                                                                        F I L E D
                                                                  United States Court of Appeals
                                                                          Tenth Circuit
                          UNITED STATES CO URT O F APPEALS
                                                                          July 7, 2006
                                FO R TH E TENTH CIRCUIT              Elisabeth A. Shumaker
                                                                         Clerk of Court

    In re: RO Y CR IBB S,

                Debtor,

    -------------------------                             No. 05-6225
                                                      (BAP N o. W O-05-012)
    FIRST N A TIO N A L B AN K ,                             (BA P)

                Plaintiff-Appellant,

      v.

    RO Y CR IBB S,

                Defendant-Appellee.



                                OR D ER AND JUDGM ENT *


Before L UC ER O, EBEL, and M U RPH Y, Circuit Judges.




           Plaintiff First National Bank (“FNB”) appeals from a decision of the United

States Bankruptcy A ppellate Panel of the Tenth Circuit (“BAP”). The BAP


*
       After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. The court generally disfavors the citation of orders and
judgments; nevertheless, an order and judgment may be cited under the terms and
conditions of 10th Cir. R. 36.3.
affirmed a decision by the bankruptcy court that a debt defendant Roy Cribbs

owed to FN B was dischargeable in M r. Cribbs’s Chapter 7 bankruptcy

proceeding. Exercising jurisdiction pursuant to 28 U.S.C. § 158(d), we affirm.

                                          I.

      In 1999, Cribbs, acting on behalf of Purcell Assisted Living, Inc. (“PALI”),

and working with a mortgage broker, Everett Cox, applied for a construction loan

from FNB to finance an assisted living center project in Purcell, Oklahoma

(“Purcell Project”). C ribbs did not have a relationship with FNB at this time. H e

submitted a financial statement to FN B (“April 1999 Statement”), which does not

appear to be part of the record. FN B rejected his application because he did not

have adequate liquid assets.

      In M arch 2000, Cribbs obtained two additional investors, Cox and Terry

Poole, whose personal financial statements showed significant liquidity and net

worth. Cribbs applied again for a loan from FN B and submitted a second

financial statement dated M arch 1, 2000 (“M arch 2000 Statement”), although his

signature and that of Cox, who witnessed the statement, were dated April 26,

1999. The M arch 2000 Statement purported to be a joint statement by Cribbs and

his wife, but his wife never signed it. FN B never inquired about the dates and

never asked M rs. Cribbs about the statement or to sign it. M ost of the listed

assets in fact were held either by one of Cribbs’s closely-held businesses or by his

wife’s trust. One of those assets that FNB contends w as not listed on the April

                                          -2-
1999 Statement was a promissory note in the amount of $483,630 (“Note”) that

Cribbs claimed one of his closely-held businesses, Phoenix Health Services, Inc.

(“Phoenix”), owed to him on another assisted living center project in M ustang,

Oklahoma (“M ustang Project”). However, there was no Note. Instead, the listing

represented the profit Cribbs anticipated on completion of the M ustang Project.

Cribbs also orally represented that he would contribute the proceeds from the

M ustang Project to the Purcell Project, and he omitted from the M arch 2000

Statement the fact that Phoenix owed his wife’s trust $600,000.

      During the loan approval process, Suzi M ack, an FNB vice president,

performed a credit analysis by comparing Cribbs’s financial statement with

information from other companies similar to PA LI. Robert Bishop, a commercial

bank officer at FN B, reviewed the prospectus for the Purcell Project and toured

another PA LI project. He also inspected the M ustang Project. W hen he contacted

the bank handling the M ustang Project loan, he learned that Phoenix was current

on its obligations. Bishop never asked to see the Note, and FNB never attempted

to take a security interest in or an assignment on the Note.

      Ultimately, FN B extended a construction loan to PA LI in November 2000

for $2,838,903.94, on which Cribbs and his two co-investors executed personal

guaranties. FN B extended a second loan to PA LI in the amount of $101,050 for

fixtures and equipment, on which Cribbs executed a personal guaranty. W hen




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PA LI defaulted on both loans, Cribbs and the other investors refused to honor

their guaranties.

