                        UNITED STATES COURT OF APPEALS
                            FOR THE EIGHTH CIRCUIT


                                     No. 96-1893


FIRST NATIONAL BANK,                   *
 of Olathe, Kansas,                           *
                                       *
      Plaintiff - Appellant,                         *
                                       *             Appeal from the United
          v.                           *             States District Court for
                                       *             the Southern District of
Iowa
THOMAS M. PONTOW;                      *
ANN M. PONTOW,                                *
                                       *
      Defendants - Appellees.                 *


                         Submitted:     November 18, 1997

                                                     Filed: April 17, 1997


Before BEAM, FRIEDMAN*, and LOKEN, Circuit Judges.



FRIEDMAN, Circuit Judge.

      A bankruptcy court rejected a bank's attempt to bar the discharge of
a   bankrupt's   indebtedness   to    the   bank   under   §   523(a)(2)(B)   of   the
Bankruptcy Code.       The bankruptcy court held that the bank had not
established two conditions for denying discharge under that provision: that
the creditor had reasonably relied upon false information provided by the
debtor, and that the debtor had intended to deceive the bank.          The district
court affirmed, holding that the bankruptcy court's findings that the bank
did not establish reasonable reliance were not clearly erroneous.                   We
affirm.




      *
         DANIEL M. FRIEDMAN, of the United States Court of Appeals for the Federal
Circuit, sitting by designation.
                                           I.


        A.    In June 1991 the appellee, Pontow, purchased the majority of the
stock    of    Hal    Hardin   Apparel,   Inc.   ("Hardin   Apparel"),   a   clothing
manufacturer.        Pontow financed the purchase through loans to Hardin Apparel
from the appellant First National Bank of Olathe ("the Bank"), which also
covered working capital for the business.            Initially, the Bank provided
$250,000 on an inventory term loan guaranteed by the Small Business
Administration ("SBA") and $250,000 on an accounts receivable line of
credit ("the A/R loan").        The A/R loan allowed Hardin Apparel to borrow the
lesser of $250,000 or eighty percent of eligible accounts receivable,
defined as those sixty days or less past due.          In October, 1991, the Bank
increased the A/R loan limit to $350,000 and in January, 1992 to $500,000,
both subject to the eighty percent limitation.


        Hardin Apparel executed promissory notes to the Bank for the loans.
The notes and loans were secured by security arrangements covering all of
Hardin Apparel's assets.        Pontow personally guaranteed the foregoing debts
of Hardin Apparel.


        Each time Hardin Apparel drew on the line of credit, it was required
to submit to the Bank a borrowing base certificate ("certificate").              This
was a printed one-page form which required Hardin Apparel to provide
specified information, including both eligible and ineligible accounts
receivable, the amount to be borrowed and comparisons with previous
certificates.        During the period the financing arrangements were operative,
Hardin Apparel submitted certificates to the Bank.             Hardin Apparel also
submitted with the certificates its balance sheet.
        Upon receiving a certificate, a Bank clerk verified the calculations
to insure that the loan balance after the draw did not exceed eighty
percent of the accounts receivable shown on the certificate.             If the loan
sought met that standard and the certificate was properly completed, the
clerk issued a draw slip.        If the loan balance exceeded that percentage or
there were other problems, the clerk had to obtain a loan officer's




                                           2
approval to do the draw slip.       In the majority of instances, the clerk
issued the draw slip without obtaining loan officer approval.


     Brian Roby ("Roby"), the loan officer responsible for the Hardin
Apparel loan, on four separate occasions approved payments in excess of
eighty percent of the accounts receivable shown on the certificate.           He did
so based on "assurances" by Pontow that the loan balance would not exceed
that limit for a significant length of time.           Roby also approved loans
although the certificates did not reconcile the balance of accounts
receivable with that shown on the previous certificate.         He also approved
loans where the certificate included accounts receivable that were more
than sixty days past due and where " on account items" were treated as
"eligible accounts receivable," although he was aware that the deviations
had the effect of overstating accounts receivable.


     Unlike other documents relating to the loans, the Bank did not retain
the certificates, either as part of the loan file or elsewhere.             Instead,
it disposed of them shortly after the loans for which they were filed had
been made.


