Court Opinion

ID: 4514619
Source: CourtListenerOpinion
Date Created: 2020-03-11 00:02:04.238417+00
Date Added: 2024-06-11T12:34:09.681212
License: Public Domain

FILED
                                                              MAR 27 2019
                       ORDERED PUBLISHED
                                                          SUSAN M. SPRAUL, CLERK
                                                            U.S. BKCY. APP. PANEL
                                                            OF THE NINTH CIRCUIT

         UNITED STATES BANKRUPTCY APPELLATE PANEL
                   OF THE NINTH CIRCUIT

In re:                                    BAP No.    OR-18-1286-KuFS

ANTOINETTE MICHELLE MAXWELL,              Bk. No.    3:17-bk-32084-DWH

                       Debtor.            Adv. No.   3:17-ap-03113-DWH

ANTOINETTE MICHELLE MAXWELL,

                       Appellant,
v.                                         OPINION

STATE OF OREGON,

                       Appellee.

                 Argued and Submitted on March 20, 2019
                          at Portland, Oregon

                         Filed – March 27, 2019
                    Ordered Published – April 30, 2019

             Appeal from the United States Bankruptcy Court
                        for the District of Oregon

         Honorable David W. Hercher, Bankruptcy Judge, Presiding

Appearances:     Michael Fuller argued for appellant Antoinette Michelle
                 Maxwell; Sander Marcus Hull of Oregon Department of
                    Justice argued for appellee State of Oregon.

Before: KURTZ, FARIS, and SPRAKER, Bankruptcy Judges.

KURTZ, Bankruptcy Judge:

      For several years, the State of Oregon (State) gave food stamp and

public assistance benefits to debtor, Antoinette Michelle Maxwell, based on

earned and unearned income reported in her benefit applications. State

later discovered that Ms. Maxwell failed to report all her income and thus

received benefits to which she was not entitled.

      State filed an adversary proceeding against Ms. Maxwell seeking a

determination that the overpayments were nondischargeable under

§ 523(a)(2).1 After a trial and supplemental briefing by the parties, the

bankruptcy court issued a Letter Opinion finding that § 523(a)(2)(B)

applied to State's claim and that all elements of the statute were met. The

bankruptcy court entered judgment in favor of State, finding that

overpayments totaling $16,288.43 were nondischargeable. This appeal

followed. We AFFIRM.

      1
      Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                           2
                                   FACTS

A.    Prepetition Events

      Ms. Maxwell received food stamp benefits from State from

February 1, 2009 through May 31, 2013, through the Supplemental

Nutrition Assistance Program (SNAP). She also received public assistance

benefits from State through the Temporary Assistance for Needy Families

program (TANF) from April 22 through September 30, 2009. Finally, from

September 1, 2009 through May 31, 2013, Ms. Maxwell received public

assistance benefits through the Employment Related Day Care program

(ERDC).

      During these time periods, Ms. Maxwell had earnings from her

employment with Oregon Health & Science University (OHSU) and from

her employment as a domestic employee for Martin Meaux. She also

received child support payments.

      State began an investigation of Ms. Maxwell's income due to a report

that she had failed to advise State about a change of circumstances; i.e., that

her husband was part of her household. Although there was insufficient

evidence to confirm that her husband was part of her household, the

investigation revealed that Ms. Maxwell failed to report child support

payments and earned income on her benefit applications. In January 2017,

State recorded a Distraint Warrant for the balance due from Ms. Maxwell

for the overpayment of public assistance benefits in the amount of

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$16,288.42. This pushed Ms. Maxwell into a chapter 7 bankruptcy in June

2017.

B.      Bankruptcy Events

        1.   The Adversary Complaint

        State filed an adversary proceeding against Ms. Maxwell seeking to

find the overpayment nondischargeable under § 523(a)(2). State alleged

that Ms. Maxwell had a duty to accurately report her earnings and her

receipt of child support payments while receiving food stamps and public

assistance benefits. State further alleged that Ms. Maxwell failed to report

her earnings from Mr. Meaux or her child support payments. According to

State, this failure constituted material false representations that she had

insufficient income with which to meet the needs of her family. Finally,

State maintained that it acted in reliance on Ms. Maxwell's false

representations by providing her benefits which she was not entitled to

receive.

