Colombo Bank, F.S.B. v. Sharp et al

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
COLOMBO BANK, F.S.B.,
:
Appellant
:
v. 	: Civil Action No. DKC 2007-2935
:
PETER A. SHARP, ET AL.,
:
Appellees
:
MEMORANDUM OPINION
Presently 	pending 	and 	ready 	for 	resolution 	is 	the 	appeal 	of
Colombo 	Bank, 	F.S.B. 	from 	the 	Orders 	of 	United 	States 	Bankruptcy
Judge 	Nancy 	V. 	Alquist 	denying 	Colombo 	Bank’s 	objection 	to
discharge, 	(bankr. 	papers 	61, 	82). 	Oral 	argument 	is 	deemed
unnecessary 	because 	the 	facts 	and 	legal 	arguments 	are 	adequately
presented 	in 	the 	briefs 	and 	record, 	and 	the 	decisional 	process
would 	not 	be 	significantly 	aided 	by 	oral 	argument. 	See
Fed.R.Bankr.P. 8012. 	For the reasons that follow, the court will
affirm the orders of the bankruptcy court.
I. 	Background
This appeal arises from a consolidated adversary proceeding in
which 	the 	bankruptcy 	court 	granted 	Peter 	and 	Joycelyn 	Sharp 	a
discharge 	of 	the 	debt 	they 	owed 	to 	Colombo 	Bank, 	F.S.B. 	(“the
Bank”). 	The 	Sharps 	defaulted 	on 	a 	loan 	from 	the 	Bank 	and
subsequently filed for Chapter 7 bankruptcy, under which their debt
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 1 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 1 of 20

1 The Bank sought relief under both 11 U.S.C. § 523(a)(2)(A)
and 	§ 	523(a)(2)(B) 	in 	its 	complaint, 	but 	failed 	to 	argue 	its 	§
523(a)(2)(A) claims at the hearing in September 2004. 	As a result,
the bankruptcy court entered judgment in favor of the Sharps on §
523(a)(2)(B) 	only, 	and 	did 	not 	address 	the 	§ 	523(a)(2)(A) 	claim.
(Bankr. Paper 61). 	After realizing its mistake, the Bank filed a
motion to reconsider with regard to the § 523(a)(2)(A) claim. 	The
bankruptcy 	court 	granted 	the 	motion, 	but 	did 	not 	make 	additional
findings 	of 	fact. 	On 	September 	28, 	2007, 	the 	court 	entered
judgment in favor of the Sharps on § 523(a)(2)(A). 	(Bankr. Paper
82).
2
to the Bank would be discharged. 	In the proceeding below, the Bank
sought 	a 	determination 	of 	nondischargeability 	under 	11 	U.S.C. 	§
523(a)(2)(A) 	and 	§ 	523(a)(2)(B). 1 	The 	bankruptcy 	court 	rejected
the 	Bank’s 	arguments 	and 	found 	that 	no 	exceptions 	to 	discharge
applied. 	The undisputed facts found by the bankruptcy court are as
follows.
Mr. 	Sharp 	is 	the 	founding 	member, 	president 	and 	sole
shareholder of First Charter Title Corporation. 	In either March or
April 	1995, 	Mr. 	Sharp 	approached 	the 	Bank 	for 	a 	$500,000 	loan 	to
fund 	an 	amount 	owing 	from 	a 	settlement 	agreement 	reached 	with 	a
client of First Charter. 	On September 25, 1995, the parties closed
on a $500,000 loan to be repaid within one year. 	As security for
the 	loan, 	the 	Bank 	received 	a 	mortgage 	which 	it 	believed 	was 	a
second priority lien on the Sharps’ Bethesda residence and a second
priority 	lien 	on 	the 	Sharps’ 	South 	Carolina 	vacation 	home. 	The
Bank did not know that its mortgage was in fact in third position
behind the first mortgages and an undisclosed second mortgage from
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 2 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 2 of 20

