223 F.3d 548 (7th Cir. 2000)
In re Hewlett E. Morris, Jr.,  a/k/a H. Edward Morris, Debtor-Appellee.
No. 99-3800
In the  United States Court of Appeals  For the Seventh Circuit
Argued May 31, 2000Decided August 11, 2000

Appeal of Shaw Steel, Inc.
Appeal from the United States District Court  for the Northern District of Illinois, Eastern Division.  No. 99 C 2327--Elaine Bucklo, Judge.[Copyrighted Material Omitted]
Before Flaum, Chief Judge, and Bauer and  Harlington Wood, Jr., Circuit Judges.
Flaum, Chief Judge.


1
Plaintiff Shaw Steel, Inc.  appeals the district court's decision affirming  a bankruptcy court's determination that defendant  Hewlett E. Morris, Jr.'s (a/k/a H. Edward Morris)  debt to Shaw Steel was not exempt from discharge  under 11 U.S.C. sec. 523(a)(2)(B) of the United  States Bankruptcy Code. For the reasons stated  herein, we affirm the decision of the district  court.

I.  Background

2
In 1993, Shaw Steel filed suit in the United  States District Court for the Northern District  of Ohio against O.L. Anderson Co. and defendant  Morris, the Chairman of the Board and Chief  Executive Officer of O.L. Anderson. In its  complaint, Shaw Steel alleged that O.L. Anderson  owed it money for materials that Shaw Steel had  previously shipped to O.L. Anderson. Shaw Steel  also alleged that Morris, in his capacity as a  corporate officer for the company, had  fraudulently induced Shaw Steel to extend credit  to O.L. Anderson for the purchase of those  materials.


3
On September 1, 1993, the United States  District Court for the Northern District of Ohio  entered judgment in favor of Shaw Steel and  against O.L. Anderson in the amount of  $215,836.69 plus 10% interest on that amount from  November 17, 1992. At the time this judgment was  entered, Shaw Steel's complaint against Morris  was dismissed without prejudice. Subsequent to  the entry of judgment in favor of Shaw Steel, and  prior to the satisfaction of O.L. Anderson's  judgment debt to Shaw Steel, O.L. Anderson was  dissolved without any money being paid to Shaw  Steel.


4
When O.L. Anderson was dissolved prior to the  payment of its judgment debt to Shaw Steel, Shaw  Steel again filed suit against Morris in the  United States District Court for the Northern  District of Ohio alleging the same fraud that was  the subject of its first complaint. On July 26,  1994, Shaw Steel signed a stipulated entry  dismissing its case against Morris with prejudice  and, on August 22, 1994, Shaw Steel and Morris  executed a "Settlement Agreement and Mutual  General Release" ("Settlement Agreement" or  "Agreement"). This Agreement provided for the  payment of $35,000 by Morris to Shaw Steel, and  it contained a variety of representations as to  Morris's financial condition.1 The Agreement  also incorporated an Affidavit of Financial  Condition previously given by Morris to MNC  Financial Group, a major lender to O.L. Anderson.  As part of the Settlement Agreement, Morris  consented to Shaw Steel's investigation of the  representations he made in that Agreement.


5
Under the terms of the Settlement Agreement,  Shaw Steel had the right to challenge the  statements made by Morris in the Settlement  Agreement as to his financial condition by  commencing an arbitration proceeding. If Shaw  Steel decided to commence such a proceeding, the  sole issue to be arbitrated was the material  accuracy of Morris's representations. The  Settlement Agreement also provided that if the  arbitration terminated in Shaw Steel's favor, a  previously-agreed consent judgment in the amount  of $215,000 could be filed in the United States  District Court for the Northern District of Ohio.


6
On July 13, 1995, Shaw Steel commenced  arbitration proceedings pursuant to the  Settlement Agreement after an investigation led  it to believe that Morris's statements as to his  financial condition were false. Morris then filed  suit in Michigan state court seeking to enjoin  Shaw Steel from proceeding with the arbitration.  This state court action was removed to federal  district court and, after summary judgment was  granted to Shaw Steel, the arbitration continued.  On April 16, 1997, an arbitration panel ruled in  Shaw Steel's favor, finding that there were  material inaccuracies in the representations made  by Morris in the Settlement Agreement. This  arbitration award was later confirmed by the  United States District Court for the Northern  District of Ohio and Shaw Steel's consent  judgment against Morris was entered.


7
On December 23, 1997, Morris filed a voluntary  bankruptcy petition under Chapter 7 of the  Bankruptcy Code in the United States Bankruptcy  Court for the Northern District of Illinois.  Although Shaw Steel argued that the money owed to  it by Morris pursuant to the arbitration award  and consent judgment was not dischargeable in  bankruptcy under 11 U.S.C. sec. 523(a)(2)(B), the  bankruptcy court disagreed. The bankruptcy court  held that Morris's debt to Shaw Steel was  dischargeable because Shaw Steel could not show  that its reliance on Morris's representations was  reasonable. This determination was affirmed by  the district court, and Shaw Steel now appeals.

