As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.
What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.
This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!
Count II: § 523(A)(2)(B)
The Court turns to Count II, analyzing nondischargeability under § 523(a)(2)(B). As explained previously, the Court will analyze only those four of the six alleged representations that arguably relate to the Debtor’s financial condition.
Section 523(a)(2)(B) provides in relevant part that a discharge under section 727:
does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by 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.
Put another way, § 523(a)(2)(B) requires a creditor to show, by a preponderance of the evidence, these elements:
(1) the debtor [or agent] made
(2) a statement in writing
(3) respecting the debtor’s financial condition
(4) that was materially false and
(5) that was made with the intent to deceive; and
(6) that was reasonably relied upon by the [creditors].
In re Bohr, 271 B.R. 162, 167 (Bankr. W.D. Mo. 2001); Grogan v. Garner, 498 U.S. 279, 286–87 (1991) (preponderance of the evidence standard).
At the threshold, § 523(a)(2)(B) requires the same legal analysis as to whether the debt was for money, property or services “obtained” by the misrepresentation. The Court incorporates its analysis from Count I and concludes that the Debtor obtained a property interest such that her motion for judgment should be denied.
Turning to the elements (and assuming the first element):
Second Element (Statement in Writing)
The second element requires a statement in writing, which “must have been either signed by the debtor, written or produced by the debtor, or have been adopted and used by the debtor.” Kerbaugh, 162 B.R. at 261 (citing In re Mutschler, 45 B.R. 482, 490 (Bankr. D.N.D. 1984)); see also 4 COLLIER ON BANKRUPTCY ¶ 523.08[a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
Courts generally construe this requirement rather broadly, and focus their real analysis on whether the written statement relates to the “debtor’s financial condition.” For this reason, a debtor signing a contract can be said to have made misrepresentations based on the content of the contract. See, e.g., In re Whitenack, 235 B.R. 819, 825–27 (Bankr. D.S.C. 1998) (real estate sale contract, general warranty deed, and closing statement found to be “statement[s] in writing” for purposes of § 523(a)(2)(B)); In re Aman, 492 B.R. 550 (Bankr. M.D. Fla. 2010) (collection of closing documents, such as the HUD-1, found to be “statement[s] in writing” sufficient to satisfy the “writing” requirement); but see In re Chew, 182 B.R. 341, 347 (Bankr. N.D. Ala. 1995) (“Without further evidence, this Court is unable to find that the signing of the lease in question was ‘use of a statement in writing’ under [§ 523(a)(2)(B)].”).
Third Element: Respecting the Debtor’s Financial Condition
The third requirement, that the statement is about the debtor’s financial condition, means that the statement “concern[s] the debtor’s or insider’s overall financial health, net worth, or ability to generate income, as opposed to a statement concerning the status or quality of a single asset or liability.” Kloven, 1993 WL 181309, at *2 (emphasis added); see also In re Mulder, 306 B.R. 265, 271 (Bankr. N.D. Iowa 2004) (“The purpose of the statement must be to indicate the debtor’s overall financial condition.”).
Fourth Element: Material Falsity
Regarding the fourth requirement, “[a] financial statement is materially false if it paints a substantially untruthful picture of a financial condition by a misrepresentation of the type which would normally affect the decision to grant credit.” In re Asbury, 441 B.R. 629, 634 (Bankr. W.D. Mo. 2010) (citation and internal quotations omitted). In a broader sense, “[a] financial statement is also materially false if it falsely represents the overall financial condition of the Debtor or has major omissions.” Bohr, 271 B.R. at 167 (citing Capital City Bank & Trust v. Kroh (In re Kroh), 88 B.R. 987, 994 (Bankr. W.D. Mo. 1988)).
Fifth Element: Intent to Deceive
As far as intent to deceive, “[k]nowledge of the falsity of the information or reckless disregard for the truth satisfies the intent element of § 523(a)(2)(B)” – a “malignant heart” is not required. Asbury, 441 B.R. at 634 (citing Agribank v. Webb (In re Webb), 256 B.R. 292, 297 (Bankr. E.D. Ark. 2000)); see also Bohr, 271 B.R. at 169.
