James R. Sacca, U.S. Bankruptcy Court Judge.
The primary issue in the trial of this adversary proceeding is whether the Plaintiff, when he renewed a loan for more than $400,000, actually and reasonably relied on the Debtor's personal financial statement which showed a net worth of about $12,500,000 when the Debtor's net worth was really closer to zero, but which financial statement contained one or more known material inaccuracies and other "red flags" and the Plaintiff did no investigation into its bona fides. After the Debtor filed for chapter 7 bankruptcy relief, Plaintiff filed this dischargeability action under § 523(a)(2)(B) because of the false financial statement. After the parties' cross-motions for summary judgment were denied, the matter came on for trial.
Peter Anzo ("Mr. Anzo") formed LaPrade's Marina, LLC ("LaPrade's"),
As opposed to the typical debtor/creditor situation where the debtor makes a request of the creditor for a loan, it was Mr. Hurston who reached out to Mr. Anzo after the Marina was purchased by LaPrade's to express interest in obtaining an equity interest in LaPrade's because he wanted to be involved in the Marina. Mr. Hurston never did obtain any equity, but the Marina did need money for capital improvements, so Mr. Hurston loaned LaPrade's $400,000, evidenced by a promissory note dated October 25, 2007 (the "October 2007 Note"). Mr. Anzo did not provide a guaranty or a financial statement in connection with the October 2007 Note, nor was there any collateral for the loan. The October 2007 Note's maturity date was October 25, 2008, although the parties concurrently agreed in a separate letter that Mr. Hurston would agree to become an investor pursuant to a couple of proposals discussed therein, but if he did not agree to those, then the October 2007 Note would be paid off "within 90 days of your notice that you want to be paid off with interest." Mr. Hurston testified that one of
Mr. Hurston agreed to let Mr. Anzo draft the October 2007 Note because he did not think that a transaction of this size, $400,000, warranted the expense of paying a lawyer to document it. The October 2007 Note was less than a page long and, in this Court's view, was more favorable to a borrower, with limited waivers, a provision that limited Mr. Hurston's attorney's fees to those that were reasonably and actually incurred and paid,
Prior to the maturity date of the October 2007 Note, Mr. Hurston reviewed two versions of a document called an Executive Investment Summary for investment in the Marina. It is at this time that he claims he first found out that Omni National Bank and H.H.E. Partnership, L.P. had secured positions on the Marina, which revelation apparently miffed him because he said he was previously told by Mr. Anzo that the Marina was "free and clear." The Executive Investment Summaries contained conflicting information about the extent and nature of the debt on the Marina. One version said the acquisition and construction debt was about $6,500,000 and that there had been about another $5,200,000 invested by insiders, for a total of about $11,700,000, while the other version stated the Marina had construction debt of $4,500,000, third party loans of $3,835,000 and loans from affiliates of $7,125,000, for a total of about $15,500,000, a difference of about $3,800,000. According to e-mails and discussions in early September 2008, Mr. Anzo got the feeling that Mr. Hurston felt that "we are trying to rip him off" and, in a call to LaPrade's counsel shortly thereafter, Mr. Hurston expressed his concern that he felt that Mr. Anzo had "jerked [him] around."
At this time, LaPrade's was negotiating with one or more banks to refinance the debt it owed to its lenders, including Mr. Hurston. These negotiations, which are referenced in the E-mails described below, were taking place in late 2008 at a time when many commentators were contending that the country's financial markets were on the verge of collapsing and the availability of commercial real estate loans was extremely limited if not almost non-existent. North Georgia, where this Marina is located, was particularly hard hit and that area was among the nation's leaders in bank failures during this time.
Despite Mr. Hurston's feelings, he and Mr. Anzo discussed a potential extension or renewal of the October 2007 Note because of LaPrade's inability to pay back that note at that time. In connection with
Eventually, Mr. Hurston and LaPrade's agreed to an extension, evidenced by a note dated October 29, 2008 in the principal amount of $432,000,
Upon his receipt of a draft of the October 2008 Note from Mr. Anzo, Mr. Hurston stated in an e-mail that "while I agree with the current guarantee language for the 90 day period, for any further extensions I should be entitled to the data furnished any other lender including a clearly worded personal guarantee with supporting financial statements. I would also need to complete the option agreement for the conversion to boat slips."
