                                 UNPUBLISHED ORDER
                             Not to be cited per Circuit Rule 53



              United States Court of Appeals
                                For the Seventh Circuit
                                Chicago, Illinois 60604

                               Submitted May 10, 20051
                               Decided August 26, 2005

                                          Before

                     HON. JOEL M. FLAUM, Chief Judge

                     HON. MICHAEL S. KANNE, Circuit Judge

                     HON. ANN CLAIRE WILLIAMS, Circuit Judge

No. 03-3153

In re JAMES A. HUDGENS                           Appeal from the United States District
and PAMELA HUDGENS,                              Court for the Northern District
           Debtors-Appellees,                    of Indiana, South Bend Division.

                                                 No. 3:03 CV 192AS

Appeal of: NEW EQUIPMENT                         Allen Sharp,
LEASING INCORPORATED.                            Judge.


                                        ORDER

       James and Pamela Hudgens (“Debtors”) filed for bankruptcy protection under
Chapter 7 of the United States Bankruptcy Code. Among the debts for which they
sought discharge was a debt owed to New Equipment Leasing (“NEL”). NEL filed a
complaint contending that the debt owed to it should not be discharged because the
debtors provided a materially false and intentionally deceptive financial statement
in order to receive a lease; the debtors made a false oath or account; and the debtors

       1
        On April 25, 2005, this court granted appellant New Equipment Leasing’s motion to
waive oral argument. Pursuant to Fed. R. App. P. 34(f), this case was decided on the record
and the brief submitted by New Equipment Leasing. The debtors-appellees did not file a
brief on appeal.
No. 03-3153                                                                   Page 2


failed to satisfactorily explain a loss or deficiency of assets. The bankruptcy court
granted judgment in favor of the debtors, and the district court affirmed. We find
that the bankruptcy court’s conclusions that the debtors did not submit the
financial statement or bankruptcy schedules with an intent to deceive, and that the
debtors provided a satisfactory explanation for the deficiency in assets, are not
clearly erroneous. Therefore, as we explain in more detail below, we affirm.
                                I. BACKGROUND
        James Hudgens, the sole proprietor of a contracting and excavating business,
sought to lease a paver and roller from NEL in April 2000. At trial, Hudgens
testified that Jim Spock, an NEL sales representative, told Hudgens after running
his credit report that he had a good credit score, and NEL would approve the lease.
Spock then faxed Hudgens a “Personal Statement,” a two-page financial statement
that asked NEL lease applicants information about their income, net equity, and
debts.
        Before filling out the Personal Statement, Hudgens asked Spock if NEL
wanted to see Hudgens’s tax returns, stating to Spock that his tax returns “didn’t
look good” and had “never showed much of a profit.” Spock told him the tax returns
would not be necessary. Hudgens completed the Personal Statement in
approximately one and a half hours and then faxed it back to NEL. Hudgens listed
an income of $60,775 per month on the Personal Statement. In addition, the
Personal Statement listed assets of $710,000 and liabilities of $260,000.
(Hudgens’s tax returns for the years 1997, 1998, 1999 and 2000, however, stated
annual incomes of $25,007, negative $29,702, negative $11,806, and negative
$60,420 respectively. When Hudgens filed for bankruptcy about thirteen months
after submitting the Personal Statement, he listed total assets of $162,170 and
total liabilities of $320,745 on his bankruptcy schedules.)
       John Nienhuis, the sales manager with the sole authority to approve leases,
received Hudgens’s file. Nienhuis testified that he contacted trade and bank
references and ran a credit report on James Hudgens, and the credit report and the
references were all favorable. He also testified that he relied on the Personal
Statement when deciding whether to approve the lease. Nienhuis approved the
lease for approximately $35,000 of equipment, to be paid at a rate of $730.79 per
month for 60 months.
       About a week after receiving the paver and roller, Hudgens injured his knee,
rendering him unable to work for eight weeks and bringing business to a halt.
Hudgens subsequently defaulted on his lease with NEL. The roller and paver were
repossessed and sold at an auction. On February 19, 2001, NEL obtained a
judgment of $38,326.38 in a Michigan court, reflecting the amount still owed after
the sale of the equipment.
      Pamela and James Hudgens filed for protection under Chapter 7 of the
No. 03-3153                                                                    Page 3


