1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-10-1995

In Re: David Louis Cohn

Precedential or Non-Precedential:

Docket 94-1742

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Recommended Citation

"In Re: David Louis Cohn" (1995). 1995 Decisions. Paper 129.

http://digitalcommons.law.villanova.edu/thirdcircuit_1995/129
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 

 No. 94-1742 

 

 IN RE: DAVID LOUIS COHN, 

 Debtor 

 INSURANCE COMPANY OF NORTH AMERICA, 

 Appellant 

v. 

 DAVID LOUIS COHN 

 

 Appeal from the United States District Court 

 for the Eastern District of Pennsylvania 

 (D.C. No. 91-cv-06073) 

 

 Argued February 13, 1995 

 BEFORE: STAPLETON, GREENBERG and COWEN, 

 Circuit Judges

 (Filed May 10, l995 ) 

Kenneth F. Carobus (argued) 

Morris & Adelman 

Suite 400 

1920 Chestnut Street 

P.O. Box 30477 

Philadelphia, PA 19103-8477 

 Counsel for Appellant 

 Insurance Company of North America 

Alan M. Seltzer (argued) 

Ryan, Russell, Ogden & Seltzer 

1100 Berkshire Boulevard 

P.O. Box 6219 

Reading, PA 19610-0219 

 Counsel for Appellee 

 David Louis Cohn 
 

OPINION 

 

COWEN, Circuit Judge. 

 Insurance Company of North America ("INA") objects to 

the discharge in bankruptcy of a debt owed to it by David Cohn. 

This appeal turns on the proper interpretation of 11 U.S.C. § 

523(a)(2)(B). The bankruptcy court concluded, and the district 

court affirmed, that INA did not meet its burden of proving that 

it reasonably relied upon a materially false statement contained 

in an investor bond application submitted by Cohn, and the debt 

was therefore dischargeable. Because the bankruptcy court based 

its decision upon facts that were not in the record, and because 

the district court acted beyond its authority in making its own 

factual findings, we will remand the case to the district court 

with instructions to remand to the bankruptcy court for further 

fact-finding. 

I. 

 Between September 1984 and September 1985, David Cohn 

was involved in a business relationship with a financial 

consultant, Christopher Scutto, an employee of Cigna Individual 

Financial Services Company ("Cigna Financial Services"). Cohn 

became interested in a limited partnership known as The Village 

Apartments Associates Ltd. ("Village Apartments"). In order to 

become a limited partner, Cohn was required to sign a promissory 
note for his share, and to obtain a surety for the note. On 

September 12, 1985, Cohn submitted an investor bond application 

("the application") to INA, requesting INA to act as a surety on 

a promissory note in the principal amount of $47,500 which was to 

be executed between Cohn, as obligor, and the Bank of New York, 

as obligee. 

 Cohn relied upon Scutto and his staff to fill out the 

application and related documentation based upon financial and 

other information that Cohn had provided to Scutto over the 

previous year. After Scutto completed the application, Cohn 

reviewed it (though he contends that he did not read each page of 

the various documents), and signed it. 

 At the top of the application, the first paragraph 

read: 

 FOR THE PURPOSE OF PROCURING CREDIT OR 

GUARANTEE OF CREDIT FROM INSURANCE COMPANY OF 

NORTH AMERICA (SURETY), THE UNDERSIGNED 

FURNISH THIS APPLICATION AND THE INFORMATION 

CONTAINED THEREIN INCLUDING A TRUE AND 

ACCURATE STATEMENT OF THE UNDERSIGNED'S 

FINANCIAL CONDITION AS OF THE DATE OF THIS 

APPLICATION. 

Item 9 on the second page of the application requested that the 

applicant list "Real Estate Registered in own name," and 

instructed, "See Sched. No. 5." Scutto indicated in Item 9 that 

Cohn had real estate valued at $110,000. Schedule No. 5 required 

as follows: "The legal and equitable title to all the real estate 

listed in this statement is solely in the name of the 

undersigned, except as follows: . . . ." Two blank lines were 

then provided for entries by the applicant. Also in Schedule No. 
5, immediately below the two blank lines, the application 

provided a table for the applicant to fill out, requesting 

information regarding, inter alia, the description, dimensions, 

improvements, mortgages or liens, and assessed value of each 

property. It is not clear from the application whether this 

information was requested only regarding real estate not solely 

in applicant's name, or all real estate to which the applicant 

holds legal and equitable title. Neither the two blank lines nor 

the table were filled in on Cohn's application.1 

 Cohn admits that at the time that he signed the 

application, he did not own real estate valued at $110,000 

registered in his own name. Cohn testified that before he signed 

the application, he was assured by Scutto that using the ultimate 

value of the asset he was seeking to purchase as part of his 

present net worth, when applying for credit to purchase that very 

same asset, was "an accepted procedure." Scutto testified that 

such a practice was followed by other individuals in his office. 

