Opinion ID: 4514311
Heading Depth: 3
Heading Rank: 2

Heading: 2013–14 Loan Renewal

Text: Veritex next argues that the bankruptcy court clearly erred in finding that it did not reasonably rely on Osborne’s 2013 personal financial statement 27 In re Norris, 70 F.3d 27, 30 n.12 (5th Cir. 1995) (quoting Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 305 (11th Cir. 1994)). 28 Id. at 31 (5th Cir. 1995) (brackets removed) (quoting First National Bank LaGrange v. Martin (In re Martin), 963 F.2d 809, 814 (5th Cir. 1992)). 10 Case: 19-10479 Document: 00515338394 Page: 11 Date Filed: 03/10/2020 No. 19-10479 that Karen provided Veritex as part of the Osbornes’ request for a renewed loan.29 We agree. The bankruptcy court first addressed the reasonableness of Veritex’s reliance when Osborne initially requested a loan extension. Looking to the first factor in Coston, the bankruptcy court observed that the two parties had no preexisting relationship that would have lulled Veritex into a sense of trust. The evidence showed, however, that Osborne and Veritex had built up a working relationship over the previous thirteen months. Indeed, Osborne had a reputation as a well-respected cardiologist within the community, and he had been forthcoming about SOTHC’s financial struggles.30 These dealings, coupled with his reputation as a superbly well-trained cardiologist, demonstrate that Veritex had reason to trust Osborne at this stage in their dealings. Next, the bankruptcy court criticized Veritex for relying on the financial statement Karen provided because it was not on Veritex’s own form and was unsigned. Veritex, however, showed that it followed its standard practice in extending the loan.31 For example, it provided uncontroverted evidence that clients were not required to use the bank’s own forms when providing financial statements, and that clients used their own forms fifty percent of the time. 29 On appeal, Osborne does not challenge the bankruptcy court’s finding that the omission of the PMC lease default was done with the intent to deceive. Instead, Osborne argues that Karen’s fraudulent intent may not be imputed to him, and that regardless, the bankruptcy court erred in finding that she was his agent. Both issues are discussed in Section II, Part B of this opinion. 30 The record reflects that Osborne was an accomplished doctor who had also obtained a Ph.D. Osborne did his postdoctoral at Harvard, where he published numerous articles. In 2003, the American Heart Association named him the Cardiac Care Provider of the Year. He also taught at numerous universities throughout his career. In addition, Osborne gave public talks, which generated significant speaking fees. 31 See In re Young, 995 F.2d 547, 549 (5th Cir. 1993) (observing “uncontroverted testimony that the relevant practice in the industry was to rely solely on the documentation presented by the applicant” in finding that the creditor reasonably relied). 11 Case: 19-10479 Document: 00515338394 Page: 12 Date Filed: 03/10/2020 No. 19-10479 Additionally, no law or evidence suggests that a lack of a signature on a financial statement should be considered a red flag; § 523(a)(2)(B) does not require the written statement be signed, and Veritex established it was within bank protocol to accept a document without a signature. Finally, the bankruptcy court found that the financial statement listed no contingent liabilities—including the Osbornes’ guarantee of the Veritex loan—and that Wood approved the statement after being alerted to this absence. It is reasonable, however, that Veritex would not have been alarmed by this, because this was its loan—the Osbornes’ personal guarantee of the SOTHC loan was therefore well-known by all parties.32 The record showed Wood understood the report to have a lower level of detail but did not believe this one omission required further inquiry. Veritex provided uncontested evidence that it had no reason to believe the Osbornes would have other contingent liabilities, and that regardless, Osborne’s 2012 agreement required that he update his financial statement with any material changes. Thus, the sole omission of the SOTHC loan did not make Veritex’s reliance unreasonable. In finding