        2.   State's Trial Memorandum

        In its trial memorandum, State argued that § 523(a)(2)(A) applied.

State asserted that it justifiably relied on Ms. Maxwell's false

representations when it provided her with public assistance benefits. In

support, State explained that it provides public assistance benefits to

numerous applicants and must rely upon the truth of each applicant's

statements in their applications. According to State, its reliance on

                                       4
Ms. Maxwell's false representations was justifiable under the

circumstances.

      3.    The Trial

      At the trial, State proceeded to prove its case presumably under

§ 523(a)(2)(A). State's sole witness was Marisol Carter, an employee with

the Department of Human Services, Overpayment Writing Unit. Ms. Carter

testified about the department's operations and procedures. As a benefit

overpayment specialist, she was familiar with State's policies and

procedures for evaluating benefit eligibility for the TANF, SNAP and

ERDC programs. Ms. Carter confirmed that the applicants fill out the

benefit application, not State, and that they must identify the benefits for

which they are applying so that State can determine eligibility. She testified

as to how benefits were calculated and the significance of accurately

completing applications.

      Ms. Carter explained that State calculates the amount of a benefit that

an individual is entitled to based on his or her income and the number of

household members. Ms. Carter further explained that to qualify for

benefits, the household must be under the Countable Income Limit, which

is a government-mandated figure. According to Ms. Carter, if the amount

of earned income is reported inaccurately to State, the household ends up

receiving more benefits than what they are allowed. Ms. Carter also

testified about the overpayments made to Ms. Maxwell, and how they were

                                       5
calculated with respect to TANF and ERDC benefits.

      On cross-examination, Ms. Maxwell's attorney, Mr. Fuller, asked

Ms. Carter whether she had personal knowledge about whether anyone

with State ever actually relied on Ms. Maxwell's representations in her

applications when deciding whether to issue her public assistance from

2009 to 2013. Ms. Carter replied “no.”

      At that point, Mr. Fuller moved for a directed verdict on the grounds

that there was no evidence that Ms. Maxwell had the intent to deceive and

no evidence showing actual reliance by State on the information

Ms. Maxwell provided in her benefit applications.

      In response, State's attorney, Mr. Hull, explained that benefit

applications asked for unearned income from any source, including child

support, and for earned income. Mr. Hull stated that the applicants sign the

document under penalty of perjury that they are providing accurate

information. According to Mr. Hull, it was reasonable for State, under the

circumstances, to rely on individuals telling the truth on the applications.

Mr. Hull further argued that it was clear from the reports generated, and

the information that State had collected, that Ms. Maxwell knew enough

about the application process. She put information about her employment

income from OHSU, but did not put down information about income from

Mr. Meaux or her child support payments. From State's perspective,

Mr. Hull argued, the only reasonable conclusion was that Ms. Maxwell

                                      6
intended to keep this information from State so that she could increase her

benefits.

      In reply, Mr. Fuller argued that there was no evidence showing that

State reviewed any of the documents submitted by Ms. Maxwell, which

suggested that State gave benefits without regard to anything in the

applications.

      The bankruptcy court denied the motion for a directed verdict,

finding that there was enough evidence for it to infer that State relied on

the information in Ms. Maxwell's applications and the absence of

information.

      Ms. Maxwell subsequently testified and was cross-examined. She

testified that she was a domestic employee for Mr. Meaux and earned

about a couple hundred dollars a month, but was not sure of the exact

amount. On cross examination, Mr. Hull asked her why she did not list

income from Mr. Meaux on one of her applications. Ms. Maxwell

answered: “I don't know. I don't remember. To my knowledge, I forgot to

put it down. It wasn't intentionally.” Later, when asked why she did not

list the child support payments and income from Mr. Meaux, Ms. Maxwell

testified: “Because, at the time, I forgot about the second income.”