 Scutto submitted the application to INA in October 

1985, and it was accepted later that month. In the interim, INA 

made no inquiry of Cohn or his financial consultant regarding any 

aspect of the real estate questions in the application, including 

the listing of real estate registered in Cohn's own name and the 

absence of any mortgages, liens or other indebtedness as 

reflected in Schedule No. 5. INA did obtain information from a 

 

1. For clarity, the application is made an addendum to this 

opinion. 
credit report that indicated that Cohn had no mortgage, real 

estate payments, or other indebtedness. 

 INA became the surety for the promissory note and Cohn 

became a limited partner in the Village Apartments. Scutto was 

compensated for the sale by Village Apartments. Cohn executed an 

indemnification agreement under which Cohn agreed to indemnify 

INA against any loss INA might incur in the event that Cohn 

defaulted on the promissory note. Thereafter, Cohn defaulted on 

the note and a claim was made against INA based upon the investor 

bond. Cohn later filed a Chapter 7 proceeding under the 

provisions of the Bankruptcy Code, and listed INA in his schedule 

of creditors whose debts were to be discharged. INA filed a 

complaint with the bankruptcy court seeking an exception to 

Cohn's discharge for the indebtedness arising from this 

transaction. 

 The bankruptcy court found that INA did not meet its 

burden of proof to demonstrate that it reasonably relied on a 

materially false statement when it accepted Cohn's application 

and refused to exempt Cohn's indebtedness to INA from discharge. 

Insurance Company of North America v. Cohn (In re Cohn), 131 B.R. 

19 (Bankr. E.D. Pa. 1991). While finding that Cohn's application 

contained a materially false statement regarding his financial 

condition, the bankruptcy court based its ultimate conclusion on 

its finding that Cigna Financial Services is the parent company 

of INA. The court found "troublesome" that INA was "attempting 

to have a debt declared nondischargeable based upon the fraud 

masterminded by an employee of its own parent company." Id. at 
21. The bankruptcy court held that "any reliance placed upon the 

application by INA was done at its own risk and must be found 

unreasonable." Id. Further, the court concluded that INA must 

be estopped from having the debt found nondischargeable because 

it had "unclean hands" in that an "employee of INA's parent 

company" was the ultimate source of the wrongdoing. Id. at 21-

22. 

 The district court affirmed the order of the bankruptcy 

court, but on different grounds. It found that INA did not 

reasonably rely on the statement in Item 9: 

 in that the most reasonable reading of 

[Schedule No. 5] is that it provides blank 

lined spaces for the applicant to note which 

scheduled properties are not held solely in 

his name but otherwise requires the applicant 

to specify, inter alia, the location, 

dimensions, liens against and assessed value 

of each property and indeed it being 

illogical to assume that a lender or 

guarantor would require such information only 

for collateral not solely registered to an 

applicant, in that the failure of the debtor 

to identify any property on schedule 5 was 

sufficient to trigger further inquiry by a 

reasonable lender or guarantor, see In re 

Martz, 88 B.R. 663, 674 (E.D. Pa. 1988), and 

in that a simple request of the debtor to 

identify the property listed on line 9 would 

have revealed that this was the value of the 

property the debtor proposed to acquire by 

investment of the borrowed funds. 

Insurance Company of North America v. Cohn (In re Cohn), No. 91-

6073 (E.D. Pa. June 28, 1994) (order denying appeal and 

dismissing action). This appeal followed. 

II. 
 The district court had jurisdiction to hear this case 

pursuant to 28 U.S.C. § 158(a). Our jurisdiction rests on 28 

U.S.C. § 1291 and 28 U.S.C. § 158(d). 

 As a proceeding tried initially before the Bankruptcy 

Court for the Eastern District of Pennsylvania, the standard of 

review for the district court is governed by Rule 8013 of the 

Bankruptcy Rules, which provides: 

 On an appeal the district court or bankruptcy 

appellate panel may affirm, modify, or 

reverse a bankruptcy judge's judgment, order, 

or decree or remand with instructions for 

further proceedings. Findings of fact, 

whether based on oral or documentary 

evidence, shall not be set aside unless 

clearly erroneous, and due regard shall be 

given to the opportunity of the bankruptcy 

court to judge the credibility of the 

witnesses. 

Bankruptcy Rule 8013. 

 Our review of the district court's order is plenary 

because in bankruptcy cases the district court sits as an 

appellate court. Brown v. Pennsylvania State Employees Credit 

Union, 851 F.2d 81, 84 (3d Cir. 1988) (citing Universal Minerals, 

Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981)). 