2 	The 	Sharps 	defaulted 	on 	the 	first 	priority 	mortgage 	after
they 	defaulted 	on 	the 	loan 	from 	the 	Bank. 	The 	foreclosure 	sale
yielded 	proceeds 	to 	pay 	the 	first 	priority 	lender’s 	encumbrance,
but not the debt owed to the Bank.
3
Signet Bank to secure a home equity line of credit in the amount of
$75,000 (“the Signet loan”).
At 	some 	point 	prior 	to 	closing, 	as 	part 	of 	the 	loan
negotiations, 	Mr. 	Sharp 	presented 	the 	Bank 	with 	a 	financial
disclosure 	statement 	dated 	December 	12, 	1994, 	which 	purported 	to
describe Mr. Sharp’s assets and liabilities. 	(Pl.’s Hr’g Ex. 3).
The 	principal 	assets 	listed 	were 	the 	ownership 	of 	First 	Charter
(valued at $3 million), the Sharps’ residence in Bethesda, Maryland
(valued 	at 	$1.3 	million), 	and 	the 	Sharps’ 	vacation 	residence 	in
South 	Carolina 	(valued 	at 	$525,000). 	The 	principal 	liabilities
listed were the first mortgages on each of the Maryland and South
Carolina 	properties 	(for 	$748,000 	and 	$367,000, 	respectively). 2
The financial statement did not list the Signet loan, even though
it had been recorded on March 6, 1995. 	The bankruptcy court found
that Mr. Sharp’s presentment of the December 1994 disclosure after
the Signet loan had been made was a fraudulent misrepresentation.
Also 	in 	connection 	with 	the 	loan 	negotiations, 	Mr. 	Sharp
provided a commitment for title insurance from American Pioneer, to
which 	was 	attached 	a 	title 	abstract 	of 	the 	Bethesda 	property
prepared by First Charter. (Pl.’s Hr’g Ex. 9). 	Although the title
abstract 	had 	an 	effective 	date 	of 	September 	11, 	1995, 	it 	did 	not
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 3 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 3 of 20

4
reflect the Signet loan. 	At the hearing below, Mr. Sharp attempted
to 	explain 	the 	deficiency 	by 	stating 	that 	the 	abstract 	had 	been
prepared 	in 	January 	1995. 	The 	bankruptcy 	court 	did 	not 	believe
that 	a 	professional 	title 	company 	would 	issue 	a 	title 	commitment
based 	on 	eight 	month-old 	title 	work. 	The 	court 	found 	that 	Mr.
Sharp “misled the Bank and that he deliberately furnished a stale
financial disclosure and a stale title abstract which he knew did
not reflect the Signet Loan and mortgage.” 	(Bankr. Paper 61, at 6)
(emphasis in original).
Although 	the 	bankruptcy 	court 	found 	that 	Mr. 	Sharp 	made 	a
fraudulent 	misrepresentation 	to 	the 	Bank, 	it 	found 	that 	the 	Bank
had 	not 	established 	the 	other 	elements 	necessary 	to 	require 	an
exception to discharge under either 11 U.S.C. § 523(a)(2)(A) or §
523(a)(2)(B). 	The court found that Mrs. Sharp did not know of the
misrepresentations and had no intent to deceive. 	The Bank does not
appeal the court’s findings regarding Mrs. Sharp.
The 	Bank 	presents 	the 	following 	four 	issues 	on 	appeal:
regarding 11 U.S.C. § 523(a)(2)(A), did the bankruptcy court err in
finding 	that 	the 	Bank 	did 	not 	justifiably 	rely 	on 	Mr. 	Sharp’s
fraudulent concealment of the Signet loan? and did the court err in
concluding that the fraudulent concealment of the Signet loan was
not 	the 	proximate 	cause 	of 	its 	loss? 	Regarding 	11 	U.S.C. 	§
523(a)(2)(B), 	did 	the 	court 	err 	in 	finding 	that 	the 	fraudulent
financial statement was immaterial to the Bank’s loss? 	and did the
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 4 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 4 of 20

5
court 	err 	in 	finding 	that 	the 	Bank’s 	reliance 	on 	Mr. 	Sharp’s
fraudulent financial statement was not reasonable?
II. 	Standard of Review
On appeal from the bankruptcy court, the district court acts
as an appellate court and reviews the bankruptcy court’s findings
of fact for clear error and conclusions of law de novo. 	See In re
Johnson, 	960 	F.2d 	396, 	399 	(4 th 	Cir. 	1992); 	In 	re 	Bryson 	Props.,
XVIII, 	961 	F.2d 	496, 	499 	(4 th 	Cir. 	1992). 	For 	findings 	of 	fact,
“due 	regard 	shall 	be 	given 	to 	the 	opportunity 	of 	the 	bankruptcy
court to judge the credibility of the witnesses.” 	Fed.R.Bankr.P.
8013. 	Under the clearly erroneous standard, a reviewing court will
not 	reverse 	“simply 	because 	it 	is 	convinced 	that 	it 	would 	have
decided the case differently.” Anderson v. Bessemer City, 470 U.S.
564, 	573 	(1985); 	Citizens 	Bank 	of 	Md. 	v. 	Broyles 	(Matter 	of
Broyles), 	55 	F.3d 	980, 	983 	(4 th Cir. 1995). 	A finding of fact is
clearly 	erroneous 	only 	when 	the 	reviewing 	court 	“is 	left 	with 	a
definite 	and 	firm 	conviction 	that 	a 	mistake 	has 	been 	committed.”
Anderson, 470 U.S. at 573 (quoting United States v. United States
Gypsum 	Co., 	333 	U.S. 	364, 	395 	(1948)). 	“Where 	there 	are 	two
permissible views of the evidence, the factfinder’s choice between
them cannot be clearly erroneous.” Id. at 574.
III. Analysis
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 5 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 5 of 20

