Court Opinion

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Opinions of the United
1995 Decisions                                                                                                             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Precedential or Non-Precedential: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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                 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.     Well-

established 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 credit-

worthiness, 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).