     Case: 11-30654        Document: 00511884692              Page: 1       Date Filed: 06/12/2012




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                                        FILED
                                                                                      June 12, 2012

                                             No. 11-30654                             Lyle W. Cayce
                                                                                           Clerk

In the Matter of: STEPHEN JOHN BANDI; CHARLES EDWARD BANDI,

                                                          Debtors.

--------------------------------------------------------------------------------------------------------

STEPHEN JOHN BANDI,

                                                          Appellant,

v.

CHRISTOPHER BECNEL,

                                                          Appellee.

--------------------------------------------------------------------------------------------------------

CHARLES EDWARD BANDI,

                                                          Appellant,

v.

CHRISTOPHER BECNEL,

                                                          Appellee.
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                                   No. 11-30654


                 Appeal from the United States District Court
                     for the Eastern District of Louisiana



Before REAVLEY, PRADO, and OWEN, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge:
      The principal question in this appeal is the proper construction of the
phrase “respecting the debtor’s . . . financial condition” as it appears in 11 U.S.C.
§ 523(a)(2)(A) and (a)(2)(B). Because we agree with the bankruptcy court’s
interpretation and find no clear error in that court’s determination that the
debtors obtained an advance of money through actual fraud, we affirm the
judgment of the district court.
                                         I
      Christopher Becnel is the holder of a $150,000 promissory note executed
by Charles Bandi on behalf of RSB Companies, LLC (RSB) and personally
guaranteed by Charles Bandi and his brother, Stephen Bandi. When RSB
defaulted, Becnel obtained separate judgments in state court against each of the
Bandis based on their respective personal guarantees.
      Stephen Bandi subsequently filed a voluntary Chapter 7 petition in the
United States Bankruptcy Court for the Eastern District of Louisiana. Charles
Bandi filed a voluntary Chapter 7 petition in the same court two months later.
Becnel commenced adversary proceedings against each debtor, alleging that the
debts owed to him were non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A)
and (a)(2)(B). Section 523(a)(2)(A) provides that certain debts obtained by false
pretenses, a false representation, or actual fraud are nondischargeable but
excludes from its coverage “a statement respecting the debtor’s . . . financial




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                                        No. 11-30654

condition.”1 Section 523(a)(2)(B) provides that certain debts obtained by a false
“statement in writing . . . respecting the debtor’s financial condition” are
nondischargeable.2
      The bankruptcy court consolidated the adversary proceedings for trial.
Becnel alleged that both Charles and Stephen Bandi falsely represented that
they owned a commercial building on North Causeway Boulevard in Metairie,
Louisiana. He further alleged that Stephen Bandi falsely represented that he
owned Algiers Riverpoint Condominiums in Algiers, Louisana, and that he
owned a residence on Camp Street in New Orleans, Louisiana. Becnel also
alleged that both Charles and Stephen Bandi presented him with a list of RSB’s
accounts receivable and that this list was fraudulent. Becnel asserted that the
Bandis never intended to repay the loan and that Becnel would not have made
the loan if he had known the accounts receivable list was falsified or that the
Bandis had misrepresented their property ownership.
      After a bench trial at which the Bandis cross-examined witnesses but
presented no evidence, the bankruptcy court ruled in favor of Becnel, concluding
that the debts were non-dischargeable. The court found that the loan of money
was acquired by false pretenses, false representations, or actual fraud regarding
property ownership.             The bankruptcy court accordingly entered judgment
against Stephen and Charles Bandi. Stephen Bandi filed a motion to alter or
amend the judgment, requesting additional findings of fact, and for a new trial,
specifically raising the issue of the proper interpretation of § 523(a)(2)(A) and
(a)(2)(B). He noted a split among courts on the interpretation of these sections
of the Bankruptcy Code and argued that throughout the case, the bankruptcy
court had made contradictory rulings. He asserted that the court diverged after


      1
          11 U.S.C. § 523(a)(2)(A).
      2
          Id. § 523(a)(2)(B).