We review the findings of fact of the bankruptcy court only for 

clear error. Id. (citing In re Morrissey, 717 F.2d 100, 104 (3d 

Cir. 1983)). Findings of fact by a trial court are clearly 

erroneous when, after reviewing the evidence, the appellate court 

is "left with the definite and firm conviction that a mistake has 

been committed." Anderson v. City of Bessemer City, N.C., 470 

U.S. 564, 573, 105 S. Ct. 1504, 1511 (1985) (citation omitted). 
We have plenary review over questions of law. Epstein Family 

Partnership v. Kmart Corp., 13 F.3d 762, 765-66 (3d Cir. 1994). 

It is error for a district court, when acting in the capacity of 

a court of appeals, to make its own factual findings. Universal 

Minerals, 669 F.2d at 104. 

III. 

 The overriding purpose of the Bankruptcy Code is to 

relieve debtors from the weight of oppressive indebtedness and 

provide them with a fresh start. Exceptions to discharge are 

strictly construed against creditors and liberally construed in 

favor of debtors. See, e.g., United States v. Stelweck, 108 B.R. 

488, 495 (Bankr. E.D. Pa. 1989). Title 11, section 523(a)(2) of 

the United States Code provides for exceptions to discharge as 

follows: 

 (a) A discharge under section 727, 1141, 

1228(a), 1228(b), or 1328(b) of this title 

does not discharge an individual 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 or an 

insider's financial condition; 

 (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 . . . . 

11 U.S.C. § 523(a)(2) (1988). The burden of proving that a debt 

is nondischargeable under § 523(a) is upon the creditor, who must 

establish entitlement to an exception by a preponderance of the 

evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S. Ct. 

654, 659-60 (1991). Thus, pursuant to § 523(a)(2)(B), INA must 

prove that Cohn used a statement in writing: (1) that is 

materially false; (2) respecting his financial condition; (3) 

upon which INA reasonably relied; and (4) with the intent to 

deceive INA. 

A. 

 The bankruptcy court held that "[i]t cannot be disputed 

that debtor's application contains a materially false statement 

regarding debtor's financial condition." Cohn, 131 B.R. at 21. 

The court noted Cohn's admission that at the time he executed the 

application he did not have legal and equitable title to real 

estate valued at $110,000. Id. Citing Century Bank of Pinellas 

County v. Clark (In re Clark), 1 B.R. 614, 617 (Bankr. M.D. Fla. 

1979), the bankruptcy court held that Cohn's financial statement 

was sufficiently overstated such that it was a materially false 

statement within the meaning of § 523(a)(2)(B)(i). Id. 

 While Cohn does not deny that his statement was false, 

he asserts that the statement was not material. He cites 

Landmark Leasing Inc. v. Martz (In re Martz), 88 B.R. 663, 671 
(Bankr. E.D. Pa. 1988) and Afsharnia v. Roland (In re Roland), 65 

B.R. 1003, 1006 (Bankr. D. Conn. 1986) for the proposition that 

the "materially false" component of § 523(a)(2)(B)(i) requires a 

showing both that the statement was in fact false, and that the 

falsehood was material to the creditor's decision to enter into 

the transaction. We note, however, that In re Bogstad, 779 F.2d 

370 (7th Cir. 1985), the case upon which both the Martz and 

Roland courts rely, in actuality has a narrower holding than the 

proposition asserted by Cohn. The Court of Appeals for the 

Seventh Circuit wrote: 

 Material falsity has been defined as "an 

important or substantial untruth." A 

recurring guidepost used by courts has been 

to examine whether the lender would have made 

the loan had he known of the debtor's true 

financial condition. 

Bogstad, 779 F.2d at 375 (citations omitted) (emphasis added). 

Thus, it would appear that the effect of the falsity on the 

creditor's decision to enter into the transaction should be used 

only as one indicia of the materiality of the falsity; it is not 

in fact a second requirement of § 523(a)(2)(B)(i). 

 The materiality prong of the "material falsehood" test 

includes a certain reliance component. Under a materiality 

analysis, we refer to a creditor's reliance upon a false 

statement in the sense that an untruth can be considered 

important (or "material") if it influences a creditor's decision 

to extend credit. However, a statement can still be material if 

it is so substantial that a reasonable person would have relied 

upon it, even if the creditor did not in fact rely upon it in the 
case at hand. Cf. Kungys v. United States, 485 U.S. 759, 771, 

108 S. Ct. 1537, 1547 (1988) (materiality turns on whether the 

misrepresentation "was predictably capable of affecting, i.e., 

had a natural tendency to affect, the official decision"); United 

States v. Keefer, 799 F.2d 1115, 1127 (6th Cir. 1986) ("[T]he 

test for materiality is not whether the agency actually relied on 

the false statement, but whether the statement was capable of 

influencing, or had a natural tendency to influence, the agency's 

decision."). 

 We note that there is also a reliance component in the 

"reasonable reliance" requirement of § 523(a)(2)(B)(iii). See 

discussion below in part III B. These are certainly overlapping 

concepts. Section 523(a)(2)(B)(iii), however, requires that the 

creditor actually rely on the debtor's statement. Accordingly, 

if it were reasonable to rely on a debtor's statement, but the 

creditor did not in fact rely upon the false statement, (B)(iii) 

would not be satisfied. 