6
In 	general, 	“[w]hen 	considering 	the 	applicability 	of 	an
exception 	to 	discharge, 	we 	construe 	the 	exception 	narrowly 	‘to
protect the purpose of providing debtors a fresh start.’” Nunnery
v. 	Rountree 	(In 	re 	Rountree), 	478 	F.3d 	215, 	219 	(4 th 	Cir. 	2007)
(citing Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130
(4 th 	Cir. 	1999)). 	The 	burden 	of 	proof 	is 	on 	the 	creditor 	to
establish 	by 	a 	preponderance 	of 	the 	evidence 	that 	its 	debt 	is
entitled 	to 	nondischargeability 	under 	§ 	523(a). 	Kubota 	Tractor
Corp. 	v. 	Strack 	(In 	re 	Strack), 	-- 	F.3d 	--, 	No. 	07-1200, 	2008 	WL
681809, at *3 (4 th Cir. March 11, 2008, released for publication May
1, 	2008); 	Grogan 	v. 	Garner, 	498 	U.S. 	279, 	291 	(1991); 	In 	re
Rountree, 478 F.3d at 220.
A. 	Nondischargeability for false pretenses, fraud, or false
misrepresentation: 11 U.S.C. § 523(a)(2)(A)
Title 	11 	U.S.C. 	§ 	523(a)(2)(A) 	disallows 	a 	discharge 	“for
money, property, services, or an extension, renewal, or refinancing
of credit, to the extent obtained by . . . false pretenses, a false
representation, or actual fraud, other than a statement respecting
the debtor’s or an insider’s financial condition[.]” 	In Field v.
Mans, 516 U.S. 59, 71 n.9 (1995), the Supreme Court of the United
States 	established 	that 	§ 	523(a)(2)(A) 	incorporated 	the 	“general
common 	law 	of 	torts.” 	The 	common 	law 	elements 	of 	fraudulent
misrepresentation include (1) a representation; (2) that the debtor
knew 	was 	false; 	(3) 	that 	he 	made 	with 	the 	intention 	of 	deceiving
the creditor; (4) that the creditor justifiably relied on; and (5)
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 6 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 6 of 20

7
that 	the 	creditor 	sustained 	the 	alleged 	loss 	and 	damage 	as 	the
proximate result of the false representation. 	See In re Rountree,
478 F.3d at 218. 	In the proceeding below, the Bank argued that Mr.
Sharp’s 	submission 	of 	a 	false 	title 	report 	was 	a 	fraudulent
misrepresentation 	that 	precluded 	discharge 	under 	§ 	523(a)(2)(A).
The 	bankruptcy 	court 	found, 	and 	the 	Bank 	does 	not 	challenge 	on
appeal, that Mr. Sharp’s omission of the Signet mortgage from the
title report was a fraudulent misrepresentation. 	The Bank contests
the bankruptcy court’s findings that the Bank was not justified in
relying 	on 	Mr. 	Sharp’s 	false 	misrepresentation 	and 	that 	the
misrepresentation was not the proximate cause of the Bank’s loss.
The conclusions regarding justifiable reliance and proximate cause
are findings of fact. 	Giovanni v. Grayson, Kubli & Hoffman, P.C.
(In re Giovanni), 324 B.R. 586, 593 (E.D.Va. 2005).
1. 	Justifiable Reliance
Justifiable 	reliance 	is 	an 	intermediate 	standard 	requiring
more than mere reliance but less than reasonable reliance. 	Field,
516 U.S. at 72-75. 	The Supreme Court explained that the inquiry is
a subjective one, as “[j]ustification is a matter of the qualities
and 	characteristics 	of 	the 	particular 	plaintiff, 	and 	the
circumstances 	of 	the 	particular 	case, 	rather 	than 	of 	the
application of a community standard of conduct to all cases.” Id.
at 	71 	(quoting 	R ESTATEMENT 	(S ECOND ) 	OF 	T ORTS 	§ 	545A, 	cmt. 	b). 	The
standard of justifiable reliance imposes no duty upon the recipient
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 7 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 7 of 20

