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In Re James M. Lavender v. James M. Lavender


November 3, 2010



In re James M. Lavender


Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court's Local Rule 32.1.1. When citing a summary order in a document filed with this court, a party must cite either the Federal Appendix or an electronic database (with the notation "summary order"). A party citing a summary order must serve a copy of it on any party not represented by counsel.

1 At a stated term of the United States Court of Appeals for the Second Circuit, held at the 2 Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on 3 the 3rd day of November, two thousand ten.

PRESENT: DEBRA ANN LIVINGSTON, 6 DENNY CHIN, 7 Circuit Judges, 8 DAVID G. LARIMER, 9 District Judge.*fn1

5 UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED, AND DECREED 6 that the judgment of the district court be AFFIRMED.

7 Debtor-Appellant James M. Lavender appeals from a judgment of the Eastern District of 8 New York (Seybert, J.), denying his appeal from an order of the United States Bankruptcy Court 9 (Trust, J.) that found the debt owed to Creditors Manheim's Pennsylvania Auction Services, Inc. and 10 Manheim Automotive Financial Services, Inc. ("Manheim") to be non-dischargeable in bankruptcy 11 under 11 U.S.C. § 523(a)(2)(B). We assume the parties' familiarity with the underlying facts, the 12 procedural history, and the issues presented for review.

13 "As an order of the district court functioning in its capacity as an appellate court in a 14 bankruptcy case is subject to plenary review, we 'independently review the factual determinations 15 and legal conclusions of the bankruptcy court.'" In re Jackson, 593 F.3d 171, 176 (2d Cir. 2010) 16 (citation omitted) (quoting In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1994)). We 17 review the Bankruptcy Court's factual findings for clear error and review de novo its conclusions 18 of law. Id. This Court also engages in de novo review of a grant or denial of summary judgment, 19 "viewing the record in the light most favorable to the party against whom summary judgment is 20 sought." In re Novartis Wage & Hour Litig., 611 F.3d 141, 150 (2d Cir. 2010). Under Federal Rule 21 of Civil Procedure 56(c), "the district court must consider all 'pleadings, depositions, answers to 22 interrogatories, and admissions on file, together with the affidavits,' in determining whether there 23 is a genuine issue of material fact." Davis v. New York, 316 F.3d 93, 100 (2d Cir. 2002) (quoting 24 Fed. R. Civ. P. 56(c)); see also Fed. R. Bankr. P. 7056 (making Fed. R. Civ. P. 56 applicable in 25 adversary proceedings in bankruptcy).

1 We review the Bankruptcy Court's decision regarding sanctions for abuse of discretion. See 2 In re Highgate Equities, Ltd., 279 F.3d 148, 151 (2d Cir. 2002). Recognizing that "the [bankruptcy] 3 court is better situated than the court of appeals to marshal the pertinent facts and apply the 4 fact-dependent legal standard that informs its determination as to whether sanctions are warranted," 5 we are nevertheless "mindful that a [bankruptcy] court would necessarily abuse its discretion if it 6 based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the 7 evidence." Id. at 152 (alterations in original) (internal quotation marks omitted) (quoting Sussman 8 v. Bank of Israel, 56 F.3d 450, 456 (2d Cir. 1995)); see also In re Kalikow, 602 F.3d 82, 91 (2d Cir. 9 2010).

10 Debtor first appeals the Bankruptcy Court's denial of his motion for summary judgment in 11 a hearing held on March 28, 2007. He claims that because the Bankruptcy Court refused to consider 12 Creditors' opposition to his motion for summary judgment, there was no evidence establishing a 13 disputed question of material fact with respect to the issue of whether Manheim reasonably relied 14 on a financial statement Lavender was alleged to have submitted in 1998.*fn2 Because reasonable 15 reliance must be demonstrated by a creditor to establish that a debt owed to it is non-dischargeable 16 in bankruptcy under 11 U.S.C. § 523(a)(2)(B), Debtor argued that, given the alleged absence of 17 disputed fact on this point, he was entitled to summary judgment on Creditors' claim.

18 As an initial matter, the record does not reflect that the Bankruptcy Court in fact expressly 19 refused to consider Creditors' papers in opposition. Even if it had, Debtor's motion for summary 1 judgment does not establish an absence of any genuine question of material fact such that he would 2 have been entitled to summary judgment in the first place. Manheim, in its response to Debtor's 3 interrogatories, had indicated that it intended to call Robert Slade as a witness at trial, who would 4 testify that Manheim Automotive Financial Services relies on the information provided by debtors 5 in such financial statements in general and did so specifically in this case. In disputing this 6 contention, Debtor highlighted the absence of any evidence regarding Manheim's efforts to verify 7 or analyze the financial information Lavender provided, other than in consulting a credit reporting 8 agency, and argued that Manheim was already obligated to increase the credit limit under the terms 9 of a promissory note signed in 1997, that there was no indication that the loan was being reworked, 10 and that Manheim had not been concerned with previous breaches by the Debtor of the existing 11 credit limit, such that it could not claim to be truly concerned with the maximum limitations set out 12 in the promissory notes.

