In Re Sharp
In re Wendy SHARP, Debtor.
Midwest Comm. Fed. Cr. Union, Plaintiff,
v.
Wendy Sharp, Defendant.
United States Bankruptcy Court, N.D. Ohio.
*761 *762 *763 Randy Lee Reeves, Lima, OH, for Debtor.
DECISION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after a Trial on the Plaintiffs Complaint to Determine Dischargeability, and the Defendant's counterclaim thereto. At the conclusion of the Trial, the Court took the matter under advisement so as to afford the opportunity to fully consider the evidence in light of the arguments presented by the Parties. The Court has now had this opportunity, and finds, for the reasons set forth herein, that the Plaintiffs Complaint has merit, and accordingly, the claim held by the Plaintiff against the Defendant is hereby found to be a nondischargeable debt.
FACTS
Beginning in 2000, the Defendant/Debtor, Wendy Sharp (hereinafter the "Debtor") became a member of the Midwest Community Federal Credit Union, the Plaintiff/Creditor in this action (hereinafter the "Creditor"). During the course of their relationship, the Debtor made to the Creditor multiple requests for the extension of credit, with at least two of these requests being unsuccessful. First, in 2003, the Debtor was denied, on an unsecured basis, a loan request of 83,107.85; then in 2004, the Debtor was again denied a loan request of $32,500.00 for the purchase of real property. The basis for both of these denials of credit: the Debtor's other obligations were too excessive. (Pl. Ex. I & J).
In March of 2005, the Debtor again sought an extension of credit from the Creditor for the purchase of a second automobile. In applying for the credit, the Debtor completed an "indirect loan application" at the dealership selling the vehicle, which was then forwarded to the Creditor. (Pl.Ex. A). This loan application, *764 which contained details concerning the sources of the Debtor's income, was largely consistent with her past two loan requests which had been denied. For example, in all the loan applications, the Debtor's gross monthly salary was listed at around $3,000.00. However, as it concerned the Debtor's income, there did exist this one notable exception: in the "indirect loan application" for the vehicle, unlike in the prior two loan applications which had been denied, the Debtor claimed also having a monthly rental income of $1,850.00. At the Trial, the Debtor related that this rental income had yet to be realized, but was included in the loan application at the direction of a salesperson.
After receiving a copy of the Debtor's most recent pay stub, the Creditor promptly approved the loan, finalizing the contractual paperwork with the Debtor on March 4, 2005. (Pl.Ex. G). The amount financed with the Creditor was $19,506.25, which took a security interest in the vehicle. However, just one week later, on March 11, the Debtor sought out the advice of legal counsel regarding the possibility of filing for bankruptcy relief. Six days later, on March 17, the Debtor filed in this Court a petition under Chapter 7 of the United States Bankruptcy Code. In her petition, the $1,850.00 in rental income, as just set forth in the loan application, was not disclosed.
After filing for bankruptcy relief, the Debtor made one payment to the Creditor under the terms of the Parties' agreement. Thereafter, the Debtor surrendered her vehicle to the Creditor. By all accounts the Debtor was cooperative in this process. On the vehicle loan, there presently exists a deficiency of $4,755.42, plus accruing interest and costs. The instant action seeks a determination that this obligation was incurred through fraud, and therefore is a nondischargeable debt.
DISCUSSION
Proceedings, such as this, to determine the dischargeability of a particular debt are deemed core proceedings over which this Court has been conferred with subject matter jurisdiction to enter final orders and judgments. 28 U.S.C. § 157(b)(2)(I); 28 U.S.C. § 1334.
The Creditor's complaint to determine dischargeability is brought pursuant 11 U.S.C. § 523(a)(2) which provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), 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
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
(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[.]
