                         RECOMMENDED FOR FULL-TEXT PUBLICATION
                             Pursuant to Sixth Circuit I.O.P. 32.1(b)
                                      File Name: 13a0162p.06

                   UNITED STATES COURT OF APPEALS
                                  FOR THE SIXTH CIRCUIT
                                    _________________


                                                           X
                                                            -
 In re: BRYAN PAZDZIERZ,
                                                            -
                                Debtor.
 _____________________________________                      -
                                                            -
                                                                 Nos. 11-2398/2441

                                                            ,
                                                             >
                                                            -
 BRYAN PAZDZIERZ,

                                                            -
                        Appellant/Cross-Appellee,
                                                            -
                                                            -
              v.
                                                            -
                                                            -
                                                            -
 FIRST AMERICAN TITLE INSURANCE
                                                           N
 COMPANY,
                  Appellee/Cross-Appellant.
                  Appeal from the United States District Court
                 for the Eastern District of Michigan at Detroit.
             No. 2:11-cv-10016—David M. Lawson, District Judge.
                                   Argued: January 18, 2013
                             Decided and Filed: June 10, 2013
   Before: BOGGS and WHITE, Circuit Judges, and McCALLA, District Judge.*

                                      _________________

                                           COUNSEL
ARGUED: Shawn R. Cioffi, SHEEHAN & ASSOCIATES, PLC, Rochester Hills,
Michigan, for Appellant/Cross-Appellee. Phillip J. Neuman, NADIS & NEUMAN,
P.C., Farmington Hills, Michigan, for Appellee/Cross-Appellant. ON BRIEF: Kenneth
A. Koluch, SHEEHAN & ASSOCIATES, PLC, Rochester Hills, Michigan, for
Appellant/Cross-Appellee. Phillip J. Neuman, Sarah Heisler Gidley, NADIS &
NEUMAN, P.C., Farmington Hills, Michigan, for Appellee/Cross-Appellant.




        *
         The Honorable Jon Phipps McCalla, Chief United States District Judge for the Western District
of Tennessee, sitting by designation.


                                                  1
Nos. 11-2398/2441      Pazdzierz, v. First Am. Title Ins.                             Page 2


                                  _________________

                                       OPINION
                                  _________________

       HELENE N. WHITE, Circuit Judge. In this bankruptcy proceeding, Bryan
Pazdzierz (“Pazdzierz”) appeals the district court’s determination that Michigan
assignment law does not bar First American Title Insurance Company (“First
American”) from asserting that Pazdzierz’s debt is non-dischargeable under 11 U.S.C.
§ 523(a)(2)(B). First American cross-appeals the district court’s determination that its
subrogation rights derived from its payment under a title insurance policy do not provide
an alternative ground to assert non-dischargeability. We AFFIRM the district court’s
decision on the assignment issue, find it unnecessary to reach the subrogation issue, and
REMAND to the bankruptcy court for proceedings consistent with this opinion.

                                            I.

       The parties do not dispute the bankruptcy court’s findings of fact:
       In July of 2007, defendant debtor Bryan Pazdzierz entered into a business
       relationship with Randy Saylor whereby defendant performed security
       work at a nightclub owned or controlled by Saylor. Defendant also did
       work for American Business Consulting, Inc., ABCI, an entity owned or
       controlled by Saylor. Defendant’s work for ABCI included scouting for
       commercial properties, including car washes and reporting to Saylor
       about potential acquisitions.
       In the fall of 2007, defendant personally applied for and obtained loans
       totaling $1,018,350 to purchase four car washes in southeastern
       Michigan. . . . The defendant doesn’t dispute that he took out these
       loans.
       The loan closings were conducted by Patriot Title Agency, LLC, a
       former agent of plaintiff, First American Title Insurance Company, and
       a company owned or controlled by Saylor. Patriot issued title
       commitments on each property to the original lenders. The title
       commitments were underwritten by plaintiff. Patriot also arranged for
       plaintiff to issue closing protection letters, CPL[]s, to the original
       lenders. These letters indemnified the lenders and their assigns from
       certain specific losses, including losses arising out of fraud or dishonesty
       of the issuing agent—that is Patriot—handling their funds or documents
Nos. 11-2398/2441          Pazdzierz, v. First Am. Title Ins.                                     Page 3


