The opinion
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
In re: § Case No. 18-47063-659
§
Jason Shawver, § Chapter 7
§
and §
§
Briana Shawver, §
§
Debtors. §
______________________________ §
§
GCAP Holdings LLC, §
§
Plaintiff, § Adv. No. 19-04009-705
§
Jason E. Shawver, et al., §
§ [Related to Doc. Nos. 1 and 13]
Defendants. §
OPINION AND FINDINGS OF FACT
On August 27, 2019, the Court held a trial in the Adversary Proceeding
docketed as 19-04009-705. For the reasons set forth herein, the Court ORDERS that
the relief sought by GCAP Holdings, LLC (the “Creditor”) be DENIED in full.
I. FACTS
From December 2016 through November 3, 2018 (the “Petition Date”), Jason
Shawver and Briana Shawver (collectively, the “Debtors”) owned and operated
Elysium Restoration and Design, L.P. as the limited partners (“Elysium”). Debtors
owned a 99% interest in the partnership. Elysium’s purpose is to perform real estate
restoration, construction, and/or renovation work.
In or around June 2018, Debtors entered into negotiations with the Creditor
for a loan to complete multiple pending real estate renovation and restoration
projects. Creditor is a limited liability company located in Brooklyn, New York,
which operates as a private equity firm. Vsevold “Steve” Garanin (“CEO”) is an
investment banker by trade and Creditor’s sole owner. According to the CEO’s
testimony, Creditor usually lends to small businesses in amounts between $15,000
and $25,000. Creditor’s ordinary underwriting process includes reviewing three
months of business bank statements to create a cash flow profile, conducting a credit
profile of the business owners, and inputting the data into the CEO’s propriety
algorithm. This algorithm takes into account revenue, income, expenses, business
type, and seasonality of certain businesses to run a risk assessment. The algorithm
computes and produces a funding offer.
The Debtors represented to the Creditor that Elysium was able to repay the
Creditor for the loan, including interest. As required by the Creditor’s underwriting
process, the Debtors submitted a one-page business credit application
(“Application”) requesting $225,000, although the Debtors and the Creditor dispute
how this amount originated. In addition to the Application, the Debtors provided
Elysium’s bank statements from December 2017—April 2018.
The Creditor began its underwriting process by reviewing Elysium’s bank
statements and inputting the information into the CEO’s algorithm. Based on this
evaluation, the algorithm suggested the Application amount requested was too high.
In addition, the CEO’s analysis determined that the Debtors may not be able to make
timely payments. The CEO did not provide any written documentation illustrating
this analysis.
The Creditor requested additional information related to Elysium’s future cash
flows. Understanding the nature of Elysium’s business, the Creditor asked for
construction contracts and the anticipated revenue stream from those contracts.
Elysium responded by providing four signed proposals (the “Elysium Proposals”)
for renovation and construction work totaling an estimated $520,000. No evidence
was submitted by the Creditor that it only considers future revenue streams after the
initial Application is reviewed.
Prior to funding, Elysium received payments for completed work on the
Elysium Proposals. The Debtors and the Creditor (collectively, the “Parties”)
stipulated that the following table breaks down the information regarding total
contractual amounts and amounts paid prior to the Creditor’s loan.
Contract Amount Paid Prior to Creditor
Contract
Total Loan
4068 Botanical $91,583.75 $0.00
3843 McCree $71,852.40 $17,513.64
17883
$194,334.00 $135,034.00
Blakefield
4116 Flad $162,313.20 $32,500.00
$520,083.15 $185,107.64
One day prior to funding, the Creditor conducted an eight to ten-minute phone
call (“Funding Call”) with Debtors.
Despite Elysium’s historical poor performance, the Creditor and Elysium
came to an agreement on June 25, 2018 (“Funding Date”). The CEO testified that he
believed the Elysium Proposals represented significant upcoming revenues.
However, the Debtors credibly disputed any requirement that the Creditor insisted
that the Elysium Proposals could only indicate funds still due.