     When Hardin Apparel was unable to pay two notes due in May and June
1992, which covered part of the A/R loan, Roby extended the time for
payment until July 1, 1992.     In granting the extensions, Roby thought that
Hardin   Apparel's   accounts   receivable   balance   was   that   shown    on   the
certificate.   Roby doubted whether an extension would have been granted had
he known then that accounts receivable were actually $100,000 less than
what was represented on the certificates.


     In June, 1992, Pontow and his accountant told Roby that Hardin
Apparel needed an additional $200,000 loan to survive the fall 1992 season.
Roby recommended to the bank's loan committee that it approve both the
additional $200,000 loan, to be guaranteed by the SBA, and renewal of the
$500,000 A/R loan.    The SBA, however, refused the guarantee.




                                       3
       Roby, realizing that Hardin Apparel would not survive the season
without some infusion of money, resubmitted both requests to the loan
committee, which approved them.          When Roby submitted the request he was
"generally" aware of Hardin Apparel's accounts receivable as represented
on the certificates.       The note covering the additional $200,000 was due on
September 15, 1992 but was extended to April 1, 1993.            When Roby extended
the due date he was aware of and claimed to have relied upon the accounts
receivable balance as stated in the certificates and the balance sheets for
that time period.


       In December 1992, Pontow and his accountant advised the Bank that
Hardin Apparel would not survive the winter, unless it merged with another
company and received another $200,000 loan.          The Bank refused to lend any
more money without a guarantee by the SBA, which the SBA refused to make.
The Bank called the loans on February 4, 1993.


       Shortly thereafter, the parties met to discuss liquidation of the
collateral, and the accountant provided Roby with a balance sheet listing
the accounts receivable at $318,272.           Roby wanted to know why that amount
was    so   much   lower    than   the   accounts   receivable   shown   on   recent
certificates, but Pontow refused to explain the discrepancy.


       What had occurred was that Hardin Apparel repeatedly had overstated
its accounts receivable by (1) delaying the recording of payments received
from those accounts, and (2) including in accounts receivable those that
were between sixty to ninety days overdue, although under its agreement
with the Bank eligible accounts receivable were limited to those no more
than sixty days past due.          These overstatements originally began because
Hardin Apparel's bookkeeper and her clerk were too busy timely to record
payments on accounts receivable.         At some point Pontow instructed the clerk
to exclude from accounts receivable only those ninety days or more past
due.   He told the clerk and the bookkeeper that the reason for doing that
was to overstate accounts receivable so that Hardin Apparel would have
sufficient cash flow.




                                           4
The Bank's expert witness, an accountant, testified that from June 17, 1992
until December, 1992 (with the exception of the August 31, 1992 balance
sheet), the certificates and balance sheets overstated Hardin Apparel's
accounts receivable by at least $200,000.


       B.    In October, 1993, Pontow filed in the United States Bankruptcy
Court for the Southern District of Iowa a voluntary petition under Chapter
7 of the Bankruptcy Code.        The Bank filed a complaint in the bankruptcy
court seeking, among other things, a determination that Pontow's obligation
under his guaranty of Hardin Apparel's loans was not dischargeable under
11 U.S.C. § 523(a)(2)(B).    The amended complaint alleged that between April
1, 1992 and February 10, 1993 Pontow "induced" the Bank "to make, extend,
renew, and make further advances on the loans" to Hardin Apparel by
submitting to the Bank "statements that overstated the balance of Hal
Hardin Apparel, Inc.'s accounts receivable," on which the Bank "reasonably
relied and which were made or published by . . . Pontow with the intent to
deceive, all within the meaning of 11 U.S.C. § 523(a)(2)(B)."


       After an evidentiary hearing, the bankruptcy court** held that the
Bank   had   not   established   that   Pontow's   indebtedness   to   it   was   not
dischargeable.     Ruling from the bench, the bankruptcy court found that the
certificates contained false statements "regarding the financial condition
of the debtor or the debtor's business," but that the Bank had not relied
upon those statements in extending the loans.        The court stated that "the
certificates were in fact, just a means by which a request for money based
on the line of credit would be accomplished."       The court further found that
if the Bank had relied upon the statements in the certificates, "the
reliance is not reasonable."      Finally, the bankruptcy court found that the
Bank had not established that Pontow had made the false statements "with
the intent to deceive" the Bank.