About a month before its maturity, Mr. Hurston sent a letter to Mr. Anzo informing him that he expected full payment upon maturity of the October 2008 Note. In a letter dated January 21, 2009, Mr. Anzo explained to Mr. Hurston that despite his attempts to refinance, the October 2008 Note could not be repaid on its maturity date because "we will not be able to pay you off until the loan gets completed." In the letter, Mr. Anzo included a copy of a recent appraisal of the Marina as of November 2008 obtained by a potential lender for more than $22 million,
According to the Financial Statement, Mr. Anzo's assets totaled $15,290,433, made up of: (a) $119,000 of cash on hand and in financial institutions; (b) $5,622,178 worth of stocks and bonds, almost all of which were interests in privately held companies;
As it turns out, the Financial Statement contained numerous inaccuracies. About half of the assets listed in the Financial Statement were not actually Mr. Anzo's assets in January 2009, but rather those of his wife. In particular, Mr. Anzo did not have an interest in: (a) the personal property; (b) unspecified blue chips; (c) Little Creek Investment Group; (d) Little River Investment Group; (e) Willoughby Investment Group; (f) Lake Perry Marina, LLC; (g) Shallow Anchor Marina; (h) VMG Investment Group, L.P.; (i) VMG DSOO, LLC; (j) VMG GC, LLC; (k) the Family Partnerships; (l) the Lake House; and (m) half of the Condo. He also only had a partial interest in other assets included in the Financial Statement. In addition, the Financial Statement omitted almost $10 million worth of contingent liabilities from personal guaranties.
As previously noted, included on the Financial Statement were the Lake House that Mr. Anzo had told Mr. Hurston was not in his name, but the name of his wife, valued on the statement at $2,100,000, and the Condo valued on the Financial Statement at $1,300,000 that he had previously told Mr. Hurston he owned jointly with his wife, nor was his contingent liability to Mr. Hurston or any other lender disclosed. Even though Mr. Hurston knew of these inaccuracies, he did not raise them with Mr. Anzo at the time. Mr. Hurston did not seek to have Mr. Anzo clarify or reaffirm the ownership of assets, nor did he request from Mr. Anzo any personal tax returns, property deeds, bank account or investment account records, loan documents, credit reports, or any information regarding the private entities, interests in which were included as assets in the Financial Statement, or any other financial information or documents about his personal financial condition.
Thereafter, the parties agreed to a new note dated January 28, 2009 in the principal amount of $444,782,
In the interim, LaPrade's principal secured lender, Omni National Bank, failed in March 2009. The January 2009 Note was not paid off on its maturity date. On May 23, 2009, Mr. Hurston sent a letter to Mr. Anzo and LaPrade's declaring a default on the January 2009 Note and demanding payment or he would pursue other collection remedies (the "May Default Letter"). Mr. Anzo responded to the May Default Letter with his own letter dated May 28, 2009, wherein he offered, "as a compromise to avoid litigation," paying monthly payments of $5,559.78 on the
Mr. Hurston retained a lawyer in April or May 2009 to review his position against LaPrade's and Mr. Anzo. Mr. Hurston provided his attorney with the January 2009 Note and the Financial Statement, but he did not inform his lawyer about the material discrepancies in the Financial Statement that he knew about.
After the May Default Letter and Mr. Anzo's response, the parties discussed an extension of the January 2009 Note, and eventually, in June 2009, they agreed to another extension, effective as of April 29, 2009, evidenced by a note in the principal amount of $461,233, with a maturity date of October 28, 2009 (the "June 2009 Note").
Although Mr. Hurston alleges that he relied heavily on the Financial Statement when deciding whether to extend the January 2009 Note in June 2009, and that he would have filed suit immediately if he had known that Mr. Anzo's net worth was less than what was represented, both he and his lawyer testified that the January 2009 Note was extended so Mr. Hurston could get a "real note and guaranty."
Mr. Hurston did not request either a new or updated financial statement from Mr. Anzo prior to the execution of the June 2009 Note, nor did Mr. Hurston ask Mr. Anzo any questions about the one he had provided, but Mr. Hurston contends that he had no reason to suspect Mr. Anzo's financial condition changed in any material way since receiving the Financial Statement in January 2009 until the note was extended in June 2009, despite the deep recession the country was in and Mr. Anzo's further request for an extension of time to pay because he did not have the ability to pay, in part because he contended that Mr. Anzo continued to maintain a lavish lifestyle. This alleged lavish lifestyle, which Mr. Anzo disputed, appeared to be based on the Lake House in which Mr. Anzo lived and that he supposedly drove nice cars, wore nice clothes, frequently ate at the restaurant at the Marina, and used an undescribed yacht.
On November 25, 2014, Mr. Anzo filed for chapter 7 bankruptcy relief. Mr. Hurston timely filed the present adversary proceeding seeking to have his debt declared non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(B) and recover attorneys' fees and expenses. The Court previously denied the parties' cross motions for summary judgment, but it did narrow the issues for trial by finding that Mr. Hurston's claims were not barred by the Georgia statute of limitations for fraud, that the Financial Statement was a materially false statement in writing regarding Mr. Anzo's financial condition and that it was not stale by the time of the June 2009 Note. The Court also found that Mr. Hurston did not have to show damages from the extension or renewal of the loan.
