 

through Mr. Kraselnick to the Board and that the Board relied on 

that fraud, then the court must determine whether the Board's 

reliance was reasonable. 

The judgment of the United States District Court for the 

Northern District of Oklahoma is REVERSED and REMANDED with 

instructions to remand the action to the bankruptcy court for 

further proceedings consistent with this order and judgment. 

ENTERED FOR THE COURT 

PER CURIAM 

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