This provision implements the long-standing bankruptcy policy that only those debts which are honestly incurred are entitled to the benefits of a bankruptcy discharge. Mack v. Mills (In re Mills),
As set forth above, the statutory structure of § 523(a)(2) makes a distinction between two types of fraudulent acts: those in writing "respecting the debtor's or an insider's financial condition," and all other types of fraud. Subparagraph (B) of § 523(a)(2) governs statements regarding the debtor's financial, condition; while subparagraph (A), by explicitly excluding a statement of that type, operates congruously to encompass, by default, all other types of fraud. First Safety Fund Nat'l Bank v. Valley (In re Valley),
At the Trial held in this matter, the Creditor's case-in-chief centered on the Debtor falsely setting forth in her written loan application that she received a monthly rental income of $1,850.00. For purposes of § 523(a)(2)(B), a written statement respecting a debtor's financial condition may be described as one representing the debtor's net worth, overall financial health, or ability to generate income so as to enable an accurate assessment to be made of the debtor's creditworthiness. In re Joelson,
Once § 523(a)(2)(B) is shown to be applicablethat the alleged fraud arose as the result of a written statement respecting the debtor's financial conditiona finding of nondischargeability hinges on the applicability of these three additional elements: (1) the existence of a materially false statement; (2) the creditor's reasonable reliance on the false statement; and (3) the debtor's intent to deceive by making the statement. Thorp Credit, Inc. v. Carmen (In re Carmen),
The first element, a materially false statement, has been described as one that paints a substantially inaccurate picture of a debtor's financial condition by misrepresenting information of the type which normally would affect the decision to grant credit. Blue Ridge Bank and Trust v. Cascio (In re Cascio),
In looking to whether a statement is substantially inaccurate, the size of the discrepancy is a key factor, and becomes a dispositive consideration in this *766 matter given the breadth of the inaccurate statement provided by the Debtor. Enterprise National Bank of Atlanta v. Jones (In re Jones),
However, while the Creditor's utilization of the materially false statement evidences actual reliance thereon, § 523(a)(2)(B)(iii), setting forth the second element supra, then goes a step further. Not only must the creditor actually rely on the false statement, but such reliance must be reasonable. This is in contrast to the level of reliance required under subparagraph (A) which adopts the lower, common-law standard of justifiable reliance. See, e.g., Redmond v. Finch (In re Finch),
To this question, the Debtor, while strenuously denying that she actually intended to mislead, argued that the Creditor's failure to verify the veracity of her rental income, despite the importance it admittedly attached to its existence, demonstrates that the Creditor failed to exercise the necessary degree of care for § 523(a)(2)(B)(iii)'s requirement of reasonable reliance. Against this, the Creditor called this Court's attention to the measures, it took to establish the Debtor's creditworthinessfor example, obtaining an updated copy of the Debtor's credit report and requiring the Debtor to produce a recent pay stub so as to corroborate her representation in the credit application regarding her salary. The Creditor also pointed to the relationship of trust which had been established between the Parties during the years they did business together.
On the point made by the Debtor, whether a creditor makes an independent inquiry to verify the veracity of a statement upon which it relies to extend credit, while undoubtedly important, is not dispositive on the issue of the reasonableness of a creditor's reliance. Bank of Washington v. Hunter (In re Hunter),
When these precautions are then combined with the nature and the character of the Parties' transaction, things conclusively bend in the Creditor's favor; at issue in this matter is a simple consumer loan involving a purchase money security interest. Furthermore, the measures taken by the Creditor, such as running a credit check and obtaining a copy of the Debtor's pay stub, appear entirely reasonable in light of the two competing principles underlying the reasonable reliance requirement of § 523(a)(2)(B)(iii). The general policy that courts should exercise caution when second guessing the business judgment of a creditor in making loans and setting loan policy, versus the concern that creditors should not be able to shield themselves from the negative consequences that flow from facts that were readily ascertainable. Id.