Pursuant to the “Revenue Based Factoring (RBF/ACH) Agreement” (the
“Contract”), the Creditor funded $66,000 to Elysium in exchange for forty-two
weeks of payments totaling $96,000. Creditor sought 45% return on investment
under the Contract. Due to the Creditor’s policy, the Debtors personally guaranteed
the loan.
The Contract required the Debtors to provide “true, accurate, and complete”
financial information “in all respects.” Specifically, if the Debtors provided any
“false or misleading” information, the Debtors breached the Contract. However,
nothing within the contract language barred Elysium from receiving payments on
the Elysium Proposals prior to the Contract.
Over the next several months, Elysium suffered unforeseen project delays that
restricted anticipated cash flow. As a result, by late October 2018, Elysium struggled
to make its payment to Creditor. On November 1, 2018, the Creditor declared the
Debtors in default for failure to satisfy the weekly payments. On the Petition Date,
the Debtors owed an outstanding debt of $62,000 to the Creditor, pursuant to the
Contract (the “Debt”).
On the Petition Date, the Debtors filed a joint petition for relief under Chapter
7 of Title 11 of the United States Code (the “Bankruptcy Code”1), thereby
commencing the bankruptcy case, Case No. 18-47063-659. On January 28, 2019,
the Creditor filed a complaint commencing the adversary proceeding (“Adversary
Proceeding”), Case No. 19-04009-705. Therein, the Creditor alleges that the Debtors
1 Unless otherwise indicated, any reference to “section(s)” or “§[§]” shall refer to
the indicated section[s] of the Bankruptcy Code.
owe him the Debt that is subject to exception from discharge under §§ 523(a)(2)(A)
or 523(a)(2)(B).
II. PRELIMINARY MATTERS
This Court finds that it has jurisdiction under 28 U.S.C. § 151, 157, and 1334
and Local Rule 81-9.01(B) of the United States District Court for the Eastern District
of Missouri. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (2016). Venue
is proper in this District under 28 U.S.C. § 1409(a). Both the Debtors and the
Creditor affirmatively consent to the jurisdiction of this Court.
III. LAW
A. Law on the §§ 523(a)(2)(B) and 523(a)(2)(A) Exceptions to Discharge
Pursuant to § 727(b), the Court shall grant a discharge that “discharges the
debtor from all debts that arose before the petition date,” except from those debts
that are specified in § 523. The Creditor relies on two mutually exclusive exceptions.
Section 523(a)(2)(B) provides that any debt arising from an intentionally deceitful
and materially false “statement in writing … respecting the debtor’s … financial
condition” upon which the creditor reasonably relied is excepted from discharge.
Section 523(a)(2)(A) provides that any debt that arises out of “false pretenses, a false
representation, or actual fraud,” is excepted from discharge. To prevail on either
claim the Creditor must prove each element by a preponderance of the evidence. In
re Nelson, 357 B.R. 508, 513 (B.A.P. 8th Cir. 2006). The Court analyzes each in
turn.
IV. EXCEPTION TO DISCHARGE PURSUANT TO THE
PROVISION OF § 523(a)(2)(B)
Under § 523(a)(2)(B), a debtor may not be granted a discharge from any debt
for funds or extension of credit obtained by a written statement “(1) that is materially
false; (2) respecting a debtor’s financial condition; (3) on which the creditor
reasonably relied; and (4) that debtor made or published with intent to deceive.” 11
U.S.C. § 523(a)(2)(B) (2007); see also In re Baker, 419 B.R. 47, 50-51 (Bankr. E.D.
Mo. 2009).
A. Materiality
For purposes of Section 523(a)(2)(B), a statement is materially false if it
“paints a substantially untruthful picture of a debtor’s financial condition by
misrepresenting information of the type which would normally affect the decision
to grant credit.” In re Bohr, 271 B.R. 162, 167 (Bankr. W.D. Mo. 2001) (quoting
Meyer v. Dygert (In re Dygert), 2000 WL 630833 *1, *21 (Bankr. D.Minn. 2000)).
Multiple courts find it “well established that writings with pertinent omissions” may
be materially false for purposes of § 523(a)(2)(B). In re McCleary, 284 B.R. 876,
886 (Bankr. N.D. Iowa 2002); see also In re Dammen, 167 B.R. 545, 551 (Bankr.
