United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

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No. 99-6070SI

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In re: Billie Franklin Guske *

*

Debtor *

*

Barbara M. Guske *

* Appeal from the United States

Plaintiff - Appellee * Bankruptcy Court for the

* Southern District of Iowa

v. *

*

Billie Franklin Guske *

*

Defendant - Appellant *

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Submitted: December 29, 1999

Filed: January 13, 2000

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Before KOGER, Chief Judge, KRESSEL and WILLIAM A. HILL, Bankruptcy Judges.

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KOGER, Chief Judge.

Debtor Billie Franklin Guske appeals the Judgment of the Bankruptcy Court excepting

his debt to Barbara M. Guske from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). For the

reasons that follow, we reverse and remand the cause to the Bankruptcy Court for further

findings.
2

Factual Background

The Debtor and Barbara Guske were married on December 5, 1969. On or about

March 30, 1991, the parties executed a financial statement that indicated they had a net

worth of $241,925.00. On or about April 10, 1992, the parties were divorced by the Iowa

District Court, Dallas County, Iowa. The parties, who were represented by the same attorney

in the dissolution proceedings, signed a consent dissolution decree which the state court

approved. Among other things, the decree provided that neither party was to pay alimony

to the other. In addition, the decree awarded certain stock and personalty to the Debtor and

awarded certain real estate and personalty to Ms. Guske. In addition, the dissolution decree

awarded Ms. Guske a judgment for $30,000 payable interest free within five years. The

wording of the relevant provision was as follows:

That Respondent [Billie F. Guske] shall pay to Petitioner [Barbara M. Guske],

as and for property settlement, the sum of $30,000.00, without interest, within

5 years from the date of this decree; provided further, that any amount not paid

within said 5 year period shall then draw interest at the rate of ten per cent

(10%) per annum until paid.

The Debtor had paid approximately $1,400 toward the $30,000 obligation under the

dissolution decree by paying some insurance premiums during the five-year interest-free

period.

On May 27, 1997, some forty-seven days after the full unpaid balance became due

under the dissolution decree, the Debtor filed his voluntary petition for relief under Chapter

7 of Title 11 of the United States Code. On August 20, 1997, Barbara Guske filed a

Complaint to Determine Dischargeability wherein she asserted that the Debtor’s debt to her

pursuant to the dissolution decree was nondischargeable under 11 U.S.C. § 523(a)(15),

which renders nondischargeable certain debts relating to property divisions in connection

with a divorce or separation. Ms. Guske amended her Complaint on August 21, 1997, to also

assert a § 523(a)(2)(A) cause of action based on fraud.

On September 1, 1999, following a trial, the Bankruptcy Court entered an Order and

Judgment finding and ordering that the $28,600.00 remaining on the unpaid balance plus
3

interest at 10% per annum from April 10, 1997, was nondischargeable under 11 U.S.C. §

523(a)(2)(A). Because the Bankruptcy Court determined the debt to be nondischargeable

under § 523(a)(2)(A), it expressly declined to address the issues raised under § 523(a)(15).

Standard of Review

We review findings of fact for clear error and legal conclusions de novo. See O’Neal

v. Southwest Mo. Bank (In re Broadview Lumber Co.), 118 F.3d 1246, 1250 (8th Cir. 1997);

Hartford Cas. Ins. Co. v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 214 B.R. 197,

199 (B.A.P. 8th Cir. 1997); see also Fed. R. Bankr. P. 8013. Because the Bankruptcy Court

applied the correct legal principles and standard for nondischargeability under §

523(a)(2)(A), our review of its factual findings thereunder is under the clearly erroneous

standard. “A finding is ‘clearly erroneous’ when although there is evidence to support it, the

reviewing court on the entire evidence is left with a definite and firm conviction that a

mistake has been committed.” Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct.

1504, 1511, 84 L.Ed.2d 518 (1985) (quoting United States v. U.S. Gypsum Co., 333 U.S.

364, 395, 68 S.Ct. 525, 542, 92 L.Ed.746 (1948); accord In re Waugh, 95 F.3d 707, 711 (8th

Cir. 1996); Chamberlain v. Kula (In re Kula), 213 B.R. 729, 735 (B.A.P. 8th Cir. 1997). 

Discussion

The Bankruptcy Court correctly held that in order to establish nondischargeability of

a debt by reason of 11 U.S.C. § 523(a)(2)(A), the plaintiff must prove, by a preponderance

of the evidence, five discrete elements. Those are:

1) that the debtor made a representation;

2) that at the time the debtor knew the representation was false;

3) that the debtor made the representation deliberately and intentionally and

with the intention and purpose of deceiving the creditor;

4) that the creditor justifiably relied on such representation; and

5) that the creditor sustained the alleged loss and damage as the proximate

result of the representation having been made.
4

See In re Ophaug, 827 F.2d 340 (8th Cir. 1987), as refined by Field v. Mans, 516 U.S. 59,

116 S. Ct. 437, 133 L. Ed. 2d 351 (1995); see also Merchants Nat’l Bank of Winona v. Moen

(In re Moen), 238 B.R. 785, 790 (B.A.P. 8th Cir. 1999).