      In January 2003, FNB obtained a judgment against Cribbs on both loans in

Oklahoma state court. In M arch 2004, Cribbs filed a petition in the bankruptcy

court under Chapter 7. FN B then initiated an adversarial proceeding to have the

debt excepted from discharge under 11 U.S.C. § 523(a)(2)(B). After a trial, the

bankruptcy court held that the debt was dischargeable because FNB failed to

establish that (i) it actually and reasonably relied on the M arch 2000 Statement

and (ii) Cribbs acted w ith intent to deceive. The BAP affirmed, and FNB appeals.

                                           II.

      “On appeal from BAP decisions, we independently review the bankruptcy

court’s decision.” Lampe v. W illiamson (In re Lampe), 331 F.3d 750, 753

(10th Cir. 2003). “[W]e review the bankruptcy court’s legal determinations

de novo and its factual findings under the clearly erroneous standard.” Conoco,

Inc. v. Styler (In re Peterson Distrib., Inc.), 82 F.3d 956, 959 (10th Cir. 1996). A

factual finding “is clearly erroneous if it is without factual support in the record

or if, after review ing all of the evidence, we are left with the definite and firm

conviction that a mistake has been made.” Id. As discussed in detail below, FNB

argues on appeal that the bankruptcy court misapplied the legal standards or

applied the wrong legal standards and, therefore, its factual findings are clearly

erroneous.

                                           -4-
      W hen an individual debtor files for bankruptcy protection under Chapter 7,

a court generally discharges all of the debtor’s pre-existing obligations. See

11 U.S.C. § 727. Some debts obtained by fraud, however, cannot be discharged.

The relevant statute provides that a discharge under Chapter 7 does not discharge

a monetary debt that is obtained by use of a written statement

      (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)(B). FN B must establish each element by a preponderance

of the evidence. See Leadership Bank, N.A. v. W atson (In re W atson), 958 F.2d

977, 978 n.2 (10th Cir. 1992). Cribbs conceded that his personal financial

statement contained materially false representations about his financial condition.

Thus, FN B’s arguments concern the third and fourth elements of the statute.

      As to the third element, a creditor must show that it actually relied on the

financial statement and that its reliance was reasonable. Field v. M ans, 516 U.S.

59, 68 (1995). FN B argues that the bankruptcy court applied a newly formulated

“most substantial factor” or “only substantial factor” test when it found that

FN B’s decision to extend the loans to PA LI was more likely based on the

presence of the new guarantors. FN B urges that, in order to show actual reliance,

it need not show that the financial statement was the only influential factor or



                                         -5-
even the most substantial factor, but only that its reliance on the financial

statement was “a contributory cause of the extension of credit and that credit

would not have been granted if the lender had received accurate information,”

First Int’l B ank v. K erbaugh (In re Kerbaugh), 162 B.R. 255, 264 (Bankr. D.N.D .

1993) (quotations omitted).

      This circuit has held that “§ 523(a)(2)(B) does not require that a creditor

rely exclusively on the false financial statement. Partial reliance is enough.”

Cent. Nat’l Bank & Trust Co. v. Liming (In re Liming), 797 F.2d 895, 897-98

(10th Cir. 1986) (citation omitted). Relying in part on In re Liming, this circuit

has explained that “a debt is obtained by fraud if the fraud is a substantial factor

in the creditor’s decision.” John Deere Co. v. Gerlach (In re Gerlach), 897 F.2d

1048, 1052 (10th Cir. 1990) (quotation omitted). Thus, partial reliance on a

financial statement is adequate if it is substantial, even if the financial statement

is not the most substantial factor. W hether the claimed partial reliance is actual,

however, is not necessarily distinct from the reasonableness inquiry, as

“reasonableness goes to the probability of actual reliance.” Field, 516 U.S. at 76

(discussing whether reasonable or justifiable reliance is required under 11 U.S.C.

§ 523(a)(2)(A)).

      The bankruptcy court found that FNB’s “final decision to make the loan to

PA LI was substantially based on the guaranties provided by Cox and Poole.”

Aplt. App. at 129, ¶ 4. The court noted that, despite insisting that the decision to

                                          -6-
extend the loans was based on the Note, FN B never even asked to see the Note or

to take an assignment on it. Id. at 133, ¶ 13. The court found “unconvincing”

FN B’s argument that the loan decision “was based on [Cribbs’s] financial

condition, namely the $483,000 note. Rather, . . . a more significant factor . . .

was the inclusion of new guarantors with substantial net worth.” Id., ¶ 14

(emphasis added). The court also found that FN B “did not actually rely on

[Cribbs’s] representation that he was owed $483,000, in making its final decision

to make the loan. Instead, . . . [FNB’s] decision was more likely based on the

additional guarantors.” Id. at 133-34, ¶ 15 (emphasis added).

