Appeal from the Ninth Circuit Bankruptcy Appellate Panel. Volinn, Russell and Jones, Judges, Presiding. Original Opinion Reported at,
Before: Alfred T. Goodwin, Betty B. Fletcher and Thomas G. Nelson, Circuit Judges. Opinion by Judge Fletcher.
Order AND AMENDED OPINION
Bruce L. Siriani, Mark W. Stevens and Philip J. Andrews (the "debtors") appeal the decision of the Bankruptcy Appellate Panel ("BAP") reversing the bankruptcy court's decision that their debt to Northwestern National Insurance Company ("Northwestern") was dischargeable. The BAP found the debt was nondischargeable under 11 U.S.C. 523(a)(2)(B). We affirm.
In November, 1983, a limited partnership formed by the debtors and another individual purchased an apartment building in Dallas. A $1.2 million loan from Springbrook Lenders ("Springbrook") partially financed the purchase. The loan was due on September 15, 1985; the debtors expected to sell enough limited partnership interests to pay it off.
As a condition of the loan, Springbrook required the debtors to obtain a financial guaranty bond. Northwestern agreed to issue the bond, provided the debtors agreed to indemnify Northwestern for any sums it had to pay Springbrook. Under the indemnity agreement, should a claim be made on the bond, Northwestern required the debtors to deposit funds with Northwestern in the amount of the claim. In addition, the indemnity agreement gave Northwestern security interests in the debtors' personal and other property, and the power of attorney to perfect them at any time.
Before the Springbrook loan became due, the debtors realized they would be unable to pay it on the due date. Springbrook agreed to extend the loan for an additional year, provided the bond was also renewed. Before deciding whether to renew, Northwestern requested financial statements from the debtors. The debtors submitted financial statements that omitted substantial obligations owed by them. After receipt of the financial statements, Northwestern agreed to renew the bond. The bankruptcy court found that Northwestern agreed to renew the bond before the original term expired, and that Springbrook and the debtors relied on the agreement to renew. However, because debtors were late in paying fees for the agreement, the official bond renewal was not issued until November, 1985.
On March 17, 1986, debtors defaulted on the Springbrook loan, and Springbrook made a claim on the bond. Although the debtors failed to make the deposits required by the agreement, Northwestern took no steps to protect itself, by, for example, seeking to perfect its security interests. On April 25, 1986, other creditors of the debtors filed involuntary chapter 7 petitions against them. Northwestern eventually paid Springbrook $1,610,000 on the bond.
Northwestern filed a claim with the bankruptcy court, alleging that debtors' obligation to it under the indemnity agreement was nondischargeable under section 523(a)(2)(B) of the bankruptcy code because it had relied on fraudulent financial statements in deciding to renew the bond.*fn1 After trial, the bankruptcy court first issued an oral ruling in favor of Northwestern, but later, after a motion for reconsideration or new trial by the debtors, entered judgment in favor of the debtors. The bankruptcy court found that Northwestern had established that the debtors had made a misrepresentation of material fact, with intent to deceive, on which Northwestern reasonably relied. However, it held that Northwestern had failed to show its losses were proximately caused by the renewal of the bond.
Northwestern appealed to the BAP, which reversed.
The court of appeals reviews the BAP's decision de novo. The bankruptcy court's Conclusions of law are reviewed de novo, and its findings of fact are reviewed for clear error. Fireman's Fund Ins. Cos. v. Grover ...