D.N.D. 1994); see also In re Bundy, 95 B.R. 1004, 1008 (Bankr. W.D.Mo. 1989).
Here, the Debtors provided a variety of documentation to support the
Application, including the Elysium Proposals. The Creditor maintains that the
Elysium Proposals are materially false because the Elysium Proposals fail to
accurately represent the Debtors’ future cash flows from the corresponding
renovation and construction projects based solely on the fact some funds had been
received on the Elysium Proposals. The Elysium Proposals stated that the Debtors’
estimated payments were in excess of $500,000 for renovation and construction
work on the four projects. However, at the time of funding, the Debtors had already
received over one-third of the expected payments, thereby reducing the amount of
future receivables by the same.
The Debtors’ position is that the Creditor never demanded that the Elysium
Proposals totals represented only future receivables. Additionally, the Debtors did
not represent the Elysium Proposals total as only future receivables. In McCleary,
the debtor failed to disclose his outstanding accounts with suppliers, specifically a
$6,000 debt, when applying for a substantial bank loan. 284 B.R. at 886. The court
there concluded that the bank’s decision to approve the loan would not have been
affected by knowledge of the outstanding account “[g]iven the size of the loan” and
“[the] Debtor’s net expenditures.” Id. Conversely, here, the Debtors received
payments amounting to over one-third of the expected $520,000 of receivables.
Here, the Creditor’s knowledge of the substantial reduction in future receivables may
have affected Creditor’s decision to lend. Regardless, the already collected
receivables are a pertinent omission of a type which normally affects the decision to
grant credit, because the Creditor specifically asked for the proposals when assessing
Elysium’s ability to repay. Therefore, the Debtors’ omission regarding the amount
of future receivables available pursuant to the Elysium Proposals is materially false
statement.
The Court FINDS the element of materiality is met.
B. Respecting a Debtor’s Financial Condition
A statement about a single asset can be a “statement respecting the debtor’s
financial condition” under § 523(a)(2) of the Bankruptcy Code. Lamar, et al., v.
Appling, 138 S.Ct. 1752, 1764 (2018).
In Lamar, the debtor made a series of oral misrepresentations about the
amount of his tax return to his lawyers when the lawyers sought prompt payment.
Id. at 1757. By the time the case reached the Supreme Court, the issue became
whether a statement about a single asset can be a statement respecting the debtor’s
financial condition. Id. at 1758. The Supreme Court held yes. Id. at 1764.
The Debtors provided Elysium’s bank statements and the Elysium Proposals
to the Creditor as evidence of Elysium’s past, present, and future financial condition.
Although the Debtors did not provide personal bank statements to the Creditor, for
purposes of this analysis, the Court ignores, the issue of piercing the corporate veil.
Because the Debtors personally guaranteed the debt, the Court will assume
statements about Elysium’s financial condition sufficiently serves as a statement
about the Debtors’ financial condition. Additionally, all Parties agreed that the
Debtors provided the Creditor with information sufficient to access additional bank
records if it so chose prior to the funding.
Here, Elysium’s statement about future receivables expected from Elysium
Proposals, whether viewed as one asset or separate assets from individual contracts,
satisfies the element of a statement “respecting a debtor’s financial condition” under
§ 523(a)(2)(B). Id.
The Court FINDS the element of a statement respecting a debtor’s financial
condition is met.
C. Creditor’s Reasonable Reliance
The Court must look at the reasonableness of a creditor’s reliance “in light of
the totality of the circumstances.” First Nat’l Bank of Olathe, Kansas v. Pontow, 111
F.3d 604, 610 (8th Cir. 1997) (quoting Coston v. Bank of Malvern (In re Coston),
991 F.2d 257, 261 (5th Cir. 1993) (en banc)); see also In re Keim, 236 B.R. 400,
402-03 (B.A.P. 8th Cir. 1999). Among other things, a court may consider if there
were “red flags” that would have alerted an ordinary prudent lender to the possibility
that the representations relied upon were not accurate; and whether even minimal
investigation would have revealed the inaccuracy of the debtor’s representation.