      FN B’s argument that the bankruptcy court improperly weighed any reliance

on the M arch 2000 Statement against FNB’s reliance on the additional guarantors,

rather than determine if reliance on the financial statement was in and of itself

substantial, is largely based on the emphasized language in the foregoing

quotations. Although that language, view ed in isolation, supports FNB’s

argument, consideration of the court’s decision as a whole indicates otherw ise.

      The bankruptcy court held that FN B did not “actually rely” on the M arch

2000 Statement because the addition of the new guarantors resolved FNB’s

concerns about Cribbs’s lack of adequate liquid capital, which was the reason

FNB denied his first loan application. Id. at 139. The court continued: “It is

difficult to believe [FN B’s] assertion that its change in position was not based on

the additional guarantors but instead on the $483,000 purportedly owed to

                                          -7-
[Cribbs].” Id. Read in conjunction with the court’s finding that FN B never even

asked to see the N ote, it is evident that the court did not determine that, of two

substantial bases for reliance, FNB’s reliance on the new guarantors was the more

substantial. Rather, the court determined that there was no actual reliance, and

thus no substantial reliance, on the M arch 2000 Statement because the claimed

reliance on the Note was unreasonable.

      This, however, does not end our inquiry. W e must next consider whether

FNB’s claimed reliance on the M arch 2000 Statement was unreasonable.

Reasonableness must be “evaluated according to the particular facts and

circumstances present in a given case.” First Bank v. M ullet (In re M ullet),

817 F.2d 677, 679 (10th Cir. 1987), abrogated on other grounds by Field,

516 U.S. at 74-75. Relevant factors a court must consider include the creditor’s

standard lending practices, the standard in the creditor’s industry, and the

surrounding circumstances at the time the debtor applies for credit, including

whether there are any “red flags” in the application, whether there was an ongoing

business relationship, and whether further investigation would have revealed

inaccuracies in the debtor’s application. Ins. Co. of N . Am. v. Cohn (In re Cohn),

54 F.3d 1108, 1117 (3d Cir. 1995); In re M ullet, 817 F.2d at 681.

      Relying on a number of cases, FNB emphasizes that, absent “other factors,”

a creditor’s reliance on a financial statement is reasonable if it follows its own

standard lending practices. See In re Cohn, 54 F.3d at 1117; Gertsch v. Johnson

                                          -8-
& Johnson, Fin. Corp. (In re G ertsch), 237 B.R. 160, 170 (B.A.P. 9th Cir. 1999);

Peoples Thrift Sav. Bank v. Larrieu (In re Larrieu), 230 B.R. 256, 265 (Bankr.

E.D. Pa. 1999); In re Kerbaugh, 162 B.R. at 265. Although we generally agree,

we conclude that one of the “other factors” that might render a creditor’s

adherence to its own standard lending practices insufficient for purposes of

establishing reasonable reliance is a lack of ordinary diligence under the

particular facts of the case. See Norwest Card Servs. v. Barnacle (In re

Barnacle), 44 B.R. 50, 54 (Bankr. D. M inn. 1984) (holding that reliance is

reasonable “if a creditor’s actual conduct followed its normal business practices

and/or standards in the industry and if the creditor, upon the particular facts acted

with ordinary diligence” (emphasis added)).

      Although not explicitly stating that it w as requiring ordinary diligence, a

close reading of the bankruptcy court’s decision indicates that it was, in large

part, FN B’s lack of any diligence as to the Note itself that rendered reliance on

the M arch 2000 Statement too unreasonable to constitute reliance in fact. The

court noted that FNB had never done business w ith Cribbs before. The court

considered the testimony of M s. M ack, the FNB vice president who conducted a

credit analysis, that it is FN B’s policy never to request evidence to support

customer representations on financial statements, and that it was not incumbent

on FNB to investigate the Note because FNB was not taking an assignment of it.

It is apparent the court found FNB’s adherence to its own policy insufficient to

                                          -9-
protect it given the facts of this case. The court also recognized that FNB

investigated two of Cribbs’s other projects and called the bank handling the loan

on the M ustang Project to see how that loan was performing. It is clear, however,

that these steps were not aimed at verifying the existence of the Note.