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                                       No. 11-30654

trial from its last pretrial ruling, prejudicing his defense. The bankruptcy court
denied Stephen Bandi’s motion but commented further on its judgment. The
court specifically noted that it previously had not considered Bandi’s statutory
interpretation argument, but Bandi had not raised it. The bankruptcy court
concluded that “a statement respecting the debtor’s . . . financial condition” must
pertain to the overall financial condition of the debtor and that a statement
about the status of specific assets was not “a statement respecting the debtor’s
or an insider’s financial condition.”3
       The Bandis appealed to the United States District Court for the Eastern
District of Louisiana. The district court affirmed. The Bandis have appealed to
this court.
                                             II
       We apply the same standard of review to the bankruptcy court’s decision
as the district court applied.4 The meaning of § 523(a)(2) is a question of law
that we consider de novo.5
       In a Chapter 7 bankruptcy proceeding, many of a debtor’s debts are
discharged.6 However, there are a number of exceptions.7 At issue here are the
exceptions to discharge set forth in § 523(a)(2)(A) and (a)(2)(B). While the
general purpose of the bankruptcy code is for debtors to obtain a “fresh start,”



       3
           11 U.S.C. § 523(a)(2)(A).
       4
         Wells Fargo Bank of Tex. N.A. v. Sommers (In re Amco Ins.), 444 F.3d 690, 694 (5th
Cir. 2006) (citing Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling,
Inc.), 258 F.3d 385, 387 (5th Cir. 2001)).
       5
         Valley Educ. Found. v. Eldercare Props. Ltd. (In re Eldercare Props. Ltd.), 568 F.3d
506, 515 (5th Cir. 2009) (citing Nesco Acceptance Corp. v. Jay (In re Jay), 432 F.3d 323, 325
(5th Cir. 2005)).
       6
           See 11 U.S.C. § 727.
       7
           See id. § 523.

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                                          No. 11-30654

that policy has limits, and § 523(a)(2)(A) and (a)(2)(B) are intended to protect
victims of fraud.8
         Some debts for value obtained by means of a fraudulent statement are
dischargeable under § 523(a)(2), and others are not. Debt for property or other
value obtained by fraud is broadly rendered nondischargeable by § 523(a)(2)(A),
but that subsection carves out certain debt that follows a transfer of value or
extension of credit obtained by “a statement” regarding the debtor’s “financial
condition” and makes that debt dischargeable.9 However, certain other debt
that follows a transfer of value or extension of credit obtained by “a statement”
regarding the debtor’s “financial condition” is rendered nondischargeable by
§ 523(a)(2)(B).10 Under this subsection, if a statement respecting the debtor’s or
an insider’s financial condition is in writing, materially false, reasonably relied
upon by the creditor, and the debtor made the statement with intent to deceive,
the debt obtained by the fraud is not discharged.
         The Bandis contend that all of their alleged fraudulent statements and
false representations were “statement[s] respecting [their] financial condition”
within the meaning of § 523(a)(2)(A) and therefore that the debt owed to Becnel
should be discharged. None of their alleged statements or representations to
Becnel meet the requirements of § 523(a)(2)(B), they contend, and therefore, they
argue, the debt owed to Becnel is not rendered non-dischargeable under that
subsection. We must determine whether representations that one or both of the




         8
             See Tumell & Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314, 318-19 (5th Cir.
2005).
         9
             11 U.S.C. § 523(a)(2)(A).
         10
              Id. § 523(a)(2)(B).

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                                         No. 11-30654

Bandis owned particular pieces of real property constituted “statement[s]
respecting [the Bandis’] financial condition.”11
      We begin our analysis with the words chosen by Congress. The word
“statement” modified by the phrase “respecting the debtor’s or an insider’s
financial condition” appears in both § 523(a)(2)(A) and (a)(2)(B).12 The Supreme
Court has described these two subsections as “two close statutory companions
barring discharge,” the first of which pertains to fraud “not going to financial
condition” and the second of which pertains to “a materially false and
intentionally deceptive written statement of financial condition upon which the
creditor reasonably relied.”13 The question before the Supreme Court in the case
in which this statement was made was the level of reliance required by
§ 523(a)(2)(A) when actual fraud had been employed by the debtor.14 The Court
held that the applicable standard was common-law justifiable reliance rather

      11
           Id. § 523(a)(2)(A).
      12
           See 11 U.S.C. § 523(a)(2), which provides in pertinent part:

      (a)       A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) 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 —
                        (A)    false pretenses, a false representation, or actual fraud,
                               other than a statement respecting the debtor’s or an
                               insider’s financial condition;
                        (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; . . . .
      13
           Field v. Mans, 516 U.S. 59, 66 (1995).
      14
           Id. at 61.