Ms. Maxwell also testified that she received letters from State which

explained that she did not need to report all her income if it was below a

certain level. She could not remember when she received those letters, but

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relied upon them since she earned so little.

      During closing argument, Mr. Hull maintained that State's reliance

on Ms. Maxwell's assertions in her application was “almost” res ipsa

loquitur. In other words, it was Ms. Maxwell's representations or omissions

in her applications that resulted in State paying the money to her. Mr. Hull

also walked the bankruptcy court through State's calculations for the

overpayments.

      In response, Mr. Fuller argued that State was imposing or asking the

bankruptcy court to adopt a new rule—res ipsa loquitur means that benefits

equal reliance. Mr. Fuller maintained that was not the law and reiterated

that there was no evidence in the record of reasonable reliance.

      The bankruptcy court took the matter under submission.

      4.    The Supplemental Briefing

      The bankruptcy court subsequently held a hearing on the matter due

to its questions about the record. The court stated that it had to determine

whether every dollar of the alleged overpayment was attributable to

§ 523(a)(2) fraud. As a result, the bankruptcy court requested State to

further explain the legal basis for each of the line items on State's

calculations for benefits and explain how the items in the calculation were

supported by other items in the record.

      Moreover, subsequent to trial, the Supreme Court issued its decision

in Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018), which the

                                       8
bankruptcy court interpreted as requiring Ms. Maxwell's omissions in her

written applications to be treated as false financial statements under

§ 523(a)(2)(B). As such, under § 523(a)(2)(B), State had to prove reasonable

reliance on Ms. Maxwell's misrepresentations.

      In its supplemental brief, State argued that the holding in Lamar had

no material impact on the instant case. State maintained that Ms. Maxwell

conveyed her financial condition through the benefit applications such that

under Lamar, the benefit applications would be considered written

statements for her financial condition because they relate to her overall

financial status. State asserted that the elements for a § 523(a)(2)(B) claim

were met. Noting that Ms. Maxwell was obligated to provide true and

complete information, it contended that she failed to do so by not including

employment and income from Mr. Meaux or her child support in every

application she signed between January 2009 and January 2013. State

argued that the evidence showed she was working for Mr. Meaux for the

relevant time periods even though there was no pay advice for certain

months.

      In addition, State claimed that the elements for a § 523(a)(2)(A) claim

had also been met. State noted that nondisclosure of a material fact in the

face of a duty to disclose had been held to establish the requisite reliance

and causation for actual fraud. Apte v. Romesh Japra, M.D., F.A.C.C., Inc.

(In re Apte), 96 F.3d 1319 (9th Cir. 1996). State maintained that Ms. Maxwell

                                       9
had a duty to disclose all sources of employment and income on her benefit

applications and, by failing to do so, committed fraud by omission.

      Finally, State attached a line item detail for the calculation of income

for each month Ms. Maxwell received food stamps and TANF benefits. In

addition, State provided the legal basis for each line item for those benefits.

State further explained that income calculations are less exacting under

ERDC and set forth the legal basis for such calculations.

      Ms. Maxwell's supplemental brief consisted of three pages. She

objected to references of data, sources, or calculations not already admitted

into evidence at trial and contained in the record. The brief also stated that

the Lamar decision should not affect the court's analysis in this case because

the only statements at issue were Ms. Maxwell's benefit applications, which

were indisputably made in writing.

      5.    The Letter Opinion

      On October 18, 2018, the bankruptcy court issued its findings of fact

and conclusions of law in a Letter Opinion.

      First, the court noted that State had not specified whether it was

relying on § 523(a)(2)(A) or (B) in its complaint. The bankruptcy court

ultimately found that § 523(a)(2)(B) rather than subsection (A) applied

because (1) the misrepresentations on which State relied—nondisclosure of

some of Ms. Maxwell's sources of income—had a direct relation to and thus

were “respecting” her overall financial status and (2) Ms. Maxwell's

                                      10
omissions of material information were from a writing respecting her

financial condition.