8
of 	the 	representation 	to 	investigate, 	unless 	there 	are
circumstances 	that 	should 	arouse 	suspicion. 	The 	Supreme 	Court
explained 	that 	an 	individual 	is 	“required 	to 	use 	his 	senses, 	and
cannot 	recover 	if 	he 	blindly 	relies 	upon 	a 	misrepresentation 	the
falsity 	of 	which 	would 	be 	patent 	to 	him 	if 	he 	had 	utilized 	his
opportunity 	to 	make 	a 	cursory 	examination 	or 	investigation.”
Field, 516 U.S. at 71 (quoting R ESTATEMENT (S ECOND ) OF T ORTS § 541 cmt.
a 	(1976)). 	Thus, 	“only 	the 	disregard 	of 	‘red 	flags’ 	falls 	below
the 	justifiable-reliance 	standard.” 	In 	re 	Giovanni, 	324 	B.R. 	at
594; 	see 	also 	W. PROSSER , LAW OF TORTS 	§ 	108, 	at 	718 	(4 th 	ed. 	1971)
(“It 	is 	only 	where, 	under 	the 	circumstances, 	the 	facts 	should 	be
apparent 	to 	one 	of 	his 	knowledge 	and 	intelligence 	from 	a 	cursory
glance, 	or 	he 	has 	discovered 	something 	which 	should 	serve 	as 	a
warning that he is being deceived, that he is required to make an
investigation of his own.”).
Based on these principles, the bankruptcy court concluded that
the Bank did not justifiably rely on the title abstract prepared by
First Charter. 	The bankruptcy court identified several factors to
support its finding. 	First, the fact that the title abstract was
completed 	by 	Mr. 	Sharp’s 	company 	should 	have 	caused 	the 	Bank 	to
conduct an independent title check. 	The court noted that without
a 	preexisting 	relationship 	of 	trust 	and 	confidence, 	the 	Bank 	was
not justified in relying on Mr. Sharp’s self-produced title report.
Next, 	the 	court 	found 	that 	the 	Bank 	was 	“hot” 	to 	extend 	the 	loan
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 8 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 8 of 20

9
because it would mean increased business with First Charter. 	The
Bank’s 	eagerness 	itself 	was 	a 	red 	flag, 	as 	the 	Bank 	should 	have
recognized that its collective judgment could have been adversely
affected. 	The 	court 	further 	found 	that 	the 	stale 	financial
statement 	should 	have 	been 	a 	red 	flag 	to 	the 	Bank. 	In 	sum, 	the
Bank’s sophistication, the irregularity of the documents, and the
lack of history between the parties led the court to conclude that
the Bank’s reliance was not justified.
According 	to 	the 	Bank, 	the 	following 	comment 	from 	the
RESTATEMENT , which was cited in Field v. Mans, establishes that the
bankruptcy court’s conclusion was erroneous:
A, seeking to sell land to B, tells B that the
land is free from all incumbrances. By walking
across 	the 	street 	to 	the 	office 	of 	the
register 	of 	deeds 	in 	the 	courthouse, 	B 	could
easily 	learn 	that 	there 	is 	a 	recorded 	and
unsatisfied 	mortgage 	on 	the 	land. 	B 	does 	not
do 	so 	and 	buys 	the 	land 	in 	reliance 	upon 	A’s
misrepresentation. 	His 	reliance 	is
justifiable.
RESTATEMENT (S ECOND ) OF TORTS 	§ 	540 	cmt. 	b, 	illus. 	1 	(1977); 	see 	also
Field, 516 U.S. at 70. 	This general illustration is qualified by
the 	exception 	that 	one 	is 	not 	justified 	in 	relying 	on 	another’s
mere 	assertions 	where 	there 	are 	obvious 	indications 	that 	an
independent investigation may be necessary. 	Field, 516 U.S. at 71-
72.
As asserted by the Bank, the present case is analogous to the
illustration 	in 	the 	R ESTATEMENT , 	as 	the 	title 	abstract 	prepared 	by
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 9 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 9 of 20

10
First 	Charter 	is 	the 	equivalent 	of 	a 	statement 	by 	Mr. 	Sharp 	that
there 	were 	no 	encumbrances 	on 	the 	property. 	However, 	as 	the
bankruptcy 	court 	noted, 	there 	were 	red 	flags 	that 	should 	have
alerted 	the 	Bank 	to 	the 	need 	to 	investigate. 	Most 	notably, 	the
Bank 	ignored 	the 	suspicious 	financial 	statement. 	The 	financial
statement 	was 	nine 	months 	old 	by 	the 	time 	of 	closing, 	it 	was
completed on a “First National Bank of Maryland” form rather than
on a Colombo form, and it was not signed by Mrs. Sharp, even though
she 	was 	a 	signatory 	to 	the 	loan. 	(See 	Pl.’s 	Hr’g 	Ex. 	3). 	The
irregularity of this financial statement alone should have caused
the Bank to question Mr. Sharp’s assertions.
The Bank further contends that the bankruptcy court erred in
considering the Bank’s sophistication. 	The Bank cites In re Biondo
to 	demonstrate 	that 	a 	party’s 	sophistication 	does 	not 	per 	se
require 	it 	to 	make 	an 	investigation. 	In 	re 	Biondo 	is
distinguishable 	because 	there, 	the 	lender 	had 	no 	indication 	that
the 	debtor 	was 	deceiving 	it. 	In 	re 	Biondo 	stands 	for 	the
proposition that a lender is not required to make an investigation
merely because it is a sophisticated entity. 	By contrast, where,
as 	here, 	a 	party 	has 	knowledge 	and 	experience 	that 	makes 	it
particularly 	perceptive 	to 	warning 	signs, 	consideration 	of 	the
party’s sophistication is certainly warranted. 	Provident Bank v.
Merrick (In re Merrick), 347 B.R. 182 (Bankr.M.D.La. 2006), cited
by 	the 	bankruptcy 	court, 	is 	instructive 	on 	this 	point. 	In 	re
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 10 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 10 of 20