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                                       No. 11-30654

than “reasonable reliance,” even though “reasonable reliance” is the standard
expressly set forth in § 523(a)(2)(B).15 But in the course of its examination of the
interplay between § 523(a)(2)(A) and § 523(a)(2)(B), the Court gave at least some
insight into the meaning of “a statement respecting the debtor’s . . . financial
condition.”       At one juncture, the Court equated such a statement with a
statement by a debtor about his “bank balance.”16 In then explaining why
Congress would choose the common-law standard of justifiable reliance for
actual fraud under § 523(a)(2)(A) while expressly requiring “reasonable reliance”
on written financial statements under § 523(a)(2)(B), the Court seemed to equate
a “statement” about “financial condition” with what is commonly understood as
something akin to a balance sheet or bank balance. The Supreme Court had
considered the legislative history of § 523(a)(2)(B) regarding “the peculiar
potential of financial statements to be misused not just by debtors, but by
creditors who know their bankruptcy law.”17 The Court further explained,
       [t]he House Report on the Act suggests that Congress wanted to
       moderate the burden on individuals who submitted false financial
       statements, not because lies about financial condition are less
       blameworthy than others, but because the relative equities might be
       affected by practices of consumer finance companies, which
       sometimes have encouraged such falsity by their borrowers for the
       very purpose of insulating their own claims from discharge.18
       We conclude that the phrase “a statement respecting the debtor’s or an
insider’s financial condition” as used in § 523(a)(2) was meant to embody terms

       15
            Id.
       16
          Id. at 76 (“Does it not count against our reading of the statute that a debtor who
makes a misrepresentation with the formality of a written financial statement may have less
to bear [the more exacting standard of reasonable reliance found expressly in § 523(a)(2)(B)]
than the debtor who commits his fraud by a statement, perhaps oral, about something other
than his bank balance?”).
       17
            Id.
       18
            Id. at 76-77.

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                                        No. 11-30654

commonly understood in commercial usage rather than a broadly descriptive
phrase intended to capture any and all misrepresentations that pertain in some
way to specific assets or liabilities of the debtor. The term “financial condition”
has a readily understood meaning. It means the general overall financial
condition of an entity or individual, that is, the overall value of property and
income as compared to debt and liabilities. A representation that one owns a
particular residence or a particular commercial property says nothing about the
overall financial condition of the person making the representation or the ability
to repay debt. The property about which a representation is made could be
entirely encumbered, or outstanding undisclosed liabilities of the person making
the representation could be far more than the value of the property about which
a representation is made.
      We find support for construing “financial condition” in § 523(a)(2) to
connote the overall net worth of an entity or individual in other provisions of the
Bankruptcy Code. The term “financial condition” is part of the definition of the
term “insolvent.”19 The words “financial condition” are used three times to define
“insolvent” with respect to three classes of entities.20               In each instance,

      19
           11 U.S.C. § 101(32).
      20
           Id. This provision states:

      (32) The term “insolvent” means—

      (A) with reference to an entity other than a partnership and a municipality,
      financial condition such that the sum of such entity’s debts is greater than all
      of such entity’s property, at a fair valuation, exclusive of—

                (i) property transferred, concealed, or removed with intent to hinder,
                delay, or defraud such entity’s creditors; and

                (ii) property that may be exempted from property of the estate under
                section 522 of this title;

      (B) with reference to a partnership, financial condition such that the sum of
      such partnership’s debts is greater than the aggregate of, at a fair valuation—

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                                         No. 11-30654