13 None of these contentions establish that there was no question of material fact with regard 14 to whether Creditors relied on the financial statement in granting Debtor not just an increase in his 15 line of credit but also an "extension, renewal or refinancing" of his existing line of credit, as indeed 16 the Bankruptcy Court ultimately found was the case here. The conclusion that credit was renewed 17 or extended could be drawn, as the Bankruptcy Court noted, from the similarity in terms between 18 the promissory notes executed by Debtor in 1994 and 1998, both of which were included in Debtor's 19 motion for summary judgment. Moreover, while Creditors did not demonstrate in opposing this 20 motion for summary judgment that they had conducted perfect due diligence, this fact alone did not 21 remove any question of fact with respect to the reasonableness of their reliance, particularly given 22 the admitted length of their relationship with Lavender at the time he allegedly submitted the 23 financial statement in 1998. Thus, even without considering the evidence produced in Creditors' 4 1 motion opposing summary judgment, there was still a genuine question of material fact as to 2 reasonable reliance, and the Bankruptcy Court properly denied Debtor's motion for summary 3 judgment.

4 Debtor further contends that sanctions should have been granted by the Bankruptcy Court 5 based on the untimely filing of Creditors' opposition to his motion for summary judgment, their 6 untimely disclosure of an additional witness and additional documents, the failure to file an initial 7 disclosure statement as required by Rule 7026 of the Federal Rules of Bankruptcy Procedure, and 8 their failure to answer interrogatories under oath or have them signed by the person making them. 9 He asserts that these purported failures entitled him to sanctions under Rules 7033 and 7037 of the 10 Federal Rules of Bankruptcy Procedure, which make Rules 33 and 37 of the Federal Rules of Civil 11 Procedure applicable in adversary proceedings in bankruptcy.

12 With respect to Rule 37, governing the alleged discovery abuses, in considering a decision 13 to exclude evidence under this rule, we have identified as relevant factors: "(1) the party's 14 explanation for the failure to comply with the [disclosure requirement]; (2) the importance of the 15 testimony of the precluded witness[es]; (3) the prejudice suffered by the opposing party as a result 16 of having to prepare to meet the new testimony; and (4) the possibility of a continuance." Patterson 17 v. Balsamico, 440 F.3d 104, 117 (2d. Cir. 2006) (alterations in original) (quoting Softel, Inc. v. 18 Dragon Med. & Scientific Commc'ns, Inc., 118 F.3d 955, 961 (2d Cir.1997)).*fn3 The Bankruptcy 19 Court was well within its discretion not to impose sanctions in this case. Debtor cites one case that

1 remanded to the district court a decision to deny expenses under Rule 37, when the district judge 2 stated in open court that he would award a party expenses in connection with the other party's 3 failure to appear for a deposition, but then denied expenses without explanation. Novak v. Wolpoff 4 & Abramson LLP, 536 F.3d 175, 177 (2d Cir. 2008). Even there, however, we noted that "[w]e have 5 never held that Rule 37(b)(2) expenses are mandatory and need not do so here." Id. at 178. Here, 6 as the District Court noted, Creditors' lawyer did offer an explanation for the failure to timely 7 produce evidence, with respect to both the original failure to produce documents within the 8 discovery period and producing additional documents and a witness in opposing the motion for 9 summary judgment, an explanation that the Bankruptcy Court was free to credit. The judge also was 10 free to find that any prejudice Debtor suffered here, for example, having to drive to the office of 11 Creditors' lawyers to conduct discovery of documents at a time when not all the documents were 12 available, was not substantial. Debtor was also able to depose the witness who was produced after 13 the close of discovery and to file another motion for summary judgment after the new evidence had 14 been disclosed. While the testimony and documents produced were certainly important, they were 15 not produced, as in Patterson, a mere ten days before trial. See 440 F.3d at 118. Deciding not to 16 issue sanctions for the alleged discovery violations was thus well within the Bankruptcy Court's 17 discretion.