 We recognize that the distinction between the two 

reliance concepts is somewhat subtle, and to a degree, the 

reliance concept in (B)(i) is subsumed within (B)(iii). However, 

it is important to keep the distinction intact in light of the 

long-established cannon of statutory construction that in 

construing a statute, courts are obliged to give effect, if 

possible, to every word Congress used. See, e.g., Gustafson v. 

Alloyd Company, Inc., U.S. , 115 S. Ct. 1061, 1069 (1995) 

("the Court will avoid a reading which renders some words 
altogether redundant"); United States v. Menache, 348 U.S. 528, 

538-39, 75 S. Ct. 513, 519-20 (1955). 

 The element of materiality under § 523(a)(2)(B)(i) is a 

question of law. Cf. United States v. Greber, 760 F.2d 68, 73 

(3d Cir. 1985) (materiality element of the crime of making a 

false statement pursuant to 18 U.S.C. § 1001 is a question of 

law); United States v. Slawik, 548 F.2d 75, 79 (3d Cir. 1977) (in 

a perjury prosecution materiality is "a question of law, decision 

upon which is reserved for the court"). See also United States 

v. Gaudin, 28 F.3d 943, 955-65 (9th Cir. 1994) (Kozinski, J., 

dissenting) (surveying case law regarding whether materiality is 

a question of fact or law). As such, we review materiality under 

a plenary standard of review. See, e.g., Epstein Family 

Partnership, 13 F.3d at 765-66. 

 We believe that the material falsity element has 

sufficiently been established. INA offered the testimony of its 

employee, Steven Hollberg, who gave his expert opinion that the 

bond would not have been issued if the application had not 

indicated that Cohn held $110,000 in real estate. Cohn contends 

that Hollberg's conclusion is speculative and unsupported since 

he did not participate in the development of the underwriting 

criteria governing investor bonds, he did not specifically review 

or have any input in determining Cohn's eligibility, nor did he 

participate in INA's decision to act as surety. 

 We are unpersuaded by Cohn's arguments. Because the 

element of materiality under § 523(a)(2)(B)(i) is an objective 

one, our determination does not have to turn on Hollberg's 
credibility regarding INA's actual reliance on the false 

statement. It is sufficient that the false statement is one that 

is capable of influencing, or had a natural tendency to 

influence, a creditor's decision. As INA points out, Cohn's 

application indicated a total net worth of $259,000. The false 

asset of $110,000 constituted a substantial portion of his 

purported net worth. Under the circumstances of this case, we 

find it fully logical and reasonable that such a substantial sum 

could have influenced a creditor's decision to enter into such a 

transaction. We conclude that the bankruptcy court did not err 

in its determination that Cohn's financial statement was both 

false and material. 

B. 

 Both the bankruptcy court and the district court found 

that INA did not meet its burden of proof on the "reasonable 

reliance" component of § 523(a)(2)(B)(iii). The courts, however, 

based their determinations on different grounds and we address 

their analyses separately. 

1. 

 The bankruptcy court held: 

 [W]e find troublesome the fact that INA is 

attempting to have a debt declared 

nondischargeable based upon the fraud 

masterminded by an employee of its own parent 

company. For this reason, we conclude that 

any reliance placed upon the application by 

INA was done at its own risk and must be 

found unreasonable. See, Signal Consumer 

Discount Company v. Malachosky (In re 
Malachosky), 98 B.R. 222, 224 (Bankr. W.D. 

Pa. 1989). 

Cohn, 131 B.R. at 21. In Signal, cited by the bankruptcy court, 

the same corporation that extended the loan also knew that the 

written statement of the debtor's financial condition was false. 

Signal, 98 B.R. at 223. Nonetheless, the corporation tried to 

rely upon the truth of the written statement. Id. at 223-24. 

The Signal court found that the creditor had not reasonably 

relied upon the statement. Id. at 224. If INA knew that the 

written statement was untrue prior to granting the investor bond, 

then it, like the creditor in Signal, could not have reasonably 

relied upon the written statement. Indeed, the bankruptcy court 

based its holding on the factual predicate that Cigna Financial 

Services is the parent company of INA. The bankruptcy court's 

determination, however, is flawed for two reasons. First, we 

find that the trial record lacks sufficient facts from which the 

bankruptcy court could determine the exact relationship between 

Cigna Financial Services and INA. Second, there is no basis in 

the record to impute the knowledge of a Cigna Financial Services 

employee to INA. 