In its Order, the Bankruptcy Court found that Ms. Guske met her burden of proving

each of the elements of fraud under § 523(a)(2)(A). After carefully reviewing the entire

record, we respectfully disagree. We concur that the record contains sufficient evidence to

support a finding that Ms. Guske met her burden as to the first three elements, as well,

perhaps, as the fifth element. However, because the record before us is devoid of any

evidence regarding justifiable reliance, we find that Bankruptcy Court clearly erred in

concluding that Ms. Guske met her burden of proving that element under § 523(a)(2)(A).

At the outset, we note that although Ms. Guske amended her Complaint to add the §

523(a)(2)(A) cause of action well before trial, counsel for both parties seemed to have

forgotten this fact at trial. In his opening statement, counsel for Ms. Guske stated, “this

action lives or dies entirely on this Court’s interpretation and application of 11 U.S.C.

Section 523(a)(15).” He made no mention of § 523(a)(2) in his opening statement. The trial

then proceeded in a manner that conformed to counsel’s statement: the evidence and

arguments focused almost exclusively on the cause of action under § 523(a)(15). In fact, the

first mention of § 523(a)(2)(A) came at what appeared to be the conclusion of the Debtor’s

testimony when, after the Debtor admitted he never intended to pay Ms. Guske (discussed

more fully below), the Court prompted the Debtor’s attorney that he might want to ask the

Debtor some questions pertaining to § 523(a)(2)(A). Even then, neither attorney asked more

than a few questions relevant to that cause of action. Finally, at the conclusion of the

presentation of evidence and argument, which had been based almost exclusively on the

elements of § 523(a)(15), counsel for Ms. Guske orally moved to amend the Complaint to

add a basis of recovery under § 523(a)(2)(A) “for purposes of amending to conform to

proof,” apparently having forgotten that the Complaint had already been so amended long

before trial.

Nevertheless, we reviewed the record and transcript very carefully for any evidence

tending to support each of the elements of § 523(a)(2)(A). As the Bankruptcy Court found,

the Debtor admitted at trial that he had no intention of ever paying his ex-wife the $30,000
1

 As discussed more fully below, it is extremely rare for a debtor to admit under oath

that he entered into an agreement to pay an obligation with no intent to fulfill that obligation.

It is not surprising that this testimony caught the attention of the Bankruptcy Judge.

2

 It was at this point when the Court asked Debtor’s counsel where he stood on §

523(a)(2)(A) and suggested to Debtor’s counsel that it would be a good idea if he would ask

some questions to clear that up.

5

property settlement obligation under the dissolution decree, essentially because he did not

have the money to pay her. Specifically, the Debtor testified:

Q. [BY MS. GUSKE’S ATTORNEY]: Was it ever your intent to pay [Barbara] any

of that property settlement?

A. [BY THE DEBTOR]: No, sir.

Q. You signed a decree that said you would, didn’t you?

A. Well, I also told her I’d never pay her.

Q. All right. You told her you never intended to pay her off?

A. That’s right.

At what appeared to be the conclusion of the Debtor’s testimony,1 the Court asked the Debtor

about this again:

THE COURT: Did you tell Barbara Guske that you weren’t going to pay that?

THE WITNESS: I sure did.

THE COURT: You had no intention of paying it?

THE WITNESS: I told her that for sure.

THE COURT: And when the Court, the Iowa district court, ordered you to pay that

$30,000, you had no intention of paying it?

THE WITNESS: No, sir.2

After this testimony, it should have been relatively easy for Ms. Guske to prove a §

523(a)(2)(A) cause of action because intent is very often one of the most difficult, if not the

most difficult element to prove. Because a debtor rarely, if ever, admits he made a promise

to pay an obligation which he never intended to pay, and since the court cannot look inside
6

the debtor’s head to determine intent, courts have been required to formulate various lists and

tests to help them determine intent based on the surrounding circumstantial evidence. See

e.g., In re Moen, 238 B.R. at 791 (because direct proof of intent is nearly impossible to

obtain, the creditor may present evidence of the surrounding circumstances from which intent

may be inferred) (quoting In re Van Horne, 823 F.2d 1285, 1287 (8th Cir. 1987)). Needless

to say, this is often a difficult and time consuming task. Very luckily for Ms. Guske,

however, that was not the case here: the Debtor freely admitted he never intended to pay the

debt and thereby set a foundation (perhaps unwittingly) for proving a § 523(a)(2)(A) cause

of action. 

