Borg Warner Central Environmental Systems, Inc. v. Nance (In Re Nance)Borg Warner Central Environmental Systems, Inc. v. Nance (In Re Nance)
MEMORANDUM OPINION
This Memorandum Opinion constitutes the Court’s findings of fact and conclusions of law under Bankruptcy Rule 7052 with respect to the trial on December 18, 1986.
Gerrald W. Nance (“Nance” or “Defendant”) filed for bankruptcy on approximately April 10, 1985. On July 22, 1985, Borg Warner Central Environmental Systems, Inc. (“Plaintiff”) filed a complaint to determine the dischargeability of Nance’s debt to it. Shortly thereafter, Plaintiff filed a similar complaint against Douglas Wayne McCormack (“McCormack” or “Defendant”), Nance’s former partner who had also filed bankruptcy. Each Defendant answered the respective complaints, and on September 28, 1985, this Court signed a pretrial order that these adversary proceedings be tried concurrently.
Because the factual background in the two adversary proceedings was basically the same, and they were tried concurrently, Plaintiff argued facts and law in support of each adversary proceeding.
Plaintiff is in the business of manufacturing and selling heating and air conditioning equipment and accessories. Prior to 1984, Ryan Air Conditioning & Heating, Inc. (“Ryan A/C & H”) had been a customer of Plaintiff. On approximately April 1, 1984, Defendants Nance and McCormack, and an individual named Garland Tackett purchased the business and shortly thereafter formed a new corporation known as Ryan Mechanical, Inc. (“RMI”). At that time, the entire balance owed to Plaintiff, in the approximate amount of $24,743.29, was transferred to RMI’s account.
A portion of the consideration paid by RMI for the assets of Ryan A/C & H included the assumption by RMI of Ryan A/C & H’s outstanding open account obligation to Plaintiff, which stood at $24,-743.29 as of March 31, 1984.
Plaintiff received actual notice of the sale of the business of Ryan A/C & H to RMI in March, 1984.
In April, 1984, Plaintiff began to extend trade credit to RMI without requiring any additional documentation, guaranties, credit application or credit references.
Defendants first met with Sam Burgess, Plaintiff’s financial manager, in late May or early June of 1984. At that meeting, Mr. Burgess reviewed the account and requested that the Defendants supply him with a financial statement for the company in order to document support for the credit relationship. At the time of the meeting, the outstanding credit balance on the RMI account with Plaintiff approximated $50,-000, including the balance assumed from Ryan A/C & H by RMI.
The business did not fare much better under the new ownership, and in approximately June, 1984, RMI owed Plaintiff approximately $70,000 to $77,000 on open account. At about that time, Defendant Nance gave Mr. Burgess a copy of a corporate financial statement. There is no contention about material falsity in the corporate financial statement. Mr. Burgess indicated it was unsatisfactory, and that he would require personal financial statements, and, assuming they were satisfactory, personal guarantees of Defendants Nance and McCormack (collectively “Defendants”).
In or about July, 1984, Defendants met with Mr. Burgess and each Defendant presented Plaintiff with personal financial statements. Each Defendant had very recently married for the second time and said financial statements, to some extent, listed
During the course of the July, 1984 meeting, Burgess expressed serious concern about the size of the outstanding account and Defendants’ ability to reduce it. In line with that concern, Burgess directed Defendants to execute personal guaranties of the account prepared by Plaintiff, which were then back-dated by an employee of Plaintiff to May, 1984. Burgess also directed Defendants to take immediate steps to reduce the size of the outstanding credit balance.
At the July, 1984 meeting, Burgess stated that, in the absence of personal guarantees of the principals, in the future all purchases would be for cash and RMI would be expected to pay additional sums of money to pay down its present outstanding account balance.
Upon review of the personal financial statements by Mr. Burgess, Plaintiff agreed to open up the credit line of RMI and extend it credit up to ninety days, if Defendants would personally guarantee the account. Defendants signed personal guarantees in favor of Plaintiff, and Plaintiff, allegedly relying on said guarantees and the supporting financial statements, extended further credit to RMI.