 There is little evidence in the record regarding the 

relationship between the two companies. INA maintains that there 

are a number of "Cigna" companies: Cigna Company is the parent, 

with subsidiaries including Cigna Holding, Inc., INA Holdings, 

Inc., Insurance Company of North America, Cigna Investment Group, 

Connecticut General Life, Ins. and Cigna Individual Financial 
Services, Inc. The following testimony of Hollberg reflects how 

confusing and muddled this issue is: 

 BY MR. SELTZER: 

 Q: Now, does Wade Hill Services of INA have 

any relationship to Cigna Financial Services? 

 A: I believe INA is related to Cigna as a 

subsidiary of Cigna. 

 Q: But Cigna, in fact, owns INA; is that 

correct? 

 A: That is correct. 

 Q: Okay. 

 THE COURT: And they own 

Connecticut General, right? 

 THE WITNESS: That's the company -- 

 THE COURT: What's left of it. 

 THE WITNESS: Yeah, exactly. 

 BY MR. SELTZER: 

 Q: Okay. And based on the information you 

have in your file, do you know who if anybody 

Mr. Scutto was working with or for at the 

time that you had dealings with him relative 

to the financial application and investor 

bond? 

 A: It's evident just from that letter that 

he was working for Cigna as a financial 

analyst, I believe it says. 

 Q: That being the parent company of INA? 

 A: That's correct. 

 Q: Okay. But you've never had any direct 

contact with Mr. Scutto at all; right? 

 A: No, I have not. 

App. at 112a-13a. 

 We are unable to determine from the record the 

relationship between INA and Cigna Financial Services; it is 

unclear from Hollberg's testimony which "Cigna" is the parent 

company of INA -- Cigna Company or Cigna Financial Services. It 

is not surprising that the relationship between INA and Cigna 

Financial Services remained unresolved since the issue was 
neither raised in the pleadings nor briefed before the bankruptcy 

court. 

 Other testimony by Hollberg and Scutto indicated that 

there was no contact or relationship between Cigna Financial 

Services and INA regarding the transaction and the real estate 

value.2 App. at 91a, 96a, 123a-24a. As INA correctly contends, 

only when the corporate veil can be pierced can INA be said to 

have knowledge of the falsity of the written statement. Wellestablished precedent holds that in order for one company to be 

held responsible for the actions of a related company, it is 

necessary that there be sufficient facts to pierce the corporate 

veil. See, e.g., Big Apple BMW, Inc. v. BMW of North America, 

Inc., 974 F.2d 1358, 1373 (3d Cir. 1992) (statement of subsidiary 

may be attributed to its corporate parent where parent dominates 

activities of subsidiary), cert. denied, U.S. , 113 S. Ct. 

1262 (1993); Culbreth v. Amosa (Pty) Ltd., 898 F.2d 13, 14 (3d 

Cir. 1990) (party seeking to pierce corporate veil must establish 

that controlling corporation wholly ignored separate status of 

controlled corporation and so dominated and controlled its 

affairs that separate existence was mere sham); A.K. Nahas 

Shopping Center, Inc. v. Reitmeyer (In re Nahas), 161 B.R. 927, 

932-33 (Bankr. W.D. Pa. 1993). The record is conspicuously 

lacking any such facts.3 

 

2. Scutto testified that he had contact with INA regarding 

Cohn's liquidity. This information exchange does not change the 

fact that INA was not aware of the false real estate value. 

3. In addition to basing its determination of unreasonable 

reliance on the putative relationship between the Cigna and INA, 
2. 

 The district court affirmed the bankruptcy court's 

holding of unreasonable reliance upon a false statement, but 

based its determination on different grounds. The district court 

found that INA unreasonably relied upon the application because 

the failure of Cohn to identify any property on Schedule No. 5 

was sufficient to trigger further inquiry by a reasonable lender 

or guarantor. The district court predicated its holding on its 

finding that: 

 the most reasonable reading [of Schedule No. 

5] is that it provides blank lined spaces for 

the applicant to note which scheduled 

properties are not held solely in his name 

but otherwise requires the applicant to 

(..continued) 

the bankruptcy court also concluded that INA must be estopped on 

equitable grounds from attempting to have the debt found 

nondischargeable, based upon the same factual predicate. The 

bankruptcy court held: 

 Furthermore, we conclude that INA must be 

estopped from attempting to have this debt 

found nondischargeable due to its unclean 

hands. It must be remembered that bankruptcy 

courts are essentially courts of equity, and 

as such, should render decisions with 

equitable considerations in mind. We believe 

that it would be extremely unfair to burden 

debtor with a finding that this debt is 

nondischargeable when the ultimate source of 

the wrongdoing can be traced directly to Mr. 

Scutto, an employee of INA's parent company. 

Cohn, 131 B.R. at 21-22. This holding also cannot stand, based 

on the same factual flaws as the unreasonable reliance 

determination. There is insubstantial record evidence regarding 

the exact relationship between Cigna Financial Services and INA, 

as well as whether knowledge of a Cigna Financial Services 

employee can be imputed to INA. 
specify, inter alia, the location, 

dimensions, liens against and assessed value 

of each property and indeed it [is] illogical 

to assume that a lender or guarantor would 

require such information only for collateral 

not solely registered to an applicant. 