      Second, the court found that State had proved all the elements of

§ 523(a)(2)(B). According to the bankruptcy court, Ms. Maxwell made

statements in her benefits applications that were materially false; i.e., she

failed to report income from Mr. Meaux and her child support payments.

The court found that Ms. Maxwell knew the representations were false. In

this regard, the bankruptcy court was not persuaded by her testimony that

the income from Mr. Meaux was so small as to be forgettable as her income

ranged from $134.28 to $626.65. The court was also not persuaded by her

testimony that she “didn't really read the applications” as she properly—

but incompletely—completed blanks in her applications disclosing her

primary employer and did not testify to any difficulty reading.

      The court further found that Ms. Maxwell intended to deceive State

as each application included the following statement above the signature

line “by signing below I agree that I have given DHS true, correct, and

complete information.” The court held that she either knew that she had

omitted material information from the applications or acted so recklessly as

to warrant a finding that she acted fraudulently.

      Next, the bankruptcy court determined that State had relied on the

representations in her applications by providing benefits to her. The court

noted that a logical inference was that State would not provide benefits in

                                       11
the absence of an application from an apparently eligible person. The

bankruptcy court disagreed with Ms. Maxwell's argument that, to prove

reliance, State must reconstruct her applications by adding information that

should have been included and then calculating the benefits that would

have been paid under the corrected applications. The court also disagreed

that State's access to a database with information about Ms. Maxwell's

employers and child support payments, which it apparently used in

investigating her, excused her from truthfully answering application

questions about her employment income.

      The bankruptcy court further decided that State's reliance was

reasonable. The court reached this conclusion based on Ms. Carter's

testimony that application forms, systems, and policies that State uses to

accept and process benefit applications, and to recover overpayments, are

designed to comply with laws, including federal regulations, regulating

eligibility for the benefits. In the end, the court found that although

Ms. Maxwell questioned State's actual reliance on her benefit applications,

she didn't offer any evidence or argument that State's reliance wasn't

reasonable.

      Finally, the bankruptcy court found that Ms. Maxwell's debt to State

proximately resulted from her misrepresentations. The court observed that

Ms. Maxwell presented no evidence to contradict State's calculations of the

overpayment amounts.

                                       12
      The bankruptcy court entered judgment in favor of State, finding the

overpayments nondischargeable under § 523(a)(2)(B). Ms. Maxwell filed a

timely appeal.

                                JURISDICTION

      The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334

and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

                                      ISSUE

      Whether State met its burden of proof by a preponderance of the

evidence that it reasonably relied on Ms. Maxwell's written applications for

public assistance from 2009 to 2013.

                           STANDARD OF REVIEW

      Whether a creditor reasonably relied upon false statements is a

question of fact which is reviewed under a clearly erroneous standard.

Siriani v. Nw. Nat'l Ins. Co. (In re Siriani), 967 F.2d 302, 307 (9th Cir. 1992);

Gosney v. Law (In re Gosney), 205 B.R. 418, 421 (9th Cir. BAP 1996). A finding

is clearly erroneous if it is “illogical, implausible, or without support in the

record.” Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010)

(citing United States v. Hinkson, 585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009)

(en banc)). The clearly erroneous standard does not “entitle a reviewing

court to reverse the finding of the trier of fact simply because it is

convinced that it would have decided the case differently.” Anderson v. City

of Bessemer City, 470 U.S. 564, 573 (1985).

