
USCA1 Opinion

	




                           UNITED STATES COURT OF APPEALS                            UNITED STATES COURT OF APPEALS                                 FOR THE FIRST CIRCUIT                                FOR THE FIRST CIRCUIT                                 ____________________        No. 92-2262                              IN RE:  PAUL W. GOODRICH,                                       Debtor.                                 ____________________                                 SHAWMUT BANK, N.A.,                                Plaintiff, Appellant,                                          v.                                  PAUL W. GOODRICH,                                 Defendant, Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                     [Hon. A. David Mazzone, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                                Boudin, Circuit Judge,                                        _____________                           Campbell, Senior Circuit Judge,                                     ____________________                              and Stahl, Circuit Judge.                                         _____________                                 ____________________            Michael C.  Gilleran  with whom  Paul  M.  Tyrrell and  Shafner  &            ____________________             _________________      __________        Gilleran were on brief for appellant.        ________            Robert H.  Quinn with whom Austin S. O'Toole and  Quinn and Morris            ________________           _________________      ________________        were on brief for appellee.                                 ____________________                                    July 26, 1993                                 ____________________                 BOUDIN,  Circuit Judge.   Shawmut  Bank, N.A.  asked the                          _____________            bankruptcy court to rule that the $109,000 debt owed to it by            Paul  W.  Goodrich is  not  dischargeable  in his  Chapter  7            bankruptcy because it was obtained through deliberately false            statements on  which the bank  relied.  The  bankruptcy court            held  that only $10,000 of the  debt was nondischargeable and            the district  court affirmed.   We  conclude that the  entire            debt is nondischargeable and remand.                 On September 4, 1985,  Goodrich signed a promissory note            and  credit agreement  with Shawmut  giving him  an unsecured            revolving  $100,000  line   of  credit.     This  arrangement            reflected his  long-standing relationship  with the bank  and            his partnership in a Boston law firm.  Goodrich agreed to pay            periodic finance charges and to repay the outstanding balance            and any accrued  interest on demand.  He was  not asked for a            personal financial statement at the time but agreed to submit            such  statements on  request.   The  line  of credit  was  to            expire, and  any  outstanding  principal  and  interest  were            payable, on the anniversary date.                 On  February 22,  1986,  Shawmut increased  the line  of            credit to $150,000, and then on September 4, 1986, it renewed            the line of credit.  On  June 24, 1987, Goodrich gave Shawmut            a personal financial statement dated as of December 31, 1986,            which  represented that the bank  could rely upon  it as true            unless given written notice of a  change.  The line of credit                                         -2-                                         -2-            was  renewed  again  on  September  4,  1987,  and  again  on            September  7, 1988.  Prior to the September 4, 1987, renewal,            Goodrich  had drawn down and  owed $99,000 under  the line of            credit.    On  November  18,  1988,  Goodrich  drew  down  an            additional  $10,000,  making  his   total  debt  to   Shawmut            $109,000, exclusive of interest.                 Thereafter,  Goodrich filed for bankruptcy under Chapter            7.  Shawmut, on  July 8, 1991, began an  adversary proceeding            in this  bankruptcy objecting to any  discharge of Goodrich's            debt  to the bank.  It claimed that Goodrich in his financial            statement  submitted  in June  1987  had  failed  to list  $9            million  in  contingent  liabilities and  made  certain other            material  misstatements or  omissions.    Shawmut invokes  11            U.S.C.   523(a)(2)(B), which provides:                         (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-                      . . . .                           (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[.]                                                                  -3-                                         -3-                 The  bankruptcy court,  after  an  evidentiary  hearing,            found in  an oral  opinion that the  financial statement  did            contain material falsehoods  respecting Goodrich's  financial            condition made with intent to deceive; and as these  findings            are uncontested on this  appeal, we need not elaborate.   The            bankruptcy  judge also found that Shawmut  had proved that it            "would not have renewed  the loan had Mr. Goodrich  made full            and complete  disclosure  of these  contingent  liabilities."            But, the  bankruptcy judge continued, this fact does not show            that such a refusal  to renew would have meant  that Goodrich            would  then  have  repaid  the  loan  (which  then  stood  at            $99,000).  The oral opinion concluded:                      And so, to that  extent, to the extent of                      the balance which  was outstanding at the                      time  that  they  [Shawmut] received  and                      could  have  relied  upon this  financial                      statement  there was  no  reliance.   The                      money was  already out the door and would                      not   come  home  just  because  a  false                      financial statement was given.                 The bankruptcy judge then ruled that the bank had proved            reliance  upon the  false financial  statement to  the extent            that it  had advanced  $10,000 after the  financial statement            was provided  to  it  and that  this  amount,  together  with            pertinent costs, was the amount that would  not be discharged            by bankruptcy.  