       **
       The Honorable Lee M. Jackson, United States Bankruptcy Judge for the
Southern District of Iowa.

                                         5
      On the Bank's appeal, the United States District Court for the
Southern District of Iowa*** affirmed.         The court held that the bankruptcy
court's findings that the Bank had failed to prove that it had relied upon
Hardin Apparel's financial statements and the certificates, and that any
reliance the Bank placed upon them was unreasonable, were not clearly
erroneous.     It stated that "[e]vidence supported the bankruptcy court's
conclusion that the borrowing base certificates were merely a means to
request funds be advanced under a line of credit."             The court ruled that
because it "finds substantial evidence supports the bankruptcy court's
decision that the Bank did not prove two essential elements in section
523(a)(2)(B)," it was unnecessary to decide whether the bankruptcy court
correctly found that Pontow did not intend to deceive the Bank.


                                         II.


      Section 523(a)(2)(B) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(B)
(1994) provides that a discharge in bankruptcy does not cover any money
indebtedness obtained by


             (B) use of a statement 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.



      To bar a discharge, the creditor must prove each of the foregoing
elements by a preponderance of the evidence.           Grogan v. Garner, 498 U.S.
279, 286-7 (1991); Valley Nat'l Bank v. Bush (In re Bush), 696 F.2d 640,
644 n. 4 (8th Cir. 1983).




      ***
          The Honorable Charles R. Wolle, United States District Judge for the Southern
District of Iowa.

                                           6
       Subsection       (A)   of    this    provision        bars    discharge     of    a     money
indebtedness obtained by "false pretenses, a false representation, or
actual      fraud, other than a statement respecting the debtor's or an
insider's financial condition."                  Subsection (A) does not require the
creditor to prove the four elements of subsection (B).


       Since subsection (B) covers only statements "respecting a debtor's
. . . financial condition" and subsection (A) excludes such statements, the
subdivisions "are . . . expressly mutually exclusive."                        Barclays Am./Bus.
Credit, Inc. v. Long (In re Long), 774 F.2d 875, 877, n.1 (8th Cir. 1985).


       In the bankruptcy court, the district court and this court the
parties treated the case as involving subsection (B).                        Although Count III
of    the   Bank's    complaint      in    the    bankruptcy        court    relied     upon   both
subsections (A) and (B), it also stated that the false statements regarding
Hardin Apparel's accounts receivables that Pontow submitted to the Bank
"constitute     materially         false   written       statements         respecting    [Hardin
Apparel's] financial condition . . . within the meaning of 11 U.S.C. §
523(a)(2)(B)."       The stipulated facts to which the parties agreed included:
"J.   The statements made on the Borrowing Base Certificates concerning Hal
Hardin Apparel's accounts receivable constitute statements respecting Hal
Hardin Apparel's financial condition."                 The bankruptcy court, noting that
the complaint was "focusing on 11 U.S.C. § 523(a)(2)(B)," referred to the
stipulated fact quoted above and stated that "we have these statements in
writing regarding the financial condition of the debtor or the debtor's
business . . . ."


       The district court quoted the language of subsection (B), noted that
the bankruptcy court "received evidence relevant to the elements set out
in § 523(a)(2)(B)," and concluded that "substantial evidence supports the
bankruptcy court's decision that the Bank did not prove two essential
elements in section 523(a)(2)(B)."                    In this court the parties' briefs
discussed      solely    subsection        (B).        The    question       of   the    possible
applicability of subsection (A) was raised by the court at oral argument,
and the Bank did not believe it applicable.




                                                  7
      We think it appropriate that we decide this case on the basis of the
statutory provision that the parties, the bankruptcy court and the district
court deemed applicable.   The question of which provision applies turns on
whether the certificates and financial statements Hardin Apparel submitted
to the Bank were statements "respecting the debtor's or an insider's
financial condition."      Some courts have held that such statements are
limited to balance sheets showing the debtor's net worth.       See, e.g.,
Gehlhausen v. Olinger (In re Olinger), 160 B.R. 1004, 1009 (Bankr. S.D.
Ind. 1993); Jokay Co. v. Mercado (In re Mercado), 144 B.R. 879, 885 (Bankr.
C.D. Cal. 1992).   Other courts have construed the phrase more broadly.   In
Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060, 1060-61 (4th
Cir. 1984), the court said: "Congress did not speak in terms of financial
statements.    Instead it referred to a much broader class of statements --
those respecting a debtor's . . . financial condition."     In In re Long,
this court stated that an allegation that the bankrupt "obtained excessive
loans by misrepresenting the value of its inventory" is an allegation that
"concerns the financial condition [of the debtor] and is thus governed by
11 U.S.C. § 523(a)(2)(B)." In re Long, 774 F.2d at 877 (footnote omitted).
We cannot say that the treatment of this case by the bankruptcy and
district courts as involving § 523(a)(2)(B) was such clear error that we
should now consider and determine whether § 523(a)(2)(A) was the applicable
provision.


