Opinion
Civ. No. 99-3719, Section "R" (4).
March 14, 2000.
ORDER AND REASONS
Appellant, Wayne A. Ledet, appeals an order of the bankruptcy court holding that the debt Ledet owes to appellee, Whitney National Bank, is nondischargeable under 11 U.S.C. § 523 (a)(2)(A). For the reasons stated below, the Court affirms the bankruptcy court's decision.
I. BACKGROUND
On March 27, 1997, Wayne A. Ledet filed a voluntary Chapter 7 petition in the United States Bankruptcy Court for the Eastern District of Louisiana. First National Bank of Houma, which subsequently merged with appellee, Whitney National Bank, filed a complaint in that proceeding seeking to have certain debt owed by Ledet declared nondischargeable pursuant to 11 U.S.C. § 523.
Ledet's indebtedness to the Bank arose out of a loan arrangement entered into in December 1994. At that time, Ledet was the president and sole shareholder of Team Services Inc., a Louisiana corporation. On December 29, 1994, TSI executed a promissory note in favor of First National Bank of Houma in the amount of $688,963.00. TSI also executed a promissory note for a line of credit in the amount of $400,000, which was increased by $200,000 in March 1995. Under the terms of the arrangement, TSI could initially borrow up to 80 percent of its eligible accounts receivable. In June of 1995, the Bank increased TSI's line of credit to $750,000.00, consolidated the notes, and reduced its borrowing base to 70 percent of accounts receivable. In order to draw on the line of credit, TSI had to submit a monthly list of aging accounts receivable or "borrowing baser reports," not over 90 days old, supported by invoices. Ledet personally guaranteed these loans.
The Bank raised two arguments before the bankruptcy court. First, it argued that Ledet submitted false personal financial statements, on which the Bank relied in lending money to TSI. Second, the Bank alleged that Ledet submitted false borrowing base reports on behalf of TSI to borrow on nonexistent accounts receivable. On December 19, 1999, the bankruptcy judge held that appellant's debt was not nondischargeable under 11 U.S.C. § 523 (a)(2)(B) because the Bank failed to prove that the December 1, 1994 personal financial statement Ledet submitted was "materially false." However, the bankruptcy judge held that Ledet's debt to the Bank was nondischargeable under section 523(a)(2)(A) because the loans were obtained by false pretenses and false representations. Specifically, the bankruptcy judge found that Ledet knowingly submitted false borrowing reports to the Bank between May and October 1995 for at least four contracts on which it was not yet entitled to payment and that the Bank justifiably relied on these false reports in extending credit. Ledet's central argument on appeal is that the borrowing base reports are statements regarding the debtor's financial condition, which should have been analyzed under section 523(a)(2)(B) of the Bankruptcy Code, instead of under section 523(a)(2)(A), which the bankruptcy court applied.
Under 11 U.S.C. § 523 (a)(2), a debt can be found nondischargeable on either of two grounds. Section 523(a)(2) (A) refers to false pretenses, representations, or actual fraud "other than a statement respecting the debtor's or an insider's financial condition." (emphasis added) By contrast, section 523(a)(2)(B) applies only to statements regarding the debtor's financial condition.
II. DISCUSSION
A. Standard of Review
This Court reviews the bankruptcy court's findings of fact for clear error, giving due regard to the bankruptcy judge's opportunity to judge the credibility of witnesses. See In re Young, 995 F.2d 547, 548 (5th Cir. 1993) ( citing Bankr. Rule 8013); Oldendorf v. Buckman, 173 B.R. 99, 100 (E.D. La. 1994). A bankruptcy court's factual findings are clearly erroneous only if, on the entire evidence, the Court has a "definite and firm conviction that a mistake has been made." In re Allison, 960 F.2d 481, 483 (5th Cir. 1992) (citations omitted). The Court reviews the bankruptcy court's conclusions of law de novo. See Sandoval v. Sandoval, 103 F.3d 20, 21-22 (5th. Cir. 1997) ( citing In re Kemp, 52 F.3d 546, 550 (5th Cir. 1995)); Young, 995 F.2d at 548. The admission of evidence is committed to the sound discretion of the bankruptcy court, subject to review for abuse of that discretion. See In re Charter Co., 125 B.R. 650, 654 (M.D. Fla. 1991) ( citing Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1374 (5th Cir. 1981)).
B. Timely Filings of Appellee's Brief
Ledet argues that the Bank failed to file its brief within the fifteen day period applicable under Bankruptcy Rule 8009(a)(2), and therefore the Bank should be denied oral argument. ( See App.'s Reply Br., at 1 ( citing Silk Plants, Etc. Franchise Systems, Inc. v. Register, 100 B.R. 360 (M.D. Tenn. 1989)). Because the Court finds oral argument unnecessary to an effective resolution of this appeal, appellant's argument is rejected as moot.