11
Merrick 	involved 	a 	lender 	that 	was 	in 	the 	business 	of 	making
mortgage 	loans. 	The 	borrower 	asserted 	that 	she 	had 	the 	power,
acting 	alone, 	to 	mortgage 	property 	left 	to 	her 	by 	her 	deceased
husband. 	During loan negotiations, the borrower gave the lender a
copy of her husband’s will, which explained that the borrower only
had a one-half interest in the property. 	The court found that the
lender’s 	reliance 	on 	the 	borrower’s 	assertions 	was 	not 	justified
because the lender could have discovered the false statement simply
by 	reading 	the 	will. 	Id. 	at 	188. 	Similarly, 	it 	was 	not
justifiable for the Bank to have relied on Mr. Sharp’s assertions
that 	were 	coupled 	with 	the 	financial 	statement, 	which 	the 	Bank
should have recognized as suspect.
The 	Bank 	also 	challenges 	the 	bankruptcy 	court’s 	factual
findings 	regarding 	the 	relationship 	between 	the 	Bank 	and 	First
Charter. 	The 	Bank 	insists 	that 	it 	was 	entitled 	to 	rely 	on 	the
title 	abstract 	produced 	by 	First 	Charter 	because 	they 	had 	a
preexisting 	relationship. 	At 	the 	hearing 	below, 	the 	parties
presented 	conflicting 	descriptions 	of 	the 	history 	of 	their
relationship. 	Mr. Sharp testified that First Charter had a long-
standing 	depository 	relationship 	with 	the 	Bank. 	The 	Bank 	also
submitted 	an 	internal 	loan 	approval 	memorandum 	drafted 	by 	Joel
Fernebok, 	the 	Bank’s 	former 	chairman, 	which 	stated 	that 	the 	Bank
“is 	benefiting 	[sic] 	from 	the 	operating 	and 	escrow 	accounts 	of
Charter 	title.” 	(Pl.’s 	Hr’g 	Ex. 	2, 	at 	2). 	The 	Bank 	argues 	that
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 11 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 11 of 20

3 	Mr. 	Fernebok’s 	deposition 	transcript, 	exhibit 	27 	at 	the
September 	2004 	hearing, 	has 	not 	been 	designated 	for 	inclusion 	in
the record and therefore the court cannot review the propriety of
the bankruptcy court’s reliance on the document.
12
the memorandum establishes that the Bank sought to further develop
a preexisting relationship. 	By contrast, Mr. Fernebok testified in
his 	de 	bene 	esse 	deposition 	that 	there 	was 	no 	preexisting
relationship between the parties, but one would be established upon
completion of the loan deal. 	The bankruptcy court did not make a
specific 	finding 	regarding 	the 	history 	of 	the 	parties’
relationship, but found that the parties did not have a preexisting
relationship of trust and confidence to justify the Bank’s reliance
on 	First 	Charter’s 	abstract. 3 	This 	finding 	is 	not 	clearly
erroneous, 	as 	it 	is 	not 	plainly 	contradicted 	by 	the 	internal
memorandum. 	Even 	if 	the 	parties 	had 	a 	preexisting 	depository
relationship, 	the 	nature 	of 	the 	relationship 	was 	not 	of 	the 	sort
that 	could 	support 	the 	Bank’s 	blind 	reliance 	on 	Mr. 	Sharp’s
assertions. 	The bankruptcy court aptly contrasted this case with
one 	from 	the 	First 	Circuit, 	in 	which 	the 	court 	held 	that
“[c]ertainly, 	the 	representations 	of 	a 	long-time 	customer 	with 	a
reputation for honesty and trustworthiness and an excellent track
record 	of 	consistent 	loan 	repayments 	was 	a 	basis 	on 	which 	to
justify reliance.” 	Sanford Inst. for Sav. v. Gallo, 156 F.3d 71,
76 (1 st Cir. 1998). 	Here, there was no such history to provide a
basis for the Bank’s reliance on Mr. Sharp’s representations.
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 12 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 12 of 20