Sixth Element: Reasonable Reliance
As far as the sixth and final requirement:
The determination of the reasonableness of a creditor’s reliance is to be made ‘in light of the totality of the circumstances.’ Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir.1993) (en banc). Among other things, a Court may consider ‘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.’
First Nat. Bank of Olathe, Kan. v. Pontow, 111 F.3d 604, 610 (8th Cir. 1997). “Reasonable reliance” is more demanding that “justifiable reliance” under subsection (a)(2)(A). Field v. Mans, 516 U.S. at 61. Reasonable reliance is an objective standard. See In re Braathen, 364 B.R. 688, 701 (Bankr. D.N.D. 2006).
With these elements in mind, the Court addresses each of the alleged written statements regarding financial condition in turn:
As previously explained, only four of the nine representations arguably relate to the Debtor’s financial condition – not the six the complaint alleges. The four relevant representations from the Jameses’ complaint are: (1) the Debtor’s representation that she had $999,500 in cash to purchase the property; (2) the Debtor’s representation that she was approved by Tailwind Funding for $999,500; (3) the Debtor’s representation that she had $989,500 available from Banner Bank to purchase the Property; and (4) the Debtor’s representation that she had a large estate sufficient to pay the purchase price. To the extent the elements are the same, the Court incorporates any relevant findings from its § 523(a)(2)(A) analysis. Taking each in turn:
The Debtor’s Representation That She had $999,500 in Cash to Purchase the Property
This representation, if made, comes solely from the Debtor’s act of signing the Contract. This Court finds that this representation was made in writing, and that it arguably relates to the Debtor’s financial condition. Assuming also that this statement was materially false, the Court finds the Debtor had no intent to deceive the Jameses. As already described in the context of the other representations, the Jameses have failed to produce evidence creating an inference that the Debtor intended to deceive them. At most, the Debtor was careless in signing an all-cash contract based upon Knowles’ representations that he would secure financing. Carelessness, however, does not rise to the level of reckless disregard. For this reason, this Court declines to find nondischargeability based on this representation.
The Debtor’s Representation That She Was Approved by Tailwind Funding for $999,500
Assuming this representation can be imputed to the Debtor, this Court finds that the requisite reasonable reliance is not present. The Contract’s only mechanism for ensuring that the Debtor had available funds to close the cash sale was the proof of funds provision. It required that she provide “written verification from a depository of funds on deposit” within five days.
Although the Jameses describe the Letter as a “proof of funds” representation, the Letter is from “Tailwind Funding, LLC,” not a depository of funds.
The Letter also states that Tailwind is willing to “provide funding” on behalf of the Debtor; it does not state that the Debtor has funds available. The Letter also reserves the right to impose “loan conditions,” a reservation not consistent with the cash terms of the Contract. Strong testified that the Letter did not raise any red flags, and Randy James testified to the same effect.
This Court finds such testimony credible, but notes that reasonable reliance is an objective standard, and not a subjective one. The Jameses’ actual reliance may suffice for the subjective justifiable reliance required under § 523(a)(2)(A), but does not suffice for the objective “reasonable reliance” required by § 523(a)(2)(B). For these reasons, the Jameses have failed to meet their burden to show reasonable reliance on the Letter.
The Debtor’s Representation That She Had $989,500 Available from Banner Bank to Purchase the Property
This representation suffers the same fatal flaw that it suffered under the Court’s alternative analysis under § 523(a)(2)(A): there was no actual reliance, and thus there cannot be reasonable reliance. The evidence shows that both the Jameses and Strong knew the Check was a fake almost immediately and that they did not rely on it for that reason. Nondischargeability based on this representation is denied.
The Debtor’s Representation That She Had a Large Estate Sufficient to Pay the Purchase Price
Assuming that the Debtor represented that she had a large estate or fund to purchase the Property, this statement is not actionable under § 523(a)(2)(B). Although this statement relates to the Debtor’s financial condition, there is no evidence that the statement was ever made in writing. For this reason, the Jameses have not met their burden of proof based on this alleged representation.
Conclusion as to Count II
In sum, on Count II, the Court concludes that the Jameses have failed to meet their burden of proof and that judgment should be entered in favor of the Debtor.
About the blogger:
Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
He is also the author of books on finance and bankruptcy available on Kindle through Amazon!
Whether you live in Mount Vernon, Wayne City, Carmi, Grayville and throughout Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!