On  appeal, the district court affirmed  in a            memorandum, echoing the reasoning of the bankruptcy judge and            relying specifically  upon Danns v. Household  Finance Corp.,                                       _____    _______________________            558 F.2d 114 (2d Cir. 1977), which we discuss below.                                         -4-                                         -4-                 Although  we disagree  with the  outcome reached  by the            bankruptcy judge and the  district court, it is only  fair to            say  that this  provision of  the Bankruptcy  Code, governing            nondischargeability  for false statements, has spawned a fair            amount of  case law, inter-circuit conflicts and considerable            confusion.   The seeming  simplicity of  section 523(a)(2)(B)            conceals  not only a couple of linguistic traps but a lineage            of opaque legislative history.  Still, the simple language of            section 523(a)(2)(B) is the  starting point for analysis and,            in the end, the basis for our decision.                 Reading the statute  literally, Shawmut appears  to meet            each  of its  requirements needed  to make  the $99,000  loan            nondischargeable.  The $99,000 loan was a "debt" reflecting a            "renewal . . . of credit"; the renewal was "obtained by . . .            use  of  a  statement  in  writing";  and  the   writing  was            "materially  false," it was  related to  Goodrich's financial            condition, Shawmut "reasonably relied" on it, and it was made            with intent  to deceive.  Although the statute bars discharge            only "to the  extent" that  the renewal was  obtained by  the            false  statement,  we  think  this   causation  element--also            reflected in the  statute's "reliance" requirement--is easily            satisfied here as to the full $99,000.                 The bank offered evidence from  a bank official that the            $99,000 loan would "probably" not have been renewed in either            1987 or 1988  if the true  financial liabilities of  Goodrich                                         -5-                                         -5-            had been set forth  in the financial statement  he submitted;            that  the bank  relied upon  the  financial statement  in its            renewal  of  the loan;  and  that  the omission  of  material            information   was  a  "substantial  factor"  in  causing  the            renewal.   This evidence,  presumably, led to  the bankruptcy            court's  finding  that  "the   bank  has  demonstrated  by  a            preponderance of the  evidence that they [sic] would not have            renewed the  loan  had Mr.  Goodrich made  full and  complete            disclosure . . . ."                 The evidence  amply supports the  finding.   Likelihoods            are about all that can be expected where the question is what            the  bank would  have  done five  years ago  if faced  with a            disclosure that did  not occur.   Indeed, there  is case  law            that  supports the view that it is enough if the misstatement            or omission is a "substantial factor" in the decision to make            or renew  a loan.  In  re Gerlach, 897 F.2d  1048, 1052 (10th                               ______________            Cir.  1990) (collecting cases).   After  all, if  a financial            statement is materially false and intended to deceive, then a            showing that the creditor  "relied" upon it arguably requires            no more than that the creditor took it  into account and gave            it  weight.   Here, the  bankruptcy court's  explicit finding            already quoted makes fine distinctions unnecessary.                 Although  each of the  statutory requirements of section            523(a)(2)(B)  is thus  satisfied, Goodrich  remarkably enough            does have  two decent arguments in  his favor.  The  first is                                         -6-                                         -6-            that  some  courts have  read  into the  statute  yet another            requirement, not reflected in its explicit language, that the            creditor show  that it  was damaged  by the  false statement.                                        _______            See  Norton, Bankruptcy Law and Practice,   27.41, at pt. 27,            ___          ___________________________            p.  76 & n.22 (1991)  (collecting cases); cf.  In re Siriani,                                                      __   _____________            967 F.2d  302 (9th  Cir. 1992) (limited  damage requirement).            Damage  is  easily shown  where  the bank  lends  money after                                                                    _____            receiving a false statement  and in reliance upon it.  But in            the  case of a  renewal of an  earlier untainted  loan, it is            possible that the bank would have called the loan if accurate            information had been furnished on renewal and yet been unable            to collect a penny before bankruptcy.                 This possibility appears to be what the bankruptcy judge            had in mind when he said of the $99,000 that "[t]he money was            already out  the door and would not  come home just because a            false   financial  statement  was   given."     Although  the            bankruptcy judge  used the phrase  "no reliance"  immediately            before making  this statement, a later  passage suggests that            he meant that  the bank  had not--so far  as the $99,000  was            concerned--"relied to  its detriment."   In other  words, the            bank  relied on the false statement in renewing the loan (the            judge had  already so  found), but--in the  judge's view--the            bank  had not  shown that  the reliance  caused the  ultimate            loss.                                         -7-                                         -7-                 The bank on appeal  zealously contests this "finding" of            no detriment.  It asserts that Goodrich's financial statement            on renewal showed  that he  had over $800,000  in cash,  bank            deposits   and  marketable  securities.    It  follows,  says            Shawmut,  that the  bank could  have collected  the money  by            calling  the loan  or  by insisting  that securities  or real            property interests of Goodrich be pledged to secure the loan.            