13
The Bank also contests the court’s finding that its eagerness
to 	do 	a 	deal 	with 	First 	Charter 	was 	a 	red 	flag. 	The 	court 	found
that the Bank was “hot” to make the loan because it would result in
future business for the bank. 	The court based its finding on the
internal 	loan 	memorandum 	and 	Mr. 	Fernebok’s 	deposition. 	The
internal 	memorandum 	supports 	the 	finding 	that 	the 	Bank 	was
interested 	in 	developing 	a 	profitable 	relationship 	with 	First
Charter. 	(Pl.’s Hr’g Ex. 2, at 2). 	The Bank’s eagerness to enter
into 	the 	deal 	very 	well 	could 	have 	affected 	its 	judgment 	and
thoroughness in reviewing Mr. Sharp’s loan file. 	In light of these
factors, 	therefore, 	the 	bankruptcy 	court 	did 	not 	err 	in 	finding
that the Bank was not justified in relying upon Mr. Sharp’s self-
produced title abstract.
2. 	Proximate Cause
The Bank also challenges the bankruptcy court’s finding that
Mr. 	Sharp’s 	fraudulent 	misrepresentation 	was 	not 	the 	proximate
cause of the Bank’s loss. 	Proximate cause is both (1) causation in
fact, “loss suffered by one who justifiably relies upon the trust
of 	the 	matter 	misrepresented, 	if 	his 	reliance 	is 	a 	substantial
factor 	in 	determining 	the 	course 	of 	conduct 	that 	results 	in 	his
loss;” 	and 	(2) 	legal 	causation, 	“if 	the 	loss 	might 	reasonably 	be
expected to occur from the reliance.” In re Bowden, 326 B.R. 62, 89
(Bankr.E.D.Va. 2005) (citing R ESTATEMENT (S ECOND ) OF TORTS §§ 546, 584A
(1976)); 	see 	also 	Aoki 	v. 	Atto 	Corp. 	(In 	re 	Aoki), 	323 	B.R. 	803,
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 13 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 13 of 20

14
816 	(B.A.P. 	1 st 	Cir. 	2005); 	Britton 	v. 	Price 	(In 	re 	Britton), 	950
F.2d 602, 604 (9 th Cir. 1991). 	The bankruptcy court found that the
“primary credit underwriting criterion was the value of Mr. Sharp’s
business, 	followed 	by 	the 	value 	of 	the 	commissions 	he 	was
expecting” and the hoped-for second trust on the Bethesda property
as 	collateral 	was 	not 	a 	substantial 	factor 	informing 	the 	Bank’s
decision. 	(Bankr. Paper 82, at 11).
The 	Bank 	contends 	that 	the 	bankruptcy 	court’s 	finding 	was 	a
misinterpretation 	of 	the 	internal 	loan 	memorandum. 	The 	Bank
insists that the memorandum makes clear that collateralization of
the 	loan 	was 	a 	substantial 	factor 	in 	the 	Bank’s 	decision. 	To 	be
sure, much of the memorandum discusses the potential value of the
Bethesda 	and 	South 	Carolina 	properties, 	yet 	there 	is 	also
discussion 	of 	First 	Charter’s 	worth, 	the 	Sharps’ 	worth, 	and 	Mr.
Sharp’s anticipated commissions. 	The bankruptcy court found that
the 	Sharps’ 	estimated 	worth 	of 	$3 	million 	eclipsed 	the 	estimated
equity in the homes by such a large degree that the equity was not
a 	substantial 	factor. 	The 	bankruptcy 	court 	noted 	that 	the 	fact
that 	the 	Bank 	did 	not 	verify 	the 	amount 	of 	equity 	in 	the 	homes
further 	undermined 	its 	assertion 	that 	the 	second 	mortgage 	was 	a
substantial factor in its loan decision. 	Although the Bank did not
verify 	any 	of 	the 	valuations 	provided 	by 	Mr. 	Sharp, 	checking 	the
title on the Bethesda property was a relatively simple procedure as
compared to complex valuation models for businesses. 	Certainly, if
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 14 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 14 of 20