                                         13
                                 DISCUSSION

A.    Legal Standards: Reliance Under § 523(a)(2)(B)

      To prevail on an exception to discharge claim under § 523(a)(2)(B),

the creditor must show, by a preponderance of the evidence, that: (1) it

provided debtor with money, property, services or credit based on a

written representation of fact by the debtor as to the debtor's financial

condition; (2) the representation was materially false; (3) the debtor knew

the representation was false when made; (4) the debtor made the

representation with the intention of deceiving the creditor; (5) the creditor

relied on the representation; (6) the creditor's reliance was reasonable; and

(7) damage proximately resulted from the representation. Grogan v. Garner,

498 U.S. 279, 286-87 (1991) (setting forth the preponderance of the evidence

standard); Candland v. Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469

(9th Cir. 1996); Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch), 237

B.R. 160, 167 (9th Cir. BAP 1999); In re Siriani, 967 F.2d at 304 (adopting the

elements required under the companion § 523(a)(2)(A), with the additional

and obvious requirement that the alleged fraud stem from a false statement

in writing). The bankruptcy court found that State had proven all these

elements by a preponderance of the evidence.

      On appeal, Ms. Maxwell contests the sufficiency of the evidence on

only the reliance requirements. Under § 523(a)(2)(B), the creditor's reliance

must be both actual and reasonable. Heritage Pac. Fin., LLC v. Montano (In re

                                        14
Montano), 501 B.R. 96, 115 (9th Cir. BAP 2013) (citing Field v. Mans, 516 U.S.

59, 68 (1995)). The determination of reliance therefore requires a two-part

analysis. First, the court must determine whether the creditor actually

relied on the debtor's statements. Actual reliance means that the creditor in

fact relied on the omission or misrepresentation. Id.; see also First Nat'l Bank

v. Cribbs (In re Cribbs), 327 B.R. 668, 674 (10th Cir. BAP 2005) (“To establish

a claim under § 523(a)(2)(B), the Bank must show reliance in fact, i.e., that it

actually relied on the financial information . . . .”).

      Second, the court must determine whether the creditor's reliance was

reasonable. The standard in the Ninth Circuit for “reasonable reliance”

does not require adherence to any particular list of factors; rather, the

bankruptcy court is to make its determination on a case-by-case basis in

light of the totality of the circumstances. See In re Candland, 90 F.3d at 1471;

In re Gertsch, 237 B.R. at 170. A creditor need not necessarily investigate

statements respecting a debtor's financial condition in order for its reliance

to be reasonable. In re Gertsch, 237 B.R. at 170 (“when there is evidence of

materially fraudulent statements, little investigation is required for a

creditor to have reasonably relied on the representations.”).

      While actual reliance presents a separate issue from a determination

of “reasonable reliance,” the analysis is an overlapping one. As in the case

of any other issue, the fact of reliance may be proved by circumstantial

evidence. Evidence that a creditor's reliance was reasonable is

                                        15
circumstantial evidence of actual reliance by the creditor. Field, 516 U.S. at

76 (“[T]he greater the distance between the reliance claimed and the limits

of the reasonable, the greater the doubt about reliance in fact.”); N. Tr. Co.

v. Garman (In re Garman), 643 F.2d 1252 (7th Cir. 1980) (claims to reliance

cannot be so unreasonable as to defeat a finding of reliance in fact).

      In the end, the degree of reliance required—reasonable—is more

stringent than the justifiable reliance required under § 523(a)(2)(A), and

evidences Congressional intent to create a heightened bar to discharge

exceptions. Lamar, 138 S. Ct. at 1763. This heightened requirement was not

erected to shield dishonest debtors, but to balance the potential misuse by

both debtors and creditors of statements reflecting a debtor's financial

condition. Id. at 1763-64.

B.    Analysis

      At oral argument, Ms. Maxwell's counsel conceded that State had

actually relied on her benefit applications when extending her benefits.

Therefore, our focus is on whether State's reliance—a factual inquiry—was

reasonable in light of the totality of the circumstances.

      According to Ms. Maxwell, the record contains no evidence to

establish reasonable reliance and it could not be proved in any event since

State automatically relied on her benefit applications without any cursory

examination or investigation and without caution or prudence. She further

contends that State had actual, concurrent knowledge of the source of

                                       16
income it later complained was missing from the written financial

statements at issue. According to Ms. Maxwell, State had access to a

database which showed her employment and child support payments.