By early 1985, RMI was out of business and Defendants filed their respective bankruptcy petitions. At the time of the filings, RMI and Defendants allegedly owed Plaintiff approximately $26,442.26, all on account of invoices dated in late 1984 and early 1985, several months after the financial statements were given. Per the parties’ agreement, all payments as received had been applied to the oldest invoices.
The issue in these adversary proceedings being tried concurrently is whether the debt which Defendants owe Plaintiff is nondischargeable under § 523(a)(2)(B) of the Bankruptcy Code. It is Plaintiff’s position that the debt of each Defendant is nondischargeable because the financial statements were materially false and Plaintiff reasonably relied thereon. The parties stipulated that if the debt was non-dis-chargeable against both Defendants, Plaintiff was entitled to attorney fees of $7,000, but if it was non-dischargeable against only one Defendant, then Plaintiff was entitled to $6,000 attorney fees.
Plaintiff seeks to except these debts from discharge pursuant to
(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive^]
In or about July, 1984, Defendants each presented Plaintiff with written financial statements. These financial statements were attached as Exhibit A to each of the respective complaints.
Defendant McCormack’s financial statement is dated July 5, 1984, and is signed “Doug McCormack”. Defendant Nance’s financial statement is dated July 5, 1984, and is signed “Gerrald Nance”.
In;order to come within the exception of
Defendants personally obtained the additional credit for RMI. “It is well-settled that where the debtor is an officer and shareholder of a corporation and he uses a false financial statement to induce a creditor to extend credit to the corporation, the individual debtor is considered to have obtained money within the meaning of
A materially false financial statement is one which “paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.”
In re Denenberg,
DEFENDANT McCORMACK’S FINANCIAL STATEMENT
Defendant McCormack’s financial statement contained various material representations with regard to both ownership of properties, as well as statements in value. Said representations included the following:
a.Defendant McCormack represented that the residential property at 2219 English Drive, Garland, Texas had a value of $68,500 with a $6,000 mortgage and that he was the sole owner of this property. However, the testimony showed that his ex-wife owned one-half of this property. Even if Defendant McCormack is given the benefit of the doubt as to the valuation of the property, his misstatement resulted in a $31,250 overstatement of his net worth.
b. He represented that he owned a $17,-000, 17-acre tract of land that was actually owned by his mother. His explanation of this discrepancy was that he thought he was going to inherit it.
c. He represented that he was the owner of a $140,000 jumbo certificate of deposit (“CD”). In fact, as Defendant McCormack has admitted, this jumbo CD was not his property at all, but rather was in trust for his wife and his wife’s children. This was a misrepresentation of $140,000.
Defendant McCormack stated his net worth to be $475,655, while in actuality his liquid net worth appears to have been significantly less.
The misrepresentation made with regard to the jumbo CD was material in that it represented the bulk of his liquid assets.
The most important listings on the financial statement included values represented as liquid assets. These primarily included the $100,250 in marketable stocks and the jumbo CD of $140,000. Together, these amounted to $240,250. When offset by the loan at Dallas Federal of $123,000, the resulting amount of liquid assets is approximately $117,250. This was a significant and substantial amount with which Plaintiff’s Credit Manager used to make a reasonable business decision to grant further credit.
DEFENDANT NANCE’S FINANCIAL STATEMENT
On March 25, 1984, Defendant Nance submitted a financial statement to the American National Bank of Terrell in order to obtain a line of credit for RMI. Therein,
A comparison of the two financial statements reveals that the alleged $129,000 increase in net worth was a result of the addition of the following equities:
[[Image here]]
Plaintiff contends that allegedly $94,700 of the alleged $129,000 increase is a direct result of Defendant Nance’s materially false representations.