Veritex’s reliance unreasonable, the bankruptcy court also highlighted alleged red flags that existed when Veritex finally renewed the loan in March 2014. First, it stressed that Veritex knew SOTHC was struggling and was relying primarily on the Osbornes’ guarantee for repayment. The court also recognized that SOTHC was losing money, and Osborne was funding its losses with loans. It additionally noted that SOTHC’s financial statements for the medical equipment rental expenses showed that the 2013 profit and 32 See In re Norris, 70 F.3d 27, 30 (5th Cir. 1995) (affirming bankruptcy court’s finding that a financial statement’s “only obvious substantial error . . . was one of which the bank already was aware” and “that the flawed financial statement was ‘not such a ‘red flag’ as to invoke a duty to investigate’”). 12 Case: 19-10479 Document: 00515338394 Page: 13 Date Filed: 03/10/2020 No. 19-10479 loss (P&L) statement was presented on an accrual basis, whereas the first quarter of the 2014 P&L statement was on a cash basis. These red flags, however, spoke to the soundness of Veritex’s decision to extend the loan to SOTHC rather than dishonesty by Osborne.33 The bankruptcy court was correct that Veritex was struggling and unable to service the loan. It is clear from the record, however, that Veritex, in extending the loan, was relying on Osborne’s personal guarantee. The fact that SOTHC’s financial statements showed Osborne’s practice was in financial trouble would not have alerted Veritex to the possibility that Osborne was lying on his personal financial statement. If anything, it showed that Osborne was upfront about any financial struggles SOTHC was facing. As to the P&L statement, to the untrained eye this could give an inflated sense of SOTHC’s cash flow after paying its expenses. But Veritex understood that SOTHC was struggling and unable to meet its expenses. In any event, this related more to the condition of SOTHC rather than the ability of Osborne to personally guarantee the loan. Finally, the bankruptcy court found Veritex’s reliance to be unreasonable because the Osbornes’ September 2013 financial statement on which it relied was seven months old, and a minimal amount of investigation would have revealed the Osbornes’ deceit.34 Yet the record illustrates that Veritex did not 33 See, e.g., Fulton, N.A. v. Robbins (In re Robbins), 562 B.R. 83, 109 (Bankr. E.D. Pa. 2016) ((“[T]he reasonableness issue under § 523(a)(2)(B) is not whether it was reasonable for the Plaintiff to have invested in the Debtor’s business, but whether it was reasonable for [it] to have relied upon the Debtor’s statements . . . without making further inquiries before deciding to invest.”) (citation omitted); First State Bank of Munich v. Braathen (In re Braathen), 364 B.R. 688, 701 (Bankr. D.N.D. 2006) (“The issue of reasonableness presented under section 523(a)(2)(B) is not whether it was reasonable for the Bank to have loaned the Debtor money, but whether it was reasonable for the Bank to have relied upon his statement . . . in extending him credit.”). 34 The bankruptcy court understood the September 2013 financial statement as provided for the initial sixty-day extension. This is incorrect. The record shows Veritex extended the loan on September 13, 2012, so that it would not go into default while the bank decided whether or not to extend the loan another year; the Osbornes provided the financial statement on September 27, 2013, as part of its loan renewal request. 13 Case: 19-10479 Document: 00515338394 Page: 14 Date Filed: 03/10/2020 No. 19-10479 blindly renew Osborne’s loan in bad faith. Although the financial statement was not current, Veritex did follow up on the statement, further inquiring into the Osbornes’ personal financial statement and SOTHC’s financial records months later.35 Moreover, Veritex was entitled to accept Osborne’s promise to update the financial statement with any material changes. In addition, Veritex obtained a credit report on Osborne after the judgment by confession was entered, which failed to reveal the judgment against him and showed his credit score had actually gone up two points since August 2012 (from 710 to 712). The credit report and further email