C. Issues on Appeal
The Bank argues that Ledet waived the issue of whether the bankruptcy judge properly analyzed the questionable borrowing base reports under section 523(a)(2)(A) instead of section 523(a)(2)(B) by failing to include this issue in his Rule 8006 "Designation of Items to be Included in Record on Appeal and Issues Presented for Appeal." Appellant designated the following issues in his Rule: 8006 statement:
1. Whether the trial court erred in refusing to admit into evidence the testimony and documents proffered by defendant;
2. Whether the trial court erred in finding that the defendant (i) made representations regarding the questioned accounts receivable and that they were knowing and fraudulent falsehoods;
3. Whether the trial court erred in finding that the plaintiff justifiably relied on the questioned accounts receivable in extending credit;
4. Whether the trial court erred in finding that the defendant intended to deceive the plaintiff; and
5. Whether, the trial court erred in finding that the plaintiff sustained a loss that was proximately caused by the defendant's alleged misrepresentations to the plaintiff.
In his appellate brief, Ledet replaced the second Rule 8006 issue with the following: "Whether the trial court erred in applying 523(a)(2)(A) instead of 523(a)(2)(B) of the Bankruptcy Code to determine whether the appellant's indebtedness for loans obtained by borrowing base reports that included questioned accounts receivable was dischargeable in bankruptcy." ( See App.'s Br., at 2.)
Bankruptcy Rule 8006 requires an appellant to file "a designation of the items to be included in the record on appeal and a statement of the issues to be presented." The Fifth Circuit has expressly held that a bankruptcy appellant's failure to designate an issue as required under Bankruptcy Rule 8006 results in waiver of that issue on appeal, even if the issue was presented to the bankruptcy court. See In re GGM, P.C., 165 F.3d 1026, 1031-32 (5th Cir. 1999); Stanford v. Butler, 826 F.2d 353, 354 n. 2 (5th Cir. 1987). Here, Ledet did not list the issue of whether the bankruptcy judge erred in applying the wrong subsection of 11 U.S.C. § 523 (a)(2) in his Rule 8006 statement of issues on appeal.
Furthermore, the applicability, vel non, of section 523(a)(2) (B) is not inferable from the other issues listed in appellant's Rule 8006 statement. See Freeman v. Snap-On Tools, 956 F.2d 252, 254 (11th. Cir. 1992) (issue not listed pursuant to Rule 8006 and not inferable front issues listed is deemed waived on appeal). Ledet argues that he raised the issue several times in his Rule 8006 designation, in particular, in issues two through five. The Court disagrees. Ledet concedes that the references in Issue 2 to "representations" and "knowing and fraudulent falsehoods" concern elements under section 523(a)(2)(A). ( See App.'s Reply Br., at 1.) Likewise, Issue 3, which asks whether the creditor "justifiably relied" on the questioned accounts receivable in extending credit, recites the scienter standard under section 523(a)(2)(A). See Field v. Mans, 516 U.S. 59, 70, 116 S.Ct. 437, 444 (1995). Section 523(a)(2)(B), on the other hand, requires a showing of "reasonable reliance." As the bankruptcy judge noted: "justifiable reliance is more than reliance: in fact but less than reasonable reliance." See Mem. Op., In re Ledet, No. 97-11661 (Bankr. E.D. La. Oct. 19, 1999) (citing Field, 516 U.S. at 74-75). Issue 5, proximate loss to appellee, is also an element of section 523(a)(2)(A), but not of section 523(a) (2)(B). See id. at 16 n. 3 (citing RecoverEdge, L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th. Cir. 1995). Finally, although "intent to deceive" is an element of "actual fraud" under section 523(a)(2)(A), as well as under section 523(a)(2)(B), that commonality is insufficient to give notice that the applicability of section 523(a)(2)(B) was an issue for appeal. Because the issue: of whether the bankruptcy judge properly applied section 523(a)(2)(A) instead of section 523(a)(2)(B) is not listed and not inferable from those issues listed in appellant's Rule 8006 statement of issues, the issue is waived, and this Court may not consider it on appeal.
Furthermore, the Court need not consider the applicability of section 523(a)(2)(B) for another reason. It is well established that an issue is not preserved for appeal when it was not presented to or considered by the bankruptcy court. See Matter of Quenzer, 19 F.3d 163, 164 (5th Cir. 1993); Matter of Gilchrist, 891 F.2d 559 (5th Cir. 1990). See also United States v. Williams, 156 B.R. 77, 81 (S.D. Ala. 1993) ("This court's function on appeal from a Bankruptcy Court's determination is to reverse, affirm, or modify only those issues that were presented to the trial judge.") (citations omitted). For instance, in In re Bercier, the Fifth Circuit reversed the district court and held that the creditor should not have been allowed to raise a new exception to discharge, 11 U.S.C. § 523 (a)(6), when the bankruptcy court had not considered that exception but instead found the: debt dischargeable under 11 U.S.C. § 523 (a)(2). 934 F.2d 689, 693 (5th Cir. 1991)
This Court finds nothing in the transcript of the proceedings before the bankruptcy judge to suggest that Ledet raised the issue of the applicability, vel non, of section 523(a)(2)(B). Neither does Ledet point to any pleadings that indicate that the issue was litigated and considered below. Ledet's failure to raise this issue is therefore a second reason that this Court will not address the issue of the applicability of section 523(a)(2)(B).
