                                   United States Court of Appeals,

                                             Fifth Circuit.

                                            No. 92-4399.

          In the Matter of Rodney Dale COSTON and Billie Katherine Coston, Debtors.

                 Rodney Dale COSTON and Billie Katherine Coston, Appellants,

                                                  v.

                                 BANK OF MALVERN, Appellee.

                                            May 24, 1993.

Appeal from the United States District Court for the Eastern District of Texas.

Before POLITZ, Chief Judge, KING, GARWOOD, JOLLY, HIGGINBOTHAM, DAVIS, JONES,
SMITH, DUHÉ, WIENER, BARKSDALE, EMILIO M. GARZA, and DEMOSS, Circuit Judges.

       PER CURIAM:

       We have taken this case en banc for the sole purpose of deciding whether the "reasonableness"

of a creditor's reliance under 11 U.S.C. § 523(a)(2)(B) is an issue of law subject to de novo review

on appeal or a question of fact to be reviewed under the clearly erroneous standard. Today we hold

that, for purposes of section 523(a)(2)(B), the reasonableness of a creditor's reliance is a question of

fact, which is reviewable only for clear error. In so doing, we overrule our opinion in In re Jordan,

927 F.2d 221 (5th Cir.1991), to the extent it held that reasonableness of reliance is a conclusion of

law.

                                                   I.

       In June 1987, Rodney and Billie Coston (the Costons) applied to the Bank of Malvern (the

Bank), which is located in Malvern, Arkansas, for a $175,000 loan. To obtain the loan, the Costons

were required to submit a joint financial statement to the Bank. On that statement, Rodney

represented that his account in his employer's retirement plan was worth $1.2 million (which it was)

and was readily convertible into cash (which it was not). Rodney repeated these representations at

several subsequent meetings with bank officials. Relying on these representations, the Bank decided

to make the $175,000 loan to the Costons, who in turn executed a note in favor of the Bank.

       About a year and a half later, in January 1989, the Costons filed a petition for bankruptcy in
the Eastern District of Texas.1 The Bank thereafter objected to the Coston's discharge from the

$175,000 note, arguing that the debt was not dischargeable under 11 U.S.C. § 523(a)(2)(B). The

bankruptcy court agreed. In particular, the bankruptcy court determined that (1) the Costons had

submitted a materially false written statement to the Bank, (2) the statement concerned the Costons'

financial condition, (3) the Costons intended to deceive the Bank, and (4) the Bank reasonably relied

on the statement. The bankruptcy court also rejected the Costons' argument that the Bank's objection

to discharge was untimely.

         On appeal to the district court, the Costons argued that the bankruptcy court erred in finding

that the Bank timely objected to their discharge and that the Bank reasonably relied on their financial

statement.    The district court rejected these arguments and affirmed the bankruptcy court's

determination that the $175,000 note was non-dischargeable. The Costons then appealed to this

court.

         The panel that originally decided this appeal reversed the district court's decision. See In re

Coston, 987 F.2d 1096 (5th Cir.1992). The panel agreed with the bankruptcy and district courts that

the Bank's motion for denial of discharge was timely. With respect to the bankruptcy court's

determination that the Bank had reasonably relied on the Coston's materially false financial statement,

however, the panel dutifully applied the de novo standard of review announced in In re Jordan. And,

in reviewing the bankruptcy court's reasonable reliance determination de novo, the panel concluded

that, although it was a close question, the Bank's "reliance on the [Costons'] statement without so

much as making a single telephone call to verify liquidity simply was not reasonable." The panel

therefore held as a matter of law that the $175,000 note was subject to discharge.

                                                   II.

         Because our policy of reviewing de novo reasonableness of reliance determinations under

section 523(a)(2)(B) is in conflict with the policy of other circuits, we decided to rehear this case en

   1
     When the Costons voluntarily filed for bankruptcy, an involuntary petition, which had been
filed one day earlier by the Bank and the Arkansas Development and Finance Authority, was
already pending in the bankruptcy court for the Western District of Arkansas. The bankruptcy
court in Arkansas subsequently dismissed the involuntary petition, however, allowing the
voluntary proceeding in Texas to go forward.
banc, thereby vacating the panel opinion. Specifically, we now consider whether, despite our

statement in In re Jordan to the contrary, a bankruptcy court's determination regarding the

reasonableness of a creditor's reliance under section 523(a)(2)(B) is factual in nature and therefore

insulated by the clearly erroneous standard of review.2 For the following reasons, we hold that it is.