United States Bankruptcy Code on May 25, 2001. NEL then filed a complaint
objecting to the discharge of Hudgens’s debt to NEL. After a trial, the bankruptcy
court granted judgment in favor of the debtors, and the debt to NEL was discharged.
The district court affirmed the bankruptcy court’s decision, and NEL appeals.
                                  II. ANALYSIS
        “The distinguishing feature of a Chapter 7 proceeding for the individual
debtor is the discharge: after surrendering his non-exempt property for the benefit
of his creditors, the debtor is discharged from what remains of most of the debts he
owed as of the date the bankruptcy petition was filed.” Matter of Turner, 156 F.3d
713, 717 (7th Cir. 1998) (citing 1 Robert E. Ginsberg & Robert D. Martin, Ginsberg
& Martin on Bankruptcy § 12.01, at 12-4 (4th ed. rev. 1998)). The primary purpose
of the bankruptcy discharge is to give the debtor a “fresh start.” In re Chambers,
348 F.3d 650, 653 (7th Cir. 2003).
       The benefits of this “fresh start” policy, however, are limited to the “honest
but unfortunate debtor.” Peterson v. Scott (In re Scott), 172 F.3d 959, 966-67 (7th
Cir. 1999) (citing Grogan v. Garner, 498 U.S. 279, 286-87 (1991)), and the
Bankruptcy Code provides for exceptions to discharge when a debtor has been less
than honest. NEL contends that three provisions preclude discharge of the debt
owed to it. First, it argues that the bankruptcy court should have granted an
exception to discharge under 11 U.S.C. § 523(a)(2)(B) because, it contends, the
debtors submitted a materially false financial statement made with the intent to
deceive that NEL reasonably relied on when it granted financing to Hudgens. NEL
next argues that 11 U.S.C. § 727(a)(4) bars discharge because the debtors made a
false oath either on the Personal Statement or on their bankruptcy schedules.
Finally, NEL contends that 11 U.S.C. § 727(a)(5) bars discharge because the
debtors did not satisfactorily explain a loss of assets.
       We review the district and bankruptcy courts’ legal conclusions de novo.
Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide, Ltd.), 139 F.3d
574, 576 (7th Cir. 1998). A bankruptcy court’s interpretation of the Bankruptcy
Code is a legal conclusion that we review de novo. In re Birkenstock, 87 F.3d 947,
951 (7th Cir. 1996) (citation omitted). In contrast, we review the bankruptcy court’s
findings of fact upon which a finding of discharge is predicated only for clear erro.
Id. That is, we will reverse the bankruptcy court’s factual findings only when,
although there is evidence to support the findings, we are “left with the definite and
firm conviction that a mistake has been committed.” In re Thirtyacre, 36 F.3d 697,
700 (7th Cir.1994) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)).
In keeping with the fresh start goal of bankruptcy, exceptions and objections to
discharge from bankruptcy are “‘constructed strictly against a creditor and liberally
in favor of the debtor.’” Goldberg Sec., Inc. v. Scarlata (In re Scarlata), 979 F.2d
521, 524 (7th Cir. 1992) (citations omitted); see also In re Juzwiak, 89 F.3d 424, 427
(7th Cir. 1996) (citations omitted).
No. 03-3153                                                                        Page 4