First Nat’l Bank, 111 F.3d at 610; Keim, 236 B.R. at 403. Additionally, “the
stringency of the reasonableness standard varies with the lender’s sophistication.”
Bundy, 95 B.R. at 1009.
After reviewing the totality of the circumstances, substantial evidence
supports that the Creditor unreasonably relied on the statement within the Elysium
Proposals for the Creditor’s proposition that Elysium Proposals only represent future
revenue. The Debtors provided Elysium’s bank statements in conjunction with the
Elysium Proposals. The statements provided contain record of deposits
corresponding to completed work on the Elysium Proposal jobs. The Creditor need
only inquire as to the origin of the deposits to discover incoming payments for work
completed on the Elysium Proposals. Additionally, Creditor failed to procure a basic
balance sheet and financial statement for Elysium prior to funding. Further, no
evidence was produced that such financial documents were requested and not
provided. To the contrary, the Debtors credibly testified that if requested, they would
have produced such documents. Had these core financial documents been obtained
prior to the Funding Date, the Creditor would have noticed a discrepancy regarding
the outstanding accounts receivable at funding. Instead the CEO, a sophisticated
financial professional, used his own proprietary algorithm that takes into account
revenue, income, expenses, business type, and seasonality of certain businesses to
run his risk assessment. The CEO repeatedly described the transaction as
“borderline” in his testimony. That description gives the Court pause, because it
indicates the CEO recognized the risk and proceeded against his company’s ordinary
practices. Despite the “borderline” nature of this deal, the Creditor—who typically
lends much smaller amounts of approximately $15,000 to $20,000, to small
businesses like Elysium—decided to deviate from its ordinary lending practices and
lent $66,000.
The Creditor ignored some obvious red flags. The Creditor conducts business
with general contractors like Elysium. Due to this, the Creditor knows construction
contractors often receive money up front and payment for work as the work is
completed. Here, for example, one of the four Elysium Proposals provided that
$58,300 be due at signing of the proposal. This proposal was accepted on January
21, 2018 by Elysium’s client. The Creditor funded Elysium on June 25, 2018.
Through minimal investigation and basic due diligence, the Creditor ought to have
read the proposal contract the Creditor supposedly relied so heavily upon and
recognized that a large deposit had been due—and likely paid—nearly five months
prior to funding.
Finally, despite Elysium’s history of poor financial performance, the Creditor
lent nonetheless. An ordinary prudent lender likely requires basic business
accounting documents like financial statements and balance sheets when evaluating
lending opportunities. However, the Creditor failed to even request such documents,
overlooked historical poor performance, and conducted less than minimal
investigation into the documents Elysium provided, all in an effort to chase a 45%
return on investment within forty-two (42) weeks. With great reward comes great
risk.
The Court FINDS the element of reasonable reliance is not met.
D. Debtors’ Intent to Deceive
A debtor’s state of mind, including whether a debtor held the intent to deceive
is exceedingly difficult to produce, therefore, creditors may present circumstantial
evidence for the Court to infer the intent. In re Lindsey, 443 B.R. 808, 815 (B.A.P.
8th Cir. 2011). “When the creditor introduces circumstantial evidence proving the
debtor’s intent to deceive, the debtor cannot overcome [that] inference with an
unsupported assertion of honest intent.” Id. “The focus is, then, on whether the
debtor’s actions appear so inconsistent with [his] self-serving statement of intent that
the proof leads the court to disbelieve the debtor.” Id.
Although the Court finds the Debtors’ omission regarding the future
receivables to be materially false, the Debtors failed to act with the requisite intent
to deceive the Creditor. Upon the Creditor’s request, the Debtors furnished the
Elysium Proposals as evidence of ability to repay. However, nothing in the Elysium
Proposals’ estimated revenue totals suggest that all revenue is attributable to future
receivables. To the contrary, at least one of the proposals, which made up the lion’s
share of the contested receivables collected prior to funding, outlines payment terms
that describe a deposit due at signing and progress payments. This agreement
occurred five months before the Funding Date.