Clearly, the first three elements of fraud have been met at this point: the Debtor made

a representation by signing the dissolution decree that he would pay the $30,000 obligation;

the representation was admittedly knowingly false; and the debtor admittedly intended to

never pay his wife, despite the promise to do so.

However, the record contains no evidence that Ms. Guske justifiably relied upon the

representation contained in the dissolution decree. We recognize that the standard for

showing justifiable reliance as established by the Supreme Court in Field v. Mans is fairly

low and that a party may justifiably rely on a misrepresentation even when she could have

ascertained its falsity by conducting an investigation. See Sanford Institution for Savings v.

Gallo, 156 F.3d 71, 74 (1st Cir. 1998) (citing Restatement (Second) or Torts § 540, 541 cmt.

a (1976)). “However, the reliance on misrepresentations known to the victim to be false or

obviously false is not justified; falsity which could have been discovered by senses during

a cursory glance may not be relied upon.” Id. at 75 (citations omitted). In other words, if

there are any warning signs (i.e., obvious or known falsities, see Restatement § 541) either

in the documents, in the nature of the transaction, or in the debtor’s conduct or statements,

the creditor has not justifiably relied on his representation. Id. 

In the case at bar, by signing the consent decree, the Debtor represented that he would

pay Ms. Guske $30,000. There was no evidence that the Debtor made any affirmative

representation to Ms. Guske that he would pay her the money or honor the provisions of the

dissolution decree. To the contrary, as quoted above, the Debtor testified twice that he had

told his wife he never intended to pay her. This testimony set the groundwork for an obvious
3

 On the issue of justifiable reliance, the Bankruptcy Court’s Order merely states

“The court finds that Barbara was unaware of [the Debtor’s] intentions at the time of the

signing of the stipulated dissolution of marriage decree,” and that “Barbara justifiably relied

upon these representations and was unaware of Bill’s deceit when she signed the consent

decree.” 

7

defense to the § 523(a)(2)(A) action because if the Debtor had told Ms. Guske from the

beginning that he did not intend to pay the debt, there clearly could be no justifiable reliance

on her part. 

Unfortunately, however, no one asked Ms. Guske (who followed the Debtor on the

witness stand) whether the Debtor had ever told her that he did not intend to pay her.

Although Ms. Guske testified from page 69 of the transcript to page 124 of the transcript, the

only statement relevant to reliance came when she said she expected to be paid when they

got the divorce. We recognize that the Bankruptcy Court may have discredited the Debtor’s

testimony on this issue.3 However, it was Ms. Guske who bore the burden of proving she

relied on the Debtor’s representation that he would pay her the $30,000, and that her reliance

was justifiable. Despite being presented with the opportunity and patent reason to do so, she

never rebutted his statement that he had told her that he did not intend to pay the $30,000.

A simple denial by her would have been sufficient to put the issue in play, but her total

silence in response to his direct testimony left that testimony essentially uncontroverted.

Likewise, we believe Guske’s testimony that she “expected [to receive the money]

when we got the divorce,” without more, is not enough to meet her burden of proving she

justifiably relied on the dissolution decree, particularly considering the Debtor’s

uncontroverted testimony that he would not pay her. Although Ms. Guske was not required

to conduct any investigation as to the truth of the Debtor’s representation by signing the

consent decree that he intended to pay the money, the evidence indicates that there were

“obvious warning signs” of its falsity, namely, that he told her he would not pay it. 

As a result, because the record contains no evidence that the plaintiff met her burden

of proving she justifiably relied upon any alleged misrepresentation by the debtor, we

conclude that the Bankruptcy Court’s determination that the debt to her was
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nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) was clearly erroneous. SeeAnderson

v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985); In re

Waugh, 95 F.3d 707, 711 (8th Cir. 1996); Chamberlain v. Kula (In re Kula), 213 B.R. 729,

735 (B.A.P. 8th Cir. 1997). 

Finally, we wish to comment that we believe the appropriateness of a § 523(a)(2)(A)

action in typical cases involving marital obligations is questionable. Although the possibility

exists that a case giving rise to a § 523(a)(2)(A) action in the marital obligation context may

come along, we believe that under normal circumstances, debts arising out of marital

dissolutions are more appropriately addressed under either § 523(a)(5) or § 523(a)(15).

In this case, the Bankruptcy Court expressly declined to address the alternative §

523(a)(15) action because he determined the debt was nondischargeable under §

523(a)(2)(A). Consequently, we believe it is appropriate to remand the matter for findings

under the alternative § 523(a)(15) cause of action. Upon remand, the bankruptcy court’s

review shall be limited to the evidentiary record previously established in the trial of the

adversary proceeding.

For the foregoing reasons, the judgment of the Bankruptcy Court is reversed and

remanded for further findings pertaining to the cause of action under § 523(a)(15).

A true copy.

Attest:

CLERK, U.S. BANKRUPTCY APPELLATE PANEL,

EIGHTH CIRCUIT