Vision Bank v. Woerner

Filing 14

OPINION AND ORDER:This Court finds no error in the factual findings and legal conclusion of the bankruptcycourt. Therefore, the bankruptcy courts order declaring the debt dischargeable is AFFIRMED. Signed by Senior Judge Charles R. Butler, Jr on 4/16/2012. (adk)

IN THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
In re:

)

NORMAN L. WOERNER,

)
Debtor

VISION BANK,

)
)

Appellant,

)

v.

)

NORMAN L. WOERNER,

)
Appellee.

CIVIL ACTION NO. 11-0269-CB-C

)

OPINION and ORDER
This matter is before the Court on appeal from the decision of the Bankruptcy Court in an
Adversary Proceeding. Vision Bank, the plaintiff in that proceeding, appeals the bankruptcy
court’s order declaring the debt of the appellee, Norman L. Woerner, to Vision Bank
dischargeable in bankruptcy. For reasons discussed below, the bankruptcy court’s order is
affirmed.
Background
Norman Woerner filed a Chapter 7 bankruptcy petition on August 6, 2009. On
November 20, 2009, Vision Bank instituted an adversary proceeding to determine the
dischargeability of Woerner’s debt to Vision Bank pursuant to 11 U.S.C. § 523(a)(2)(B). After
an evidentiary hearing, the bankruptcy court held that the debt is dischargeable. This appeal
followed.

The debt arises from a loan to Total Vision of the Gulf States (“Total Vision” or “the
company”) that was guaranteed by Woerner. Total Vision’s intended purpose was to install
video boxes in hotel rooms and condominiums across the country to provide on-demand video
and internet services. In 2006, Woerner took steps to acquire a controlling interest in Total
Vision. To do so, Woerner invested $2 million of his own money and assumed Total Vision’s
debt, which was considerable. But this was not enough to sustain the company. It needed an
additional $1.5 million to purchase new equipment for installation. Vision Bank, which had
previously loaned Total Vision $5 million,1 agreed to fund the line of credit if Woerner and one
of his companies,2 Wood Treaters, LLC, would guarantee the loan.
Vision Bank’s nondischargeability claim arises from Woerner’s failure to disclose Wood
Treaters’ contingent liability on a loan, or series of loans, from AmSouth Bank to various
Woerner-related entities. Less than two months before Vision Bank issued its commitment letter
on the Total Vision loan, Woerner and several of his limited liability companies, including Wood
Treaters, entered into a Master Loan Agreement with AmSouth. The Master Loan Agreement
actually involved several loans. The Wood Treaters’ loan consisted of a $1 million term note, a
line of credit up to $600,000 and a $400,000 equipment loan. Several other Woerner companies
received loans, up to $3.4 million in total. AmSouth required Mr. Woerner and his wife, as well
as all of the companies involved in the AmSouth loan, including Wood Treaters, to sign crossguaranty agreements. These cross-guaranty agreements made each entity contingently liable for

1

This loan had been paid down to $4.2 million.

2

Woerner had an interest in numerous business enterprises, hereinafter collectively
referred to as “the Woerner entities” or “the Woerner companies”.

2

the debt of the others. Consequently, Wood Treaters had up to $2 million in direct liability to
AmSouth plus up to $3.4 million in contingent liability to AmSouth.3
In connection with the Total Vision loan, Woerner and Ray McCraine, CFO of Woerner
Management, provided Vision Bank with numerous documents related to Woerner’s business
and personal finances. None of these documents disclosed Wood Treaters’ contingent liability to
AmSouth. Prior to closing, Vision Bank discovered several UCC-1 filings by AmSouth
reflecting liens on Wood Treaters’ assets. These UCC-1’s had not been provided by Woerner.
However, McCraine did provide Vision Bank with unsigned copies of the AmSouth/Wood
Treaters loans, which apparently reflected only Wood Treaters’ direct liabilities, i.e., the $1
million promissory note, the $600,000 line of credit and the $400,000 equipment loan. Vision
Bank never asked for signed copies of those loan agreements, nor did it ask for all documents
from the AmSouth loan. Woerner and McCraine also provided unaudited internal financial
reports to Vision Bank. These included monthly internal balance sheets and profit/loss statement
for each company. These internal financials contained no footnotes. Pursuant to accepted
accounting practices, contingent liabilities are disclosed in footnotes. The Woerner companies’
audited year-end financial statements, which Woerner were provided to Vision Bank, contained
footnotes disclosing contingent liabilities.
Based on the information before it, Vision Bank concluded that Wood Treaters had
sufficient cash flow to serve as a secondary source of repayment if the primary source (the sale
of equipment purchased by Total Vision) was insufficient. Vision Bank considered Wood
Treaters’ guaranty to be an integral part of the loan. At the time it entered into the $1.5 million
3

Prior to consolidating its loans with AmSouth, the Woerner entities had shopped around
with several banks, including Vision Bank. Vision Bank knew about the search because it had
been one of the banks in contention for the loan.