The creditor objecting to dischargeability has the burden of proving by a preponderance of the evidence that a debt is non-dischargeable. Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994). When objecting to dischargeability of a debt under § 523(a)(2)(B), the creditor must prove each individual element required by § 523(a)(2)(B) or the entire debt is dischargeable. Id. "[C]ourts generally construe the statutory exceptions to discharge in bankruptcy `liberally in favor of the debtor,' and recognize that `the reasons for denying a discharge ... must be real and substantial, not merely technical and conjectural.'" Id. (citations omitted). "This narrow construction ensures that `the honest but unfortunate debtor' is afforded a fresh start." Id. (citations omitted).
Pursuant to § 523(a)(2)(B), a debt is excepted from discharge if it is
11 U.S.C. § 523(a)(2)(B). In order for its debt to be declared non-dischargeable under § 523(a)(2)(B), a creditor must prove by a preponderance of the evidence that the debtor obtained money, property, or the extension of credit through the use of: (1) a written statement; (2) the written statement was materially false; (3) the written statement concerns the debtor's financial condition; (4) the plaintiff reasonably relied on the statement; and (5) the debtor published the writing with the intent to deceive the plaintiff. Bank of N. Ga. v. McDowell (In re McDowell), 497 B.R. 363, 369 (Bankr. N.D. Ga. 2013).
For a debt to be non-dischargeable pursuant to § 523(a)(2)(B), the creditor's reliance must have been both actual and reasonable. First a creditor must actually rely on the false statement; if the reliance would have been reasonable, but there is no actual reliance, § 523(a)(2)(B) is not satisfied. Mountain Valley Cmty. Bank v. Freeman (In re Freeman), 469 B.R. 128, 131 (Bankr. M.D. Ga. 2012). While actual reliance is difficult to prove, it can be established by circumstantial evidence. First Nat'l Bank v. Cribbs (In re Cribbs), 327 B.R. 668, 674 (10th Cir. BAP 2005). A financial statement does not have to be the only factor influencing a creditor; partial reliance is all that is needed. First Commercial Bank v. Robinson (In re Robinson), 192 B.R. 569, 576 (Bankr. N.D. Ala. 1996). Partial reliance does, however, require a showing that the financial statement was a substantial cause for providing or extending credit. See Colo. E. Bank & Tr. Co. v. McCarthy (In re McCarthy), 421 B.R. 550, 561-61 (Bankr. D. Colo. 2009); Barclays American/Business Credit, Inc. v. Long (In re Long), 44 B.R. 300, 309 (Bankr. D. Minn. 1983).
A creditor generally cannot claim that he actually relied on a financial statement when the creditor is aware of material inaccuracies on the statement, yet still extends credit. First Nat'l Bank of Stuttgart, Ark. v. Owens (In re Owens), 322 B.R. 411, 421 (Bankr. E.D. Ark. 2005) ("Clearly, [the creditor] knew of the existing but undisclosed [ ] indebtedness; therefore, he did not actually rely on the financial statement as to these obligations."); see also RBC Bank (USA) v. Hoefling (In re Hoefling), No. 09-2669, 2011 WL 2118226, at *6 (Bankr. D.N.J. May 23, 2011) (finding no actual reliance when the creditor was aware of incorrect information listed in financial statement, indicating the creditor did not rely on the statement provided). Courts can infer that a creditor did not rely on the financial statement when the creditor takes no action upon receiving an insufficient financial statement. Kelly et al. v. Merrill (In re Merrill), No. 12-01111, 2014 WL 1244791, at *6 (9th Cir. BAP Mar. 26, 2014). Additionally, just because a creditor actually relies on the initial financial statement provided does not necessarily mean the creditor relied on subsequent financial statements to extend the credit. See, e.g., Bank One of Wapakoneta, NA v. Huffman (In re Huffman), 45 B.R. 590, 594 (Bankr. N.D. Ohio 1984) (finding the creditor did not rely on subsequent financial statements because the original statement involved the most thorough credit check, and reliance on subsequent statements would have only occurred if debtor's income changed).
