UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: RANDALL E. DALTON,
Debtor.

CONSOLIDATED BANK AND TRUST
COMPANY,                                                            No. 99-1330
Plaintiff-Appellant,

v.

RANDALL E. DALTON,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Richard L. Williams, Senior District Judge.
(CA-98-659-3, BK-95-30883-T, AP-95-3072-T)

Argued: October 26, 1999

Decided: February 17, 2000

Before MURNAGHAN, WILKINS, and TRAXLER, Circuit Judges.

_________________________________________________________________

Reversed and remanded by unpublished per curiam opinion.

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COUNSEL

ARGUED: Lawrence Douglas Wilder, Jr., WILDER & GREGORY,
Richmond, Virginia, for Appellant. Richard Robert James, Glen
Allen, Virginia, for Appellee. ON BRIEF: Gerald W.S. Carter, WIL-
DER & GREGORY, Richmond, Virginia, for Appellant.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

The plaintiff, Consolidated Bank & Trust Co. ("the Bank"), appeals
the district court's order affirming the bankruptcy court's determina-
tion that Dr. Randall E. Dalton's ("Dalton") debt to the Bank was dis-
chargeable in bankruptcy. Because we hold that the bankruptcy
court's findings were clearly erroneous, we reverse and remand.

I.

Dalton is a physician practicing in Richmond, Virginia. From 1986
until 1993, he practiced medicine as a corporation, Ear, Nose, Throat,
Head & Neck Medicine and Surgery of Richmond, Inc. ("ENT Medi-
cine"). Dalton was the President, sole director, and sole shareholder
of ENT Medicine.

Between 1986 and 1992, ENT Medicine obtained loans from the
Bank to finance Dalton's medical practice. Dalton and his wife per-
sonally guaranteed all of ENT Medicine's debts. By early 1992, ENT
Medicine's loans from the Bank were in arrears. Dalton claims that
the cause of the corporation's financial problems was the failure of
ENT Medicine's time-and-billing computer system in June 1991. The
computer crash caused ENT Medicine to lose thousands of dollars in
accounts receivable.

On November 25, 1992, Dalton and his accountant, Brian LaLonde
("LaLonde"), met with two individuals from the Bank to discuss
restructuring the loans. Mr. Henley, the Bank's chairman of the board
of directors, and Mr. Winston, the assistant vice president of the
Bank's loan review program, represented the Bank. The Bank
required Dalton to provide financial statements before it would
restructure the loans. Dalton and LaLonde prepared two financial
statements for the Bank.

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Both financial statements contained an entry that listed a "loan to
stockholder" as one of the assets of ENT Medicine. The loan to stock-
holder entry on the November 30, 1992 financial statement listed a
balance of $249,014.52. The total assets of ENT Medicine as of
November 30, 1992 were $275,041.23. The "loan to stockholder"
asset thus amounted to approximately 91% of the total assets of ENT
Medicine as of that date.

Dalton concedes that the "loan to stockholder" was not really a loan
from ENT Medicine to Dalton. Instead, Dalton received the amounts
listed in the loan to stockholder entries as his salary. Dalton wrote
checks to himself from ENT Medicine's account that he notated as
salary. LaLonde characterized Dalton's salary as a"loan to stock-
holder" on ENT Medicine's financial statements because it allowed
Dalton to defer his payroll tax liability. Dalton owed a lot of money
to the IRS for back taxes, and LaLonde did not believe that Dalton
could meet his obligations if his payroll tax liability increased.1

During the restructuring of Dalton's loans, the Bank was not aware
that the "loan to the stockholder" was, in reality, salary paid to Dal-
ton. The Bank thought that the "loan" was an asset of ENT Medicine.
Had Dalton and LaLonde listed the "loan to stockholder" entries prop-
erly, ENT Medicine would have been insolvent as of November 30,
1992 because its liabilities would have exceeded its assets by over
$214,000. Consequently, the Bank would not have restructured the
loan to Dalton had it known that the "loan to stockholder" was not
really an asset of ENT Medicine.

Both Dalton and LaLonde were aware that the "loan to stock-
holder" entries were an incorrect characterization of Dalton's salary.
Dalton was also aware that the Bank was relying on the data in the
financial statements in deciding whether to restructure his loans. Nev-
ertheless, neither Dalton nor LaLonde informed the Bank about the
true nature of the "loan to stockholder" entries.
_________________________________________________________________
1 A true "loan to stockholder" would have been supported by a loan
agreement or promissory note, with specified repayment terms and an
arms-length interest rate. Dalton did not comply with any of these for-
malities.