inquiries demonstrate that a “minimal amount of investigation” would not have uncovered Osborne’s deceit. It is clear that Veritex investigated the Osbornes’ loan request for months before reaching its decision. For example, in Wood’s 2014 loan presentation to the bank loan committee, he explained that he had met with the Osbornes in December 2013 to discuss the loan extension. His report reasoned that SOTHC had run into bad luck in its first year of operation; Karen, who was going to oversee the practice, had been diagnosed with cancer, and SOTHC’s two office managers “proved to be less than capable and reliable.”36 Wood reported that Karen’s father had since been brought in to assist with the business. Karen’s father had many years of experience helping troubled businesses, and he had previously provided up-to-date financial statements and completed certifications and billings. Wood also knew that Osborne earned annual speaking fees of $325,000, which could help support SOTHC. And again, Osborne’s credit score made no reference to a judgment 35 For example, in one email dated December 27, 2013, Wood told Karen Osborne and her father that a caveat to the loan renewal was that Veritex would “need to confirm the Osborne’s [sic] personal liquidity during this renewal process.” He also asked for clarification on the information provided on the Osbornes’ income statements. 36 Medicaid and Medicare certification billing, staff certification for insurance billings, and up-to-date financial information all suffered as a result. 14 Case: 19-10479 Document: 00515338394 Page: 15 Date Filed: 03/10/2020 No. 19-10479 against him in Pennsylvania. Veritex’s efforts show that it did not idly ignore red flags, and help demonstrate that “even minimal investigation” would not have “revealed the inaccuracy of the debtor’s representations.”37 We conclude that Veritex exercised reasonable diligence in evaluating the Osbornes’ financial condition before renewing the loan. The fact that SOTHC was ultimately unable to service the loan did not make Veritex a bad faith lender. The record is clear that Veritex looked to Osborne to guarantee the loan, and it relied heavily on his financial statement. The alleged red flags were not significant enough to alert Veritex to Osborne’s dishonesty. The bankruptcy court erred in focusing on the soundness of the loan to SOTHC rather than the truthfulness of Osborne’s representations. B. Imputation of Fraudulent Intent under § 523(a)(2)(B) Veritex asserts that the bankruptcy court correctly determined that Karen’s intent to deceive could be imputed to Osborne, thereby satisfying the requisite intent under § 523(a)(2)(B)(iv). Osborne, however, contends the bankruptcy court erred in concluding that his wife Karen could act as his agent when she submitted the 2013 financial statement as part of their loan renewal request. First, Osborne contends that § 523(a)(2)(B)(iv) requires that the fraudulent statement be one “that the debtor caused to be made or published with intent to deceive,” and thus a fraudulent statement by a debtor’s partner or agent may not be imputed to the debtor.38 Second, he argues the bankruptcy court erred in finding that Karen actually was his agent when she submitted the 2013 financial statement. We have held that fraud of one partner may be imputed to an agent or partner for determining dischargeability under § 523(a)(2)(A), which provides 37 In re Coston, 991 F.2d 257, 261 (5th Cir. 1993) (en banc) (per curiam). 38 11 U.S.C. § 523(a)(2)(B) (emphasis added). 15 Case: 19-10479 Document: 00515338394 Page: 16 Date Filed: 03/10/2020 No. 19-10479 an exception to discharge from any debt made under false pretenses other than a written statement respecting the debtor’s financial condition.39 In In re Luce, this court held that a husband’s fraud could be imputed to his wife under § 523(a)(2)(A) because his wife was a partner in the business, she made misrepresentations while acting on behalf of the partnership, and she shared in the monetary benefits of the fraud.40 Although this court has not yet addressed whether fraud may be imputed to another for determining dischargeability under § 523(a)(2)(B), Supreme Court law points in that direction. In 