“insolvent” is a “financial condition.”21 In the first two instances, the financial
condition of insolvency is defined by reference to debts as compared to property.22
With respect to the third instance, which pertains to municipalities, the financial
condition of insolvency is defined by reference to “generally not paying its debts
as they become due” or “unable to pay its debts as they become due.”23
      The Tenth Circuit similarly looked to the definition of “insolvent” in 11
U.S.C. § 101(32) and that definition’s use of “financial condition” in construing
§ 523(a)(2)(A) and (B).24           That court concluded that the use of “financial
condition” in the definition of “insolvent” “suggests that the term ‘financial
condition’ in § 523(a)(2)(A) and (B) also relates to a debtor’s net worth or overall
financial condition.”25 In the case before the Tenth Circuit, a debtor had made
false oral representations that she owned residences in two cities, a motel, and




                 (i) all of such partnership’s property, exclusive of property of the kind
                 specified in subparagraph (A)(i) of this paragraph; and

                 (ii) the sum of the excess of the value of each general partner’s
                 nonpartnership property, exclusive of property of the kind specified in
                 subparagraph (A) of this paragraph, over such partner’s nonpartnership
                 debts; and

      (C) with reference to a municipality, financial condition such that the
      municipality is—

                 (i) generally not paying its debts as they become due unless such debts
                 are the subject of a bona fide dispute; or

                 (ii) unable to pay its debts as they become due.
      21
           Id.
      22
           Id. § 101(32)(A) and (B).
      23
           Id. § 101(32)(C).
      24
           Cadwell v. Joelson (In re Joelson), 427 F.3d 700, 706-07 (10th Cir. 2005).
      25
           Id. at 707.

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                                          No. 11-30654

antique vehicles in order to obtain a loan from an acquaintance.26 She had also
represented that she intended to and would obtain financing from her brother
to repay the loan.27 The Tenth Circuit held that none of the debtor’s statements
pertained to her “overall financial health” and that they were not statements
“respecting” her “financial condition” within the meaning of § 523(a)(2)(A).28 The
Tenth Circuit reasoned that statements within the meaning of that section “are
those that purport to present a picture of the debtor’s overall financial health.”29
We agree.
       We recognize, as did the Tenth Circuit, that there is a split among various
courts as to the correct interpretation of § 523(a)(2).30 A number of bankruptcy
courts have reached conflicting conclusions as to meaning of “a statement
respecting the debtor’s or insider’s financial condition.31 There are relatively few
Circuit Court decisions, but at least one conflicts with the Tenth Circuit’s


       26
            Id. at 704.
       27
            Id. at 714.
       28
            Id. at 715.
      29
            Id. at 714; see also id., explaining further the Tenth Circuit’s reasoning:

       We hold that such false statements are those that purport to present a picture
       of the debtor’s overall financial health. Statements that present a picture of a
       debtor’s overall financial health include those analogous to balance sheets,
       income statements, statements of changes in overall financial position, or
       income and debt statements that present the debtor or insider’s net worth,
       overall financial health, or equation of assets and liabilities. However, such
       statements need not carry the formality of a balance sheet, income statement,
       statement of changes in financial position, or income and debt statement. What
       is important is not the formality of the statement, but the information contained
       within it—information as to the debtor’s or insider’s overall net worth or overall
       income flow.
       30
            Id. at 710.
      31
         See Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 112-13 (2d Cir.
2002) (collecting cases).

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                                           No. 11-30654

construction of § 523(a)(2). The Fourth Circuit has held that a debtor’s false
representation that certain property he owned was unencumbered at the time
he pledged it as collateral for a loan from the creditor was a statement regarding
the debtor’s financial condition and therefore dischargeable.32
         The Eighth Circuit has construed § 523(a)(2)(A) in a way that is consistent
with our and the Tenth Circuit’s construction of that provision.33 A debtor had
represented that future payments for the balance of the purchase price for
limited partnership interests would be funded from a joint venture interest in
a particular nursing home.34 The debtor did not disclose that at the time these
representations were made, the nursing home had been sold.35 The court
rejected the debtor’s argument that the failure to disclose was “a statement
respecting the debtor’s or an insider’s financial condition” and held that the debt
was not discharged.36
         The Bandis cite our court’s en banc decision in AT&T Universal Card
Services v. Mercer (In re Mercer).37 They correctly acknowledge that this decision
does not resolve the issues presented by their appeal. The primary questions
before our court in Mercer were “whether credit card use (card use) constitutes
a representation of intent to pay the loan thereby obtained (intent to pay); and,
if so, whether the issuer may justifiably rely on it.”38 We set forth the elements


