IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________________

No. 92-4399 Summary Calendar _____________________________

IN THE MATTER OF: RODNEY DALE COSTON and BILLIE KATHERINE COSTON, Debtors.

RODNEY DALE COSTON and BILLIE KATHERINE COSTON, Appellants,

versus

BANK OF MALVERN, Appellee. _________________________________________________

Appeal from the United States District Court for the Eastern District of Texas

_________________________________________________

(October 30, 1992)

Before KING, DAVIS, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

In this bankruptcy case, Debtors-Appellants Rodney and Billie

Coston (the Costons) appeal two rulings of the bankruptcy

court))one procedural and the other substantive))and the

affirmations of those rulings by the district court, in favor of

Appellee, Bank of Malvern (the Bank). The Costons ask us to

reverse the bankruptcy court's rulings that (1) the Bank timely

filed its motion for non-dischargeability of a loan, and (2) the

loan itself was not a dischargeable debt. Concluding that the

bankruptcy court erred in its determination of non-dischargeability

of the debt, we reverse that court's decision and the subsequent affirmance thereof by the district court.

I

FACTS AND PROCEDURAL HISTORY

Both of the Costons were employees of American Airlines. They

resided part of the time in Malvern, Arkansas, where Rodney's

family had been long-time residents, and the other part of the time

in Athens, Texas. In Malvern, they purchased a pleasure-boat

manufacturing operation, which became the Coston Corporation. In

furtherance of that business, the Costons took out a series of

loans from the Bank, the first of which))the one here at issue))was

for $175,000.

To obtain the $175,000 loan (and others), the Costons were

required to submit a joint financial statement to the bank. On

that statement, Rodney represented that his account in his

employer's retirement plan was worth $1.2 million (which it was)

and was readily convertible into cash (which it was not). At

several meetings with representatives of the Bank after filing the

statement, Rodney reiterated those representations. The court

found that the bank, in making the loan, relied on Rodney's

representation that the retirement fund was readily convertible to

cash.

By the late 1980s, the Costons had begun to experience

business and financial problems. On January 25, 1989, the Bank and

the Arkansas Development and Finance Authority (ADFA), another the

Coston's Arkansas creditors, filed a petition in the bankruptcy

2 court for the Western District of Arkansas, forcing the Costons

into involuntary bankruptcy. The next day the Costons filed a

voluntary petition in the bankruptcy court for the Eastern District

of Texas. Pursuant to bankruptcy rule 1014(b),1 ADFA filed a

notice of stay with the bankruptcy court in Texas, which notice

informed that court of the requirement that it stay all proceedings

involving the Costons. The court in Texas had already set March 1,

1989, as the date for the first meeting of creditors and was in the

process of setting other deadlines when it was informed of the

stay. Given the pre-existence of the Arkansas proceedings and the

rule 1014(b) stay, the court in Texas cancelled the creditors'

meeting and in essence put the bankruptcy proceedings in Texas on

hold pending disposition by the court in Arkansas of a motion to

determine proper venue.

On May 10, 1989, the bankruptcy court in Arkansas entered an

order dismissing the involuntary petition, effectively

resuscitating the Texas proceeding. The bankruptcy court in Texas

then set the initial meeting of creditors for July 10, 1989.

Within sixty days after this meeting, the Bank filed its "Complaint

Objecting to Discharge" of the $175,000 note. At that point, and

consistently thereafter, the Costons argued that the Bank's

objection to discharge was untimely because it was not filed within

sixty days following the March 1, 1989, meeting,2 even though that

meeting had been cancelled by the bankruptcy court in Texas under

1 BANKR. R. 1014(b) (1988). 2 See BANKR. R. 4004, 4007.

3 the Rule 1014(b) notice of stay from its counterpart in Arkansas.