In any event, Shawmut argues, there is no requirement that it            show  detriment in  the  sense of  ultimate loss;  reasonable            reliance  on  the false  statement  in renewing  the  loan is            enough.                 We agree with Shawmut that  the only detriment that need            be shown is the  renewal of the loan.   To be sure, it  would            not be absurd  to require,  in addition, that  the bank  show            that  it could--or  even  would--have collected  on the  loan            prior  to bankruptcy but for  the renewal.   Some courts have            done so.   The nondischargeability  provisions are frequently            construed in favor  of debtors.   3 Collier  on Bankruptcy                                                   ______________________            523.05A  (15th ed.  1993) (collecting  cases).   Further, one            could argue that if the bank was not ultimately harmed by the            renewal,  it should not be  able to improve  its situation in            the bankruptcy proceeding based  on the happenstance that the            renewal was based on a false statement.                 The   difficulty   is   that  including   this   further            requirement of actual damage is a policy choice.  There is no                                         -8-                                         -8-            indication in the statutory  language that Congress made such            a  choice,  and  the  evidence from  legislative  history  is            inconclusive.     The  statute  is  quite   detailed  in  its            conditions for nondischargeability.   Had Congress  wished to            add "damage" as  an element,  it could easily  have done  so,            especially  since   some  of  the  decisions   favoring  this            requirement   were  issued   before   the   elaboration   and            reenactment of section 523(a)(2)(B) in 1978.  Congress, as we            shall see, actually had some knowledge of case law construing            the predecessor section when it adopted its new version.                 If  it  considered the  matter  at  all, Congress  could            easily  have  concluded  on  policy  grounds  that  a  damage            requirement was not appropriate.   The debtor, by hypothesis,            has caused the trouble by making a materially false statement            with intent to deceive and the creditor has reasonably relied            upon the statement in renewing the loan.  Congress could have            thought that making the bank  shoulder the further burden  of            proving  that  it  could have  collected  the  loan  prior to            bankruptcy--a matter of solvency on which the debtor has most            of  the  information--was  not   a  proper  addition  to  the            compromises reflected in section 523(a)(2)(B).                   The  legislative  history  of  section  523(a)(2)(B)  is            invoked at  some length by  both sides, and  it does  in fact            discuss the  case in which  a loan is  renewed.  We  find the            discussion tangled,  if not  contradictory, but note  that it                                         -9-                                         -9-            lends some support to Shawmut by stressing that "[t]he amount            of the  debt  made nondischargeable  on  account of  a  false            financial statement  is not  limited to `new  value' extended            when a loan is  rolled over."   H. Rep. No.  595, 95th Cong.,            1st  Sess. 129-30 (1977).   The problem is  that the question            here is when, and on what conditions, is the "old money" made            nondischargeable,  and on  that  issue  the same  legislative            history may be more confusing than helpful.  Id.1                                                         __                 In  all events,  even if  Congress never  considered the            point  one way  or  the  other,  the  outcome  is  the  same.            Congress enacted  a  detailed  statute  without  an  explicit            damage requirement.  In the  face of conflicting policies for            and against, there is no warrant for the court to  add such a            requirement.  Accordingly, there is no need here to weigh the            bank's evidence or disturb the  bankruptcy judge's conclusion            that there was no detriment, in  the sense he used the  term,            so far as  the $99,000 is  concerned.   Instead we hold  that            detriment  or damage  in  that  sense  is  not  required  for            nondischargeability.   Accord  In re  Gerlach, 897  F.2d 1048                                   ______  ______________            (10th Cir. 1990).  To the extent that the Ninth Circuit is in                                            ____________________                 1Just as  the  House Report  is  on balance  helpful  to            Shawmut, so  there are  floor statements (quoted  below) that            are marginally helpful to Goodrich.  This floor language does            use the phrase  "relied to his detriment,"  as the bankruptcy            judge  did in this case; but the  phrase was used only in the            context of discussing the special problem of In re Danns, and                                                         ___________            we  decline to  read it  as a general  gloss on  the statute,            which contains no such words.                                         -10-                                         -10-            disagreement,  see In re Siriani,  we prefer to  follow In re                           ___ _____________                        _____            Gerlach for the reasons already set forth.            _______                 Yet there  is more to be  said.  The district  court, in            affirming  the  bankruptcy  court,  used  some  of  the  same            reasoning but  also invoked a different  argument, renewed by            Goodrich in  this court, by  relying upon Danns  v. Household                                                      _____     _________            Finance  Corp., 558  F.2d 114  (2d  Cir. 1977).   Danns  is a            ______________                                    _____            curious  case  decided  under  the   predecessor  to  section            523(a)(2)(B) which used largely  similar language.  