The parties dispute whether the substance of the Financial Statement was a material part of the extension that was agreed upon or whether the Financial Statement was merely something that Mr. Hurston just wanted to have for his file because he said he wanted the type of information other lenders received, which included a financial statement. Mr. Anzo argues that any reliance on the Financial Statement was not reasonable because Mr. Hurston knew of at least some of the inaccuracies in the Financial Statement from the E-mails the parties exchanged in which Mr. Hurston was informed that Mr. Anzo did not own the Lake House and only jointly owned the Condo with his wife. Mr. Anzo contends Mr. Hurston's knowledge of such inaccuracies is a red flag that should have alerted Mr. Hurston to other potential inaccuracies in the Financial Statement. "The existence of a `red flag' which would put a reasonably prudent person on notice that the information contained in the financial statement may not be accurate is a key factor in the reasonable reliance test under § 523(a)(2)(B)." Bailey v. Turner (In re Turner), 358 B.R. 422, 427 (Bankr. N.D. Okla. 2006). A creditor cannot ignore red flags that suggest inaccuracies, and should undertake at least some minimal investigation as to the representations contained in a financial statement with red flags. See Bank of Commerce v. Smith (In re Smith), 278 B.R. 532, 538-39 (Bankr. N.D. Okla. 2002) (concluding no reasonable reliance when bank failed to undertake even minimal investigation of representations contained in financial statement when incomplete financial statement contained information which called into question the accuracy of information); Teates v. Kuranda (In re Kuranda), 122 B.R. 264, 269 (Bankr. E.D. Va. 1990) ("A creditor cannot ignore `red flags' and expect to benefit from nondischargeability."). When red flags exist that indicate a financial statement lacks accuracy, it creates a necessity for additional minimal investigation by the creditor. Fahey Bank v. Benton (In re Benton), 367 B.R. 592, 599 (Bankr. S.D. Ohio 2006); but see In re
A red flag is a "glaring inconsistency" known to the creditor. Insouth Bank v. Michael (In re Michael), 265 B.R. 593, 600 (Bankr. W.D. Tenn. 2001) (finding grossly overstated income, failure to list any expenses or personal property, and creditor's actual knowledge of debtor's inability to pay obligations constituted red flags). A creditor also has little or no basis to trust a financial statement from a debtor with whom he has not conducted business before. Lease Corp. of Am. v. Harloff (In re Harloff), 272 B.R. 496, 500 (Bankr. M.D. Fla. 2001). The existence of one red flag may be sufficient to establish that a reasonably prudent person would have been on notice that the information may not be accurate. In re Turner, 358 B.R. at 427 (finding the valuation of the debtor's interest was a sufficient red flag that required further inquiry).
After considering all of the evidence, including the documents and testimony, credibility and demeanor of the witnesses, the Court finds that Mr. Hurston neither actually nor reasonably relied on the Financial Statement.
As more fully set forth in the discussion that follows, it is apparent to the Court that Mr. Hurston did not actually rely on the Financial Statement to renew the loan for the following reasons: (1) the initial advance of money was made on the initiative of Mr. Hurston without either a guaranty or any meaningful due diligence so it is not credible under the facts and circumstances of this case that Mr. Hurston relied on the Financial Statement to merely extend the loan, particularly when each extension provided him with benefits and Mr. Anzo told him neither he nor LaPrade's could pay; (2) both Mr. Hurston and his lawyer testified that the reason the loan was extended was so Mr. Hurston could get a "real note and guaranty;" (3) the failure to do any investigation of the Financial Statement, under the circumstances of this case, is inconsistent with the conduct of a person who was actually relying on it;
Even if this Court were to find that Mr. Hurston actually relied on the Financial Statement, the Court would conclude that under the totality of the circumstances in this case, his reliance was not reasonable for the following reasons: (1) Mr. Hurston should have been more cautious because he did not have an established lending procedure to follow in renewing the loan application; (2) Mr. Hurston did not verify the Financial Statement through readily available sources; (3) even minimal investigation by Mr. Hurston would have revealed additional inaccuracies of Mr. Anzo's representations; (4) Mr. Hurston did not have a previous or close personal relationship or friendship with Mr. Anzo, but rather strictly a business relationship at the time of the extensions and one that was chilly at best; (5) the Financial Statement contained many "red flags" that should have alerted Mr. Hurston to inaccuracies; and (6) the debt was initially incurred for commercial reasons on Mr. Hurston's initiative with no documented financial information. All of these factors show that Mr. Hurston's reliance on the Financial Statement was neither actual nor reasonable.
So what red flags were there, if any, in the Financial Statement? First, Mr. Hurston insisted on getting paid, but was told by Mr. Anzo in January 2009 that "we are unable to pay you off until the loan gets completed." That statement does not merely suggest illiquidity, but it admits it. Mr. Hurston then received the Financial Statement prior to finalizing the extension, and the Financial Statement showed a net worth of more than $12,500,000 with debt of less than $3,000,000 and an asset to debt ratio of about 5:1! Yet supposedly LaPrade's and Mr. Anzo did not have the ability to pay him. How could that be, other than that either the Financial Statement was wrong or Mr. Anzo did not tell the truth that he could not pay? At the very least, investigation of the Financial Statement was necessary to reconcile the two contrary statements.