Finally, Ms. Maxwell asserts that “some actual evidence of creditor's

behavior, of creditor's state of mind, of creditor's actual reliance, of

creditor's actual cautiousness or prudence, must be present in the record to

satisfy the required element of reasonableness under § 523(a)(2)(B).”

      Ms. Maxwell's understanding of what is required to prove reasonable

reliance by a preponderance of the evidence is flawed. Although

Ms. Maxwell complains that there was no direct evidence of State's

reasonable reliance in the record, there are ample facts in the record from

which a factfinder may infer that State's reliance on Ms. Maxwell's benefit

application was reasonable.

      This is not a typical § 523(a)(2)(B) case where a creditor required the

debtor to furnish a financial statement as part of the credit transaction.

Rather, the reasonableness of State's reliance is properly analyzed in the

context of applying for and receiving public assistance benefits, which by

its nature, does not form a creditor-debtor relationship at the outset. As

noted by the bankruptcy court, the types of governmental-benefit

payments at issue in this case are intended for people whose other

resources are insufficient to support them or their dependents. It follows

that the benefits sought are essential to applicants and their families.

                                       17
      The record shows that to facilitate access to necessary assistance

without delay, an applicant completes the benefit application in order to

receive the various benefits and signs it under penalty of perjury, testifying

that he or she is providing accurate and truthful information. Indeed, one

purpose of the benefit application is to provide information to State about

the applicant's financial need for benefits.

      The import of an applicant's truthfulness on his or her benefit

application was explained by Ms. Carter. She testified that eligibility for

benefits is based on numerous laws and regulations, and that the income

level of an applicant is a significant factor in the calculation of benefits

based on government formulas. Further, according to Ms. Carter and

State's attorney, Mr. Hull, State takes the applications at face value since

the applicant is signing under penalty of perjury.

      Considering these facts, the bankruptcy court did not clearly err in

finding that it was more likely than not that State's reliance on

Ms. Maxwell's benefit applications was reasonable. The essential nature of

the benefits at issue, the design of the benefits system, and policies

employed by State demonstrate that the benefit application, objectively

speaking, amounts to the sort of financial statement that State could

reasonably rely upon without further inquiry or verification. In short, the

record shows that the benefit-seeking process depends in most instances on

the benefit application and the honesty of the applicant, as happened here.

                                        18
From all appearances, Ms. Maxwell's applications signed under penalty of

perjury showed that she was eligible for a certain level of benefits, but that

was not true.

      The fact that State had access to a database with information about

her employers or child support payments does not negate the

reasonableness of State's reliance on Ms. Maxwell's benefit applications.

Absent patent falsity, or prior knowledge of the falsity of a representation,

or circumstances that would have aroused suspicion as to her earned and

unearned income in the mind of a reasonable person, State had no duty to

affirmatively investigate and determine for itself whether or not the debtor

was telling the truth. In re Gertsch, 237 B.R. at 170; cf. Heritage Pac. Fin., LLC

v. Machuca (In re Machuca), 483 B.R. 726, 737 (9th Cir. BAP 2012) (creditor

cannot ignore red flags that directly call into question the truth of

statement on which creditor claims to have relied).

      Although reasonable reliance is determined on a case-by-case basis

for purposes of § 523(a)(2)(B), other courts have similarly found reasonable

reliance in this context. See Cabarrus Cty. v. Boyd (In re Boyd), 525 B.R. 299,

306 (Bankr. M.D.N.C. 2015) (finding that programs administered by the

County were intended to help struggling families receive assistance and

their policy was to presume that customers would complete the forms

truthfully); Colorado v. O’Brien (In re O’Brien), 110 B.R. 27, 33 (Bankr. D.

Colo. 1990) (noting that an immediate investigation to ensure only truly

                                        19
eligible persons receive benefits would bog down the system and delay

payments to those truly in need).

                             CONCLUSION

     The bankruptcy court's factual finding of reasonable reliance was

plausible and supported by inferences drawn from the facts in the record.

Accordingly, we AFFIRM.

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