D. Dischargeability of Debt Under 523(a)(2)(A)
Title 11 U.S.C. § 523 (a)(2)(A) makes nondischargeable debts for money, property, services, or an extension, renewal, or refinancing of credit, obtained by false pretenses, a false representation, or actual fraud. The Fifth Circuit sets forth different standards for proving nondischargeability depending upon whether the exception from discharge: is based upon false pretenses and representations or actual fraud. See RecoverEdge, 44 F.3d at 1293. Accord Mercer v. ATT Universal Card Services, 220 B.R. 315, 322 (S.D. Miss. 1998); In re Hernandez, 208 B.R. 872, 875 (Bankr. W.D. Tex. 1997). To prove that a debt is nondischargeable under section 523(a)(2)(A) on the grounds of false pretenses or false representations, the: creditor must establish: (1) a knowing and fraudulent falsehood; (2) describing past or current facts; (3) that was relied upon by the other party. See RecoverEdge, 44 F.3d at 1293 (5th Cir. 1995) ( quoting Allison, 960 F.2d at 483). By contrast, actual fraud requires additional proof of intent to deceive by the debtor and proof of proximate loss to the creditor as a result of the fraud. See id. ( quoting In re Roeder, 61 B.R. 179, 181 (Bankr. W.D. Ky. 1986)). The bankruptcy court found the debt nondischargeable under the false pretenses and representation standard.
1. Knowing and Fraudulent Falsehood Made by the Debtor
The bankruptcy court made the factual determination that Ledet had the ultimate responsibility for submitting the borrowing base reports to the Bank, and he was aware that invoices were included before work was done on jobs. It therefore concluded that he made the representations as to the eligible receivables. Although Ledet's trial testimony conflicted with his Rule 2004 examination testimony on this issue, the bankruptcy judge credited Ledet's testimony at his 2004 examination. ( See Mem. Op. at 8-9.) In his 2004 examination1 Ledet stated that he had the ultimate responsibility for submitting the reports and that he knew the Bank would determine how much money he could borrow based on the amount of accounts receivable listed in the reports. ( See Rule 20004 Exam. Tr., at 87, 89.) Furthermore, Ledet admitted at trial that TSI was not entitled to payment in full on at least two of the contracts at the time those receivables were included in the reports. The bankruptcy court found credible the testimony of the Bank's loan officer and expert accountant that a valid receivable is one that has been earned under the terms of the contract and that reports which included receivables before they were earned were clear misrepresentations. ( See Trial Tr., at 53, 107.)
The bankruptcy court's determination that Ledet's representations were knowingly false and fraudulent is not clearly erroneous, especially considering that court's ability to judge the credibility of the witnesses. See In re Martin, 963 F.2d 809, 814 (5th Cir. 1992) ("If the bankruptcy judge finds one version of events more credible than other versions, this Court is in not position to dispute the finding."); In re Anderson, 936 F.2d 199, 204 (5th Cir. 1991) ("The bankruptcy court is in the best position to judge the credibility of any witness who testifies under oath before it. . . .").
2. Justifiable Reliance
The bankruptcy court found that the Bank actually relied on the reports submitted by TSI and that this reliance was justifiable. See Field, 516 U.S. at 69-71, 116 S.Ct. at 443-44; Household Credit Servs., Inc. v. Walters, 208 B.R. 651, 653 (Bankr. W.D. La. 1997). The Supreme Court has held that reliance on a representation is justifiable if its falsity is not ascertainable upon a cursory examination or investigation. See Field, 516 U.S. at 71, 116 S.Ct. at 444; accord Sanford Inst. for Savings v. Gallo, 156 F.3d 71, 74 (1st Cir. 1998). The bankruptcy court found that nothing on the face of the borrowing base reports indicated that the supporting invoices were false and that the Bank had performed a cursory examination of the reports without discovering any abnormality. The bankruptcy judge therefore held that the Bank justifiably relied on the representations in the reports.
Ledet now argues that the Bank did not actually rely on the questioned receivables because it would have made the loans even if the questioned receivables had not been included in the borrowing base reports. In particular, Ledet asserts that as of July 7, 1995, TSII had earned a portion of the questioned receivables and that this earned amount, when added to the total eligible receivables, was sufficient to support a loan balance based on 70 percent of eligible receivables. Ledet further argues that the bankruptcy judge erred by refusing to admit evidence to this effect.