      Under the particular facts of this case, where the Note listed on the

financial statement accompanying Cribbs’s second loan application addressed the

reason FNB had denied his first application, FNB should have undertaken at least

a minimal investigation into the legitimacy of the Note in order to show ordinary

diligence. That investigation could have involved as little as reviewing a copy of

the Note, w hich would not have been too burdensome on FNB. Certainly it would

not have required FNB to verify every representation in the M arch 2000

Statement. Requesting to see a copy of the Note might not have revealed that

Phoenix, Cribbs’s company that purportedly held the fictitious Note, owed

M rs. Cribbs’s trust $600,000, but it likely would have demonstrated that there

was no Note. 1

      In requiring a creditor to exercise ordinary diligence under the

circumstances of a particular loan application, we do not suggest an affirmative



1
       To the extent FN B claims also to have relied on Cribbs’s oral
representation that he would contribute the profit on the M ustang Project to the
Purcell Project, the exception to discharge FNB invoked in this case, 11 U.S.C.
§ 523(a)(2)(B), applies only to materially false written statements and, therefore,
does not protect FN B. See In re M ullet, 817 F.2d at 679 (noting that reliance on
oral representations is covered by 11 U.S.C. § 523(a)(2)(A)).

                                        -10-
duty to investigate in every circumstance. W hat constitutes ordinary diligence

sufficient to support a finding of reasonable reliance is to be determined

according to the particular facts of each case. In some instances, it may not

require any investigation at all. See M gmt. Jets Int’l, Inc. v. M utschler (In re

M utschler), 45 B.R. 482, 493 (Bankr. D.N.D. 1984) (explaining that creditors “are

entitled to rely on [a written financial] statement as being an accurate

representation of what it purports to be as long as fraud is not apparent from the

document itself”). In this case, however, even though fraud as to the Note was

not apparent from the M arch 2000 Statement itself, FNB did not exercise ordinary

diligence because the Note was the asset that distinguished the M arch 2000

Statement from the A pril 1999 Statement and purportedly was central to FNB’s

decision to extend the loans after its rejection of Cribbs’s first loan application.

      FN B also argues that the absence of M rs. Cribbs’s signature and the gap

between the signature date, April 26, 1999, and the “date of statement,” M arch 1,

2000, were not the type of “red flags” indicative of inaccurate or unreliable

financial information in the statement that ordinarily require a creditor to conduct

a more thorough investigation. W e need not address this argument because the

deficient investigation of the Note was a sufficient basis for the bankruptcy

court’s determination that FNB’s purported reliance on the N ote (and therefore

the M arch 2000 Statement) was unreasonable even without reference to the “red

flags.”

                                          -11-
      FN B contends that the bankruptcy court committed legal error by ignoring

uncontroverted evidence that neither FN B nor anyone in the industry verifies

(i) the ownership of real property listed on a financial statement unless the

property is being used as collateral or (ii) the amount of money held in checking

accounts listed on financial statements. These points are immaterial. The court

did not discuss FNB’s internal standards or industry standards concerning title

checks and bank balances because they were not relevant to its holding. The

court emphasized FNB’s failure to verify the debt represented by the Note. W e

concluded above that FN B’s contention that it followed its own standards was

insufficient as to the N ote under the facts of this case. Furthermore, FNB

presented no evidence of the industry standards concerning the factual scenario

present here, namely, when a new asset listed on a second financial statement

addresses the very shortcoming in a loan applicant’s earlier financial statement.

      In sum, we conclude that the bankruptcy court’s findings are not “without

factual support in the record,” and we are not “left with the definite and firm

conviction that a mistake has been made.” In re Peterson Distrib., Inc., 82 F.3d at

959. W e further conclude that the court committed no legal error. Because FNB

has failed to meet its burden as to the third element of § 523(a)(2)(B), the

exception to discharge does not apply, and we need not consider whether FNB

met its burden as to the fourth element, intent to deceive.




                                         -12-
      The judgment of the United States Bankruptcy Appellate Panel of the Tenth

Circuit affirming the judgment of the bankruptcy court is AFFIRM ED.



                                                 Entered for the Court



                                                 Carlos F. Lucero
                                                 Circuit Judge




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