Second, there were known material inaccuracies on the face of the Financial Statement. In October 2008, about a month after Lehman Brothers filed for bankruptcy and about one week after the President signed the TARP bill to shore up the country's financial markets allegedly to prevent their collapse, the parties exchanged the E-mails wherein Mr. Anzo specifically told Mr. Hurston that he did not own the Lake House, but rather his wife did, and that the Condo was jointly owned by he and his wife. The E-mails were exchanged in October 2008 while the parties were negotiating an extension of the October 2007 Note. The Financial Statement was actually delivered in late
Contrary to the representations in the E-mails, the Financial Statement delivered to Mr. Hurston in January 2009 showed that Mr. Anzo was the sole owner of the Lake House and the Condo, which Mr. Hurston knew to be untrue based on the E-mails. It also showed a net worth in excess of $12,500,000, despite the country's financial turmoil and Mr. Anzo's statement to Mr. Hurston that he could not pay him. There were certainly other red flags on the face of the Financial Statement, including the failure to list the contingent liability to Mr. Hurston, himself, and other substantial contingent obligations one would reasonably expect to be associated with the Marina, especially since Mr. Hurston knew about the secured debt on the Marina at that point. By the time the Financial Statement was reaffirmed by Mr. Anzo in connection with the June 2009 Note, the country was in a deep recession, and the real estate and financial markets were destabilized and it was extremely difficult to finance or close a real estate or commercial transaction. Based on Mr. Anzo's reaffirmation of the Financial Statement in connection with the June 2009 Note, Mr. Hurston asserts that he had no reason to question that Mr. Anzo's net worth was not adversely affected by the recession, despite the fact that so many people in the country had suffered a significant drop in the value of their portfolios. Particularly given the economic situation the country was in at that time, the Court finds that the representation from Mr. Anzo, a marina owner/operator and owner of real estate, that his financial condition had not deteriorated during this time was not reasonable to rely upon and was another red flag that required further inquiry or is evidence that the Financial Statement was not actually relied upon in extending the note. See In re Mansour, No. 08-3096-dof, 2010 WL 3853151, at *8 (Bankr. E.D. Mich. Sept. 30, 2010) (noting the creditor should have been skeptical of values placed in a financial statement from August 2007 because of the general decline of real estate).
Because Mr. Hurston knew that Mr. Anzo did not own the Lake House and only owned half of the Condo and had mortgages of about $2,700,000, he acknowledged he was not relying on the real estate disclosed in the Financial Statement for repayment, but rather on the stocks and bonds and the partnership interests disclosed on the Financial Statement. Mr. Hurston testified that those interests, valued at more than $10,000,000 on the Financial Statement, made him comfortable that he could get paid the amounts owed him because the amount owed to him was such a small percentage of the amount of those assets.
To the contrary, however, a reasonable person, particularly knowing what Mr. Hurston knew, would have questioned, and consequently further investigated, both the ownership and the actual value of those assets on the Financial Statement if he intended to actually rely on them. First, with respect to the ownership of the assets listed on the Financial Statement, Mr. Hurston knew of material inaccuracies specifically with respect to the ownership of substantial assets. It was not reasonable for him to assume the ownership of the other assets was correct, but quite to the contrary: a reasonable person intending to rely on the Financial Statement would have either (a) assumed that the ownership was also not correct or (b) at the very least investigated further. With respect to the value of the business interests, numerous red flags also existed. For example, one red flag was the value of Mr. Anzo's interest in LaPrade's at $2,700,000. This value
Mr. Hurston testified that he relied on the value of Mr. Anzo's alleged interests in partnerships and privately held companies because of their liquidity, but there was no reasonable basis for him to conclude that they had liquidity without doing some type of investigation into that fact. It appeared to the Court that his basis that these investments were sufficiently liquid to pay his claim was that the partnerships or privately held companies had allegedly invested a lot of money into LaPrade's so they must have more money. That was not a reasonable assumption to make, particularly in early 2009 in the middle of such a deep recession. It would seem to the Court that the opposite assumption — that they were not liquid — would have been the more reasonable assumption to make at this time, particularly with respect to whether someone's interest in the company was sufficiently liquid to support a credit decision or, at the very least, necessitated further investigation if Mr. Hurston was actually relying on those assets for repayment. Furthermore, it would not be reasonable to rely on an entity's liquidity when the reason for the extension of the maturity date is because more time was needed for the borrower to refinance the property because the obligors are not otherwise able to pay. Mr. Anzo admitted as much before the loan was extended. The need for an extension of time to pay was a red flag that liquidity was an issue because the obligors admitted they did not have the money to otherwise pay.
