Opinion ID: 626064
Heading Depth: 3
Heading Rank: 1

Heading: Clarkston’s Reliance

Text: The majority of the bankruptcy court’s opinion focused on whether Clarkston’s reliance on Oster’s false statements was reasonable. After considering the totality of the circumstances, including the nature of the loan approval documents and the value of the marketable securities line -4- No. 11-1388 Oster v. Clarkston State Bank item on the financial statements, the bankruptcy court concluded that Clarkston “did rely on the false statements of the debtor and reasonably so.” The district court agreed. Section 523(a)(2)(B)(iii)’s requirement has been interpreted to require the creditor to prove that it actually relied on the false statement (reliance in fact), and that such reliance was reasonable. Field v. Mans, 516 U.S. 59, 68 (1995). This is a higher standard than that of “justifiable reliance,” the standard for § 523(a)(2)(A) claims. This Court, in a § 523(a)(2)(A) case that was decided prior to Field, articulated five factors that may affect the reasonableness of a creditor’s reliance: (1) whether the creditor had a close personal relationship or friendship with the debtor; (2) whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; (3) whether the debt was incurred for personal or commercial reasons; (4) whether there were any “red flags” that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and (5) whether even minimal investigation would have revealed the inaccuracy of the debtor's representations. BancBoston Mortg. Corp. v. Ledford (In re Ledford), 970 F.2d 1556, 1560 (6th Cir. 1992). Oster limits his argument on appeal to claims that the bankruptcy court clearly erred when it determined that Clarkston actually relied on the false statements and representations, and when it determined that there were not sufficient “red flags” to put Clarkston on notice that something was amiss. Oster argues that Clarkston did not rely on the false financial statements because, under Michigan law, certificates of stock and certain other evidences of indebtedness are held by a married couple in a joint tenancy in the entireties. So, he claims, Clarkston should have been on notice that when Oster listed joint assets of eight million dollars in marketable securities, such assets could never have been seized pursuant to a judgment entered against only one spouse. Even if Clarkston employees did not actually know the mechanics of Michigan’s entireties law, Oster argues that they -5- No. 11-1388 Oster v. Clarkston State Bank were constructively on notice and thus could not have reasonably relied on the statements. Oster asserts this argument for three different reasons: to prove that Clarkston did not in fact rely on the statements, to show that the statements were not material, and to argue that it was a “red flag” that should have put Clarkston on notice. This argument fails. While true that Mich. Comp. Laws § 557.151 states that “bonds [and] certificates of stock . . . shall be held by such husband and wife in joint tenancy,” that same law also states that this presumption may be overcome if “therein expressly provided . . . .” When Oster presented a financial statement showing that he had over $8,000,000 in marketable securities, and then also signed a loan agreement stating that he would maintain at least $4,000,000 in marketable securities, it was entirely reasonable for Clarkston to believe that those assets were not held as entireties property.1 While Michigan affords such property a presumption of being included as part of a tenancy in the entireties, the presumption is not absolute, and Oster’s own acts suggested otherwise. Further, Michigan did not make it explicitly clear that brokerage accounts, which were at issue here, were within § 557.151’s ambit until 2007—three years after the initial loan agreement’s execution. See Zavradinos v. JTRB, Inc., No. 268570, 2007 WL 2404612 (Mich. Ct. App. Aug. 23, 2007). In response, Oster argues that the brokerage accounts at issue contained stock and bond 1 Oster argues that the loan agreement was a “covenant,” rather than a “representation,” to hold more than four million dollars in marketable securities. For our purposes, this is irrelevant. Rather, the loan agreement’s language is probative as to whether Clarkston’s reliance on the financial statements, coupled together with the covenant/representation, was reasonable. A loan officer reviewing the financial statements, and then the loan agreement, would reasonably conclude that Oster had access to marketable securities in the requisite amount. -6- No. 11-1388 Oster v. Clarkston State Bank holdings, and that § 557.151 was therefore clearly applicable even before the Michigan Court of Appeals decided Zavradinos. Be that as it may, adopting Oster’s contention would run afoul of our earlier pronouncement that the reasonable reliance provision of § 523(a)(2)(B) is not a “rigorous requirement” but one that is “directed at creditors acting in bad faith.” Martin, 761 F.2d at 1166. There is no semblance of bad faith here on Clarkston’s part, nor does Oster allege as much. The only other argument that Oster puts forth as to why Clarkston’s reliance was unreasonable is that there were inconsistencies between the marketable securities information on the financial statements and the Merrill Lynch statement printouts. This, Oster argues, was a “red flag” that triggered Clarkston’s duty to investigate. The bankruptcy court determined that the account names could have been construed as “some kind of a shorthand designation for the account[s] rather than a statement of precise legal ownership . . . . [t]hey are quite casual or even colloquial in their presentation.” The district court noted that Oster’s counsel “conceded at oral argument on February 1, 2011, that the full account statements were not introduced into evidence at the bankruptcy proceeding. Therefore, the bankruptcy court’s failure to take the full account statements into consideration cannot be clearly erroneous.” In response, Oster argues, without more, that the printouts “clearly did not support” the conclusion that the securities were jointly owned. While this is true, the printouts also fail to clearly support the idea that the accounts were not jointly owned, which is the relevant question when conducting clear-error review. Oster further argues that because the printouts did not provide support for Clarkston’s interpretation of the financial statements, Clarkston was under an obligation to further investigate Oster’s financial position. -7- No. 11-1388 Oster v. Clarkston State Bank Such an argument relies entirely upon hindsight analysis, and ignores the clear language of § 523(a)(2)(B), which asks whether the creditor reasonably relied on the statements. If Clarkston was already suspicious of whether Oster had access to the marketable securities and then received the account printouts, its failure to investigate would be more troubling. But, at the time that it made the decision to lend funds, Clarkston had no reason to believe that Oster lacked access to the marketable securities. The bankruptcy court did not err, clearly or otherwise, in determining that Clarkston actually and reasonably relied upon the false statements and loan agreements.