The bankruptcy court in Texas rejected the Costons' argument

because the Bank's motion had been filed within sixty days after

the July 10, 1989, meeting. The court reasoned that the

requirement to file within sixty days of the March 1, 1989, meeting

had been nullified))not merely postponed and rescheduled))by the

stay notice under rule 1014(b) filed in the bankruptcy court in

Texas.3 The court went on to hold that the $175,000 note was not

dischargeable, explaining that the Costons had (1) submitted

materially false information to the bank to procure the loan, and

(2) the bank had reasonably relied on that information in making

the loan.

The Costons appealed the bankruptcy court's decision to the

district court, asserting error in the bankruptcy court's rulings

as to timeliness of the Bank's opposition to discharge and as to

the dischargeability of the debt. The district court affirmed

both rulings of the bankruptcy court after which the Costons timely

appealed those issues to this court.

3 One of the Costons' arguments is that the Arkansas proceeding was "facially invalid" because the Bank wrongly initiated a joint involuntary petition. The Arkansas bankruptcy court later dismissed the proceedings and one of the grounds was the joint character of the petition. Nevertheless, the force of that court's Rule 1014 stay order, which the Texas bankruptcy court correctly recognized, cannot seriously be questioned by the Costons simply because the Arkansas case was later dismissed.

4 II

ANALYSIS

A. Standard of Review

On appeal of a bankruptcy case, reviewing courts))district and

courts of appeals alike))must accept the findings of fact of the

bankruptcy court unless the findings are clearly erroneous.4 Also,

"due regard shall be given to the opportunity of the bankruptcy

court to judge the credibility of witnesses."5 Circuit courts are

guided by the rule that "[s]trict application of the clearly

erroneous rule is particularly important whe[n] the district court

has affirmed the bankruptcy court's findings."6 Matters of law,

however, are reviewed de novo.7

B. Timeliness of the Bank's Motion

Procedurally, the Costons argue that the Bank's failure to

file its objection to discharge of the $175,000 note within sixty

days of the March 1, 1989, scheduled date for the first meeting of

creditors makes that motion untimely. We join the bankruptcy and

district courts in disagreeing with this assertion. The Costons

rely on the strictness of bankruptcy Rule 4007(c), which commands

4 Wilson v. Huffman (In re Missionary Baptist Found. of America),

, 1142 (5th Cir. 1987); see In re Niland,

(5th cir. 1987). 5 BANKR. R. 8013. 6 Missionary Baptist Found., 818 F.2d at 1142. 7 See Matter of Monning's Dept. Stores, Inc.,

(5th Cir. 1991).

5 that "[a] complaint to determine the dischargeability of any debt

pursuant to § 523(c) of the Code shall be filed no later than 60

days following the first date set for the meeting of the

creditors."8 The Costons cite no less than twenty-five cases to

this court to inform us of the meaning and rigidity of that phrase.

But not one of those cases))or for that matter any of the cases

cited to the district court))deal with a situation involving a stay

under Rule 1014(b).

Rule 1014(b) mandates:

If petitions commencing cases under the Code are filed in different districts by or against (1) the same debtor, or (2) a partnership and one or more of its general partners, or (3) two or more general partners, or (4) a debtor and an affiliate, on motion filed in the district in which the petition filed first is pending and after hearing on notice to the petitioners, the United States trustee, and other entities as directed by the court, the court may determine, in the interest of justice or for the convenience of the parties, the district or districts in which the case or cases should proceed. Except as otherwise ordered by the court in the district in which the petition filed first is pending, the proceedings on the other petition shall be stayed by the courts in which they had been filed until the determination is made.9

In reliance on this rule, the Bank insists, and we agree, that it

did not have to file its motion in the Texas bankruptcy court until

the Arkansas case was terminated and the Rule 1014(b) stay was

lifted. The instant situation is precisely what is comprehended in

Rule 1014(b). Once the notice of stay was recognized by the court

in Texas, that court's proceeding was on hold indefinitely until

the stay was lifted and the proceeding in Arkansas dismissed. Only

8 BANKR. R. 4007(c)(emphasis added). 9 BANKR. R. 1014(b)(emphasis added).

6 when that occurred and a date was set for the initial meeting of

creditors did the sixty days begin to run. In the stay situation,

the new date set by the court is the "first date" under Rule

4007(c); it is not merely a rescheduling of the old pre-stay date.