         32
              Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060, 1060-61 (4th Cir.
1984).
         33
              See Rose v. Lauer (In re Lauer), 371 F.3d 406, 413 (8th Cir. 2004).
         34
              Id. at 409.
         35
              Id.
         36
              Id. at 413.
         37
              246 F.3d 391 (5th Cir. 2001) (en banc).
         38
              Id. at 399 (emphasis omitted).

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                                        No. 11-30654

that a creditor must prove to establish non-dischargeability for debt incurred as
a result of credit card use.39 We did not hold in that case that each credit card
use was a representation of the ability to repay the creditor for the extension of
credit, although we did discuss certain cases from other jurisdictions that had
held credit card use “represented both intent and ability to pay.”40 We noted that
“[t]he ‘ability’ factor has been criticized.”41 We also employed the term “financial
condition” in that case and indicated that we thought it meant the overall
financial condition of the debtor. We said, for example, “the debtor’s financial
condition at card-use is only one of many factors to consider, and should not be
the sole basis for finding fraudulent intent.”42 We then discussed whether the
fact of “hopeless insolvency” could be used, standing alone, to establish
fraudulent intent at the time of credit card use, concluding that it could not.43
We held that “the inquiry focus[es] on the debtor’s subjective intent, with such
‘hopeless insolvency’ simply being ‘evidence from which his lack of honest belief
may be inferred.’”44 We had no occasion to, and did not, decide in Mercer
whether representations regarding specific assets were “statement[s] respecting
the debtor’s or an insider’s financial condition” as used in § 523(a)(2)(A).




       39
          Id. at 403 (“for each card-use, and by a preponderance of the evidence,” the creditor
is “required to prove: (1) [the debtor] made a representation; (2) it was knowingly false; (3) it
was made with the intent to deceive [the creditor]; (4) [the creditor] actually and justifiably
relied on it; and (5) [the creditor] sustained a loss as a proximate result of its reliance.”).
       40
            Id. at 404.
       41
            Id.
       42
            Id. at 408 (emphasis omitted).
       43
            Id. at 409.
       44
            Id. (quoting the RESTATEMENT (SECOND) OF TORTS § 526 cmt. d) (emphasis omitted).

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                                         No. 11-30654

                                               III
       The bankruptcy court found implicitly if not explicitly that the
misrepresentations made by the Bandis regarding ownership of a commercial
building, a condominium development, and a residence were intended to convey
the impression that the two brothers owned valuable real property and that
their personal guarantees of a loan to RSB would be backed by some measure of
wealth. These statements fell far short, however, of representing the Bandis’
respective net worths or representing their respective “bank balance[s].”45 The
Bandis did not make any representations regarding their overall financial
condition and consequent ability to pay. Ownership of specific assets does not
mean that the assets are unencumbered or that other debts or liabilities of the
owner do not exceed the value of the assets.
       The Bandis’ false statements and misrepresentations were not
“statement[s] respecting [their] financial condition within the meaning of 11
U.S.C. § 523(a)(2)(A).
                                               IV
       The Bandis contend that the bankruptcy court erred in finding that their
alleged representations were false and in finding justifiable reliance by Becnel.
We review findings of fact for clear error,46 and there was no clear error based
on the record before us.
       Becnel and Stephen Bandi had a close personal relationship. When they
were initially introduced, and thereafter as their friendship strengthened,
Stephen Bandi told Becnel that there were re-building and development
opportunities in the New Orleans area following Hurricane Katrina. Becnel


       45
            Field v. Mans, 516 U.S. 59, 76 (1995).
       46
          Valley Educ. Found. v. Eldercare Props. Ltd. (In re Eldercare Props. Ltd.), 568 F.3d
506, 515 (5th Cir. 2009) (citing Nesco Acceptance Corp. v. Jay (In re Jay), 432 F.3d 323, 325
(5th Cir. 2005)).