         in connection with the closing. Immediately after the loans were closed,
         the notes and mortgages were assigned to Bayview Financial, LLC.[1]
         At some point, defendant defaulted on his repayment obligations.
         Bayview Financial, assignee of the lender’s notes, discovered that
         defendant did not hold title to any of the properties securing the notes.
         Bayview filed claims with plaintiff, First American Title, under title
         commitments and the CPL[]s.
         In responding to Bayview’s claims, plaintiff alleges that it determined
         that the loan applications defendant submitted to the original lenders
         contained a number of false statements regarding income, assets, and
         employment. Plaintiff initially denied Bayview’s claim asserting that the
         lenders failed to exercise due diligence in approving the loans. Bayview
         sued plaintiff, and the parties entered into a settlement [on September 24,
         2009,] whereby Bayview assigned 75 percent of its interest in the notes
         signed by defendant to plaintiff in exchange for an agreed upon sum of
         money. That settlement is under seal.
         At some point, plaintiff, First American, discovered that Saylor had used
         Patriot Title to conduct questionable transactions that resulted in dozens
         of claims against plaintiff arising out of title commitments and policies
         issued by Patriot. Plaintiff sued Patriot and Saylor for, among other
         things, fraud seeking damages incurred as a result of its obligations to
         reimburse insured parties for losses caused by Saylor’s alleged fraud.
         First American obtained a default judgment against Saylor in the amount
         of $10,172,840.
         ...
         Debtor Bryan . . . Pazdzierz filed a voluntary Chapter 7 bankruptcy
         petition on [September]11, 2009. Included on Schedule D, creditors
         holding secured claims, are the four loans from Bayview. . . . On January
         15, 2010, plaintiff filed this adversary complaint seeking the debt
         defendant owes plaintiff as assignee on the four Bayview notes, . . . in the
         amount of $763,762.50, 75 percent of $1,018,760.50, held
         undischargeable pursuant to 11 U.S.C. Section 523(a)(2)(B).

Although the record reveals that Pazdzierz executed two of the promissory notes in
November 2007, Pazdzierz asserts that Saylor told him that the purchases fell through
in October 2007, that he never received the loan proceeds, and that he did not learn that
Saylor defrauded Bayview until early 2008, when he received a statement of default


         1
           Patriot never released the loan proceeds from its escrow account to purchase the properties from
the sellers.
Nos. 11-2398/2441       Pazdzierz, v. First Am. Title Ins.                            Page 4


from Bayview. The merits of the parties’ positions on the dischargeability issue are not
before us.

                                             II.

        First American sought a judgment from the bankruptcy court that Pazdzierz’s
debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(B). Pazdzierz moved for
summary judgment, arguing that First American could not pursue an action under
§ 523(a)(2)(B) because it was an assignee of an interest in the notes and, under Michigan
law, claims for fraud cannot be assigned. Following a hearing, the bankruptcy court
agreed, and granted summary judgment to Pazdzierz.

        First American sought reconsideration, arguing that Michigan subrogation law
allows it to pursue the rights and remedies of its insured, including the right to assert that
Pazdzierz’s debt is non-dischargeable. The bankruptcy court denied the motion,
reasoning that First American’s right of subrogation gave it the right to pursue Saylor,
but not Pazdzierz.

        On First American’s appeal to the United States District Court for the Eastern
District of Michigan, the court reversed the grant of summary judgment to Pazdzierz,
concluding that because First American’s claim was based on unpaid promissory notes,
First American could assert its assignor’s reliance on Pazdzierz’s alleged
misrepresentations to satisfy § 523(a)(2)(B). However, the district court rejected First
American’s argument that subrogation allows it to pursue a claim against Pazdzierz,
reasoning that First American insured Bayview against only defects and encumbrances
in the title to the mortgaged properties, not non-payment of the debt. Pazdzierz and First
American appeal their respective losses.