Facially, this ruling may appear to contradict the wording of

Rule 4007(c). But, in light of Rule 1014(b), no other result is

sensible or possible. The Bank cannot be penalized because it did

not comply with a filing deadline of a court whose proceedings had

been stayed. To suggest that even though the court's proceedings

on the Costons' case had been stayed under Rule 1014(b), its filing

deadline under Rule 4007(c) continued to run is ludicrous. We

reject this procedural contention by the Costons.

C. Non-Dischargeability of the $175,000 Note

Substantively, the Costons argue that they were wrongfully

denied discharge of the $175,000 note under § 523 of the bankruptcy

code. The bankruptcy court properly noted that there are four

elements needed to deny a discharge: (1) a statement in writing

that is materially false; (2) that concerned the debtor's financial

condition; (3) the creditor's reasonable reliance on that

statement; and (4) the debtor's intent to deceive when the

statement was published.10

It is clear from the record, as the bankruptcy court found,

that the statement was (1) in writing, (2) materially false (the

asset had been improperly placed in the liquid assets column of the

10 See

(a)(2)(B).

7 form), (3) concerned with the debtor's financial condition, and (4)

made by the debtor with the intent to deceive.11 Like the district

court before us, however, we have a problem with the question of

the reasonableness of the Bank's reliance on the Coston's statement

that the $1.2 million retirement fund was readily convertible to

cash. We readily acknowledge that this case presents a close call

as to whether the reliance of the bank was reasonable. If we were

constrained by the clear error standard on this issue (as the

Costons wrongly assert we are))albeit such an assertion is against

their interest), there is no doubt that we would have to affirm.

We are not, however. Although reliance is an issue of fact,

reasonableness is an issue of law; and we conclude here that in

view of all of the Bank's activities in connection with this

matter, its reliance on the statement without seeking verification

simply was not commercially reasonable. We take additional comfort

in the knowledge that public policy favors discharge.12

We review de novo the determination of objective

reasonableness of the bank's reliance. In In re Jordan, we stated

that "[t]he reasonableness of reliance [under § 523] is a

11 The bankruptcy court stated: "I do not find Mr. Coston's testimony about his lack of knowledge about his retirement account credible. . . . I believe that he listed the retirement account in this specific location . . . to make it look much better than it was . . . ." We are bound by this finding. See BANKR. R. 8013. 12 See Perez v. Campbell,

(1971)(discussing the overarching desire to grant a "fresh start" in bankruptcy).

8 conclusion of law, which we review accordingly."13 It is clear that

in matters relating to questioning the applicability of the

discharge, all parts of an exception must be construed in view of

the strong presumption in favor of granting discharge.14

The district court relied on several factors in concluding

that the bankruptcy court had not erred in finding the Bank's

reliance reasonable. These included: (1) the Bank was small and

relatively unsophisticated; (2) the board members were personally

familiar with Rodney's family (we note that although the district

court stated that the officers of the Bank knew Rodney and had

participated in other loans with him, the bankruptcy court had

found that "it is clear that Rodney was not a regular customer of

the bank"); (3) the Bank had done business with the person from

whom the Costons were buying the business; (4) the president of the

Bank personally met with Rodney and discussed all aspects of the

financial statement; and (5) it was not obvious from the listing of

retirement benefits in the Costons' financial statement that

further investigation might be required to ascertain whether such

benefits were readily convertible to cash.

13

(5th Cir. 1991)(citing In re Bonnet,

(C.D. Ill. 1987), and In re Martz,

(Bankr. E.D. Pa. 1988)). 14 See Perez,

; In re Foreman,

(5th Cir. 1990)(stating that "'[i]n determining whether a particular debt falls within one of the exceptions to section 523, the statute should be strictly construed against the objecting creditor and liberally construed in favor of the debtor'" (quoting 3 COLLIER ON BANKRUPTCY ¶ 523.05A)); see also In re Jacox,

(Bankr. D. Neb. 1988)(stating that courts must look with a critical eye at creditor's proof of objective reasonableness of claimed reliance).