A. 11 U.S.C. § 523(a)(2)(B) does not preclude discharge.
        Section 523(a)(2)(B) of the Bankruptcy Code provides that a debtor is not
discharged from any debt “for money, property, services, or an extension, renewal,
or refinancing of credit, to the extent obtained by” a statement made in writing
      (i) that is materially false; (ii) respecting the debtor’s or an insider’s financial
      condition; (iii) on which the creditor to whom the debtor is liable for such
      money, property, services, or credit reasonably relied; and (iv) that the debtor
      caused to be made or published with intent to deceive.
11 U.S.C. § 523(a)(2)(B). A creditor bears the burden of proving by a preponderance
of the evidence that a debt meets the statutory requirements for an exception to
discharge. See Grogan, 498 U.S. at 291; In re MacFarland, 84 F.3d 943, 946 (7th
Cir. 1996). Therefore, NEL had the burden to prove that the written financial
statement Hudgens submitted was: (1) a materially false statement, (2) respecting
his financial condition, (3) upon which NEL reasonably relied, and (4) made with the
intent to deceive NEL. See 11 U.S.C. § 523(a)(2)(B); see also Ins. Co. of N. Am. v.
Cohn, 54 F.3d 1108, 1114 (3d Cir. 1995). The bankruptcy court concluded that any
reliance NEL placed on the financial statement was not reasonable, and, further,
that Hudgens did not submit the statement with the intent to deceive.
      1. Reasonable Reliance
       NEL first argues that, contrary to the bankruptcy court’s finding, it relied on
Hudgens’s financial statement when it made the decision to approve Hudgens’s
lease application. The bankruptcy court looked to Hudgens’s testimony that Jim
Spock, an NEL sales representative, told Hudgens NEL would approve his lease
application solely on his credit report. Hudgens, though, had no first-hand
knowledge of what documents NEL actually relied on when it approved the lease.
John Nienhuis, whom the bankruptcy court found credible, testified at trial that he
had the sole authority to approve Hudgens’s financing. Furthermore, he testified,
he relied on the financial statement when he approved Hudgens’s application.
Therefore, although Hudgens testified that he understood he would be approved
based on his credit score alone, the uncontroverted evidence in the record is that
Nienhuis, the only person with authority to approve the lease, relied on the
financial statement when he made the decision to approve the lease. We agree with
NEL that it relied, at least in part, on the financial statement when it made the
decision to approve the lease.
       NEL also contests the bankruptcy court’s finding that any reliance it placed
on the financial statement was not reasonable. In addition to demonstrating
reliance, a creditor must establish by a preponderance of the evidence that its
reliance was reasonable in order for a debt to be excepted from discharge under §
523(a)(2)(B). See 11 U.S.C. § 523(a)(2)(B)(iii). A bankruptcy court’s determination
that a creditor’s reliance was reasonable or unreasonable is a question of fact that
No. 03-3153                                                                       Page 5


we review for clear error. See In re Morris, 223 F.3d 548, 553 (7th Cir. 2000).
       We analyze the reasonableness of a creditor’s reliance on a case-by-case
basis. In re Bonnett, 895 F.2d 1155, 1157 (7th Cir. 1989). During this review, we
have recognized that we should not “undertake a subjective evaluation and
judgment of a creditor’s lending policy and practices,” In re Garman, 643 F.2d 1252,
1256 (7th Cir. 1980), nor should we use the reasonable reliance requirement to
“second-guess a creditor’s lending decisions.” Morris, 223 F.3d at 553.
Furthermore, this court has stated, “the concept of reasonable reliance does not
generally require creditors to conduct an investigation prior to entering into
agreements with prospective debtors.” Id. at 554. A lender cannot, however, ignore
evidence of deceit and expect a court to later grant an exception to the debtor’s
discharge. In re Bogstad, 779 F.2d 370, 372 n. 4 (7th Cir. 1985).
       Although investigation is not generally required, “such a precaution could be
the ordinarily prudent choice in circumstances where the creditor admits that it
does not believe the representations made by the prospective debtor.” Morris, 223
F.3d at 554. Unlike the creditor in Morris whose vice president testified to having
“reservations” about the debtor’s veracity, however, NEL personnel who reviewed
the financial statement expressed no doubts about its accuracy and assumed it to be
correct.
       Reliance may also not be reasonable if a lender “possesses information
sufficient to call the representation into question.” Mayer v. Spanel Int’l, Ltd., 51
F.3d 670, 676 (7th Cir. 1995). Here, the bankruptcy court found there were several
“red flags” on the financial statement that would have alerted an ordinarily
prudent lender that the representations might not be accurate, pointing to the
debtors’ reported monthly salary of $40,000, monthly real estate income of $20,000,
and ownership of $388,700 in real estate and $187,000 in automobiles. Noting also
that NEL did not have a prior business relationship with Hudgens, the bankruptcy
court concluded that the professed annual income of $700,000, assets of $710,000
should have been investigated further. See Garman, 643 F.2d at 1257-59 (long-
standing positive business relationship is an indication of reasonableness of
reliance).
       NEL argues persuasively that the numbers listed on the Personal Statement
do not alone raise “red flags” necessary to require further investigation. It does not
seem inconsistent, for example, for a business owner with a reported income of
$700,000 to also possess $710,000 in assets. Cf. Morris, 223 F.3d at 553 (creditor’s
vice president testified that he had “reservations” about Morris’s honesty, and the
parties’ past experience gave the creditor reason to doubt the debtor’s
representations); Insouth Bank v. Michael, 265 B.R. 593, 600 (Bankr. W.D. Tenn.,
2001) (creditor had actual knowledge of the debtor’s inability to pay and still ignored
that “red flag”). To require a creditor to conduct further investigation based solely
on the amounts reported here seems close to running counter to our previous
No. 03-3153                                                                           Page 6