15
the 	proposed 	collateral 	was 	a 	substantial 	factor, 	the 	Bank 	would
have done its own title check. 	In light of these facts, it was not
clear error for the bankruptcy court to conclude that the Bank did
not 	prove 	by 	a 	preponderance 	of 	the 	evidence 	that 	the 	second
mortgage was a substantial factor in its decision.
B. 	Nondischargeability 	for 	false 	financial 	statements: 	11
U.S.C. § 523(a)(2)(B)
The 	Bank 	contends 	that 	the 	$500,000 	loan 	should 	not 	be
discharged 	because 	Mr. 	Sharp 	used 	a 	false 	financial 	statement 	to
procure the loan. 	Title 11 U.S.C. § 523(a)(2)(B) provides relief
for 	creditors 	who 	extend 	loans 	on 	the 	basis 	of 	written 	financial
statements that are later determined to be fraudulent:
(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–
. . .
(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[.]
The bankruptcy court found that Mr. Sharp intended to deceive the
bank 	by 	deliberately 	submitting 	a 	stale 	financial 	statement 	that
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 15 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 15 of 20

16
did 	not 	disclose 	the 	existence 	of 	the 	Signet 	loan. 	The 	court
concluded that discharge was appropriate nevertheless because the
omission 	of 	the 	Signet 	mortgage 	was 	not 	material 	to 	the 	Bank’s
decision to extend the loan and the Bank did not reasonably rely on
the statement. 	The Bank seeks reversal of the court’s materiality
finding 	and 	its 	determination 	that 	the 	Bank’s 	reliance 	on 	the
statement was not reasonable.
1. 	Materiality
To 	be 	materially 	false 	under 	11 	U.S.C. 	§ 	523 	(a)(2)(B), 	“a
false statement must be objectively material, meaning that it must
misrepresent 	information 	of 	the 	type 	that 	normally 	affects 	the
particular type of decision at issue.” 	L AWRENCE P. K ING , 4 C OLLIER ON
BANKRUPTCY ¶ 523.08[2][b] (15 th ed. 1996); see also Guar. Residential
Lending, Inc. v. Koep (In re Koep), 334 B.R. 364, 373 (Bankr.D.Md.
2005) (noting that “[a] written statement is materially false if it
paints 	a 	substantially 	untruthful 	picture 	of 	the 	defendant’s
financial 	condition”); 	In 	re 	Bogstad, 	779 	F.2d 	370, 	375 	(7 th 	Cir.
1985) 	(“A 	recurring 	guidepost 	used 	by 	courts 	[for 	determining
material falsity] has been to examine whether the lender would have
made 	the 	loan 	had 	he 	known 	of 	the 	debtor’s 	true 	financial
condition.”) (citing cases). 	The bankruptcy court concluded that
the 	Bank 	failed 	to 	establish 	the 	materiality 	of 	the 	undisclosed
$75,000 Signet mortgage, as the lending decision seemed to be based
primarily 	on 	the 	Bank’s 	interest 	in 	developing 	its 	relationship
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 16 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 16 of 20

17
with 	First 	Charter 	and 	the 	Sharps’ 	alleged 	wealth. 	The 	parties
disagree as to whether the materiality element is a question of law
or fact. 	The Bank insists that materiality is an objective inquiry
and therefore it is a question of law reviewed de novo. 	The Bank’s
argument is consistent with Third Circuit law. 	See Ins. Co. of N.
Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1115 (3 d Cir. 1995) (cited
by 4 COLLIER ON BANKRUPTCY ¶ 523.08[2][b]). 	Mr. Sharp maintains that
materiality is a question of fact. 	The Ninth Circuit has held in
some circumstances that materiality under § 523(a)(2)(B) is a fact
question. 	See La Trattoria, Inc. v. Lansford (In re Lansford), 822
F.2d 	902, 	904 	(9 th 	Cir. 	1987). 	While 	the 	Fourth 	Circuit 	has 	not
addressed this issue, it appears as though materiality is a mixed
question 	of 	law 	and 	fact, 	as 	the 	court 	is 	being 	asked 	to 	apply 	a
legal standard to a particular set of factual circumstances. 	Cf.
Tighe 	v. 	Ilda 	Valencia 	(In 	re 	Guadarrama), 	284 	B.R. 	463, 	468
(C.D.Cal. 2002)(addressing materiality in the context of revocation
of discharge under 11 U.S.C. § 727(d)(1)) (citing TSC Indus. Inc.
v. Northway, Inc., 426 U.S. 438, 450 (1976)).
The 	omission 	of 	the 	Signet 	mortgage 	was 	not 	a 	material
falsity. 	Although a third mortgage would have diminished the value
of the collateral and depleted the available sources for repayment,
under the circumstances of this case, the relatively small Signet
loan 	was 	not 	likely 	to 	have 	influenced 	the 	Bank’s 	decision. 	The
burden 	was 	on 	the 	Bank 	to 	establish 	by 	a 	preponderance 	of 	the
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 17 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 17 of 20