There the            debtor secured a  new loan  from a finance  company based  on            false  statements; and  the question  was whether  this false            statement also rendered nondischargeable an earlier untainted            loan that  the finance company consolidated with  the new one            simply because state  law forbad the company  from having two            loans to the same debtor.                 The Second Circuit  ruled in a  very brief opinion  that            "there  was no evidence that the original loan was renewed in            reliance on  the false  representations," but instead  it was            renewed  and consolidated because of the state law.  558 F.2d            at 116.   Thus, said the  court, the renewal was  not "a true            extension of the original loan; the record does not show that            [the original loan] . . . would have fallen due sooner had it            not been for the refinancing."  Id.  The court concluded that                                            ___            "the   only   credit   extended   in   reliance   on   Danns'                                         -11-                                         -11-            misrepresentation was the additional amount loaned," and only            this new cash was nondischargeable.  Id.                                                 ___                 We have  devoted this space to  describing Danns because                                                            _____            Congress, in adopting  section 523(a)(2)(B) in  the following            year, may  be taken to have  endorsed it by name.   After the            bill  emerged  from   a  House-Senate  Conference  Committee,            Section   523(a)(2)(B) was  explained to  both the House  and            Senate in the following terms:                         In many cases,  a creditor is required                      by state law to refinance existing credit                      on which  there has been no  default.  If                      the creditor does not forfeit remedies or                      otherwise  rely  to  his  detriment  on a                      false financial statement with respect to                      existing   credit,   then  an   extension                      renewal, or refinancing of such credit is                      nondischargeable  only  to the  extent of                      the  new  money  advanced; on  the  other                      hand, if  an existing loan is  in default                      or  the   creditor  otherwise  reasonably                      relies  to  his   detriment  on  a  false                      financial  statement  with  regard to  an                      existing  loan, then  the entire  debt is                      nondischargeable       under      section                      523(a)(2)(B).       This   codifies   the                      reasoning expressed by the second circuit                      in In  re Danns, 558 F.2d  114 (2d [C]ir.                         ____________                      1977).            124 Cong. Rec. 24, 32399 (1978) (statement of  Rep. Edwards),            124  Cong.   Rec.  25,   33998  (1978)  (statement   of  Sen.            DeConcini).    We  do  not find  this  general  language very            helpful in resolving the present case--there was no state law            here requiring  refinancing and,  while the $99,000  loan was            not "in default," Goodrich's debt to Shawmut was repayable on            demand.  Further, we  regard the floor discussion more  as an                                         -12-                                         -12-            attempt  to explain and approve Danns than as a general gloss                                            _____            on the statute.                 Nevertheless,  the  floor  statements  are  pretty  good            evidence  that  Congress  approved  of  Danns  and,  on  that                                                    _____            assumption, it is appropriate to measure our case against the            rationale of Danns.  The Second Circuit's holding  was framed                         _____            as an  interpretation of  the "reliance" requirement  that is            explicit in the  statute.   The court said  that the  finance            company did not "rely"  on the false statement in  continuing            the original loan because the old loan was not up for renewal            at  the  time  of  the  new   loan,  and  the  old  loan  was            consolidated and  renewed solely  because of New  York's "one            loan" law.  Danns may have depended also on the court's sense                        _____            of  fairness.   After all,  whatever the  causal relationship            between  the false statement and the renewal of the old loan,            it  was sheer accident--a twist of New York law--that the old            untainted loan was renewed rather than left alone.                 By  contrast, Goodrich's loan expired in September 1987,            and then again in September 1988, unless renewed.  It was the            bank that  called for  the financial statement  prior to  the            September 1987 renewal, presumably because it had an interest            in managing the line of credit and the $99,000 loan.   So far            as  appears,  the later  draw  down  of $10,000  more,  which            occurred  in  late  1988, was  not  an  issue  when the  bank            accepted the  false financial statement and  considered it in                                         -13-                                         -13-            renewing  the loan in 1987.   Here, the  evidence showed that            the bank did "rely" on the false statement in renewing a loan            that would otherwise have fallen  due.  Accordingly, we think            that Danns is distinguishable in both letter and spirit.                   _____                 We therefore  vacate the judgment of  the district court                               ______            and remand to the bankruptcy court with directions to include                ______            the $99,000  original  loan  in the  amount  of  debt  deemed            nondischargeable, together with the later  $10,000 loan whose            status  is undisputed.  The  question of what  costs and fees            are  appropriately due to Shawmut is not before us, and we do            not address it.                 It is so ordered.                 _________________                                         -14-                                         -14-