9 The district court concluded by quoting the In re Jordan

opinion and stating that although the Bank's practices might not

have been the most prudent, they were not unreasonable. Albeit

without great enthusiasm, we reach the opposite legal conclusion.

Given the closeness of the decision, we are ultimately swayed by

the strong presumption favoring discharge.15

In In re Jordan, we determined that a bank had reasonably

relied on financial data submitted to it by the debtor, and we

affirmed the refusal of discharge on that and other grounds. The

essence of the In re Jordan decision, however, was that there were

no "red flags" that should have alerted the bank to the need to

investigate the information submitted to it.

The In re Jordan court contrasted the facts of that case with

the facts of In re Mullet,16 in which reliance on the unverified

statements of the debtor was found not to be reasonable. The

Mullet case involved a young, unproven bank customer and "'there

were inconsistencies in his representations, [and] minimal

investigation and verification would have uncovered the falsity of

the representations.'"17 In In re Jordan, as in the instant case,

there were no inconsistencies in the information submitted. Unlike

In re Jordan, however, the Costons' main asset (an allegedly liquid

retirement fund) was obviously suspicious. The instant case does

not contain the same overt flags as the Mullet case))i.e., glaring

15 See In re Foreman,

. 16

(10th Cir. 1987). 17 Jordan,

(quoting Mullet,

).

10 inconsistencies in the submitted forms))yet it does contain a

significant factor that should have been))and shortly thereafter

became))a red flag: whether the retirement fund was truly a liquid

asset.

As the Bank belatedly learned, one simple procedure))a single

phone call to American Airlines))would have provided all of the

uncomplicated and unequivocal information needed to determine that

in fact the asset was not liquid. We are not so much convinced by

our view of what a prudent banker would do to verify a financial

statement as much as we are convinced by what the Bank did on the

occasion of subsequent advances it made to the Costons. On the

event of the second loan, the bank found a need to verify the

liquidity of the asset. We do not understand how reasonable

practice on the second loan requires verification and yet

reasonable practice on the first loan, when the liquidity was not

verified, allows non-verification.

The bankruptcy court held that, as the Bank knew about the

illiquidity when it made the second and subsequent loans, its

reliance on the financial statement was unreasonable and the loans

were not excepted from discharge. We fail to see how, as a matter

of law, such a minor bit of diligence))calling American Airlines))

could become a reasonable procedure between the first and second

loans. When a significant liquid asset is an employee's account in

a pension plan and the employee is obviously under retirement age,

even a small town banker personally familiar with all the players

knows or should know to "cut the cards." A reasonable banker

11 simply would not rely so extensively on the liquidity of such an

asset without verification.

We hold that the Bank was not reasonable in thus relying on

the listing of Rodney's account in the retirement fund as the main

source of the borrower's liquidity. This was demonstrated by the

Bank's own subsequent act of verifying liquidity))actually, the

lack of liquidity))in connection with the second loan. We

therefore conclude as a matter of law that the $175,000 loan was

subject to discharge and that the bankruptcy court erred in

excepting it under § 523.

III

CONCLUSION

The bankruptcy and district courts admittedly made close calls

concerning the reasonableness of the Bank's reliance on the

liquidity of the retirement plan account. Although we too

acknowledge that the issue is a close one, we conclude that, in

view of the Bank's subsequent behavior and the suspicious nature of

the asserted liquidity of the asset, reliance on the borrowers'

statement without so much as making a single telephone call to

verify liquidity simply was not reasonable. Therefore, although we

agree with the bankruptcy and district courts that the Bank's

motion for denial of discharge was timely, we determine that the

question of discharge was wrongly decided and we thus reverse the

decision of the bankruptcy and district courts on that issue and

render a judgment discharging the Costons' remaining debt to the

12 Bank.

REVERSED and RENDERED.

13