                                             III.

A. Standard of Review

        “When reviewing an order of a bankruptcy court on appeal from a decision of a
district court, we review the bankruptcy court’s order directly and give no deference to
Nos. 11-2398/2441     Pazdzierz, v. First Am. Title Ins.                          Page 5


the district court’s decision.” Hamilton v. Herr (In re Hamilton), 540 F.3d 367, 371
(6th Cir. 2008) (quoting Chase Manhattan Mortg. Corp. v. Shapiro (In re Lee), 530 F.3d
458, 463 (6th Cir. 2008)). We review the bankruptcy court’s findings of fact for clear
error and its conclusions of law de novo. Id. “Summary judgment is proper if the
evidence, taken in the light most favorable to the nonmoving party, shows that there are
no genuine issues of material fact and that the moving party is entitled to judgment as
a matter of law.” Mazur v. Young, 507 F.3d 1013, 1016 (6th Cir. 2007).

B. Whether First American may maintain a claim for non-dischargeability under
   11 U.S.C. § 523(a)(2)(B)

       Section 523(a) in provides relevant part:

       A discharge under section 727 . . . of this title does not discharge an
       individual debtor from any debt – . . .
       (2) for money, property, services, or an extension, renewal, or
       refinancing of credit, to the extent obtained by– . . .
       (B) use of a statement in writing –
       (i) that is materially false;
       (ii) respecting the debtor’s or an insider’s financial condition;
       (iii) on which the creditor to whom the debtor is liable for such money,
       property, services, or credit reasonably relied; and
       (iv) that the debtor caused to be made or published with intent to
       deceive . . . .

11 U.S.C. § 523(a)(2). The party seeking to establish an exception to the discharge of
a debt must prove the requisite elements by a preponderance of the evidence. Grogan
v. Garner, 498 U.S. 279, 291 (1991). A central purpose of the Bankruptcy Code is to
give “honest but unfortunate debtor[s]” a “fresh start,” id. at 286–87, and “exceptions
to discharge are to be strictly construed against the creditor.” Rembert v. AT & T
Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998).

       The bankruptcy court barred First American from seeking an order of non-
dischargeability because Bayview’s claim against Pazdzierz sounded in fraud and was
therefore not assignable under Michigan law; First American could not show that
Pazdzierz made any representations to First American or that First American reasonably
Nos. 11-2398/2441           Pazdzierz, v. First Am. Title Ins.                                           Page 6


relied on such representations; and First American’s role in the transactions was to
insure title to the properties, not to evaluate Pazdzierz’s creditworthiness.

        1. Assignability under Michigan law

        “Creditors’ entitlements in bankruptcy arise in the first instance from the
underlying substantive law creating the debtor’s obligation, subject to any qualifying or
contrary provisions of the Bankruptcy Code.” Raleigh v. Ill. Dep’t of Revenue, 530 U.S.
15, 20 (2000). State law therefore governs the substance of claims unless a federal
interest requires a different result. Id. Claims of fraud are personal and not assignable
under Michigan law. See Dickinson v. Seaver, 7 N.W. 182, 185 (Mich. 1880) (“A right
to complain of fraud is not assignable[.]”).

        Pazdzierz argues that First American’s complaint seeking non-dischargeability
is a simple fraud claim that First American does not possess because the assignment of
that claim is invalid under Michigan law. First American responds that its claim is not
for fraud, but rather to enforce promissory notes, and that the fraud that underlies the
promissory notes made them non-dischargeable the moment the debt was incurred,
without regard to whether the notes were later assigned.

        The Michigan Supreme Court distinguishes between naked claims of fraud2 and
claims of fraud that are grounded in tangible property rights, such as judgments:

        All of the cases cited concede that the rule contended for, that a right of
        action for fraud is not assignable, has no application to an assignment of
        something which is in itself tangible; capable of delivery; involving a
        right of property. In such case, the right to whatever remedy the assignor
        has follows the assignment.