Although the prior red flags are sufficient for the Court to find that any reliance on the Financial Statement was not reasonable, even more red flags existed. Another red flag on the Financial Statement was the representation of the value of the interests in VMG and affiliates to be more than $5,650,000. Mr. Hurston knew from the Executive Investment Summary that he had seen on the Marina that affiliates of Vinings Marine Group ("VMG") had loaned or invested up to more than $7,000,000 in LaPrade's. Based on LaPrade's distressed situation, the value of these interests was dubious. A reasonable person would have questioned how VMG and its affiliates could pay Mr. Hurston if such a large part of the amount of their "value" was tied up in LaPrade's, which could not pay Mr. Hurston in the first place. Consequently, the vast majority of Mr. Anzo's alleged stated net worth on the Financial Statement was tied up, either
Mr. Hurston argues a creditor should be able to assume the information on a financial statement is correct if the document is signed, and even if there is a red flag, it should not require a creditor to investigate every detail on the financial statement. See Gerritsen Beach Invs. Ltd. et al. v. Jemal (In re Jemal), 516 B.R. 238 (Bankr. E.D.N.Y. 2014); Household Fin. Corp. v. Howard (In re Howard), 73 B.R. 694 (Bankr. N.D. Ind. 1987). The problem with this argument is that the issue is not whether the creditor should generally be able to assume the information in a financial statement is accurate and whether "every" detail therein needs to be investigated, but rather whether the creditor's reliance on the financial statement was reasonable under the totality of the circumstances of the case. Differences exist between what reliance would be reasonable for a creditor who makes a $3,000 consumer loan versus a creditor who makes a $400,000 commercial loan.
In support of this argument, Mr. Hurston relies upon In re Jemal for the proposition that the reasonableness standard is a "low hurdle for a creditor to meet, and is intended as an obstacle only for creditors acting in bad faith." 516 B.R. at 246, quoting In re Bonnanzio, 91 F.3d 296, 305 (2nd Cir. 1996), which itself quoted from In re Woolum, 979 F.2d 71, 76 (6th Cir. 1992), which quoted from In re Martin, 761 F.2d 1163, 1166 (6th Cir. 1985). Martin dealt with a mere $2,500 loan by a bank to an existing customer based on a financial statement showing a net worth of more than $100,000 where the bank also ran a credit report. 761 F.2d at 1166, 67. In Woolum, the bank obtained a tax return and ran a credit report as part of an investigation of the debtor's financial statement, which additional information supported
If the reasonableness standard is a low hurdle for the creditor to meet, this Court finds that Mr. Hurston did not even clear that hurdle because he did no investigation despite the red flags being waved to signal him to investigate. If the standard set out in Martin, Woolum and Bonnanzio is the focus is on the creditor's lack of bad faith — and this Court thinks it is not — that standard is neither correct nor is it the standard in the Eleventh Circuit. In In re Vann, the Eleventh Circuit Court of Appeals concluded that "the requirement of reasonableness [is] a more stringent standard than justifiable reliance or actual reliance" and specifically contrasted that with the aforementioned language from Martin. 67 F.3d 277, 280 (11th Cir. 1995). The Eleventh Circuit appropriately focused on the fact that "[r]easonable reliance connotes the use of the standard of an ordinary and average person." Id. citing In re Kirsh, 973 F.2d 1454, 1458 (9th Cir. 1992). This generally accepted standard of the "ordinary and average person" to determine reasonableness is certainly not the same as a standard based on a creditor who merely does not act in bad faith. Reasonableness requires more than that. This Court also thinks the Second and Sixth Circuits require more than that, as well, and the language used by them is merely a factor used in considering the totality of circumstances which they also all discuss to determine reasonableness. Martin, 761 F.2d at 1166 ("Initially the Bankruptcy Court should make its determination of reasonableness considering all the facts and circumstances of the case"); Woolum, 979 F.2d at 75 ("[w]hether a creditor's reliance was reasonable is a factual determination to be made in light of the totality of the circumstances."); and Bonnanzio, 91 F.3d at 305 ("The reasonableness of reliance requires the fact finder to consider "the totality of the circumstances..."). The Eleventh Circuit cited with approval the standard of reasonableness set forth by the Tenth and Fifth Circuits. The Tenth Circuit held
Vann, 67 F.3d at 280, quoting In re Mullet, 817 F.2d 677, 679 (10th Cir. 1987). Simply put, Mr. Hurston has not provided a reasonable basis to rely on Mr. Anzo's representations. The Fifth Circuit held that reasonable reliance would be ascertained by asking the following questions:
Vann, 67 F.3d at 280, quoting In re Coston, 991 F.2d 257, 261 (5th Cir. 1993). Similarly, each of these factors is answered in Mr. Anzo's favor and against Mr. Hurston.
Mr. Hurston also relied upon Master Fin., Inc. v. DeJulio (In re DeJulio), 322 B.R. 456 (Bankr. M.D. Fla. 2005). In DeJulio, the debtor claimed that the creditor did not reasonably rely on a financial statement because the alleged substantial salary disclosed therein for an "administrative assistant" was a red flag. Id. at 462-63. The court was unpersuaded and found that the salary alone was not a sufficient red flag to require further investigation and that the creditor's actions conformed to industry standards. Id. at 463. To the contrary, the Financial Statement before this Court contained more than one red flag. The multiple red flags should have caused Mr. Hurston to proceed further with caution and investigate the Financial Statement if he truly intended to rely on it.