caution that “the concept of reasonable reliance does not generally require creditors
to conduct an investigation prior to entering into agreements with prospective
debtors.” Morris, 223 F.3d at 554.
       Moreover, NEL did not approve the lease on the debtors’ representations
alone. Rather, prior to approval, it obtained a credit report, which was positive, and
also contacted bank and trade references, who were also positive. We know now
that NEL would have been better served had it investigated the representations in
the Personal Statement further, but we are hesitant to say that its reliance was
unreasonable here.2
       2. Intent to deceive
       Ultimately, however, we reject NEL’s argument that § 523(a)(2)(B) precludes
discharge because the bankruptcy court’s conclusion that NEL did not prove by a
preponderance of the evidence that Hudgens acted with the requisite intent to
deceive was not clearly erroneous. A creditor can prove intent to deceive through
direct evidence. In re Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). In addition,
intent to deceive may be inferred where “a person knowingly or recklessly makes a
false representation which the person knows or should know will induce another to
make a loan.” Id. (citations omitted). A bankruptcy court’s determination that a
debtor did not act with the intent to deceive is a finding of fact that we review for
clear error. Id.
       NEL first argues that the bankruptcy court improperly used only a “knew or
should have known” standard when it analyzed whether the debtors acted with the
intent to deceive and failed to consider whether they acted recklessly. NEL
correctly asserts that recklessly making a false representation can satisfy the
intent to deceive requirement of § 523(a)(2)(B). See Sheridan, 57 F.3d at 633 (citing
Garman, 643 F.2d at 1260-61) (stating intent to deceive may be inferred where “a
person knowingly or recklessly makes a false representation which the person
knows or should know will induce another to make a loan.”). Contrary to NEL’s
assertion, however, the bankruptcy court did not fail to consider whether the
debtors acted recklessly. Rather, it specifically stated in its opinion, “the debtors,
believing they were already approved for the lease, filled out the Personal
Statement sloppily or carelessly but not deceptively or with a reckless disregard for
the truth,” and it cited to Sheridan for this proposition. We conclude that the
bankruptcy court applied the correct legal standard.
       NEL also argues that the bankruptcy court’s finding that the debtors did not