1885, the Court in Strang v. Bradner held that a partner’s fraud can be imputed to a debtor to make a debt nondischargeable under the predecessor statute to § 523(a)(2).41 The 1978 Bankruptcy Reform Act shows that Congress did not intend to dramatically alter existing bankruptcy law when it enacted § 523(a)(2)(B).42 The Court has also stated that “if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific.”43 It has “followed this rule with particular care in construing the scope of bankruptcy codifications.”44 Thus, nothing suggests Congress sought to circumvent 39 Luce v. First Equipment Leasing Corporation (In re Luce), 960 F.2d 1277, 1282 (5th Cir. 1992) (per curiam). The court in Luce cited approvingly Fluehr v. Paolino (In re Paolino), 75 B.R. 641, 649 (Bankr. E.D. Pa. 1987), which held that “if husband acted as wife’s agent within the scope of the agency relationship, then the agent’s fraud could be imputed to the principal under § 523(a)(2).” In re Luce, 960 F.2d at 1282 n.6. 40 In re Luce, 960 F.2d at 1283. In Deodati v. M.M. Winkler & Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d 746, 751 (5th Cir. 2001), we clarified that one does not have to share in the monetary benefits of the fraud, holding “if a debt arises from fraud and the debtor is liable for that debt under state partnership law, the debt is nondischargeable under § 523(a)(2)(A).” 41 114 U.S. 555, 561 (1885). 42 S.Rep. No. 95-989, 2d Sess. at 78 (1978) (noting that § 523(a)(2) is “modified only slightly from current section 17a(2)”); H.R.Rep. No. 95-595, 1st Sess. at 364 (1977) (same). 43 Kelly v. Robinson, 479 U.S. 36, 47 (1986) (quoting Midlantic National Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494, 501 (1986)). 44 Id. 16 Case: 19-10479 Document: 00515338394 Page: 17 Date Filed: 03/10/2020 No. 19-10479 Strang.45 Furthermore, this court in In re Luce endorsed Strang when holding a partner’s fraud could be imputed to a debtor under § 523(a)(2)(A).46 It would be anomalous for us to now hold that fraud can be imputed to an innocent partner or agent under § 523(a)(2) unless that fraud happens to be in the form of a written statement.47 We therefore hold that a fraudulent statement by a debtor’s partner or agent may be imputed to the debtor under § 523(a)(2)(B). Osborne next argues that the bankruptcy court erred in finding that Karen was his agent. An agency relationship based on actual authority arises when “the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.”48 An agency relationship based on apparent authority is formed “when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.”49 The bankruptcy court found that Karen was Osborne’s actual and apparent agent.50 The record supports the court’s finding. Osborne directed Karen to manage their personal financial affairs, and she had the authority to prepare their 2013 financial statement because she prepared their 2012 financial statement that he signed. Karen also worked with Wood in securing the loan renewal. Osborne cites numerous cases holding that marriage alone does not 45 See Federal Dep. Ins. Corp. v. Calhoun (In re Calhoun), 131 B.R. 757, 762 (Bankr. D.D.C. 1991) (“There is no evidence that Congress intended to abandon Strang v. Bradner in enacting § 523(a)(2)(B).”). 46 960 F.2d 1277, 1282 (5th Cir. 1992) (per curiam). 47 See, e.g., In re Calhoun, 131 B.R. at 762 (“[I]t would be anomalous to allow imputation of fraud for purposes of § 523(a)(2)(A) but not for § 523(a)(2)(B).”). See also In re Paolino, 75 B.R. 641, 646–47 (Bankr. E.D. Pa. 1987) (holding that an agent’s fraud may be imputed to a partner under § 523(a)(2)). 48 RESTATEMENT (THIRD) OF AGENCY § 2.01 (2006). 49 Id. § 2.03. 50 The district court, affirming the bankruptcy court’s conclusion that Veritex did not reasonably rely, never reached this issue. Veritex Cmty. Bank v. Osborne, No. 4:18-CV-00129- O, 2019 WL 1382646, at  n.1 (N.D. Tex. Mar. 27, 2019). 17 Case: 19-10479 Document: 00515338394 Page: 18 Date Filed: 03/10/2020 No. 19-10479 create an agency relationship, but the record shows that Karen was more than just Osborne’s wife—she oversaw SOTHC’s day-to-day finances. The bankruptcy court thus did not err in finding Karen was Osborne’s agent.