        2
            Under Michigan law, actionable fraud requires:
        (1) That defendant made a material representation; (2) that it was false; (3) that when
        he made it he knew that it was false, or made it recklessly, without any knowledge of
        its truth, and as a positive assertion; (4) that he made it with intention that it should be
        acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby
        suffered injury.
Hi-Way Motor Co. v. Int’l Harverster Co., 247 N.W.2d 813, 816 (Mich. 1976) (quoting Candler v. Heigho,
175 N.W. 141, 143 (Mich. 1919)) (internal quotation marks omitted).
Nos. 11-2398/2441      Pazdzierz, v. First Am. Title Ins.                                Page 7


Sweet v. Clay, 49 N.W. 899, 901 (Mich. 1891). The Michigan Supreme Court applied
this rule in a case involving the fraudulent transfer of a mortgage to defeat the claims of
creditors. Howd v. Breckenridge, 56 N.W. 221, 222 (Mich. 1893). The court rejected
the argument that the claim on the debt involved an improper assignment of a fraud
claim, concluding that:

       It is true, as a general proposition, that a distinct right of action for fraud
       is not assignable, but where the right to enforce a claim which is in itself
       assignable depends upon showing fraud incidentally the rule has no
       application. The assignment of the claim carries with it the right to
       employ any remedy which is open to the assignor.

Id. at 222–23 (emphasis added); cf. Traer v. Clews, 115 U.S. 528, 539 (1885).

       In Jones v. Hicks, 100 N.W.2d 243 (Mich. 1960), Jones was the bankruptcy
trustee for the estate of Albert LaVoy. A creditor obtained a judgment against LaVoy
and a writ of execution was placed in the hands of the defendant, Deputy Sheriff Hicks,
for LaVoy’s truck. Id. at 244. Jones alleged that Hicks induced a bidder to buy the truck
for a sum well below the value of the truck, in order eventually to transfer the truck to
Hicks. Id. Jones elected to affirm the sale of the truck and sue Hicks for damages
caused by the fraud. Id. The court rejected Jones’s claim, holding that assignees do not
retain an election of remedies that enables them to assert a cause of action based on
fraud. Id. at 246. Although Jones could properly allege fraud in an action to recover
possession of the truck, he could not elect to sue for damages based on a claim of fraud.
Id.

       Applying these cases, the district court correctly determined that First American
is not pursuing a naked claim of fraud against Pazdzierz. First American seeks
collection of a debt owed to it based on the promissory notes it obtained from Bayview.
Under Michigan law, a promissory note is a negotiable instrument that may be
transferred between persons. Compare Mich. Comp. Laws § 440.3104(1), (5), with
§ 440.3203(2). The transfer of a promissory note “vests in the transferee any right of the
transferor to enforce the instrument.” Mich. Comp. Laws § 440.3203(2). First
American’s notes are tangible property interests, and unlike the claim in Jones, First
Nos. 11-2398/2441      Pazdzierz, v. First Am. Title Ins.                            Page 8


American’s claim is based on the notes, not a naked claim of fraud. Thus, Michigan law
does not bar First American’s claim.

        2. Whether First American can show the reliance required under 11 U.S.C.
           § 523(a)(2)(B)

        The bankruptcy court additionally held that First American did not satisfy
§ 523(a)(2)(B)(iii) because it could not show that it reasonably relied on the information
Pazdzierz provided to Bayview. The court distinguished between the loss Bayview
suffered and the loss First American suffered:         First American’s loss rested on
misrepresentations regarding title to the properties, not misrepresentations regarding
Pazdzierz’s creditworthiness.