The Debtors provided the Elysium Proposals, as requested, so that the
Creditor may evaluate risk and underwrite. According to credible testimony, the
Debtors stated that the Debtors provided the Elysium Proposals upon the Creditor’s
request with no intent to deceive. Now, the sophisticated and experienced Creditor
claims to have been bamboozled by the Elysium Proposals reduction in expected
receivables. Given the surrounding circumstances, the Court does not find the
Debtors’ actions of providing the Elysium Proposals, even without identifying the
amount of payables collected “so inconsistent” that leads the Court to disbelieve the
Debtors’ stated intentions. In addition to the Elysium Proposals, the Creditor
reviewed bank statements and the CEO conducted his own assessment of Elysium’s
loan eligibility. Specifically, given the information in possession of the Creditor, the
Court is unsympathetic to the Creditor that fails to perform minimal due diligence
on a risky loan then prays for relief when the deal sours. Borderline deals, by
definition, lead to uncertain results.
The Court FINDS the element of debtor’s intent to deceive is not met.
The Creditor failed to show by a preponderance of the evidence that each and
every element of § 523(a)(2)(B) was met. Therefore, the Court FINDS the Debt not
excepted from discharge under § 523(a)(2)(B).
V. EXCEPTION TO DISCHARGE PURSUANT TO THE
PROVISION OF § 523(a)(2)(A)
Independently, the Court considers the argument that the Debt should be
excepted from discharge under § 523(a)(2)(A). By the plain language of §
523(a)(2)(A), the debt in question must be the result of “false pretenses, a false
representation, or actual fraud.” To prevail on a claim for exception to discharge
under § 523(a)(2)(A), the Creditor must prove by a preponderance of the evidence
that: (1) the Debtors made a false representation; (2) the Debtors knew the
representation was false at the time; (3) the Debtors made the representation with
the intent to deceive the Creditor; (4) the Creditor justifiably relied on the
representation; and (5) the Creditor sustained a loss due to the representation. In re
Grause, 245 B.R. 95, 99 (B.A.P. 8th Cir. 2000).
The alleged oral misrepresentation of concern to the Court is that the Debtors
orally misrepresented the amount of expected future receivables under the Elysium
Proposals. Allegedly, this misrepresentation occurred during an eight to ten-minute
phone call, referred to by the Creditor as the Funding Call. According to the
Creditor, the Debtors “indicated” Elysium Proposal payments were “for future
work.” Debtors deny this allegation and maintain Debtors never represented that
amounts on Elysium Proposals encompassed only future receivables. The Funding
Call occurred one day prior to the Funding Date.
A. False Representation
“To qualify as a false representation or false pretenses under § 523(a)(2)(A),
the statement must relate to present or past fact.” In re Conlin, 294 B.R. 88, 100
(Bankr. D.Minn. 2003) (quoting Gadtke v. Bren (In re Bren), 284 B.R. 681, 690
(Bankr. D.Minn. 2002)). “A debtor’s silence regarding a material fact may constitute
a false representation” under § 523(a)(2)(A). In re Moen, 238 B.R. 785, 791 (8th Cir.
B.A.P. 1999).
The Court has serious doubts about the depth of conversation between the
Creditor and the Debtors on the Funding Call. The Creditor’s business practice of
the Funding Call seems almost entirely administrative in nature. Based on the lack
of detailed testimony, this Court is skeptical that the Creditor asked the Debtors
about the Elysium Proposals’ future receivables during the Funding Call.
The Debtors’ silence regarding the material fact of accepting payments on the
Elysium Proposals prior to the Funding Date may constitute a false representation.
As the Eighth Circuit opined in Van Horne, “a creditor has the right to know those
facts touching upon the essence of the transaction.” In re Van Horne, 823 F.2d 1285,
1288 (8th Cir. 1987). The Court believes the prior collection of the Elysium
Proposals’ expected future receivables would “touch” upon the Creditor’s decision
to lend and withholding that information from the Creditor is a false representation.