3

loan to Total Vision, Vision Bank knew that Wood Treaters was directly liable for up to $2
million but did not know that Wood Treaters was contingently liable for up to an additional $3.4
million.
The Bankruptcy Court held that Vision Bank failed to prove by a preponderance of the
evidence two of the five requirements necessary for nondischargeability under 11 U.S.C. §
523(a)(2)(B)--reasonable reliance and intent to deceive. The court found that Vision Bank did
not reasonably rely on the Woerner’s untrue statements about Wood Treaters’ financial condition
because “red flags” in the information Woerner provided should have alerted the bank to
investigate further. Regarding the final requirement, the bankruptcy court found that Woerner
acted with neither intent to deceive nor reckless disregard. Woerner “instructed his Chief
Financial Officer to give the Bank all of the documentation it needed. . . and disclosed all his
debts.” R. at 133. Woerner was unfamiliar with the accounting practice for guaranty obligations
and “honestly believed that cross-guarantees were different from cross-collateralizations and
misunderstood the way cross-guarantees needed to be listed on a financial statement.” Id.
Discussion
Vision Bank appeals the bankruptcy court’s decision that Woerner’s debt to it was
dischargeable. A central purpose of the bankruptcy code is to provide the “honest but
unfortunate debtor” with a fresh start. In re Miller, 39 F.3d 301, 304 (11th Cir. 1994). Not all
categories of debt are equal, however, and in 11 U.S.C. § 523 Congress excepted certain types of
debts from discharge. Grogan v. Garner, 498 U.S. 279 (1991). One of those is the fraud
exception found in § 523(a)(2)(B).
Under 11 U.S.C. § 523(a)(2)(B), a debt is non-dischargeable in bankruptcy where
it was obtained by a writing: (1) that is materially false; (2) respecting the
debtor’s or an insider’s financial condition; (3) on which the creditor to whom the

4

debt is liable for such money, property, services, or credit reasonably relied; and
(4) that the debtor caused to be made or published with the intent to deceive.
Miller, 39 F.3d at 304. Because bankruptcy exceptions are narrowly construed, the burden is on
the creditor to prove each of foregoing elements by a preponderance of the evidence. Id. If the
creditor fails to meet his burden as to any one of these elements, the debt is dischargeable. Id. As
noted above, the bankruptcy court found Vision Bank’s proof fell short on the two latter
elements—reasonable reliance and intent to deceive. This Court’s review is confined to those
two elements.
Standard of Review
Before addressing these issues, the Court must determine the appropriate standard of
review. In a bankruptcy appeal, the district court functions as an appellate court. In re Sublett,
895 F.2d 1381, 1383 (11th Cir. 1990). This Court reviews the bankruptcy court’s decision on
matters of law de novo, giving “[no] deference to that court's analysis and conclusions.” Id.
Findings of fact will not be reversed unless clearly erroneous, and [t]he bankruptcy court's
findings of fact are not clearly erroneous unless, in light of all the evidence, [this court is] left
with the definite and firm conviction that a mistake has been made.” In re Internat’l Pharm. &
Discount II, Inc., 443 F.3d 767, 770 (11th Cir. 2005). Vision Bank concedes that “intent to
deceive” is a factual finding subject to review under the “clearly erroneous” standard. See
Miller, 39 F.3d at 305. Without any citation to authority, Vision Bank argues that the bankruptcy
court’s “reasonable reliance” finding is a mixed question of law and fact subject to de novo
review. The Eleventh Circuit reached the opposite conclusion in In re Collins, 946 F.2d 815,