       2
        James Hudgens’s statement to an NEL representative that his tax returns “didn’t
look good” may have constituted a “red flag” necessitating further investigation in this case,
but the bankruptcy court did not discuss this statement in its discussion of the
reasonableness of NEL’s reliance.
No. 03-3153                                                                    Page 7


intend to deceive it was clearly erroneous. In support, it asserts that the magnitude
of the alleged misrepresentations demonstrate that Hudgens acted with the intent
to deceive when he submitted the Personal Statement. For example, the Personal
Statement indicated an annual income of $700,000, while the debtors’ tax returns
show that their income had actually been negative for that year and the two
previous years.
       Mindful of our deferential standard of review and the knowledge that the
bankruptcy court, unlike us, had the opportunity to observe the witnesses’
testimony, we do not find the bankruptcy court’s conclusion clearly erroneous.
Before Hudgens received the financial statement to complete, an NEL sales
representative told him that it was not important in light of his good credit score.
Hudgens thus completed the document with the understanding that it was not
consequential to the decision. Furthermore, and significantly, before he completed
the Personal Statement, Hudgens explicitly told Spock that his tax returns “did not
look good” and even offered to show them to Spock. Spock declined this offer.
Affirmatively offering to provide his tax returns while stating they “did not look
good” suggests that Hudgens did not act with an intent to deceive.
       Rather, as the bankruptcy court found, Hudgens was not sophisticated in
financial matters and completed the document as best he could, with the
understanding that it would not bear on the decision. In addition, the bankruptcy
court found that the debtors adequately explained the difference in the amounts
listed on the Personal Statement and bankruptcy schedules. Hudgens testified that
he was injured shortly after receiving the equipment and could not work, causing a
significant drop in income. This injury also caused him to sell most of the
equipment he owned and to incur additional bills.
       On balance, then, although Hudgens could have been more careful when he
completed the Personal Statement, we do not find clearly erroneous the bankruptcy
court’s conclusion that Hudgens did not act with the intent to deceive NEL when he
submitted the Personal Statement. We therefore reject NEL’s argument that §
523(a)(2)(B) precludes the debt to NEL from discharge.
B.    Neither 11 U.S.C. § 727(a)(4) nor § 727(a)(5) precludes discharge.
       NEL also contends that the bankruptcy court should have denied Hudgens’s
request for discharge pursuant to either 11 U.S.C. § 727(a)(4) or § 727(a)(5). As the
plaintiff, NEL has the burden of proving that an objection applies by a
preponderance of the evidence. See Fed. R. Bankr. P. 4005 (“At the trial on a
complaint objecting to discharge, the plaintiff has the burden of proving the
objection”); Scott, 172 F.3d at 966-67.
      1.      11 U.S.C. § 727(a)(4)(A)
      NEL contends that 11 U.S.C. § 727(a)(4) should have precluded discharge.
This section provides that a discharge does not apply to a debtor who, among others,
No. 03-3153                                                                        Page 8