                                                   A.

        First, our statement in In re Jordan, that "[t]he reasonableness of reliance is a conclusion of

law," 927 F.2d at 227, appears to have been unnecessary. After all, we ultimately agreed with the

bankruptcy court's determination that the creditor had reasonably relied on the financial documents

submitted by the debtors. In hindsight we are persuaded that our statement was not necessary to the

decision to affirm the bankruptcy court's determination that the specific debt involved was

non-dischargeable under section 523(a)(2)(B).

                                                   B.

        In addition, since our decision in In re Jordan, it has become clear that our policy of

reviewing de novo the bankruptcy court's reasonableness of reliance determination is in conflict with

the rule in other circuits. Most recently, in In re Woolum, 979 F.2d 71 (6th Cir.1992), cert. denied,

--- U.S. ----, 113 S.Ct. 1645, --- L.Ed.2d ---- (1993), the Sixth Circuit joined the majority of circuits

that have considered the issue and rejected our de novo approach. It explicitly held that "[t]he district

court committed reversible error in determining that reasonable reliance by a lender [under section

523(a)(2)(B) ] is a mixed question of law and fact, and then reviewing the bankruptcy court's decision

under a de novo standard." Id. at 75. The Sixth Circuit further noted:

        Our view of the matter is in accord with the holdings of the Courts of Appeals for the
        Seventh, Ninth and Tenth Circuits. See Matter of Bonnett, 895 F.2d 1155, 1157 (7th
        Cir.1989); In re Lansford, 822 F.2d 902, 904 (9th Cir.1987); In re Watson, 958 F.2d 977,
        978 (10th Cir.1992). We decline to follow the holding of the Court of Appeals for the Fifth
        Circuit in Matter of Jordan, 927 F.2d 221, 225 (1991), where that court found that
        reasonableness of reliance was a conclusion of law subject to de novo review.

Id. at 76; see also In re Collins, 946 F.2d 815, 817 (11th Cir.1991) (bankruptcy court's finding under

section 523(a)(2)(B) that lender reasonably relied on debtor's false statement is finding of fact

   2
    The panel's opinion concerning the timeliness of the Bank's objection to the Costons'
discharge is, therefore, unaffected by our decision today.
insulated by clearly erroneous standard); In re Ophaug, 827 F.2d 340, 341 (8th Cir.1987)

(suggesting that, where reliance must be reasonable under section 523(a)(2), the reasonableness

determination would be reviewed for clear error).

                                                   C.

        Further, in analogous contexts, courts have always treated the "reasonableness" of a person's

reliance as a question of fact. In the context of common law fraud, the elements of which are

substantially similar, if not identical, to those under section 523(a)(2)(B), courts uniformly treat the

issue of reasonable or justifiable reliance as a question for the factfinder. See, e.g., Ferrell v. Cox,

617 A.2d 1003, 1006-07 (Me.1992); Henderson v. Forman, 240 Neb. 939, 946, 486 N.W.2d 182,

187 (1992); Gray v. Don Miller & Assocs., 35 Cal.3d 498, 198 Cal.Rptr. 551, 553, 674 P.2d 253,

255 (1984); Berg v. Xerxes-Southdale Office Bldg. Co., 290 N.W.2d 612, 616 (Minn.1980);

Berkeley Bank for Cooperatives v. Meibos, 607 P.2d 798, 801 (Utah 1980). The rule is similar in

the context of promissory estoppel. See, e.g., Mers v. Dispatch Printing Co., 19 Ohio St.3d 100,

105, 483 N.E.2d 150, 155 (1985) (meaning of employer's promise, and whether acts flowing from

it were reasonable, are questions of fact for jury determination); Hall v. Harris County Water

Control & Improvement Dist. No. 50, 683 S.W.2d 863 (Tex.App.—Houston [14th Dist.] 1984, no

writ) (whether plaintiff reasonably relied on promise is generally a question of fact). We can see no

justification for treating a creditor's reasonableness of reliance under section 523(a)(2)(B) differently.

                                                   D.

