In re Brewood

• Citation: 15 BR 211
• Decision Date: 12 November 1981
• Docket Number: Bankruptcy No. 80-20610,Adv. No. 81-0003.
• Parties: In re Dale Robert BREWOOD, Debtor. BOATMEN'S NORTH HILLS BANK, INC., Plaintiff, v. Dale Robert BREWOOD, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas

15 B.R. 211 (1981)

In re Dale Robert BREWOOD, Debtor BOATMEN'S NORTH HILLS BANK, INC., Plaintiff, v. Dale Robert BREWOOD, Defendant.

Bankruptcy No. 80-20610, Adv. No. 81-0003.

United States Bankruptcy Court, District of Kansas.

November 12, 1981.

Douglas L. Bowen, Kansas City, Mo., Lonnie A. Hamilton, Shawnee Mission, Kan., for plaintiff.

Laurence M. Jarvis, Kansas City, Kan., for debtor-defendant.

Henry W. Green, Jr., trustee.

MEMORANDUM OPINION

BENJAMIN E. FRANKLIN, Bankruptcy Judge.

This matter came on for hearing on May 12, 1981, upon the plaintiff's Complaint to determine the dischargeability of a debt; or, in the alternative, a reclamation petition. Plaintiff, Boatmen's North Hills Bank, Inc., appeared by counsel, Douglas Bowen and Lonnie A. Hamilton. Defendant/debtor, Dale Robert Brewood, appeared by counsel, Laurence M. Jarvis. At the hearing, the Court sustained defendant's Motion for a directed verdict on plaintiff's 11 U.S.C. § 523(a)(2)(B) cause of action. The Court found that plaintiff had not sustained its burden of proof. Plaintiff did not prove that the defendant had obtained money or extensions of credit by a materially false¹ written instrument. (Journal Entry of May 18, 1981). At the conclusion of the defendant's case, the Court took under advisement two issues: (1) whether the plaintiff had sustained its burden of proof with respect to its 11 U.S.C. § 523(a)(2)(A) cause of action; and whether a reclamation ought to be granted to plaintiff in the alternative.²

FINDINGS OF FACT

There are no disputes between the parties as to the dates, amounts or security in connection with their eight loan transactions involved herein. Neither do they dispute that defendant received a total of 32 extensions of credit and that collateral was substituted on five of the loans. All other facts are in dispute, however. The Court, after reviewing the pleadings, exhibits, testimony, statements of counsel, and the file herein, finds as follows:

1. That the Court has jurisdiction over the parties and the subject matter.

2. That plaintiff made eight loans to defendant between May 19, 1977, and December 3, 1979. The loans were as follows:

                   DATE       AMOUNT      BALANCE DUE      EXTENSIONS      SECURITY      SUBSTITUTED SECURITY
                1) 5/19/77   $11,000.00    $3,587.79           9        1977 Ford        1976 Ford Pickup3 (substituted
                                                                                          on 10/21/77)
                                                                        1968 GMC
                                                                        1965 Stuart
                   _____________________________________________________________________________________________________
                2) 11/14/77  $10,000.00    $2,246.06           7        1969 Ferrari     1972 Jaguar*
                                                                                         1973 Ford
                                                                                         1972 Ford
                                                                                         (substituted 11/23/77)
                   _____________________________________________________________________________________________________
                3) 12/8/77   $6,000.00     $3,897.75           6        1974 Ford
                                                                        1972 Jaguar*     1975 Lincoln4
                                                                                         1974 Ford
                                                                                         (substituted 3/27/78)
                   _____________________________________________________________________________________________________
                4) 10/31/78  $7,000.00     $6,836.54           3        1978 Lincoln
                   _____________________________________________________________________________________________________
                5) 11/17/78  $3,500.00     $3,222.95           3        1978 Ford LTD    1978 Ford Fairmont
                                                                                         (substituted 3/6/79)
                   _____________________________________________________________________________________________________
                6) 1/2/79    $3,000.00     $2,455.21           3        1975 Cadillac    1979 Ford Wagon
                                                                                         (substituted 7/20/79)
                   _____________________________________________________________________________________________________
                7) 5/15/79   $7,700.00     $8,422.38           1        1979 Lincoln
                   _____________________________________________________________________________________________________
                8) 12/3/79   $1,000.00     $1,066.54           0        unsecured
                   _____________________________________________________________________________________________________
                             $49,200.00      -----      Total Principal of Loans
                                           $31,735.22   Total balance due on loans (including interest)
                   ____________________________________________________________________________________________________
                

3. That defendant convinced plaintiff that perfection was unnecessary; and that defendant should keep possession of the certificates of title to allow for rapid turnover or sale of the vehicles. As the vehicles were sold or otherwise disposed of, the parties entered into Substitution Agreements, which allowed the defendant to pledge substitute vehicles as collateral.