The bankruptcy judge permitted Ledet to summarize his witness's testimony that at no time did TSI's loan balance exceed 70 or 80 percent of eligible receivables, although the judge did not formally accept this testimony as a proffer. ( See Trial Tr., at 169-71.) The purpose behind Federal Rule of Evidence 103, which governs proffers, is "to enable a reviewing court to determine whether exclusion of the particular evidence was reversible error." WEINSTEIN'S FEDERAL EVIDENCE § 103.20(1) (2d ed. 1999). The failure to make an offer of proof is excused when the substance of the excluded evidence is apparent from the context in which the evidence was offered. See id. § 103.21(1); Reed v. Baxter, 133 F.3d 351, 355 (6th Cir. 1998), cert. denied, ___ U.S. ___, 119 S.Ct. 71 (1999); Parliament Ins. Co. v. Hanson, 676 F.2d 1069, 1074 (5th Cir. 1982). Here, it is clear from the transcript that the bankruptcy judge was aware of the substance of Ledet's proposed evidence. Ledet was given the opportunity to state his position, and it is properly subject to appellate review. Despite Ledet's claim, however, the bankruptcy judge credited the testimony of accountant Michael Bergeron and found as a fact that TSI did not earn any payments under three of the questioned receivables until August 1995 and that TSI never did any work on the fourth receivable. ( See Trial Tr. 111-14, 117-20; Mem. Op., at 4-6.) Thus, as Bergeron testified, if TSI did not begin work on these jobs until August, no payments on these jobs could support the borrowing base prior to that time. Furthermore, the Bank's loan officer, Louis Routier, repeatedly testified that the Bank relied on the questionable invoices in the borrowing base reports when determining whether to advance funds to TSI on its line of credit. ( See id. at 35-36, 31-35.) Accordingly, the Court finds no error in the bankruptcy court's finding on reliance.
3. Intent to Deceive and Proximate Loss to Creditor
Ledet argues that the bankruptcy court erred in finding that appellant intended to deceive the Bank. As indicated above, however, the bankruptcy court's findings of intent to deceive and proximate loss to the Bank were merely dicta, because the Fifth Circuit does not require proof of these elements in order to establish nondischargeability on the ground of false representations or pretenses under 523(a)(2)(A). Because the bankruptcy court properly found all three elements of false representations or pretenses met, the Court declines to address these arguments.
E. Extent of Non-Dischargeability
Finally, Ledet argues that the bankruptcy judge erred in holding that all of the loan was nondischargeable, rather than just the amount attributable to the questioned receivables. Ledet asserts that a debt is nondischargeable under section 523(a)(2) only "to the extent" it was obtained through fraud or false pretenses.
The Supreme Court recently held that the phrase "to the extent obtained by" in 523(a)(2)(A) modifies "money, property, services, or . . . credit," not "any debt." See Cohen v. Cruz, 523 U.S. 213, 218, 118 S.Ct. 1212, 1216 (1998). Accordingly, "[O]nce it is established that specific money or property has been obtained by fraud . . . "any debt" arising therefrom is excepted from discharge." Id. See also In re Gerlach, 897 F.2d 1048, 1051 (10th Cir. 1990) (plain language of 523(a)(2)(A) suggests that dischargeability is an "all or nothing" proposition) ( quoting Birmingham Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir. 1985)). The Gerlach court held that "not only is a new debt procured through fraud excepted from discharge, but old debt which is extended, renewed, or refinanced through fraud is also nondischargeable." 897 F.2d at 1050. See also Matter of Norris, 70 F.3d 27, 29 n. 6 (5th Cir. 1995) (entire note excepted front discharge when renewal obtained by false documentation).
Here, Ledet's initial lines of credit in the: amounts of $400,000 and $200,000 were consolidated into a $750,000 line of credit in June 1995. At the time of this refinancing, three contract invoices for the Port of Orleans, the Consolidated Waterworks District, and the Town of Berwick, remained in the borrowing base reports TSI had submitted to the Bank, even though work on these contracts did not begin until August 1995. The bankruptcy court found credible the testimony of the Bank's loan officer that the Bank advanced funds on TSI's line of credit in reliance upon the inclusion of these invoices in TSI's borrowing base reports. This reliance occurred both before and after the Bank increased TSI's line of credit and reduced the borrowing base to 70% of accounts receivable. ( See Trial Tr., at 25-26, 31-35.) Because advances on both the initial line of credit and the subsequent refinancing were procured through false representations, the full amount of the debt is nondischargeable.
III. CONCLUSION
For the foregoing reasons, the Court affirms the bankruptcy court's decision.
New Orleans, Louisiana, this 13th day of March, 2000.