                 NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                            File Name: 05a0780n.06
                            Filed: September 7, 2005
                            File Name: 05a0780n.06
                            Filed: September 7, 2005

                                           No. 04-5753

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT


In re: JOHNNY A. CRIM,                           )
                                                 )
       Debtor.                                   )
                                                 )
THE PEOPLES STATE BANK, now                      )    ON APPEAL FROM THE UNITED
known as CITIZENS UNION BANK,                    )    STATES DISTRICT COURT FOR THE
                                                 )    WESTERN DISTRICT OF KENTUCKY
       Appellant,                                )
                                                 )
v.                                               )
                                                 )
JOHNNY A. CRIM,                                  )
                                                 )
       Appellee.                                 )
                                                 )


Before: SILER and GIBBONS, Circuit Judges; STAFFORD District Judge.*

       JULIA SMITH GIBBONS, Circuit Judge. Peoples State Bank (now Citizens Union Bank)

(“Bank”) brought an action against debtor Johnny Crim under 11 U.S.C. § 523(a)(2)(A) seeking an

exception to the discharge of a particular debt. The bankruptcy court and the district court entered

judgment in favor of Crim. For the reasons set forth below, we affirm the judgment of the

bankruptcy court.


       *
         The Honorable William Stafford, United States District Judge for the Northern District of
Florida, sitting by designation.

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                                                I.




       Debtors Johnny Crim, James Milton Conkwright, and Ghassem Oshrieh were associates in

a real estate development and home building business, Double J Construction. The Bank provided

financing for the business on multiple occasions. In January 2000, Crim, Conkwright, and Oshrieh

approached the Bank to obtain a loan for the purpose of purchasing 26 acres of unimproved land.

A loan of $49,000.00 was approved and was secured by the 26 acres of land. In February 2000, they

obtained a second loan for the purpose of building a new home on that property. The Bank extended

the financing in the original loan to $92,000.00. In April 2000, they obtained a third loan for

$25,000.000 to purchase a backhoe and work truck.

       In October 2000, Crim, Conkwright, and Oshrieh approached Theresa Kinslow, a loan officer

at the Bank, to obtain a new loan for the construction of a second house on the development

property. They presented a set of plans to Kinslow, an appraisal was made, and the Bank approved

the loan entitled “Interim Construction Loan” on October 25, 2000. The amount of the loan was

$100,350.00. Crim made a number of withdrawals from the loan funds from October 31, 2000 until

February 14, 2001, totaling over $99,000.00.1 The draws were initiated by Crim’s contacting a loan

officer at the Bank via phone and requesting a draw of a particular amount. The loan officer then

checked the computer system to verify that the funds were available. Because the funds were



       1
       There were withdrawals of $10,000.00 each on October 31, 2000, November 13, 2000,
November 27, 2000, January 12, 2001, January 24, 2001, February 5, 2001, and February 14, 2001.
There was also a withdrawal of $20,000.00 on December 4, 2000, and $9,000.00 on December 20,
2000.

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available, the loan officer processed the draw. Kinslow did not personally authorize the draws, nor

was any inquiry made into the purpose of the draws or construction progress on the second house.



        After the last withdrawal, Kinslow determined that a second house was not being built with

the funds. The real estate venture ultimately proved unsuccessful, and Crim, Conkwright, and

Oshrieh each filed for Chapter 7 bankruptcy protection in November 2001. All of the

aforementioned notes have either been paid or waived by agreement, with the exception of the

October 2000 loan. The Bank brought a complaint seeking an order that would hold the proceeds

from the October 2000 loan to be a non-dischargeable debt. The Bank entered into settlement

agreements with Conkwright and Oshrieh regarding the October 2000 loan. Therefore, the

bankruptcy court only heard evidence regarding Crim.

        When questioned about his intentions regarding the loan at issue, Crim testified that he fully

intended to build the second house. Conkwright also testified that the intent was to use the money

from the loan to build the second house, that he understood that the sole purpose of the loan was for

construction of the second house, and that he did not change his mind about building the house until

about forty days after the loan was obtained. Conkwright also stated that he believed Crim intended

to build the house. Kinslow testified, “I believe their intent, at that time, was to build a house. . . .

[T]hey never made any mention of using this loan as a line of credit. Nor did I.” As the bankruptcy

court stated: “When asked if she believed that the Defendant intended to borrow the money, build

a second home, sell the house, make a profit and pay back the Bank, Ms. Kinslow again answered

in the affirmative.”




                                                   3
       The bankruptcy court held that the objection to discharge by the Bank failed based on Crim’s

testimony, the statements of other witnesses, and the entire record in the case. The district court

affirmed the bankruptcy court. The Bank filed its notice of appeal to this court on June 23, 2004.

                                                 II.