Cohn, No. 91-6073 (order denying appeal and dismissing action). 

The district court opined that had INA requested Cohn to identify 

the property in Item 9 and explain this inconsistency within the 

application, Cohn would have revealed that the value listed in 

Item 9 was the property Cohn proposed to acquire by investment of 

the borrowed funds. Id.

 The district court appears to have applied the correct 

standard in determining a creditor's reasonable reliance. The 

reasonableness of a creditor's reliance under § 523(a)(2)(B) is 

judged by an objective standard, i.e., that degree of care which 

would be exercised by a reasonably cautious person in the same 

business transaction under similar circumstances. Martz, 88 B.R. 

at 673; Lesman v. Mitchell (In re Mitchell), 70 B.R. 524, 527 

(Bankr. N.D. Ill. 1987); Signal Finance of Ohio v. Icsman (In Re 

Icsman), 64 B.R. 58, 62 (Bankr. N.D. Ohio 1986). 

 A determination of reasonable reliance requires 

consideration of three factors: (1) the creditor's standard 

practices in evaluating credit-worthiness (absent other factors, 

there is reasonable reliance where the creditor follows its 

normal business practices); (2) the standards or customs of the 

creditor's industry in evaluating credit-worthiness (what is 

considered a commercially reasonable investigation of the 

information supplied by debtor); and (3) the surrounding 
circumstances existing at the time of the debtor's application 

for credit (whether there existed a "red flag" that would have 

alerted an ordinarily prudent lender to the possibility that the 

information is inaccurate, whether there existed previous 

business dealings that gave rise to a relationship of trust, or 

whether even minimal investigation would have revealed the 

inaccuracy of the debtor's representations). See Coston v. Bank 

of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir. 1993) (en 

banc); Mitchell, 70 B.R. at 527-28; Martz, 88 B.R. at 673-74. 

 We agree with the majority of courts of appeals which 

have concluded that the determination of reasonable reliance by a 

lender under § 523(a)(2)(B) is factual in nature and insulated by 

the clearly erroneous standard of review. See Coston, 991 F.2d 

at 260-61; Bank One, Lexington, N.A. v. Woolum (In re Woolum), 

979 F.2d 71, 75 (6th Cir. 1992), cert. denied, U.S. , 113 

S. Ct. 1645 (1993); In re Bonnett, 895 F.2d 1155, 1157 (7th Cir. 

1989); Trattoria, Inc. v. Lansford (In re Lansford), 822 F.2d 

902, 904 (9th Cir. 1987); Leadership Bank, N.A. v. Watson (In re 

Watson), 958 F.2d 977, 978 (10th Cir. 1992); Collins v. Palm 

Beach Savings & Loan (In re Collins), 946 F.2d 815, 817 (11th 

Cir. 1991). 

 The district court based its holding of unreasonable 

reliance upon a number of factual predicates: (1) that the most 

reasonable reading of Schedule No. 5 is that the chart requires 

the applicant to specify information regarding all property that 

the applicant owns (not just property not solely registered in 

the applicant's name); (2) that Cohn's failure to identify any 
property in Schedule No. 5 was sufficient to trigger further 

inquiry by a reasonable lender or guarantor (i.e., the existence 

of a "red flag"); and (3) that a simple request of Cohn to 

identify the property listed in Item 9 would have revealed that 

Cohn did not hold legal or equitable title to $110,000 of real 

estate. 

 While the district court may have applied the correct 

legal standard in determining INA's unreasonable reliance, the 

court acted beyond its authority in making its own factual 

findings. As we held in Universal Minerals: 

 The district court did not set aside any of 

these basic findings . . . . The district 

court chose, however, to emphasize other 

facts not mentioned in the bankruptcy court's 

opinion and to draw opposing inferences from 

the record. In doing so, the district court 

erred. A reviewing court may not substitute 

its own findings for those of the primary 

tribunal merely because it finds other 

inferences more likely. 

669 F.2d at 104. Where, as here, the record is susceptible to 

more than one reasonable reading, factual findings are only 

properly made by the bankruptcy court after a hearing where both 

parties have an opportunity to offer such evidence as they deem 

appropriate. The bankruptcy court failed to make factual 

findings on these matters. We have consistently deferred to the 

fact-finding duties of the bankruptcy court and have held that 

where sufficient facts have not been developed by that court, the 

proper response is to remand. See, e.g., Wheeling-Pittsburgh 

Steel Corp. v. McCune, 836 F.2d 153, 163 (3d Cir. 1987); In re 
Abbotts Dairies of Pa., Inc., 788 F.2d 143, 150-51 (3d Cir. 