“knowingly and fraudulently, in or in connection with the case . . . made a false oath
or account.” In order for this section to preclude discharge, NEL must establish by
a preponderance of the evidence that: (1) the debtor made a statement under oath;
(2) the statement was false; (3) the debtor knew the statement was false; (4) the
debtor made the statement with fraudulent intent; and (5) the statement related
materially to the bankruptcy case. See, e.g., Lee Supply Corp. v. Agnew (In re
Agnew), 818 F.2d 1284, 1289-90 (7th Cir. 1987); see also Scott, 172 F.3d at 966-67
(holding preponderance standard applies to 11 U.S.C. § 727(a) objections). A
creditor can establish fraudulent intent by showing that the debtor knowingly made
a false and material statement. In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998). A
showing of reckless disregard for the truth is also sufficient to prove fraudulent
intent. Id. (citing In re Yonikus, 974 F.2d 901, 905 (7th Cir.1992)).
        The bankruptcy court treated both the Personal Statement and the
bankruptcy schedules as statements under oath. It found that NEL failed to show
by a preponderance of the evidence that Hudgens knew the statements in the
Personal Statement and bankruptcy schedules were false, and even if they were
false, that they were made with fraudulent intent. NEL contends that Hudgens
made a false statement under oath on at least one of the documents because the
two documents, signed thirteen months apart, contain a difference in net worth of
about $450,000.
       Like its challenge under § 523(a)(2)(B), NEL’s objection under § 727(a)(4)
fails because the bankruptcy court’s conclusion that Hudgens did not act with
fraudulent intent was not clearly erroneous. After hearing the testimony at trial,
the bankruptcy court judge concluded that Hudgens provided a credible and more
complete picture of the circumstances that led to his loss of assets. For reasons
explained in the previous section, the bankruptcy court’s conclusion that Hudgens
did not submit the Personal Statement with the intent to deceive was not clearly
erroneous. In addition, the bankruptcy court’s conclusion that Hudgens did not
complete the bankruptcy schedules with fraudulent intent is not clearly erroneous,
as NEL failed to demonstrate that any of the entries were made with knowledge
that they were false or deceptive.
       2. 11 U.S.C. § 727(a)(5)
        Finally, NEL contends that 11 U.S.C. § 727(a)(5) precludes discharge of the
debt to NEL. Under this provision, a debtor may be denied a discharge if he or she
“fail[s] to explain satisfactorily . . . any loss of assets or deficiency of assets to meet
the debtor's liabilities.” 11 U.S.C. § 727(a)(5). A bankruptcy court has “broad power
to decline to grant a discharge . . . where the debtor does not adequately explain a
shortage, loss, or disappearance of assets.” In re D’Agnese, 86 F.3d 732, 734 (7th
Cir. 1996) (quoting First Federated, 698 F.2d at 886). A debtor can violate §
727(a)(5), which unlike § 727(a)(4) does not contain a fraudulent intent
requirement, yet still receive a discharge. Prairie Prod. Credit Ass’n v. Suttles (In
No. 03-3153                                                                      Page 9


re Suttles), 819 F.2d 764, 766 (7th Cir. 1987).
       The creditor has the initial burden to establish that there has been a loss or
disappearance of assets; then, the burden shifts to the debtor to satisfactorily
explain the loss of assets. First Federated, 698 F.2d at 886. A satisfactory
explanation of a loss of assets “‘must consist of more than . . . vague, indefinite, and
uncorroborated’ assertions by the debtor.” D’Agnese, 86 F.3d at 734 (quoting Baum
v. Earl Millikin, Inc., 359 F.2d 811, 814 (7th Cir. 1966)). Whether a debtor has
satisfactorily explained a loss of assets is a question of fact that we review for clear
error. D’Agnese, 86 F.3d at 734.
       First, NEL argues that it was clear error for the bankruptcy judge to find the
debtors’ explanation of the whereabouts of their assets satisfactory when they did
not offer any documentation. In In re D’Agnese, 86 F.3d 732 (7th Cir. 1996), on
which NEL relies, we found the debtor’s explanation of the whereabouts of several
valuable assets inadequate because the debtor “failed to provide any documentation
or adequate explanation for the missing assets,” and we upheld the denial of
discharge “based upon the debtor’s failure to specifically provide an explanation
from which the court could determine how she disposed of the assets.” D’Agnese, 86
F.3d at 735. D’Agnese does not set forth a bright line rule that a debtor must
present always present documentation whenever a creditor establishes a loss of
assets. Rather, it stands for the proposition that documentation is but one way,
albeit a very good way, for a debtor to explain a loss of assets. Like the bankruptcy
court, we agree that documentary evidence would have been preferable. There is no
bright line rule in our circuit, however, that a debtor must present documentary
evidence in order for an explanation of asset loss to be satisfactory.
       NEL also argues that even if documentation is not necessary, the debtors’
explanation was too vague to be satisfactory. The bankruptcy court found Hudgens
credible and believed his explanation that after an injury forced him to stop work,
he sold his equipment and filed for bankruptcy. In addition, it pointed to Hudgens’s
testimony that he prepared the Personal Statement and bankruptcy schedules to
the best of his ability. In light of our deferential standard of review, we do not find
clearly erroneous the bankruptcy court’s finding that the debtors’ explanation of the
difference in assets was satisfactory.
                                 III. CONCLUSION
       For the reasons stated above, the decision of the district court affirming the
decision of the bankruptcy court is AFFIRMED.