18 With respect to the claim that interrogatories were not signed, Debtor asserts that while 19 Creditors' lawyer undertook to have the documents signed at the sanctions hearing, it was never in 20 fact done. However, Debtor's motion for sanctions was denied without prejudice. To the extent he 21 is complaining of a continued failure to comply that allegedly prejudiced him at trial, that argument 22 is waived based on a failure to present it to the Bankruptcy Court. See Allianz Ins. Co. v. Lerner, 23 416 F.3d 109, 114 (2d Cir. 2005). To the extent he is complaining only of the initial decision not 6 1 to issue sanctions, the lack of any meaningful prejudice clearly supported the judge's decision not 2 to impose sanctions. As a result, there is no abuse of discretion with respect to the denial of any of 3 the claims for sanctions. 4 Finally, Debtor challenges the Bankruptcy Court's finding at trial that Creditors reasonably 5 relied on Debtor's 1998 financial statement to extend their financing plan with the Debtor and to 6 increase his line of credit. This Circuit had held that:

7 Although the reasonableness requirement of § 523(a)(2)(B)(iii) presents a low 8 threshold . . . to meet, whether [a party] has met that threshold is a question of fact. 9 . . . The reasonableness of reliance requires the fact finder to consider "the totality 10 of the circumstances," and we recognize that the bankruptcy court is "most familiar" 11 with this factual setting and has had the opportunity to judge the credibility of the 12 witnesses.

14 In re Bonnanzio, 91 F.3d 296, 305 (2d Cir. 1996) (quoting Matter of Coston, 991 F.2d 257, 261-62 15 (5th Cir. 1993)). Because of its factual nature, we review the district court's finding that there was 16 actual reliance and that the reliance was reasonable for clear error. 17 With respect to actual reliance, the internal notes put into evidence by Creditor, referencing 18 the property owned by Debtor in Long Island in justifying the decision to increase the credit limit, 19 and the testimony from Michael Wynn, Manheim's Director of Operations in the fall of 1998, that 20 he personally relied on Debtor's financial statement in extending credit easily suffice to establish 21 that the Bankruptcy Court's finding was not clearly erroneous.

22 With respect to the reasonableness of that reliance, Lavender's primary argument is that the 23 finding of reasonableness here was improper given the allegedly insufficient investigation by 24 Creditors in light of certain "red flags" in the 1998 financial statement submitted by Debtor. 25 However, no significant red flags were present. The only potential reasons for concern were the 26 increases in Lavender's net worth from November 1996 to September 1998, from $936,000 to 1 $1,850,000. However, as the Bankruptcy Court expressly recognized, the change in overall net 2 worth and the changes in individual categories of assets purportedly held by the Debtor were not 3 inherently suspicious, particularly given Lavender's tax reports from 1996 and 1997 to which 4 Creditors had access, indicating an adjusted gross income of over $400,000 in both years. Debtor 5 also claims that Manheim's investigation of the claims made in the 1998 financial statement was 6 generally insufficient. However, given the circumstances in this case, the Bankruptcy Court's 7 finding that Creditors sufficiently investigated the statement so as to be able reasonably to rely on 8 it was not clearly erroneous. At the time Manheim received the statement, it had a relationship with 9 Lavender that had lasted for over four years. There is testimony that Manheim had satisfied itself 10 that the Debtor's wife had given a personal guaranty for the loan and that it had a bank letter and 11 proof of dealer's license from the Debtor, although the Bankruptcy Court was not able to determine 12 whether Manheim verified Lavender's insurance. It had also obtained tax returns and a credit report 13 from Lavender. In the face of this evidence, the Bankruptcy Court's finding that reliance was 14 reasonable was not clear error.

15 The Appellant also argues that the extension of credit to $900,000 in 1998 was irrelevant, 16 whether because the limit had already been raised to that level in 1997, because Manheim had 17 indicated in the past that it was not overly concerned when Lavender's business exceeded its then 18 $500,000 limit, or because the money that was eventually owed was less than the previous credit 19 limit, such that the extension did not play a causal role in any loss to Creditors. As the District Court 20 noted, however, the Bankruptcy Court specifically found there was actual and reasonable reliance 21 on the 1998 financial statement not just in increasing Debtor's line of credit but also in extending 22 or renewing the existing line of credit. This finding was not clearly erroneous, given the similarity 23 in terms between the promissory note executed in 1994 and that executed between the parties in 8 1 1998 and the testimony from Wynn that the line of credit was reviewed on an annual basis. As a 2 result, the Bankruptcy Court's finding that Manheim reasonably relied on the Debtor's 1998 3 financial statement both to renew the financing agreement and increase Debtor's line of credit was 4 not clear error.

5 We have considered Debtor's other arguments on appeal and find that they are without merit 6 or moot. For the foregoing reasons, the judgment of the district court is hereby AFFIRMED.

FOR THE COURT: Catherine O'Hagan Wolfe, Clerk

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