                    3
The Bank ultimately agreed to restructure Dalton's loans. The par-
ties restructured three loans and a line of credit by combining the four
bad debts into one. ENT Medicine executed a new note secured by
its corporate assets, and both Dalton and his wife supplied personal
guarantees. The Loan Restructure Agreement that Dalton signed con-
tained the following proviso:

          The information that has been furnished to the Bank by the
          Borrowers in connection with the restructure of the Notes is
          accurate in all material respects and does not contain any
          untrue statements of a material fact or omit to state any
          material fact necessary to make such statements, in light of
          the circumstances under which they were made, not mis-
          leading.

By May of 1993, Dalton was in default under the Restructure
Agreement. On March 9, 1995, Dalton filed for bankruptcy under
chapter 7. On June 12, 1995, the Bank brought adversary proceedings
to exclude Dalton's debt to the Bank from discharge under
§ 523(a)(2)(B).2 The Bank argued that Dalton's debt to the Bank
should be excluded from discharge because the "loan to stockholder"
entries on ENT Medicine's financial statements were false representa-
tions made with the intent to deceive the Bank.

On September 30, 1996, the bankruptcy court found that the loan
to stockholder entries were materially false statements respecting
ENT Medicine's financial condition. The bankruptcy court also found
that the Bank reasonably relied on the loan to stockholder entries in
restructuring Dalton's loans. The court nevertheless held that Dalton's
debt to the Bank was dischargeable because it found that the Bank
had failed to establish that Dalton intended to deceive the Bank.

On January 22, 1997, the Bank appealed to the district court, which
held that the bankruptcy court's finding that Dalton did not intend to
deceive the Bank was clearly erroneous. The district court therefore
_________________________________________________________________
2 The Bank also attempted to exclude the debt from discharge based on
other subsections of § 523(a). The Bank's argument under
§ 523(a)(2)(B), however, is the only basis for exclusion raised in the
instant appeal.

                    4
reversed and remanded the case to the bankruptcy court for a determi-
nation of the amount of the debt that would be excluded from dis-
charge under § 523(a)(2)(B).

The bankruptcy court entered an order on remand granting judg-
ment in favor of the Bank for $338,619.19. Dalton appealed to the
district court. The district court, with a new judge hearing the appeal,
reversed its original finding in favor of the Bank and held that Dal-
ton's debt to the Bank should be discharged because the bankruptcy
court's original finding of no intent to deceive was not clearly errone-
ous. The Bank appeals, arguing that the bankruptcy court's finding
that Dalton did not intend to deceive the Bank was clearly erroneous.

II.

The Bank argues that Dalton's debt to the Bank should be excluded
from discharge under § 523(a)(2)(B) of the Bankruptcy Code. Section
523(a)(2)(B) provides:

          (a) A discharge under section 727 . . . 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 condi-
          tion;

          (iii) on which the creditor to whom the debtor is liable for
          such money, property, services, or credit reasonably relied;
          and

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          (iv) that the debtor caused to be made or published with
          intent to deceive; . . . .

11 U.S.C. § 523(a)(2)(B). A creditor attempting to exclude a debt
from discharge under § 523(a)(2)(B) has the burden of proving each
of these elements by a preponderance of the evidence. See Grogan v.
Garner, 498 U.S. 279, 291 (1991). The bankruptcy court held that the
Bank established the first three elements of § 523(a)(2)(B). The court,
however, found that the Bank did not establish that Dalton intended
to deceive the Bank. Intent to deceive is the only element at issue in
the instant appeal.

In bankruptcy cases, we "review de novo the decision of the district
court, effectively standing in its place to review directly the findings
of fact and conclusions of law made by the bankruptcy court." Butler
v. David Shaw, Inc., 72 F.3d 437, 440 (4th Cir. 1996). Rule 8013 of
the Federal Rules of Bankruptcy Procedure sets out the standard of
review of a bankruptcy court's judgments. Rule 8013 provides that
"[f]indings of fact shall not be set aside unless clearly erroneous, and
due regard shall be given to the opportunity of the bankruptcy court
to judge the credibility of the witnesses." Fed. R. Bankr. P. 8013. A
trial court's findings of fact are clearly erroneous"when, although
there is evidence to support it, the reviewing court on the entire evi-
dence is left with the definite and firm conviction that a mistake has
been committed." In re Green, 934 F.2d 568, 570 (4th Cir. 1991). The
Supreme Court has stated "[w]here there are two permissible views
of the evidence, the factfinder's choice between them cannot be
clearly erroneous." Anderson v. City of Bessemer City, 470 U.S. 564,
574 (1985). We review the bankruptcy court's legal conclusions de
novo. See In re Weiss, 111 F.3d 1159, 1166 (4th Cir. 1997).

