In re Lavender

Summarized by Robert Yan , Otterbourg P.C.
15 years 3 months ago

Citation:

Case No. 10-0984, 2010 U.S. App. LEXIS 23021 (2d Cir. November 3, 2010)

Tag(s):

2nd Circuit

Ruling:

The Court held that the Bankruptcy Court properly denied the Debtor’s motion for summary judgment. Based on the facts of the case, there was a genuine question of material fact concerning reasonable reliance, one of the requirements necessary to deem a debt nondischargeable under 11 U.S.C. § 523(a)(2)(B). For example, in their response to interrogatories, the Creditors indicated their intention to call a witness at trial who would testify that information provided in financial statements is relied on in general, as was the case with the Debtor’s financial statement. The Court also noted, as did the Bankruptcy Court, that the renewal or extension of credit to the Debtor could be drawn from the similarity in terms in the promissory notes from 1994 and 1998. The Court also held that the Bankruptcy Court’s decision not to grant the Debtor’s request for sanctions was not an abuse of discretion. The Debtor sought sanctions under Rules 33 and 37 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings under Rules 7033 and 7037 of the Federal Rules of Bankruptcy Procedure, for alleged discovery abuses. The alleged discovery abuses claimed by the Debtor included the untimely filing of opposition papers, the untimely disclosure of additional witness and documents, and the failure to file an initial disclosure statement under Rule 26 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings under Rule 7026 of the Federal Rules of Bankruptcy Procedure. The Court considered the following factors: (1) the party’s explanation for the failure to comply with the [disclosure requirement]; (2) the importance of the testimony of the precluded witness[es]; (3) the prejudice suffered by the opposing party as a result of having to prepare to meet the new testimony; and (4) the possibility of a continuance. Id. at *7 (quoting Patterson v. Balsamico, 440 F.3d 104, 117 (2d Cir. 2006)). The Court found that the Bankruptcy Court was well within its discretion not to impose sanctions. The Bankruptcy Court, in its discretion, was free to credit the Creditors’ explanation for the failure to timely produce evidence and free to find that any prejudice suffered by the Debtor was not substantial. Here, the Debtor was afforded an opportunity to depose witnesses produced after the close of discovery and to file a second motion for summary judgment after the disclosure of new evidence. Lastly, the Court held that the Bankruptcy Court’s finding of actual and reasonable reliance on the financial statement in increasing the line of credit and in extending or renewing the existing line of credit was not clearly erroneous. In order to deem a debt nondischargeable under section 523(a)(2)(B), the creditor to whom the debt is owed must demonstrate, among other things, reasonable reliance on the written statement. The Court has previously held that: Although the reasonableness requirement of § 523(a)(2)(B) (iii) presents a low threshold . . . to meet, whether [a party] has met that threshold is a question of fact. . . . The reasonableness of reliance requires the fact finder to consider “the totality of the circumstances,” and we recognize that the bankruptcy court is “most familiar” with this factual setting and has had the opportunity to judge the credibility of the witnesses. Id. at *10 (quoting In re Bonnanzio, 91 F.3d 296, 305 (2d Cir. 1996)). Because the finding is factual, the Court reviewed the finding for clear error. Testimony from the Creditors’ witness that he personally relied on the financial statements in extending credit sufficiently demonstrated actual reliance. As to the reasonableness of the reliance, the Bankruptcy Court rejected the Debtor’s argument that the Creditors did not sufficiently investigate the financial statement. In particular, the Bankruptcy Court’s finding was not clearly erroneous in light of the parties’ four-year relationship at the time the financial statement was submitted and the fact that the Creditors obtained tax returns and a credit report from the Debtor, among other things.

Procedural context:

Debtor appealed a judgment of the United States District Court for the Eastern District of New York denying his appeal of an order from the United States Bankruptcy Court for the Eastern District of New York that found the debt owed to a certain creditor was nondischargeable under 11 U.S.C. § 523(a)(2)(B). Affirmed.

Facts:

The Debtor and his wife (a co-debtor) operated a used car business. In 1994, the Debtor entered into a floor plan financing agreement with Mannheim’s Pennsylvania Auction Services, Inc. d/b/a Mannheim Auto Auction and Manheim Financial Services, Inc. (“Creditors”). Sometime in 1998, the Debtor sought to increase the existing $500,000 credit line to $900,000. The Debtor submitted a financial statement to Creditors which contained materially false statements. The Debtor also executed a personal guaranty of the $900,000 promissory note in Creditors’ favor. The credit line was increased to $900,000 but was later decreased by Creditors to $650,000. In 2000, Creditors sued the Debtor and his wife in New York state court and obtained a $518,728.27 judgment against the Debtor. On January 18, 2006, the Debtor and his wife filed a voluntary petition for relief under chapter 7 of Title 11 of the United States Code. Creditors commenced an adversary proceeding seeking a determination that the state court judgment was not dischargeable based on the material misrepresentations made in a financial statement provided by the Debtor to obtain financing from Creditors. The Bankruptcy Court found the debt owed by the Debtor to Creditors was not dischargeable because the requirements set forth under 11 U.S.C. § 523(a)(2)(B) were met. Debtor appealed and raised three issues: (1) the Bankruptcy Court should have granted Debtor’s motion for summary judgment because Creditors did not raise a genuine issue of fact; (2) the Bankruptcy Court should have sanctioned Creditors for alleged discovery abuses; and (3) the Bankruptcy Court improperly found Creditors reasonably relied on the financial statement in extending the Debtor’s credit line. The District Court affirmed the Bankruptcy Court’s order and denied the Debtor’s appeal. This appeal followed.

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