         Ultimately, our conclusion that the section 523(a)(2)(B) reasonableness of reliance

determination is a factual one rests on the nature of the determination. The reasonableness of a

creditor's reliance, in our view, should be judged in light of the totality of the circumstances. The

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. See In re Ledford, 970 F.2d 1556, 1560 (6th Cir.1992) (setting forth
circumstances that may be considered in context of section 523(a)(2)(A) reasonableness of reliance

determination), cert. denied, --- U.S. ----, 113 S.Ct. 1272, 122 L.Ed.2d 667 (1993); see also In re

Mullet, 817 F.2d 677, 679 (10th Cir.1987) ("[T]he reasonableness o f a creditor's reliance will be

evaluated according to the particular facts and circumstances present in a given case."). Because the

inquiry into the reasonableness of the creditor's reliance ultimately rests on the particular

circumstances of each case, we think that the bankruptcy judge, who is most familiar with those

circumstances, should have the benefit of the clearly erroneous rule when making the reasonableness

determination.3

                                                  III.

         Having concluded that a bankruptcy court's reasonableness of reliance determination under

section 523(a)(2)(B) is a factual one, we must now review the bankruptcy court's finding in this case

that the Bank of Malvern reasonably relied on the Costons' financial statements. That is, we must

determine whether the bankruptcy court's finding of reasonable reliance is clearly erroneous. We hold

that it is not.

         Under the clearly erroneous standard of review, we will not set aside a finding of fact unless,

based upon the entire record, we are left with a definite and firm conviction that a mistake has been

committed. Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84

L.Ed.2d 518 (1985). If the bankruptcy court's "account of the evidence is plausible in light of the

   3
    We note, however, that the clearly erroneous standard of review "does not inhibit an appellate
court's power to correct ... a finding of fact that is predicated on a misunderstanding of the
governing rule of law." Bose Corp. v. Consumers Union of United States, Inc., 466 U.S. 485,
501, 104 S.Ct. 1949, 1960, 80 L.Ed.2d 502 (1984). If an appellate court determines that the
bankruptcy court's reasonableness of reliance finding is predicated on an erroneous view of the
law, the appellate court should usually remand for further proceedings under the appropriate legal
standard. See Pullman-Standard v. Swint, 456 U.S. 273, 290-93, 102 S.Ct. 1781, 1791-93, 72
L.Ed.2d 66 (1982); see also In re Allen, 65 B.R. 752, 767 (E.D.Va.1986) (remanding case so
that bankruptcy court, which erroneously concluded that creditors had a per se duty to verify the
accuracy of a financial statement under section 523(a)(2)(B)(iii), could hear more evidence and
make further findings under the correct legal standard), appeal dismissed, 823 F.2d 548 (4th
Cir.1987). We also note that the determination to grant or deny a discharge is a "core"
bankruptcy proceeding. See 28 U.S.C. § 157(b)(2)(I). In reviewing such a proceeding (or
related, non-core proceeding that the parties have consented to have tried by the bankruptcy
court), the district court is bound to review the bankruptcy court's decision under the same
standards that we apply to an ordinary district court opinion. See, e.g., Matter of Hipp, Inc., 895
F.2d 1503, 1517 (5th Cir.1990).
record viewed in its entirety," we will not reverse it. Id. at 573, 105 S.Ct. at 1511. Moreover, we

must give due regard to the opportunity of the bankruptcy court to judge the credibility of witnesses.

FED.R.CIV.P. 52(a); BANKR.R. 8013.

       When we review the bankruptcy court's determination that the Bank reasonably relied on the

Costons' financial statements under the strictures of the clearly erroneous standard, we are

constrained to affirm that finding. Indeed, in the original opinion in this case, the panel—applying

a de novo standard of review—readily acknowledged that "this case presents a close call as to

whether the reliance of the [B]ank was reasonable." The panel also observed that, if it were

reviewing the bankruptcy court's reasonableness finding for clear error, "there is no doubt that [it]

would have to affirm." Thus, the panel readily conceded that the bankruptcy court's finding of

reasonable reliance is plausible in light of the record, and not clearly erroneous.

                                                 IV.

       In sum, we hold that the bankruptcy court's reasonableness of reliance determination under

section 523(a)(2)(B), being factual in nature, is reviewable only for clear error. By so holding, we

overrule our decision in In re Jordan to the extent it is inconsistent. And, after reviewing the

bankruptcy court's reasonableness of reliance determination in this case for clear error, we find none.

The district court's decision affirming the Costons' denial of discharge is therefore AFFIRMED.