II.  Analysis

8
"In the ordinary course of bankruptcy, the  debtor's assets are applied to the payment of his  debts and, even though the assets will usually be  insufficient to pay those debts in full, he will  emerge from bankruptcy with the unpaid balance  discharged . . . ." McClellan v. Cantrell, 217 F.3d 890, 892 (7th Cir. July 5, 2000). In this  case, however, Shaw Steel contends that Morris's  debt is exempt from a general discharge under  Chapter 7. Specifically, Shaw Steel argues that  because Morris's debt stems from his fraudulent  misrepresentations as to his financial condition,  that debt is excepted from discharge under 11  U.S.C. sec. 523(a)(2)(B). See, e.g., FDIC v.  Meyer (In re Meyer), 120 F.3d 66, 68 (7th Cir.  1997) (stating that "debts [that] can survive  [bankruptcy] whole despite a general discharge"  include "those that a debtor incurred with the  aid of fraud and deceit"). In considering the  bankruptcy court's determination that Shaw Steel  did not reasonably rely on Morris's statements  regarding his financial condition, we recognize  that "'exceptions to discharge are to be  constructed strictly against a creditor and  liberally in favor of the debtor.'" Goldberg  Securities, Inc. v. Scarlata (In re Scarlata),  979 F.2d 521, 524 (7th Cir. 1992) (quoting In re  Zarzynski, 771 F.2d 304, 306 (7th Cir. 1985)). We  review the bankruptcy court's legal conclusions  de novo and its factual findings for clear error.  See In re A-1 Paving & Contracting, Inc., 116  F.3d 242, 243 (7th Cir. 1997).


9
The statutory provision at issue in this case,  section 523(a)(2)(B) of the Bankruptcy Code,  provides that


10
A discharge . . . does not discharge an  individual debtor from any debt--for money,  property, services, or an extension, renewal, or  refinancing of credit, to the extent obtained by-  -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
11 U.S.C. sec. 523(a)(2)(B); see also In re  McFarland, 84 F.3d 943, 946 (7th Cir. 1996); In  re Sheridan, 57 F.3d 627, 633 (7th Cir. 1995)  ("In order to prevail on a claim under 11 U.S.C.  sec. 523(a)(2)(B), a creditor must prove . . .  that a debtor made, with an intent to deceive, a  materially false written statement regarding his  financial condition and that the creditor relied  on that statement."). Under section 523(a)(2)(B),  Morris's debt to Shaw Steel is presumed to be  dischargeable, see McFarland, 84 F.3d at 946,  unless Shaw Steel can demonstrate by a  preponderance of the evidence that the debt meets  the requirements of the statutory exception, see  Grogan v. Garner, 498 U.S. 279, 291 (1991); In re  Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994).


12
The issue in dispute between Morris and Shaw  Steel centers on the reasonableness element of  section 523(a) (2)(B)'s reliance requirement. See  11 U.S.C. sec. 523(a)(2) (B)(iii); see also Field  v. Mans, 516 U.S. 59, 68 (1995) (stating that, in  contrast to the less-demanding justifiable  reliance standard applied in section 523(a)(2)(A)  cases, "[s]ection 523(a)(2)(B) expressly requires  . . . reasonable reliance . . ."). The district  court held that the bankruptcy court correctly  found that Morris's debt to Shaw Steel did not  qualify for an exemption from discharge on the  ground that Shaw Steel did not reasonably rely on  the representations Morris made in the Settlement  Agreement as to his financial condition. In  reaching this conclusion, the district court  found it significant that Melvin Morris, Vice  President of Shaw Steel, testified that he had  "reservations" about Morris's honesty and that he  did not know whether the statements made by  Morris in his affidavit were true or false. The  district court also noted that Howard Klein, Shaw  Steel's investigator, stated that both Melvin  Morris and Harry Sulzer, the President of Shaw  Steel, did not believe the representations in  Morris's affidavit. Moreover, as the district  court recognized, Morris's past dealings with  Shaw Steel gave the company good reason to doubt  his veracity. According to the district court,  Shaw Steel could not have reasonably relied on  Morris's affidavit absent prior investigation in  light of the legitimate doubts its officers  admitted having as to the representations made by  Morris in the Settlement Agreement.


13
Although Shaw Steel acknowledges its burden to  establish that it reasonably relied on Morris's  statements, it contends that the bankruptcy court  applied too strict a standard of reasonableness.  In support of this argument, Shaw Steel cites  prior judicial interpretations of the  reasonableness standard, including a decision of  this Court in which we stated that  "reasonableness is circumstantial evidence of  actual reliance" and that a creditor should not  be denied protection against discharge unless the  "creditor's claimed 'reliance' on a 'financial  statement' would be so unreasonable as not to be  actual reliance at all." Northern Trust Co. v.  Garman (In re Garman), 643 F.2d 1252, 1256 (7th  Cir. 1980).2 Shaw Steel further notes that one  of our sister circuits, relying in part on our  decision in Garman, has stated that "[a] district  court reviewing a bankruptcy court's  determination of reasonable reliance is not 'to  undertake a subjective evaluation and judgment of  a creditor's lending policy and practices.'" Bank  One, Lexington, N.A. v. Woolum (In re Woolum),  979 F.2d 71, 76 (6th Cir. 1992) (quoting Garman,  643 F.3d at 1256). According to Shaw Steel, the  bankruptcy court erred in its reasonableness  determination because it failed to recognize that  "the reasonableness requirement of sec. 523(a)  (2)(B) 'cannot be said to be a rigorous  requirement, but rather is directed at creditors  acting in bad faith.'" Woolum, 979 F.2d at 76  (quoting Martin v. Bank of Germantown (In re  Martin), 761 F.2d 1163, 1166 (6th Cir. 1985)).