        The bankruptcy court rejected First American’s argument that the court should
follow the reasoning in Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088
(9th Cir. 2009). In Boyajian, Pateel and Salpy Boyajian (“the Boyajians”) submitted
personal financial statements accompanying a guaranty necessary for a lease by Epic
Funding Corporation (“Epic”) to their company, Blue Diamond Straw & Toothpick
Company, Inc. (“Blue Diamond”). Id. at 1089. Epic sold its interest in the lease to
Cupertino National Bank (“Cupertino”). Id. When Blue Diamond and the Boyajians
failed to make payments required by the lease, Cupertino filed a civil action and obtained
a default judgment. Id. Cupertino assigned its interest in the judgment to Stornawaye
Capital, which then assigned its interest to New Falls. Id. When the Boyajians filed for
bankruptcy, New Falls filed an adversary complaint seeking a ruling that the judgment
owed by the Boyajians was non-dischargeable under § 523(a)(2)(B). Id. at 1090. The
bankruptcy court granted summary judgment to the Boyajians, reasoning that New Falls
could not rest on the reliance of its predecessor-in-interest under § 523(a)(2)(B)(iii). Id.
The bankruptcy appellate panel reversed, holding that New Falls could stand in the shoes
of its assignor and pursue an exception to discharge based on the assignor’s reliance on
materially false financial statements from the Boyajians. Id.

        The Ninth Circuit affirmed. Analyzing the statutory language, the court rejected
the argument that the word “is” in § 523(a)(2)(B)(iii) (“on which the creditor to whom
Nos. 11-2398/2441      Pazdzierz, v. First Am. Title Ins.                          Page 9


the debtor is liable for such money, property, services, or credit reasonably relied”)
requires reliance by the creditor holding the claim at the time of bankruptcy: “The most
natural reading of the word ‘is’ in subsection (iii) is simply that the debt is non-
dischargeable if, at the time the money is obtained by the debtor, he or she used a
materially false written statement that was intended to deceive.” Id. at 1091. The court
reasoned that general principles of assignment law were known to Congress when it
passed § 523, and that Congress would have used more specific language if it had
intended to bar assignees from pursuing non-dischargeability based on fraudulent
representations made by a debtor to a predecessor-in-interest. Id. The court also
concluded that allowing an assignee to pursue non-dischargeability served the policy
goals of the bankruptcy code, as it would be unjust to allow dishonest debtors to receive
a discharge based on the fact that their creditor chose to assign their debt before they
filed for bankruptcy. Id. at 1092; see also Florida v. Ticor Title Ins. Co. of Cal. (In re
Florida), 164 B.R. 636, 640 (9th Cir. B.A.P. 1994).

       The Seventh Circuit has also rejected the argument that the assignment of loan
payments prevents a successor-in-interest from pursuing a debtor for non-discharge.
In FDIC v. Meyer (In re Meyer), 120 F.3d 66 (7th Cir. 1997), the debtor, Meyer,
personally guaranteed a loan extended by Far West Commercial Finance (“Far West”)
to Hydro-Dynamics, Inc., and Hydro-Dynamics of Colorado (collectively “Hydro-
Dynamics”). Id. at 67. When Hydro-Dynamics defaulted on the loan, Far West obtained
a default judgment against Meyer, and Meyer subsequently filed for bankruptcy. Id.
Prior to Meyer’s filing for bankruptcy, Far West transferred the loan through two
successive banks to the Resolution Trust Corporation (“RTC”) as receiver for the banks.
Id. RTC filed an adversary action in Meyer’s bankruptcy, seeking to have the debt
declared non-dischargeable. Id. RTC transferred the debt to the Federal Deposit
Insurance Corporation (“FDIC”). Id. Meyer argued that the assignment of the loan
barred RTC from seeking non-dischargeability because Meyer never misled RTC. The
Seventh Circuit rejected this argument, noting that it “betray[ed] a fundamental
misunderstanding of contract law . . . . [T]he very reason that the institution of
Nos. 11-2398/2441            Pazdzierz, v. First Am. Title Ins.                                       Page 10


assignment exists is to enable Creditor to transfer its rights against Debtor (Meyer) to
Assignee (Federal Bank).”3 Id. at 70.