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                                No. 11-30654

expressed interest in pursuing an investment with Stephen Bandi, and over
time, as opportunities were discussed, Stephen Bandi represented that he had
purchased a residence on Camp Street that he intended to restore for use as a
residence and from which his wife’s cookie business would be operated. Many
representations regarding this residence were made to Becnel and his wife
before Becnel agreed to invest in Stephen Bandi’s ventures. Stephen Bandi
made other detailed representations regarding his plans for renovating and
developing a condominium project, and Becnel testified that he relied on
Stephen Bandi’s representations about his real estate holdings. There was
evidence that neither of the Bandi brothers owned the residence on Camp Street
or the condominium project, and the Bandis introduced no evidence that they
did.
       The evidence regarding representations by Charles Bandi is not as
extensive as that regarding his brother, but we cannot say that the bankruptcy
court clearly erred in finding that Charles Bandi made false representations on
which Becnel relied. On the day that the promissory note was executed, Becnel
and his wife, who was also Becnel’s attorney in this transaction, met Stephen
and Charles Bandi at a commercial building that Charles Bandi said he and his
brother had just purchased. At the signing of the note, Becnel gave the Bandis
two checks to fund the loan, one of which was post-dated three days after the
date of this meeting and the other of which was post-dated six days after the
meeting. At that meeting, Charles Bandi gave the Becnels a “tour” of the
commercial building, representing that he and his brother owned it and had just
moved their offices into it. As of the date of these representations by Charles
Bandi, Becnel had not funded the loan because the checks he delivered were not




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                                        No. 11-30654

yet negotiable. This is some evidence to support the findings that Charles Bandi
made false representations on which Becnel justifiably relied.47
      The evidence is weakest with respect to whether the Bandis had intent to
deceive.      During closing argument, Stephen Bandi argued that he never
intended for Becnel to rely on the status of his properties and that he never
intended to deceive Becnel or his wife. As the bankruptcy court noted, however,
the Bandis did not present any evidence to counter Becnel’s proof, and the
bankruptcy court noted that the result might have been different if the Bandis
had testified or offered any other evidence. However, they did not, and the
bankruptcy court did not clearly err.
                                               V
      The Bandis argue that the bankruptcy court changed its construction of
“a statement respecting the debtor’s . . . financial condition” over the course of
the adversary proceedings. The Bandis contend that they were under the
impression throughout trial that the bankruptcy court had adopted an
interpretation of § 523(a)(2)(A) under which their representations did pertain to
their “financial condition,” and that they therefore had prevailed as a matter of
law because almost all of the statements at issue would be statements respecting
financial condition. They argue that they would have defended themselves
differently if they had known the bankruptcy court ultimately would adopt a
different view.
      Although the bankruptcy court’s statements at hearings on pretrial
motions are at times confusing, it is clear that the bankruptcy court never
definitively ruled before trial on the proper interpretation of “a statement
respecting the debtor’s . . . financial condition.” It appears as if Stephen Bandi,
who is not an attorney, was making inartful attempts to raise the issue both


      47
           See Field v. Mans, 516 U.S. 59, 73-74 (1995).

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                                    No. 11-30654

before trial and during closing arguments. However, he did not cite any cases
or make any arguments as to why the statements at issue were statements
respecting “financial condition” until a post-trial motion. The bankruptcy court
never specifically ruled on the issue until its ruling on the post-trial motion.
Furthermore, it is unclear why the Bandis thought they had won as a matter of
law, thus prejudicing their defense, when none of Becnel’s claims had been
dismissed and all had proceeded to trial.
                                *        *         *
      For the foregoing reasons, the judgment of the district court affirming the
judgment of the bankruptcy court is AFFIRMED.




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