589 B.R. 319
Bankr. W.D. Mich.2018Background
- Debtor (Christopher Ostosh), a high-earning machinist/executive, worked to rescue and lead Krieger Craftsmen, Inc. (KCI) from 2006–2009; KCI suffered severe cash-flow problems and overdrafts with West Michigan Community Bank (WMCB).
- Debtor completed a Personal Financial Statement (PFS) on Nov. 27, 2006 that listed assets (including alleged stock interests) and omitted certain liabilities; he later obtained a $100,000 loan (June 2008) and a $500,000 “emergency” personal loan (Sept. 30, 2008) tied to KCI's cash needs.
- The $500,000 loan was structured as a short-term fix to cure KCI overdrafts and included a second mortgage on the Debtor’s home and corporate guaranties; the loan largely shifted KCI liability onto the Debtor.
- WMCB later sued the Debtor; judgment was entered and ultimately assigned to KCI; Debtor filed chapter 7 in July 2015 and KCI brought this adversary alleging nondischargeability under §523(a)(2)(B) and denial of discharge under §727(a)(2)(A), (a)(4)(A), and (a)(5).
- At trial the court found the Debtor credible on many points; conflicting evidence existed about whether the Debtor truly owned a phantom stock interest in Commercial Tool & Die (the most significant PFS asset in dispute).
- Court’s practical findings: some PFS entries were false (vehicle loans, parents’ loan, Metal Masters receivable, phantom Commercial stock), but WMCB did not reasonably rely on those statements in making the $500,000 loan and the Debtor lacked intent/gross recklessness to deceive.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt from $500,000 loan is nondischargeable under §523(a)(2)(B) (false written financial statement) | PFS and later emails contained materially false statements about assets/liabilities (notably phantom Commercial stock) on which WMCB relied to make the loan; Debtor intended to deceive | Debtor filled out PFS as accommodation nearly two years earlier, believed he owned assets, and Bank did not reasonably rely on stale/inaccurate statements | Denied: plaintiff failed to prove reasonable reliance and intent; §523(a)(2)(B) claim dismissed |
| Whether discharge should be denied under §727(a)(5) for failure to satisfactorily explain loss of assets | Debtor earned substantial prepetition income and failed to account for dissipation; lack of docs is suspicious | Debtor credibly testified he spent income on living expenses for family and operated largely in cash; submitted Exhibit CC summary | Denied: plaintiff met initial burden but Debtor’s testimony + Exhibit CC were a satisfactory explanation; §727(a)(5) claim dismissed |
| Whether discharge should be denied under §727(a)(2)(A) for transfer/concealment of assets | Operating on a cash basis concealed transfers and hampered creditor collection; constitutes concealment within 1 year prepetition | Debtor switched to cash to avoid garnishment/fees, lacked intent to hinder, delay, or defraud creditors | Denied: no credible evidence of intent to defraud; §727(a)(2)(A) claim dismissed |
| Whether discharge should be denied under §727(a)(4)(A) for false oaths in schedules/SOFA | Debtor misstated income and omitted transfers (sales, family payments, Team Financial loan timing) to mislead creditors | Discrepancies were explained as estimates or ordinary-course family support; omissions not shown to be fraudulent | Denied: plaintiff failed to prove Debtor knowingly and fraudulently made materially false oaths; §727(a)(4)(A) claim dismissed |
Key Cases Cited
- Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) (bankruptcy code purpose: fresh start for honest but unfortunate debtors)
- Grogan v. Garner, 498 U.S. 279 (1991) (party seeking nondischargeability bears burden of proof by preponderance)
- Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018) (distinguishing reliance standards between §523(a)(2)(A) and (B))
- Wolf v. Campbell (In re Campbell), 159 F.3d 963 (6th Cir. 1998) (reasonable reliance as a causation requirement under §523(a)(2)(B))
- BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d 1556 (6th Cir. 1992) (factors for assessing reasonable reliance)
- National City Bank v. Plechaty (In re Plechaty), 213 B.R. 119 (6th Cir. B.A.P. 1997) (creditor must prove reasonable and actual reliance under §523(a)(2)(B))