Finally, Mr. Hurston argues that Norris v. First Nat'l Bank in Luling (In re Norris), 70 F.3d 27 (5th Cir. 1995), supports his contention that further investigation was not necessary. In Norris, the debtor maintained that the financial statement contained blatant errors that should have led a reasonable person to question the information. Id. at 30. The error known by the bank in that case was an overestimation of the value of a particular piece of real estate that was the bank's collateral which the debtor contended should have caused the bank to question his falsely reported "cash flow surplus." Id. The Court of Appeals agreed with the bankruptcy court that the overestimation of value was not a red flag because the creditor was aware of the circumstances surrounding its collateral. Id. In Norris, the loan at issue had been renewed annually several times and the bank required submission of a balance sheet, income statement and most recent tax return prior to every renewal. The loan was renewed near the end of every year. The materially false statement on the last financial statement was that the debtor, a doctor, had a "cash flow surplus" of more than $45,000 at the time of the renewal. Apparently, this amount must have been reasonably consistent with the documents submitted because that alleged surplus was not considered a red flag.
Mr. Hurston contends that he had no reason not to believe Mr. Anzo with respect to the representations of his net worth on the Financial Statement. The evidence presented to the Court is contrary to that, though. Mr. Hurston and Mr. Anzo had no prior business dealings before the October 2007 Note. While Mr. Hurston alleges that Mr. Anzo did not give him a reason not to trust him, a reasonable person would have actually been more cautious in a transaction involving a new relationship. See, e.g., In re Harloff, 272 B.R. at 500 ("[S]ince [Creditor] and Debtor did not have an existing relationship prior to these Leases, [Creditor] had even more reason to investigate further rather than relying solely on the Lease Application.").
In addition to their lack of a business or personal relationship prior to the October 2007 Note, the relationship between Mr. Hurston and Mr. Anzo after the October 2007 Note was signed was not positive. For example, in September of 2008, before the October 2007 Note was renewed, Mr. Hurston felt that he was not told the truth about the Marina being "free and clear" and that he was being ignored and "jerked around." The representations of LaPrade's debt structure in the two different Executive Investment Summaries were also substantially different. When those kind of feelings in that situation are followed up with the receipt of a Financial Statement which contains known material inaccuracies, a reasonable person would not rely on that Financial Statement, but would investigate the truth and basis for the remainder of the representations in it if he was, in fact, intending to rely on its contents as part of a credit decision.
Mr. Hurston argues that his reliance was reasonable because of his interactions with Mr. Anzo, because he claims that Mr. Anzo lived a "wealthy, lavish lifestyle," and because he reviewed the Financial Statement carefully and it was consistent with Mr. Anzo's prior representations. See Posillico
In Howard, also cited by Mr. Hurston, the court relied heavily upon the factor of standard practices: departure from custom could lead to a finding of unreasonableness if following the standard practices would have revealed important information. 73 B.R. at 707. But Howard involved a consumer loan of only about $3,000. The debtor's financial statement there only listed debts of $7,150 to two creditors. As it turns out, the debtor at that time had debts to several other creditors of at least about another $20,000, and possibly more than $60,000, which were not of the type that would appear on a typical consumer credit report. The court there did not find the debtor's explanation for omitting at least $20,000 of these creditors to be credible. The court found that the reliance was reasonable because there were no red flags prompting additional investigation, and the alleged misrepresentations could not be ascertained through normal credit-check procedures (investigating employment, background, outstanding obligations, and credit record, all of which the creditor did). Id. at 710. Without any red flags, the creditor was entitled to rely on the information provided. Furthermore, like the small loan in Martin of only $2,500, it is hard for a creditor to financially justify spending more time and expense on investigating a debtor for a $3,000 loan than what the creditors did in those cases, thus leading to the conclusion that reliance was reasonable under the circumstances in those cases.
Unlike Jemal and Howard and the other cases relied upon by Mr. Hurston, the Financial Statement that Mr. Anzo provided contained numerous red flags, all of which related to Mr. Anzo's ownership of assets and financial wherewithal, and the loan amount justified investigation. The actual and reasonable reliance requirement is not as easily satisfied as Mr. Hurston may allege — because of the red flags, lack of a positive prior relationship and the amount of the loan. A reasonable person similarly situated to Mr. Hurston would have conducted further investigation into Mr. Anzo's finances. The Financial Statement could have easily been compared against tax returns, and their supporting schedules and K-1's, and bank account statements. Mr. Hurston could have verified the information in the Financial Statement if he had asked for a few simple documents. Mr. Hurston's argument that there was no reason to further investigate the Financial Statement is without merit.