However, the Court notes the timing and nature of the Funding Call. The only
evidence by the Creditor is testimony from the CEO that the Debtors “indicated”
Elysium Proposals totals were for future work. However, very credible testimony by
the Debtors refutes the Creditor’s evidence by stating the Debtors “never told anyone
at [the Creditor] that [Elysium Proposals] were for only future revenue.” Given that
the Funding Call was under ten minutes and occurred the day before funding, the
Court determines that the Creditor fails to satisfy its burden of proof under the
preponderance of the evidence standard, because the Court doubts substantive
underwriting questions arose on a call that likely discussed little more than the
Debtors’ personal and banking information. Further, the only evidence supporting
the Creditor’s position comes from the testimony of the CEO, but it was easily
refuted by the more credible testimony of the Debtors.
The Court FINDS the element of debtor’s false representation is not met.
B. Knowledge of Falsity
“A false representation made under circumstances where a debtor should have
known of the falsity is one made with reckless disregard for the truth, and this
satisfies the knowledge requirement.” Moen, 238 B.R. at 791 (quoting In re Duggan,
169 B.R. 318, 324 (Bankr. E.D.N.Y. 1994)). In determining Debtors’ knowledge of
the falsities, “the Court must consider the knowledge and experience of the debtor.”
Id.
Ordinarily, once the Court determines no false representation occurs, the rest
of the analysis would be superfluous. However, the Court will complete the analysis
for a complete record. The question of fact is whether the Debtors should have
known that the Creditor requested information about the Elysium Proposals solely
because of the Creditor’s interest in the Elysium Proposals’ future receivables. As
stated before, the Court is not convinced that the Creditor articulated its underwriting
purpose for the Elysium Proposals during the Funding Call.
The Debtors were experienced borrowers. The evidence provided indicates
the Debtors engaged in many borrowing transactions, even transactions with the
Creditor’s competitors. The Debtors’ propensity for “cash-flow borrowing” implies
that the Debtors may have known the Creditor’s interest in the Elysium Proposals
revolved upon the future cash flow of the contracts.
If the Debtors sat in silence when asked about the Elysium Proposals expected
receivables on the Funding Call, likely knowing that disclosing the receipt of
payments on the Elysium Proposals thwarts the transaction, then the Debtors’ false
representation satisfies the knowledge requirement. However, for reasons already
stated, the Court found insufficient evidence that the Funding Call addressed the
subject of Elysium Proposals’ future receivables. The Debtors previously provided
written copies of the Elysium Proposals for Creditor to evaluate during underwriting.
By the time the Funding Call occurred, the Creditor had made the decision to lend
and Debtors would have no reason to know that the Elysium Proposals were still a
concern of the Creditor.
Based on the lack of evidence and keeping in mind our standard, the Court
finds that the Creditor fails to satisfy the Debtors’ knowledge requirement.
The Court FINDS the element of knowledge of falsity is not met.
C. Intent to Deceive
“Because direct proof of intent is nearly impossible to obtain, the creditor may
present evidence of the surrounding circumstances from which intent may be
inferred.” In re Schnuelle, 441 B.R. 616, 622 (8th Cir. B.A.P. 2011). “When the
creditor introduces circumstantial evidence proving the debtor’s intent to deceive,
the debtor cannot overcome that inference with an unsupported assertion of honest
intent.” Id. (emphasis added). The focus is on whether the debtor’s actions “appear
so inconsistent with [debtor’s] self-serving statement of intent that the proof leads
the court to disbelieve the debtor.” Id.
During the Funding Call, the Creditor maintains that the Debtors indicated no
payments had been received for Elysium Proposals. Given the length of the call and
proximity to the Funding Date, the Court doubts the future receivables of the
Elysium Proposals were discussed. The Creditor failed to introduce any evidence
and the CEO did not testify that there was any particular checklist of topics covered
in the Funding Call which would have triggered discussion about the future
receivables. Further, the Creditor did not state that it was part of the ordinary course
of business to ensure only receivables are considered. The Court, by the
preponderance of the evidence, finds it more likely that the Funding Call was
administrative and did not discuss the substantive details of the underwriting
calculation.