A debtor will rarely admit that he intended to deceive a creditor.
Courts have thus held that intent to deceive under§ 523(a)(2)(B) can
be inferred from the totality of the circumstances surrounding the
debtor's acts, including the debtor's knowledge of or reckless disre-
gard for the accuracy of his financial statements. See In re Cohn, 54
F.3d 1108, 1119 (3d Cir. 1995) ("[A] creditor can establish intent to
deceive by proving reckless indifference to, or reckless disregard of,
the accuracy of the information in the financial statement of the
debtor when the totality of the circumstances supports such an infer-

                    6
ence."); In re Miller, 39 F.3d 301, 305 (11th Cir. 1994) ("Reckless
disregard for the truth or falsity of a statement combined with the
sheer magnitude of the resultant misrepresentation may combine to
produce the inferrence [sic] of intent [to deceive].") (quoting In re
Albanese, 96 B.R. 376, 380 (Bankr. M.D. Fla. 1989) (correction in
original)); In re Batie, 995 F.2d 85, 90 (6th Cir. 1993) ("[S]ection
523(a)(2)(B)(iv) is met if a debtor is reckless when submitting finan-
cial statements that he knows are not true, not only if the debtor pos-
sesses a subjective intent to deceive.").

In the instant case, Dalton knew that the Bank was relying on his
financial statements in deciding whether to approve the restructuring
of his delinquent loans. Dalton also knew that LaLonde characterized
his salary as a "loan to stockholder" for tax purposes. At trial, Dalton
admitted that the term "loan to stockholder," without any background
information, would mean a "loan to a stockholder." Nevertheless,
Dalton failed to advise the Bank that the only significant asset of ENT
Medicine was, in fact, a mischaracterization of Dalton's salary that
Dalton used to stay ahead of the IRS. Dalton's failure to advise the
Bank of the true nature of the "loan to stockholder" entries is espe-
cially troubling given that Dalton represented in the Restructure
Agreement that the financial statements did not"omit to state any
material fact necessary to make such statements, in light of the cir-
cumstances under which they were made, not misleading."

Dalton's mischaracterization of his salary as a"loan to stock-
holder" thus constituted, at a minimum, gross recklessness. Dalton's
gross recklessness in submitting false financial statements creates an
inference that he intended to deceive the Bank. See Batie, 995 F.2d
at 90. Courts have found that the inference of an intent to deceive
does not compel a finding of intent to deceive; rather, the bankruptcy
court, in weighing the credibility of witnesses, has the discretion to
find no intent to deceive if the debtor provides a reasonable basis for
recklessly submitting a false financial statement. See, e.g., Miller, 39
F.3d at 305-06.

Here, however, Dalton's only explanation for submitting the false
financial statements is that he relied on the advice of LaLonde. Dalton
fails to recognize that "the ultimate responsibility for the omission of
a material statement rests solely with the Debtor." In re Drehsen, 190

                     7
B.R. 441, 446 (M.D. Fla. 1995). Dalton cannot abdicate his responsi-
bility for recklessly providing false information to the Bank by point-
ing his fingers at LaLonde. This principle is especially true in the
instant case because Dalton is an educated man who was well aware
of the dire financial situation of his business.

In sum, the only permissible view of the evidence is that Dalton
intended to deceive the Bank by acting with gross recklessness in sub-
mitting false financial statements. Dalton seeks refuge in the fact that
the clearly erroneous standard of review applies in the case at bar.
The clearly erroneous standard of review, however, does not allow
this court to blindly defer to the bankruptcy court's findings. Here,
after reviewing the record as a whole, we are "left with the definite
and firm conviction that a mistake has been committed." Green, 934
F.2d at 570. The bankruptcy court's finding that Dalton did not intend
to deceive the Bank was clearly erroneous. We therefore hold that
Dalton's debt to the Bank is nondischargeable under§ 523(a)(2)(B).

III.

Because of the unique procedural posture of this case, Dalton has
not had the opportunity to challenge the bankruptcy court's calcula-
tion of the amount of his nondischargeable debt to the Bank.3 The
judgment of the district court is therefore reversed and the case
remanded to the district court where Dalton may again pursue his
appeal of the amount of his debt to the Bank.

REVERSED AND REMANDED
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3 On remand after the Bank's first appeal to the district court, the bank-
ruptcy court held that the amount of Dalton's nondischargeable debt to
the Bank was $338,619.19.

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