       “In appeals from the decision of a district court on appeal from the bankruptcy court, the

court of appeals independently reviews the bankruptcy court’s decision, applying the clearly

erroneous standard to findings of fact and de novo review to conclusions of law.” Am. HomePatient,

Inc. v. Official Comm. of Unsecured Creditors, et al. (In re Am. HomePatient), Nos. 03-6500, 03-

6501, 2005 WL 1949548, at *2 (6th Cir. Aug. 16, 2005) (quoting Zirnhelt v. Madaj (In re Madaj),

149 F.3d 467, 468 (6th Cir. 1998)).

       The bankruptcy code provides:

       (a) A discharge under section 727 . . . 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 . . . (A) false pretenses, a false
       representation, or actual fraud, other than a statement respecting the debtor’s or an
       insider’s financial condition.

11 U.S.C. §523(a)(2)(A). This court held in Rembert v. AT & T Universal Card Services, Inc. (In

re Rembert), 141 F.3d 277, 280-281 (6th Cir. 1998):

       In order to except a debt from discharge under § 523(a)(2)(A), a creditor must prove
       the following elements: (1) the debtor obtained money through a material
       misrepresentation that, at the time, the debtor knew was false or made with gross
       recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the
       creditor justifiably relied on the false representation; and (4) its reliance was the
       proximate cause of loss.

Id. (footnote omitted).

       The Bank asserts that three of the bankruptcy court’s factual findings are clearly erroneous.

The Bank first argues that the bankruptcy court erred in finding that Crim did not obtain money

                                                 4
through a material misrepresentation that he knew was false or made with gross recklessness as to

its truth. The Bank also asserts that the bankruptcy court’s conclusion that Crim made preparations

for the construction of the second home was clearly erroneous. Finally, the Bank asserts that it was

clear error for the bankruptcy court to find that Crim did not intend to deceive the creditor.

       The Bank asserts that the bankruptcy court clearly erred in regard to its finding that Crim did

not obtain money through a material misrepresentation that he knew was false or made with gross

recklessness as to its truth because his intent was “to remain in business so that he could get away

from his current employment.” Put another way, the Bank asserts that Crim did not withdraw the

funds to build the house, but rather to keep his company afloat. The Bank emphasizes that, though

Crim was aware that the loan’s purpose was construction of the second house, there was no real

progress made on construction of the house at the time all of the loan principal had been withdrawn.

The bank’s argument overlooks the proof in the record that Crim did in fact intend to build the

second house at the time the loan was made and asks us only to focus on the time period during

which draws were made and the actual building of the second house became less likely. Whatever

the merit of this argument might be in a typical construction loan situation, with progress inspections

and draws dependent on progress, the argument fails here. Crim’s affirmative representations in this

case were all made at the time the loan was procured, and any omissions at the time the draws were

obtained were apparently not material to the bank, given the approval process. Therefore, there is

no error in the bankruptcy court’s finding that Crim did not obtain money through a material

misrepresentation that he knew was false or made with gross recklessness as to its truth.

       The bankruptcy court likewise did not err in finding that the debtors made preparations for

the construction of the second house and that those preparations negated intent to defraud the Bank.


                                                  5
The Bank stresses that any work done on or for the second house was solely to sell the first house.

The bankruptcy court found that the ground for the second house was prepared, a driveway was dug,

and windows were ordered and paid for. The Bank asserts that the ground for the second house was

cleared and the driveway cut because a bulldozer was already on site due to construction of the first

house and it would be cheaper to have the bulldozing work done for the second house at that time.

The Bank also argues that “it simply does not make sense that windows would be purchased when

there was no other fabrication on the lot.” Despite the Bank’s argument, the finding by the

bankruptcy court that Crim and the other debtors performed work and ordered materials in

preparation for construction of the second house was not clearly erroneous.

       Finally, the bankruptcy court did not err in finding that Crim did not intend to deceive the

Bank. Essentially, the Bank’s argument is that Crim made draws against a line of credit knowing

that he had no ability to repay. The Bank also states, “Crim withdrew funds to pay expenses

incurred in other projects, including the first house financed by the Bank, as well as to cover general

business expenses, and to make payments to himself.” The bankruptcy court considered all of the

relevant facts and circumstances including the testimony of Crim, Conkwright, and Kinslow and the

preliminary work done on the second house and concluded that Crim did not intend to deceive the

Bank. This finding is not clearly erroneous.

       Crim concedes that the Bank is correct in its assertion that the interest payments totaling

$13,000.00 were not interest on the loan in question. Crim argues that the fact that any payments

were made, regardless of which loan they were applied to, negates any fraudulent intention. There

is no merit to Crim’s argument that the erroneous finding of fact by the bankruptcy court should

work in his favor.


                                                  6
       However, the Bank’s argument that the “legal conclusion of the Bankruptcy Court, which

was affirmed by the District Court, that the Defendant did not intend to defraud the Creditor is based

in part upon a clearly erroneous finding of fact that the Debtors made over $13,000.00 in interest

payments on the loan at issue, which should be set aside” also lacks merit. Setting aside this

erroneous factual finding does not alter the result in this case.

                                                  III.

       For the foregoing reasons, the judgment of the bankruptcy court is affirmed.




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