14
Although we agree with Shaw Steel's analysis of  the relevant precedent and its assertion that  district courts are not to use the reasonable  reliance requirement of section 523(a)(2)(B) to  second-guess a creditor's lending decisions, we  cannot conclude that the district court clearly  erred in finding that Shaw Steel did not  reasonably rely on Morris's representations as to  his financial condition, see Fed.R.Bank.P. 8013  (mandating a clearly erroneous standard of review  for a bankruptcy judge's findings of fact); In re  Bonnett, 895 F.2d 1155, 1157 (7th Cir. 1989)  ("[A] bankruptcy court's determination of  dischargeability is subject to a clearly  erroneous standard of review.") (citing Prairie  Prod. Credit Ass'n v. Suttles (In re Suttles),  819 F.2d 764, 765 (7th Cir. 1987)). "The  reasonableness of a creditor's reliance should be  determined on a case by case basis," Bonnett, 895  F.2d at 1157 (citation omitted), and the  bankruptcy court should not be "overturned  'simply because [the appellate court] is  convinced it would have decided the case differently.'"  Id. (quoting Anderson v. City of Bessemer City,  470 U.S. 564, 573 (1985)). Rather, "'[w]here  there are two permissible views of the evidence,  the [bankruptcy court's] choice between them  cannot be clearly erroneous.'" EEOC v. Sears,  Roebuck & Co., 839 F.3d 302, 309 (7th Cir. 1988)  (quoting Anderson, 470 U.S. at 575). "Under the  'abuse of discretion' standard of review, the  relevant inquiry is . . . whether any reasonable  person could agree with the [bankruptcy] court."  Deitchman v. E.R. Squibb & Sons, Inc, 740 F.2d  556, 563 (7th Cir. 1984).


15
In this case, the bankruptcy court determined  that both the President and Vice-President of  Shaw Steel had serious doubts about the truth of  Morris's statement of his financial condition, a  conclusion that was based largely on the  bankruptcy court's observation of the witnesses  and their testimony. See Bonnett, 895 F.2d at  1157 (stating that appellate courts should give  particular deference to the bankruptcy court's  evaluation of witness testimony). The bankruptcy  court further found that Shaw Steel's concerns  about Morris's veracity were justified by the  company's past dealings with Morris. In spite of  its questions as to Morris's truthfulness,  however, Shaw Steel entered into a Settlement  Agreement with Morris without engaging in any  attempt to ascertain Morris's true financial  condition. While we understand that the concept  of reasonable reliance does not generally require  creditors to conduct an investigation prior to  entering into agreements with prospective  debtors, such a precaution could be the  ordinarily prudent choice in circumstances where  the creditor admits that it does not believe the  representations made by the prospective debtor.  See Coston v. Bank of Malvern (In re Coston), 991  F.2d 257, 261 (5th Cir. 1993) (stating that when  determining reasonable reliance, "[t]he  bankruptcy court may consider, among other  things Whether there had been previous business  dealings with the debtor that gave rise to a  relationship of trust; whether there were any  'red flags' that would have alerted an ordinarily  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  representations"). Under these circumstances, the  bankruptcy court's determination was a  permissible one, and we cannot conclude that the  court clearly erred in finding Shaw Steel's  reliance unreasonable.

III.  Conclusion

16
Because we determine that the bankruptcy court  did not clearly err in finding that Shaw Steel's  reliance on Morris's representations was not  reasonable, we AFFIRM the decision of the district  court.



Notes:


1
 Paragraph 4 of the Settlement Agreement stated  that
The parties acknowledge that this Agreement has  been entered into, in part, based upon the  following representations, only
a. Those contained in the Affidavit of Financial  Condition attached hereto and incorporated herein  as Exhibit B; and
b. That Defendant's personal financial condition  has not materially changed since his execution of  the Affidavit of Financial Condition;
c. That to the best of Defendant's knowledge,  there are no trust agreements in existence in  which Defendant, his wife, nor any member of his  immediate family has any present or future  interest; and
d. That Defendant has not been released of any  liability he has to MNC related to its loans to  O.L. Anderson Company, a Delaware corporation.


2
 Although Garman involves the interpretation of  section 17(a)(2), the predecessor statute to  section 523(a)(2)(B)(iii), that case's  interpretation of reasonable reliance applies  with equal force to section 523(a)(2)(B)(iii)  because "Congress clearly indicated that section  523(a)(2)(B)(iii) is merely a codification of the  cases construing section 17(a)(2)." First Nat'l  Bank of Lansing v. Kreps (In re Kreps), 700 F.2d  372, 376 (7th Cir. 1983).