1986). 

 Accordingly, we will remand this matter to the district 

court for that court to further remand the case to the bankruptcy 

court for a determination of the reasonableness of INA's reliance 

upon the application, based on either one of two theories: (1) 

whether there are sufficient facts, consistent with established 

Third Circuit precedent, to pierce the corporate veil and hold 

INA responsible for the actions and knowledge of a Cigna 

Financial Services employee; and/or (2) whether after considering 

the creditor's standard practices in evaluating creditworthiness, the standards of the creditor's industry in 

evaluating credit-worthiness, and the surrounding circumstances 

existing at the time of the debtor's application, INA reasonably 

relied upon Cohn's written statements in his application. 

C. 

 Because both the bankruptcy court and the district 

court held that INA unreasonably relied upon Cohn's application, 

neither court reached the "intent to deceive" element of § 

523(a)(2)(B)(iv). The legal parameters of intent to deceive may 

arise on remand and, accordingly, we deem it instructive and 

expedient to set forth directions for future guidance. 

 We acknowledge that because a debtor will rarely, if 

ever, admit that deception was his purpose, this fourth element 

of § 523(a)(2)(B) is extremely difficult for a creditor to prove 

by direct evidence. Thus, we join with other courts, including 
the Courts of Appeals for the Sixth, Tenth, and Eleventh 

Circuits, in holding that the intent to deceive can be inferred 

from the totality of the circumstances, including the debtor's 

reckless disregard for the truth. See, e.g., Equitable Bank v. 

Miller (In re Miller), 39 F.3d 301, 305 (11th Cir. 1994) ("A 

bankruptcy court may look to the totality of the circumstances, 

including the recklessness of a debtor's behavior, to infer 

whether a debtor submitted a statement with intent to deceive."); 

Driggs v. Black, (In re Black), 787 F.2d 503, 506 (10th Cir. 

1986) ("The creditor must establish that a materially false 

writing was made knowingly with the intent to deceive . . . . 

However, the requisite intent may be inferred from a sufficiently 

reckless disregard of the accuracy of the facts."); Martin v. 

Bank of Germantown (In re Martin), 761 F.2d 1163, 1167 (6th Cir. 

1985) ("The standard . . . is that if the debtor either intended 

to deceive the Bank or acted with gross recklessness, full 

discharge will be denied."). We hold that a creditor can 

establish intent to deceive by proving reckless indifference to, 

or reckless disregard of, the accuracy of the information in the 

financial statement of the debtor when the totality of the 

circumstances supports such an inference. 

 INA seeks to hold Cohn responsible for his agent 

Scutto's misrepresentations. INA argues that when an agent 

commits a fraud within the scope of the agency, that fraud is 

imputed to the principal for purposes of § 523(a)(2)(B)(iv). 

Cohn maintains that within an agency relationship, "intent to 

deceive" can only be inferred when a principal is recklessly 
indifferent to his agent's acts. While he does not dispute the 

applicability of the agency relationship, Cohn argues that he had 

no reason to doubt Scutto's recommendations regarding the INA 

investment or the method used to fill out the application. At 

the time Cohn was asked to sign the application, he questioned 

Scutto about the $110,000 listed for real estate on Item 9 of the 

application. Scutto advised Cohn that the $110,000 listed on 

Item 9 represented the projected value of the limited partnership 

investment and that this approach had been the practice of other 

individuals in the office. 

 We agree with INA that under an agency scenario, common 

law principles of agency law would probably dictate the 

imputation of an agent's fraud to a principal under a § 

523(a)(2)(B)(iv) analysis. If principles of imputability 

applied, Cohn could be held responsible for Scutto's statements 

and intent to deceive. However, under the facts of this case, 

agency law is not directly applicable. 

 In the case at hand, Cohn signed the application; Cohn

made representations to INA; INA relied on Cohn's

representations. The third party -- INA -- never relied upon 

anything Cohn's agent said on behalf of Cohn. Because INA relied 

only upon the principal's representations, agency law is 

irrelevant to this case. What Cohn relied upon -- the advice of 

Scutto -- is relevant only to the question of his own state of 

mind. Accordingly, on remand the question remains whether Cohn, 

in light of the totality of the circumstances, intended to 

deceive, or was reckless in making the representations. 
 Last, we find of interest discussion in certain 

bankruptcy courts within this circuit regarding a rebuttable 

presumption of intent to deceive that arises upon the making of a 

false financial statement, see, e.g., Horowitz Finance Corp. v. 

Hall (In re Hall), 109 B.R. 149, 155 (Bankr. W.D. Pa. 1990); 

First Seneca Bank v. Galizia (In re Galizia), 108 B.R. 63, 67 

(Bankr. W.D. Pa. 1989); Signal Consumer Discount Co. v. Hott (In 

re Hott), 99 B.R. 664, 667 (Bankr. W.D. Pa. 1989), and a shifting 

burden of production of evidence upon a creditor's establishing a 

prima facie case, see, e.g., Beneficial Consumer Discount Co. v. 