While on their face the two financial statements do
prima facie
raise concerns as to material falsity of Nance’s financial statement in question, Nance was able to give reasonable explanation as to the more serious apparent discrepancies. Furthermore, Plaintiff's Credit Manager testified he was not relying on the possibly exempt property in the financial statements, to wit, diamonds, jewelry and painting. Thus, it appears that on Nance’s financial statement, Plaintiff did not meet its burden of proof under
The most serious discrepancy on the Nance financial statement has to do with the alleged $60,000 equity in commercial real estate that was listed on the July, 1984 financial statement, and Plaintiff asserts such was a materially false representation. The commercial real estate was valued on the statement at $330,000. The loan against said real estate was $270,000. Defendant Nance represented that he owned a $60,000 equity in the property. However, in testimony, he admitted that he was the owner of only 45% of this property. Therefore, Defendant Nance’s alleged equity in the property amounted to only $27,-000. The resulting overstatement was in the approximate amount of $33,000. Nance testified that in agreement with McCormack and Tackett, the other owners of the property, only he listed the property. The McCormack and Tackett financial statements did not list ownership of such property. Regardless of the reasonableness of this explanation, for this creditor to have reasonably relied on this alleged $33,-000 discrepancy, the creditor would reasonably have to have made more investigation into the value of the property.
MISREPRESENTATION OF OWNERSHIP CAN BE A MATERIAL FALSITY PURSUANT TO
The Courts have held that misrepresentation of ownership is a material falsity sufficient to deny dischargeability pursuant to
Specifically, Defendant McCormack misrepresented the ownership of the $140,000 jumbo CD. In the
Matter of Rickey,
He also misrepresented his ownership interest in the residential property at 2219
In
In re Janes,
See also, Flagship Bank of Tampa v. Albert M. Davidson and Clarence S. Dick,
In
In re Gadberry,
The legislative history of
Plaintiff also reasonably relied on the McCormack personal guaranty and supporting financial statement and did not file any lawsuit for collection on the account or seek to file liens on its debt. Because of the paucity of lien information in its files at that time, Plaintiff would have had difficulty filing liens. The reliance issue under
In
In re Patch,
Plaintiff’s business decision in this instance was consistent with its normal business practices.
In the Matter of Rickey, supra, the court found that, where a debtor stated that he was the sole owner of property when he in fact knew that he was not (his property was held in joint tenancy with his wife), intent was inferred from the fact that he knew his statements were false. The court found the debt, which arose as a result of reliance upon the debtor’s false statements, to be nondischargeable on that basis alone.
Defendant McCormack represented ownership in a $140,000 jumbo CD which was not owned by him, and, in reality, not even owned by his wife. The jumbo CD was in trust for his wife and his wife’s children. Unquestionably, Defendant McCormack had knowledge of this fact. As a result, Defendant McCormack’s knowledge of his non-ownership of this property and his false statement of ownership demonstrates his intent to deceive.
In
Matter of Clark,
While it is impossible to probe the inner processes of a borrower’s mind in order to determine his intent, his acitons speak louder than his words.... [W]hile fraud is never presumed and evidence showing the possibility of fraud or showing circumstances which might create a suspicion of fraud are not sufficient, ... the fraud may be found to exist, even in the absence of direct proof, which of course, is rarely available. If the totality of the circumstances present a picture of deceptive conduct by the borrower, which indicates that the borrower intended to deceive and cheat the lender, the intended falsehood, coupled with this conduct, is sufficient to establish the requisite intent required under the Act.
In
In re Byrd,
In
In re Barnacle,
In
In re Blatz,
The court in In re Mutschler, supra at 491, stated that “where the debtor is an individual of intelligence and experience in financial matters, courts have been more inclined to hold them responsible for uttering a false financial statement.”
Defendant McCormack had been in the heating and air conditioning business since approximately 1970. However, he was more of an “outside” rather than “inside” man. He was not necessarily sophisticated. His intelligence was difficult to evaluate except in terms of past business success. He had prepared one or two financial statements in the past. His April,
While some courts have allowed an inference to arise with respect to intent to deceive, other courts have held that proof of the first three elements of a false financial statement creates a “presumption that the debtor made the statement with intent to deceive.”
In re Harms,
There was insufficient proof that RMI agreed to pay Plaintiffs claim for the A & P fund, to wit, $4,952.63. Therefore, Plaintiffs debt against McCormack is not dischargeable in the amount of $21,489.63, statutory interest, $6,000 attorney fees, and judgment interest. Plaintiff’s claim against Nance is discharged. Judgment will be entered in accordance with the foregoing Memorandum Opinion.