Southeast Nebraska Cooperative Corp. v. Schnuelle (In re Schnuelle)

Summarized by Leslie Harrell-Latham , Tower Legal Solutions
15 years 1 month ago

Citation:

(8th Circuit, Dec 31,1969)

Tag(s):

8th Circuit

Ruling:

The BAP affirmed the bankruptcy court's holding that the debt was not dischargeable under 523(a)(2)(A) and (B). After reiterating that clear error was the standard of review, the BAP first evaluated each of the elements of 523(a)(2)(A) as they had been set out in In re Freir by the 8th Circuit. As for the first element, the court noted that it was necessary to weigh the debtor's self-serving statement on his intent against the bank's actual lending policies and the debtor's knowledge of such policies. The BAP deferred to the bankruptcy court's opportunity to asses the witness' credibility and affirmed the finding that the debtor intended to deceive. Next, the court affirmed the finding that the bank had actually relied on the debtor's silence of his intentions to also feed the cattle with the grain. The BAP declined to hold that the bank's knowledge of the debtor's ownership of cattle somehow imposed a duty to investigate the debtor's feed plan and affirmed the finding of justifiable reliance. The BAP subsequently proceeded to evaluate the elements of 523(a)(2)(B) and similarly held an absence of clear error in the bankruptcy court's holding. First, the court affirmed the holding that the misstatements in the initially provided financial statements were material. The BAP relied upon the recent definition of In Re Koester and defined "materially false" for purposes of this section as a written statement that paints a substantially untruthful picture of the debtor's financial condition by misrepresenting information that would normally affect the lender's decision to extend credit. The BAP pointed to the lower court's finding that the misstatements in the balance sheet were material because of the size of the omitted liabilities, nature of such liabilities and their impact ont he balance sheet. The court proceeded to affirm the finding that a subsequent decision to advance additional funds in an effort to protect its earlier investment did not render the misstatements in the underlying financial statements immaterial. Further, the BAP affirmed the finding that the bank had relied upon the financial statements as part of their ordinary policies and that such reliance was reasonable. The BAP noted that the bankruptcy court could have agreed with the debtor's contention that the bank was on notice of the mistatements by the documents themselves, but declined to hold that the bankruptcy court was required to do so. The court held that the bank may have known the debtor had understated liabilities before it lent in 2005, but that alone was not sufficient for a finding of clear error. Finally, the BAP affirmed the bankruptcy court's holding that the debtor intended to deceive the bank by virtue of the surrounding circumstances reflecting a reckless indifference or reckless disregard of the accuracy of financial information that he had submitted.

Procedural context:

Appeal of final judgment denying discharge under 523(a)(2)(A) and (B).

Facts:

Debtor was a cattle and grain farmer who provided financial statements to the bank in both 2004 and 2005. In reliance on these projections, the bank provided the requested financing based on the crop projected by the debtor and required a first position lien in the crop. The debtor later acknowledged that he had used some of this crop to feed his cattle without permission from the bank and that the financial statements he had submitted were overstated. At the bank's request in 2005, the debtor provided an affidavit regarding collection actions that were pending against him at the time but he failed to comply with the agreed requirement that the affidavit would be supplemented with information about subsequentl collections actions and several monetary judgments that were later entered against him. Nevertheless, debtor sought additional financing from the bank in 2005 and provided the bank with a statement about expected future income that would be used to pay the new loan. The bank lent the additional money to the debtor despite notice of its financial difficulties of the time and only received a small fraction of the payments due under the new loan. The bankruptcy court entered judgment in favor of the bank determining that its debt owed by the debtor was excepted from discharge pursuant to 523(a)(2)(A) and (B). Debtor's motion to reconsider was denied and the Debtor filed the appeal.

Judge(s):

Nail, Kressel, Schermer

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