Russell (In re Russel), 18 B.R. 325, 327 (Bankr. E.D. Pa. 1982) 

(once creditor satisfies the first three elements of § 

523(a)(2)(B), a prima facie case is established and the debtor 

then has the burden of going forward with evidence on the 

question of intent to deceive); Bucks County Teachers' Federal 

Credit Union v. McVan (In re McVan), 21 B.R. 632, 634 (Bankr. 

E.D. Pa. 1982); Wybro Federal Credit Union v. Mann (In re Mann), 

22 B.R. 306, 308 (Bankr. E.D. Pa. 1982).4 We understand that 

 

4. We note that in construing § 14, sub. c(3) of the now 

repealed Bankruptcy Act, 11 U.S.C. § 32(c)(3), this Court has 

held that "once it is established that a bankrupt has benefitted 

from his issuance of a materially false written statement 

respecting his financial condition, the burden is then on him to 

show by way of excuse that his conduct was not attended by a 

blameworthy attitude or state of mind." In re Barabato, 398 F.2d 

572, 574 (3d Cir. 1968); see also In the Matter of Perlman, 407 

F.2d 861, 862 (3d Cir. 1969) ("reasonable and sufficient grounds 

were laid at the hearing to show the falsity of the statement and 

the credit relied thereon, and the burden thereupon shifted to 

the bankrupt to prove by competent evidence that he had not 

committed the offense charged"). Section 14, sub. c(3) of the 

repealed act has been incorporated into 11 U.S.C. § 727(a)(4), 

the current provision pertaining to general discharge. Whatever 
these bankruptcy courts were motivated to formulate the 

presumption and shifting burdens of persuasion in order to assist 

creditors in proving the elusive element of a debtor's intent. 

 As a preliminary matter, we are not aware of any courts 

outside of the Eastern and Western Districts of Pennsylvania that 

have utilized a shifting burdens approach. Further, we conclude 

that it is not necessary to utilize a presumption of intent or a 

shifting burden of production in processing objections to the 

discharge of a debt. We observe that in other areas of 

commercial litigation in which fraud is alleged, courts have not 

utilized a shifting burden of production. A shifting burden is 

no more necessary in the realm of discharge in bankruptcy than in 

any other area of commercial litigation in which fraud is 

alleged. It is sufficient that fraud must be pled and proven 

with particularity. See Fed. R. Civ. P. 9(b).5 Thus, the 

(..continued) 

precedential value our prior interpretations of the former "false 

financial statement" exception to general discharge has to 

current § 727(a)(4), it does not extend to our present 

interpretation of § 523(a)(2). See, e.g., 4 Collier on 

Bankruptcy ¶ 727.01[1], at 727-6 n.5 (15th ed. 1985) ("The 

concept of nondischargeability of a debt under section 523 is not 

to be confused with denial of discharge under section 727. It is 

entirely possible for a debtor with nondischargeable debts to 

receive a discharge."); Fluehr v. Paolino (In re Paolino), 75 

B.R. 641, 647-48 (Bankr. E.D. Pa. 1987); Citizens State Bank of 

Maryville v. Walker (In re Walker), 53 B.R. 174, 176-182 (Bankr. 

W.D. Mo. 1985). 

5. Rule 9 of the Federal Rules of Civil Procedure provides: 

 (b) Fraud, Mistake, Condition of the Mind. 

In all averments of fraud or mistake, the 

circumstances constituting fraud or mistake 

shall be stated with particularity. Malice, 

intent, knowledge, and other condition of 

mind of a person may be averred generally. 
creditor at all times retains both the burden of proof and the 

burden of production regarding all four elements of § 

523(a)(2)(B). 

 We believe that the standards adopted today (i.e., that 

"intent to deceive" includes both recklessness and subjective 

intent and that it is not appropriate to use a shifting burdens 

analysis) achieve the preferable balance between a creditor's 

difficult burden of proof and the underlying purpose of 

bankruptcy law to provide the debtor with a "fresh start." Upon 

remand, if the bankruptcy court determines that INA reasonably 

relied upon the application and thereby reaches the element of 

intent to deceive, it should proceed to determine intent to 

deceive in accordance with the principles we have articulated 

today. 

 IV. CONCLUSION 

 For the foregoing reasons, the order of the district 

court affirming the judgment of the bankruptcy court will be 

reversed. We will remand this matter to the district court with 

instructions that it remand the case to the bankruptcy court for 

further fact-finding and determinations on the issues of 

reasonable reliance and intent to deceive, pursuant to 11 U.S.C. 

§ 523(a)(2)(B), in accordance with the legal standards 

articulated in this opinion. 

(..continued) 

Fed. R. Civ. P. 9(b).