5

817 (11th Cir. 1991), holding that “[t]he bankruptcy court’s finding [of reasonable reliance]. . .
was a finding of fact” due to be upheld unless “it is clearly erroneous.”4
Reasonable Reliance
The Fifth Circuit succinctly defined the reasonable reliance element as follows:
The reasonableness of a creditor's reliance, in our view, should be judged in light
of the totality of the circumstances. The bankruptcy court may consider, among
other things: whether there had been previous business dealings with the debtor
that gave rise to a relationship of trust; 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.
In re Coston, 991 F.2d 257, 261 (5th Cir. 1993) (en banc) (per curiam).
Applying this standard the bankruptcy court identified “red flags” that would have caused
a reasonably prudent banker to request more information. First, Vision Bank knew that “Wood
Treaters and other Woerner Entities were negotiating a new consolidated banking arrangement
with AmSouth” and that “[t]he AmSouth loan and UCC filings were very recent.” Based on this
information, the court found that “a ‘reasonably prudent banker’ would have asked to see all of
the signed documents involved in the AmSouth loan and specifically asked to see the details
behind the UCC filings.” R. at 131. Second, Vision Bank had in its possession prior years’
audited financials from Woerner Enterprises in which contingent liabilities were set forth in
footnotes. Vision Bank also had more recent unaudited internal financials from the Woerner
entities which lacked any footnotes. In the bankruptcy court’s determination, “[a] reasonably
4

Indeed, the clear weight of authority supports application of the “clearly erroneous”
standard. See In re Kosinski 424 B.R. 599 (BAP 1st Cir. 2010); In re Cribbs, 327 B.R. 668
(BAP 10th Cir. 2005); First Nat’l Bank of Olathe, Kansas v. Powtow, 111 F.3d 604 (8th Cir.
1997); In re Plechaty, 213 B.R. 119 (BAP 6th Cir. 1997); In re Cohn, 54 F.3d 1108 (3d Cir.
1995); In re Coston, 991 F.3d 257 (5th Cir. 1993); In re Siriani, 967 F.2d 302 (9th Cir. 1992); see
also In re Rovell, 194 F.3d 867 (7th Cir. 1999) (finding reasonable reliance to be mixed question
of law and fact but subject to clearly erroneous standard).

6

prudent banker would have inquired about what any footnotes would reveal or asked for
financials prepared by [an auditor].”
Vision Bank argues that the bankruptcy court’s decision on this issue is due to be
reversed because that court held it to an unreasonably high standard that would require it to (1)
investigate a Debtor’s private financial documents with unrelated lenders, (2) obtain reviewed
year-end financial statements for 2006 that were not available and (3) to disregard written
financial statements by the lender. Contrary to Vision Bank’s argument, the bankruptcy court
applied the correct legal standard, and its reasonable reliance determination is not clearly
erroneous. The court did not impose an unreasonably high standard simply because in this
particular case the court found that a reasonably prudent banker with the knowledge Vision Bank
had would have acted differently. Vision Bank knew that the Woerner entities had recently
consolidated loans and its new lender had filed UCC-1’s.5 For that reason, the court held that
Vision Bank should have required the debtor to provide documentation from another lender.
Furthermore, the bankruptcy court’s finding did not require Vision Bank to obtain nonexistent
financial statements. Rather, the court pointed to the contrast between the audited financial
statements from prior years and the more recent unaudited monthly reports, both of which were
in Vision Bank’s possession. The former had footnotes; the latter did not. Since contingent
liabilities were disclosed in the footnotes, the lack of footnotes in the latter would have caused a
reasonably prudent banker to inquire whether there were undisclosed contingent liabilities.
Finally, Vision Bank argues that the documents presented to it by Woerner were all consistent

5

Initially, the bankruptcy court found that Woerner had provided the UCC-1’s to Vision
Bank. The court subsequently corrected its order and found that Vision Bank had discovered the
UCC-1’s through its own efforts.

7

and did not raise any red flags. That argument ignores the bankruptcy court’s findings that some
of the documents presented, i.e., the financial reports, contained red flags.6
Vision Bank relies heavily on In re Davenport, 2011 WL 2533087 (Bankr. M.D. Ala.
June 24, 2011), to demonstrate that the bankruptcy court’s reasonable reliance determination in
this case was in error. Davenport is not helpful, however, because the reasonable reliance issue
is a factual determination that must be made on a case-by-case basis. In re Gordon, 277 B.R.
796, 803 (Bankr. M.D. Ga. 2001). That two judges decided different sets of facts differently
does not leave this Court with the firm conviction that one of those judges erred. Furthermore,
even if Davenport were a guidepost for the reasonable reliance standard, it does not help Vision
Bank’s cause. In that case the debtor was both a CPA and a lawyer (who had also worked a year
toward an LL.M in tax law). He sat on the board of directors of several corporations. His
credibility was enhanced by the fact that his family was also prominent in the local community.
For these reasons, the Davenport court found that the bank reasonably relied on the debtor’s
eight financial statements which were submitted over the course of twelve years in support of a
personal loan renewal. Those statements omitted the debtor’s personal tax liability to the IRS,
omitted at least two personal guaranties and omitted several creditors. The instant case involves
one loan application with enough red flags to put Vision Bank on notice that some information
was missing. Moreover, unlike Davenport, there was no particular reason for Vision Bank to
place enhanced reliance on Woerner’s education, training, experience, or credibility.