                                    III.


      The bankruptcy court, which saw and heard the witnesses, found that
the   Bank had not relied upon the misstatements in Hardin Apparel's
certificates and balance sheets, that any such reliance would have been
unreasonable, and that Pontow had not intended to deceive the Bank.       The
district court upheld the findings on the lack of reasonable reliance as
not clearly erroneous, and therefore did not reach the lack of intent
finding.     We agree with the district court that the reasonable reliance
findings are not clearly erroneous and therefore also do not reach the lack
of intent issue.
      In a proceeding to bar a discharge under § 523(a)(2)(B), "We utilize
the same



                                      8
standard of review as that of the district court." Miller v. Farmers Home
Admin. (In re Miller), 16 F.3d 240, 242 (8th Cir. 1994).                  "We review the
bankruptcy court's legal conclusions de novo and its factual findings under
the clearly erroneous standard." Id. at 242-3; Jones v. Sinclair Oil Corp.
(In re Jones), 31 F.3d 659, 661 (8th Cir. 1994).                    The determinations
regarding lack of reasonable reliance are findings of fact. Thul v. Ophaug
(In re Ophaug), 827 F.2d 340, 341 (8th Cir. 1987) (stating that "we need
not and do not reach the question of whether the Bankruptcy Court's finding
of   fact   on    the   issue   of    reasonableness      [of    reliance]   is   clearly
erroneous").


       With respect to reliance, the district court correctly held that
"[s]ubstantial evidence supports the bankruptcy court's finding that the
Bank did not rely on the Hal Hardin financial statements and borrowing base
certificates."      The Bank made A/R loans despite Hardin Apparel's failure
to supply all the financial information called for in the certificates.
On   four   occasions,    the     Bank   made     loans   even   though   the   resulting
indebtedness exceeded eighty percent of the accounts receivable.                       The
Bank's discarding of the certificates shortly after they were submitted,
instead of retaining them as part of the Bank's records covering the loans,
strongly suggests that the Bank did not rely upon those documents in making
the loans.       As the district court concluded, "[e]vidence supported the
bankruptcy court's conclusion that the borrowing base certificates were
merely a means to request funds be advanced under a line of credit."


       Indeed, it appears that the Bank made the additional $200,000 loan
not because of reliance upon Hardin Apparel's reported accounts receivable,
but because the Bank realized that without that loan the debtor would fail
and jeopardize whatever chance the Bank had of recovering its loans.                   The
bank loan sheet, prepared before the decision to renew the A/R loan,
indicates that the Bank believed that Hardin Apparel's accounts receivables
were   significantly      lower      ($388,000)    than   the    amount   shown   on   the
certificates covering the same period (more than $500,000).
       The determination of the reasonableness of a creditor's reliance is
to be made "`in




                                            9
light of the totality of the circumstances.'          Coston v. Bank of Malvern (In
re Coston), 991 F.2d 257, 261 (5th Cir. 1993) (en banc).                  Among other
things, a court may consider `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.'      Id."   In re Jones, 31 F.3d at 662.


     As the bankruptcy court found, there were a number of "red flags"
that should have alerted the Bank to the possibility that the statements
in the certificates were inaccurate and induced it to investigate the
situation before extending credit, such as the debtor's failure to provide
all the information called for in the certificates.         Moreover, the debtor's
obvious financial problems, shown by its inability timely to pay two notes
in May and June, 1992, the need for an additional $200,000 loan to enable
the debtor to survive the fall 1992 season, and the SBA's refusal to
guarantee that loan should have made the Bank question the accuracy of the
financial information Hardin Apparel submitted to it.


     To     be sure, there was evidence in the record that would have
permitted the bankruptcy court to reach the opposite conclusions from those
it reached.    That, however, is not enough to make the bankruptcy court's
findings clearly erroneous.        "Where 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 have concluded that the record supports the bankruptcy court's findings.
That is the end of our inquiry.




                                          10
     The judgement of the district court, affirming the bankruptcy court's
determination that the debt is discharged, is affirmed.


A true copy.


     Attest:


           CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT




                                   11