18
evidence that the existence of a $75,000 second mortgage would have
influenced its decision to lend the Sharps $500,000. 	The evidence
presented indicated the contrary. 	As the bankruptcy court found,
the relevant underwriting criteria were the value of First Charter,
followed by Mr. Sharp’s anticipated commissions, and the hoped-for
second mortgage was only a third consideration. 	The Bank failed to
establish 	that 	the 	$75,000 	Signet 	loan, 	which 	was 	between 	the
$750,000 	first 	loan 	and 	the 	$500,000 	Bank 	loan, 	would 	have
influenced 	its 	decision 	to 	extend 	the 	loan 	to 	the 	Sharps. 	The
Bank’s 	assertion 	that 	it 	was 	not 	in 	the 	practice 	of 	making 	third
priority 	mortgages 	does 	little 	to 	counteract 	the 	other 	evidence
that it was mainly concerned with the Sharps’ overall wealth. 	Such
an incremental increase in the Sharps’ liabilities did not paint a
“substantially 	untruthful 	picture” 	of 	their 	financial 	condition.
Accordingly, 	the 	court 	will 	affirm 	the 	bankruptcy 	court’s
conclusion that the financial statement was not materially false.
2. 	Reasonable Reliance
The bankruptcy court did not err in concluding that the Bank
did not reasonably rely on the false financial statement. 	Whether
reliance 	was 	reasonable 	is 	a 	question 	of 	fact. 	See 	Matter 	of
Broyles, 	55 	F.3d 	at 	983. 	The 	reasonableness 	determination 	is
objective 	and 	is 	made 	upon 	examination 	of 	the 	totality 	of 	the
circumstances. 	See In re Koep, 334 B.R. at 373.
[T]he reasonableness of a creditor’s reliance
on 	a 	financial 	statement 	should 	be 	judged 	by
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 18 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 18 of 20

19
comparing 	the 	creditor’s 	actual 	conduct 	with
(1) 	the 	creditor’s 	own 	normal 	business
practices, 	and 	(2) 	the 	standards 	and 	customs
of 	the 	industry, 	(3) 	in 	light 	of 	the
surrounding circumstances existing at the time
the application was made and credit extended.
Telco Leasing, Inc. v. Patch (In re Patch), 24 B.R. 563, 567 (D.Md.
1982); see also In re Cohn, 54 F.3d at 1117 (noting that relevant
circumstances 	include 	signals 	“that 	would 	have 	alerted 	an
ordinarily prudent lender to the possibility that the information
is inaccurate . . . [or] previous business dealings that gave rise
to a relationship of trust, or whether even minimal investigation
would 	have 	revealed 	the 	inaccuracy 	of 	the 	debtor’s
representations.”).
The bankruptcy court concluded that the Bank’s reliance on Mr.
Sharp’s stale financial statement was not reasonable. 	As discussed
above, 	the 	financial 	statement 	was 	a 	notably 	irregular 	document.
It 	was 	stale, 	not 	signed 	by 	both 	potential 	borrowers, 	and 	not
completed on a Colombo Bank form. 	Further, it was not reasonable
for 	the 	Bank 	to 	ignore 	these 	irregularities 	by 	merely 	relying 	on
the title report prepared by First Charter. 	The court explained,
“[t]he 	primary 	purpose 	of 	a 	title 	report 	is 	to 	verify 	the
borrower’s 	representations 	as 	to 	the 	state 	of 	title. 	In 	the
Court’s 	view, 	a 	lender 	relies 	on 	a 	title 	report 	supplied 	by 	the
borrower at its peril.” 	(Bankr. Paper 61, at 8, ¶ 10). 	The Bank
insists 	that 	this 	finding 	was 	erroneous 	because 	First 	Charter’s
title work was insured by an independent company, American Pioneer.
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 19 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 19 of 20

20
The 	Bank 	argues 	that 	American 	Pioneer’s 	reliance 	on 	the 	First
Charter title was reason enough for the Bank to have relied on it.
This 	argument 	is 	unpersuasive, 	as 	there 	is 	no 	evidence 	of 	the
practices 	or 	reputability 	of 	American 	Pioneer, 	and 	thus 	no 	basis
for 	the 	court 	to 	conclude 	that 	American 	Pioneer’s 	use 	of 	the
abstract 	could 	justify 	the 	Bank’s 	reliance. 	In 	sum, 	the 	Bank’s
reliance on the financial statement was not reasonable, as the Bank
ignored 	the 	irregularity 	of 	the 	document 	and 	failed 	to 	conduct 	a
very basic investigation into the status of the title. 	Therefore,
the bankruptcy court properly denied the Bank’s objection under §
523(a)(2)(B).
IV. 	Conclusion
For the foregoing reasons, the court shall affirm the judgment
of the bankruptcy court. 	A separate Order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
Case 8:07-cv-02935-DKC 	Document 7 	Filed 05/05/2008 	Page 20 of 20	Case 03-01098 Doc 101 Filed 05/05/08 Page 20 of 20