6

Vision Bank contends that the UCC-1’s were adequately explained by McCraine as tied
$1.3 million in direct liability. The point is, as the bankruptcy court implicitly found, that it was
not reasonable to rely on the oral representation of the borrower.

8

In conclusion, the bankruptcy court applied the correct legal standard in reaching its
determination that Vision Bank did not reasonably rely on the written statements provided by
Woerner. The court’s factual finding on that issue is not clearly erroneous.
Intent to Deceive
Intent to deceive may be inferred from the totality of the circumstances, “including the
recklessness of a debtor’s behavior.” In re Miller, 39 F.3d at 305. “’Reckless disregard for the
truth or falsity of a statement combined with the sheer magnitude of the resultant
misrepresentation may combine to produce the inferrence [sic] of intent [to deceive].’”
Id.(quoting In re Albanese, 96 B.R. 379, 380 (Bankr. M.D. Fla. 1989)). The bankruptcy court
held that Woerner “neither intended to deceive Vision Bank nor acted with reckless disregard in
his dealings with them.” R. at 132. The court based its conclusion on the following facts:
. . .[Woerner] instructed his Chief Financial Officer to give the Bank all of the
documentation it needed. Woerner Disclosed all of his debts. He had never had
to deal with the guarantee obligations on his financial statements before and was
unfamiliar with the accounting for them. He honestly believed cross-guarantees
were different from cross-collateralizations and misunderstood the way crossguarantees needed to be listed on a financial statement. He trusted and relied
upon his CFO to provide him with the documentation the Bank needed. Finally
he had an attorney who represented him at the closing and looked over the
documents and that contributed to his belief that every thing was disclosed
appropriately. . . .
The Court found Norman Woerner to be credible. He was wrong in his
belief but the Court concludes he testified truthfully. The Court only had Ray
McCraine’s deposition to read and did not see him testify, but his testimony
appeared to be truthful.
R. at 132-33.
Vision Bank argues that this conclusion is clearly erroneous for several reasons. First, it
notes that Wood Treaters’ contingent liabilities (i.e., the cross-guaranties) were omitted from a
number of documents submitted in support of the loan. Next, it points out the amount of money
involved in the undisclosed contingent liabilities--$3.4 million. Third, it argues that the non9

disclosure was particularly egregious because Woerner was “double pledging” collateral already
pledged to AmSouth and failed to reveal this fact to AmSouth. Finally, Vision Bank points to
McCraine’s educational background and Woerner’s business acumen as evidence that they acted
recklessly in failing to disclose the contingencies. These arguments are not persuasive. Even
educated CFO’s and savvy businessmen make mistakes, and none of the facts cited by Vision
Bank convince this Court that the omission was anything other than the honest mistake the
bankruptcy court found it to be. That it occurred on a number of documents means only that the
mistake was consistent. The amount of money involved does not support a finding of
recklessness. This is a single misunderstanding about contingent liabilities arising from one
Master Loan agreement which happened to involve a substantial sum of money. Finally,
Woerner’s failure to disclose this transaction to AmSouth is immaterial for several reasons. The
record does not reveal any obligation Woerner might have had to disclose the details of his
Vision Bank loan to AmSouth. The AmSouth loan had already closed, and AmSouth had
perfected its security interests by filing UCC-1’s. Even if an obligation to disclose existed,
Woerner did not believe these were contingent liabilities and, therefore, did not realize he was
“double pledging” assets. In sum, the bankruptcy court finding regarding intent to deceive was
not clearly erroneous.
Conclusion
This Court finds no error in the factual findings and legal conclusion of the bankruptcy
court. Therefore, the bankruptcy court’s order declaring the debt dischargeable is AFFIRMED.
DONE and ORDERED this the 16th day of April, 2012.

s/Charles R. Butler, Jr.
Senior United States District Judge
10