The final element in controversy, contained in clause (iv) of § 523(a)(2)(B), is whether the Debtor caused to be made or published the false statement in writing with the intent to deceive. The level of intent required here is that of actual fraud, which means that the debtor, by some direct and active operation of the mind, undertook to deceive; this is opposed to constructive fraud which arises by operation of law irrespective of intent, Accord United States v. Hercules, Inc.,
In assessing circumstantial evidence of intent, courts have traditionally relied upon certain indicia, commonly called "badges of fraud." Barthlow v. More (In re More),
In an action brought under § 523(a)(2), a focus of the general chronology of events will often involve measuring the length of time between these two events: the petition date and the date of the transaction in question. The longer the lapse of time between these two events, the less likely an inference of fraud will arise, with the converse also being true; the shorter the lapse of time, the more likely it will be that an inference of fraud will exist. Rust v. Tellam (In re *768 Tellam),
In this matter, such a presumption necessarily arises, with not even two weeks separating the time between when the Debtor received the loan with the Creditor and the time in which she sought to escape her liability on the obligation by filing for bankruptcy. It is difficult to fathom a shorter duration of time. Yet, this window of time becomes shortened even further when it is considered that just one week after obtaining the loan, the Debtor first contemplated discharging the obligation through bankruptcy, this being demonstrated by the Debtor's consultation with a bankruptcy attorney at that time. See In re Tellam,
Another strong indicium of fraud, and one also prominent in this matter, is motive. C & H Electrical v. Newell (In re Newell),
Just as troubling, the Debtor, just after claiming the rental income in her credit application, failed to disclose it in her bankruptcy schedules. In re Bailey,
To explain the existence of these highly persuasive indicia of fraud, the Debtor relied primarily on the existence of an intervening event: that immediately after completing her credit application, her lessee, upon whom she based her rental income, unexpectedly decided not to rent her property. This explanation, however, lacks in *769 credibility. In the short term, at least, other options besides bankruptcy must have been available; for example, there is no evidence that the Debtor, before filing bankruptcy, made any attempt to re-rent her rental property. In this way; bankruptcy has always been a measure of last resort. Matter of Smith,
But even if the Debtor's explanation is taken at face value, it simply leads to another quandary. As applied to § 523(a)(2)(B), a finding that a debtor had the specific intent to deceive is not absolutely necessary to sustain a finding of fraud. Instead, in In re Martin, the Sixth Circuit Court of Appeals held that a § 523(a)(2)(B) cause of action may be sustained by showing that "the debtor either intended to deceive . . . or acted with gross recklessness. . . ."
To be sure, there do exist a couple of overall mitigating factors. First, there is no dispute that the Debtor was cooperative with Creditor after filing for bankruptcy, even going so far as to make one payment on her obligation. Additionally, the Debtor, as she contends, may have very well been directed by a salesperson to list the rental income.
However, these points are of insufficient weight to tip the balance in the Debtor's favor. Insofar as it concerns her cooperation, such conduct is expected when a debtor seeks bankruptcy relief. United States Trustee v. Halishak (In re Halishak),
In summation, the Court finds that the Creditor has sustained its burden with respect to the statutory requirements of § 523(a)(2)(B). Resultantly, the claim held by the Creditor against the Debtor is, for purposes of bankruptcy law, a nondischargeable debt. Additionally, based upon this holding, the Debtor's counterclaim against the Creditor under § 523(d) must be dismissed as a matter of law. Household Bank, N.A. v. Sales (In re Sales),
In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Decision.
Accordingly, it is
ORDERED that, pursuant to 11 U.S.C. § 523(a)(2)(B), the deficiency claim held by the Plaintiff/Creditor, Midwest Community Federal Credit Union, be, and is hereby, determined to be a NONDISCHARGEABLE DEBT.
*770 IT IS FURTHER ORDERED that the counterclaim of the Defendant/Debtor, Wendy Sharp, be, and is hereby, DIMISSED.
NOTES
Notes
[1] The Debtor's loan application also disclosed that she received $56.66 per week for child-support.
[2] Some courts have held that proof of the other elements under § 523(a)(2)(B) creates a presumption that the debtor made the statement with intent to deceive. Other courts have held that a court may infer fraudulent intent where the debtor knew or should have known of the falsity of his statement. IFG Leasing Co. v. Vavra (In re Harms),