Mr. Hurston asserts that most of the assets contained in the Financial Statement were assets that were not easily verifiable and that he was not concerned
Even if Mr. Hurston had only asked for tax returns to verify the information without the schedules, it would have been a factor in his favor because by making such an inquiry it would have shown that he was actually relying on it by making some attempt to verify it. See Massey-Ferguson Credit Corp. v. Archer (Matter of Archer), 55 B.R. 174, 178 (Bankr. M.D. Ga. 1985) (finding reliance was reasonable where creditor looked first to the financial statement but also contacted local credit bureau and the Farmers Home Administration to inquire about debtor); see also USAmeriBank v. Strength (In re Strength), No. 16-3022-WRS, 2016 WL 4204084, at *2 (Bankr. M.D. Ala. Aug. 8, 2016) (finding that failure to conduct investigation coupled with inadequate explanation for failure was not reasonable). Simply put, by making even a minimal investigation to verify a financial statement, a creditor is demonstrating that it is relying on the information in it. When no investigation is done, absent some other circumstances, it certainly gives the appearance that the creditor is not actually relying on the financial statement in extending credit or renewing a loan.
It is important to note that Mr. Hurston made the initial loan to LaPrade's without a guaranty or any material due diligence
Additionally, Mr. Hurston contends that he was not a sophisticated lender, but rather just an individual who wanted equity in a property he always admired. This argument fails to give enough weight to the fact that Mr. Hurston had years of experience working in Coca Cola's Corporate Tax Department and even served as its Director of Corporate Real Estate for six years. The creditor's knowledge and experience is relevant in determining whether the creditor's reliance was reasonable. Neilson v. Straight-Out Promotions, LLC et al. (In re Tyson), No. 05-02210 (ALG), 2011 WL 1841881, at *4 (Bankr. S.D.N.Y. May 13, 2011); W.E. Davis Co. v. Medow (In re Medow), 26 B.R. 305, 307-08 (Bankr. S.D. Fla. 1982). Mr. Hurston's experience, however, indicates he is more sophisticated in business matters than the average individual. His business experience was cultivated as a senior manager at one of the largest and most successful corporations in the world, yet he did not even want to retain a lawyer in this $400,000 transaction in which he really wanted to have equity instead of a loan and did practically no due diligence because he did not think its size warranted the cost. An ordinary person would not have shared that attitude and it reflects on his approach to this entire loan transaction and his renewals in that he was not actually relying on the Financial Statement in extending this loan. It appears to the Court that the reason the loans were extended for short periods of time was that each and every extension gave Mr. Hurston some benefit he had not received before while LaPrade's was trying to refinance the Marina and pay him off because Mr. Anzo told him he could not otherwise pay him and he knew that was a reasonable option under the circumstances. In the first extension, Mr. Hurston received an extremely basic guaranty from Mr.
Mr. Hurston argues that it is not within the purview of this Court to second guess a creditor's decision to lend money. In re Contos, 417 B.R. at 566. While this is an accurate statement, its purpose is to ensure the Court does not "subjective[ly] evaluat[e] and judg[e] the creditor's lending policy and practices." Id. The Court is not second guessing Mr. Hurston's decision to extend the note, and has previously noted that his decision to do so was a reasonable course of action even if the Financial Statement had showed a negative net worth because he had already lent the money, the extension did not hurt his ability to get repaid and it provided him with some benefits. This Court, however, must determine whether the creditor's reliance on the financial statement was reasonable under the circumstances. Id.
Accordingly, in looking at the totality of the circumstances and reviewing the factors discussed earlier, the Court finds that: (1) Mr. Hurston did not have an established lending procedure to follow in renewing the loan application; (2) Mr. Hurston did not verify the financial statements through readily available sources; (3) even minimal investigation by Mr. Hurston would have revealed the inaccuracies of Mr. Anzo's representations; (4) Mr. Hurston did not have a previous or close personal relationship or friendship with Mr. Anzo, but rather strictly a business relationship at the time of the extensions and one that was chilly at best; (5) the Financial Statement contained many "red flags" that should have alerted Mr. Hurston to inaccuracies; and (6) the debt was initially incurred for commercial reasons on Mr. Hurston's initiative with no documented financial information. All of these factors, except possibly the first one,
Based on the record before the Court, the Court finds that Mr. Hurston did not actually rely on the Financial Statement or, if he did actually rely on it, his reliance was not reasonable.
Because the Court has concluded that Mr. Hurston has failed to meet his burden that he actually relied on the Financial Statement or that his reliance on the Financial Statement was reasonable, the Court does not need to rule on the issue of whether Mr. Anzo delivered the Financial Statement to Mr. Hurston with the intent to deceive him.
Accordingly, for the reasons stated herein, it is hereby
ORDERED that Mr. Hurston's Complaint to determine that the debt owed to