         Pazdzierz cites two bankruptcy court decisions as support for his argument that
§ 523(a)(2) does not allow assignees to pursue non-dischargeability. In Cadlerock Joint
Venture, L.P. v. Pittard (In re Pittard), 358 B.R. 457 (Bankr. N.D. Ga. 2006), Merrill
Lynch obtained a pre-petition judgment against Pittard and his company that expressly
reserved a decision on the count of Merrill Lynch’s complaint that alleged Pittard made
fraudulent statements and omissions in connection with Pittard Machinery Company’s
application for a loan. Id. at 459. Merrill Lynch assigned the judgment to Cadle
Company, which then assigned the claim to Cadlerock Joint Venture, L.P.
(“Cadlerock”). Id. at 459. When Pittard filed for bankruptcy, Cadlerock objected to the
discharge of the debt under § 523(a)(2), asserting the loan was fraudulently obtained.
Id. The court concluded that claims of fraud could not be assigned under Georgia law
and therefore Cadlerock could not pursue non-dischargeability on this basis. Id. at
460–61. However, this decision was not based on § 523(a)(2)(B)(iii), but on Georgia
law prohibiting the assignment of “injuries arising from fraud to the assignor” and the
court’s characterization of the claim as “an action based on injuries arising from fraud,”
and is thus distinguishable. Id. at 461. As discussed, the Michigan courts would not
treat the instant assignment as one inviting an action arising from fraud. Pazdzierz also
cites Depue v. Cox (In re Cox), 462 B.R. 746 (Bankr. D. Idaho 2011), where the
plaintiffs sought non-dischargeability based on the theory that the debtors’ false
representations to a third-party bank prompted the bank to refuse to release the plaintiffs




         3
           District courts that have considered this issue have held similarly. The Bankruptcy Court for
the Northern District of Illinois held that under § 523(a)(2), the assignee steps into the shoes of the assignor
and “the inquiry of whether a creditor justifiably relied on Debtor’s alleged misrepresentations is focused
on the moment in time when that creditor extended the funds to Debtor.” Bombardier Capital, Inc. v.
Dobek (In re Dobek), 278 B.R.496, 508 (Bankr. N.D. Ill. 2002) (citing McClellan v. Cantrell, 217 F.3d
890, 896 (7th Cir. 2000) (Ripple, J., concurring) (“The language ‘obtained by’ clearly indicates that the
fraudulent conduct occurred at the inception of the debt, i.e., the debtor committed a fraudulent act to
induce the creditor to part with his money or property.”)); see also Turbo Aleae Invs., Inc. v. Borschow (In
re Borschow), 467 B.R. 410, 419–21 (W.D. Tex. 2012); Bertuca v. Flores (In re Flores), No. 09-01009,
2010 WL 3811920, at *3 (Bankr. S.D. Tex., Sept. 22, 2010); Green Point Funding, Inc. v. Jacobs (In re
Jacobs), No. 03-84455, 2007 WL 4163414, at *10–11 (Bankr. E.D.N.Y., Nov. 21, 2007).
Nos. 11-2398/2441       Pazdzierz, v. First Am. Title Ins.                          Page 11


from their personal guarantees. Id. at 756–58. Cox too is inapposite; the court rejected
plaintiffs’ claims as subrogees and did not discuss § 523(a)(2)(B)(iii).

        The Sixth Circuit has not addressed whether an assignee may stand in place of
the original creditor to seek non-dischargeability under § 523(a)(2)(B). Pazdzierz
advances no compelling reason we should not join the Seventh and Ninth Circuits in
concluding that assignees may seek non-dischargeability under § 523(a)(2). Although
the assignment in the instant case did not precede the bankruptcy petition as in Boyajian
and Meyer, we do not find this difference significant where there is no question that First
American received consideration as part of the settlement. Finding Boyajian and Meyer
persuasive, we affirm the district court’s determination that First American can seek non-
dischargeability under § 523(a)(2) and remand to the bankruptcy court for further
proceedings under § 523(a)(2)(B), expressing no opinion whether First American is able
to present sufficient evidence to establish non-dischargeability.

                                            IV.

        First American conceded at argument that it is unnecessary to reach its cross-
appeal if we affirm the district court’s ruling that it can proceed under the notes. In other
words, First American asserts no broader rights as subrogee than as assignee. We
therefore do not reach the cross-appeal.

                                             V.

        For the foregoing reasons, we AFFIRM the district court’s reversal of the
bankruptcy court and REMAND to the bankruptcy court for proceedings consistent with
this opinion.