The Debtors cannot intend to deceive without knowingly misrepresenting the
amount of receivables collected on the Funding Call. Even if the Debtors failed to
disclose the Elysium Proposals receivables on the Funding Call, the Debtors
provided the Creditor with the written Elysium Proposals. In this case, the Debtors
can support their assertion of honest intent and substantially weaken the Creditor’s
argument otherwise, because they provided all requested documentation—the
Elysium Proposals and bank statements—for review to the Creditor prior to the
Funding Call. Moreover, the Parties agree that banking information sufficient to
check real-time balances was provided during the Funding Call demonstrating the
openness of the Debtors with the Creditor. The Creditor fails to show by a
preponderance of the evidence that the Debtors intended to deceive anyone on the
Funding Call.
The Court FINDS the element of knowledge of intent to deceive is not met.
D. Creditor’s Justifiable Reliance
“[T]he standard for showing justifiable reliance . . . is fairly low.” In re Guske,
243 B.R. 359, 363 (8th Cir. B.A.P. 2000) (citing Sanford Institution for Savings v.
Gallo, 156 F.3d 71, 74 (1st Cir. 1998). “[A] party may justifiably rely on a
misrepresentation even when [that party] could have ascertained its falsity by
conducting an investigation.” Id. When the alleged victim knows the
misrepresentation to be false, or the misrepresentation is obviously false reliance
cannot be justified. Id. Additionally, “falsity which could have been discovered by
senses during a cursory glance may not be relied upon.” Id. A creditor is not justified
in his reliance when there “are any warning signs ... either in the documents, in the
nature of the transaction, or in the debtor’s conduct or statements.” Id. at 363-364.
The Creditor’s testimony that the Debtors indicated Elysium Proposal
payments were for future work, without more, is not enough to meet the Creditor’s
burden of proving the Creditor justifiably relied on the oral statement, particularly
considering the Funding Call appears to be little more than an administrative
formality rather than a substantial part of the Creditor’s underwriting process. In
addition, the Debtors deny the Creditor’s allegation and the record reveals no other
evidence supporting false oral representations because the Creditor and the Debtors
barely spoke prior to Funding Date.
The Debtors’ representation aside, Debtors provided the Elysium Proposals
and bank statements to the Creditor in order to assess Elysium’s cash flow prior to
the Funding Call. By this time, the Creditor analyzed the transaction and understood
the risks. By the Creditor’s own testimony, the Creditor was acutely aware of the
“borderline” nature of this transaction and had reviewed the Elysium Proposals to
satisfy Creditor’s concerns. Despite what the Debtors may have represented, one
reading of the Elysium Proposals clearly suggests that Debtors had received
payments for work well in advance of this transaction.
The Court FINDS the element of creditor’s justifiable reliance is not met.
E. Causation
The evidence and the Court’s already articulated findings do not support the
Creditor’s assertion that the loss occurred because of fraud on the Debtors’ part.
Therefore, the Court need not address the element of causation because the Creditor
fails to satisfy by a preponderance of the evidence required elements of §
523(a)(2)(A).
The Creditor failed to show by a preponderance of the evidence that each and
every element of § 523(a)(2)(A) was met. Therefore, the Court FINDS the Debt is
not excepted from discharge under § 523(a)(2)(A).
'y iY VE a
VI. CONCLUSION
For failure to sustain its burden of proof the Court ORDERS that all of the
relief sought by the Creditor be DENIED.
The Court ORDERS that judgment be rendered in favor of the Debtors on the
Claims arising under § 523(a)(2)(B). For the reasons set forth herein, the Court
ORDERS that judgment be rendered in favor of the Debtors on the Claims arising
under § 523(a)(2)(A). A separate judgment will be entered pursuant to federal rules.
Dh Qo, GEO,
DATED: March 23, 2020 CHARLES E. RENDLEN, III
St. Louis, Missouri 63102 U.S. Bankruptcy Judge
mtc
Copy Mailed To:
Patrick Tyler Connor
Riezman Berger, P.C.
7700 Bonhomme Ave
7th Floor
Clayton, MO 6310
Henry Paul Elster
The Elster Law Office, LLC
101 S. Hanley Road, Suite 1280
Saint Louis, MO 63105
Kathryn Allene Klein
Riezman Berger
7700 Bonhomme Ave., FI. 7
St. Louis, MO 63105
19