4. That for each extension or substitution of collateral, no new money was advanced by the plaintiff to the defendant.

5. That in their initial meeting in April of 1977, defendant advised Frank Romero (senior vice president of plaintiff) that he was a wholesaler and restorer of damaged vehicles. Defendant told Romero that sometimes vehicles were torn down and used as parts for other vehicles. Defendant did not tell Romero that any of the pledged vehicles would be torn down. Defendant always represented, at the time of each loan, extension, or substitution of collateral, that the pledged vehicles were restorable and that he would restore them. Although plaintiff was on notice of the nature of defendant's business, plaintiff never had actual knowledge that any of its collateral was "parted out" or destroyed.

6. That at the time of each loan, extension or substitution of collateral, the defendant expressly represented:

(a) That he was the titled owner of the vehicles;

(b) That the vehicles were in his possession and control;

(c) That the vehicles were free and clear of liens and encumbrances;

(d) That the vehicles had only minor body damage and would be restored;

(e) That the vehicles\' fair market value exceeded the amount of the loans they secured; and

(f) That the defendant\'s financial condition had not changed since his April 19, 1977 application for credit with plaintiff.

7. That the defendant testified that at the time the petition was filed, on July 1, 1980, the 1979 Lincoln was in the possession of Moore Motor Co., and that all other collateral vehicles were no longer in existence.

8. That there has not been a valuation of the collateral vehicles to date.

CONCLUSIONS OF LAW

Plaintiff contends that the debt should be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). That section states:

"(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt —

* * * * * *

(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor\'s or an insider\'s financial condition;"

Pursuant to Bankruptcy Rule 407, which continues in effect under the Code, the creditor objecting to a discharge has the burden of proving the facts essential to the objection. The creditor must make out a prima facie case. Johnson v. Bockman, 282 F.2d 544 (10th Cir. 1960).

The Ninth Circuit adopted a five part test for determining when a debt was nondischargeable under § 17(a)(2). Matter of Nelson, 561 F.2d 1342 (9th Cir. 1977); In re Houtman, 568 F.2d 651 (9th Cir. 1978).⁵ Although this Circuit has not adopted the test, it is a useful guideline. The five elements that the objecting creditor must prove are as follows:

1. That the debtor made the representation;

2. That at the time made, the debtor knew the representation was false;

3. That the debtor made the representation with the intent to deceive the creditor;

4. That the creditor relied on the representation; and

5. That the creditor sustained damage as a proximate result.

The first element of proof is that the debtor made the representation. Courts are split on the issue of whether an implied misrepresentation is actionable under 11 U.S.C. § 523(a)(2)(A). Some hold that an implied representation is actionable if it was knowingly false. See In re Harris, 458 F.Supp. 238 (U.S.D.C.Ore.1979), aff'd, 587 F.2d 451 (9th Cir. 1978), cert. den., 442 U.S. 918, 99 S.Ct. 2840, 61 L.Ed. 285; In re Quintana, 4 B.R. 508, 2 C.B.C.2d 293 (Bkrtcy., S.D.Fla.1980); In re Brooks, 4 B.R. 237, 2 C.B.C.2d 312 (Bkrtcy., S.D.Fla. 1980); In re Stone, 11 B.R. 209 (Bkrtcy., D.S.C.1981); In re Pommerer, 10 B.R. 935, 4 C.B.C.2d 766 (Bkrtcy., D.Minn.1981).

Other courts hold that the false representation must be overt. See Sears, Roebuck & Company v. Wood, 571 F.2d 284 (5th Cir. 1978); Davison-Paxon Co. v. Caldwell, 115 F.2d 189 (5th Cir. 1940), cert. den. 313 U.S. 564, 61 S.Ct. 841, 85 L.Ed. 1523 (1940).

This Court has held that an omission is not a false pretense or representation. In re Lamar, No. 78-20175 (D.Kan. 7-17-80). There, this Court cited two Tenth Circuit cases for the proposition that an omission did not constitute a materially false written statement under § 14(c)(3) of the Act. Kansas Federal Credit Union v. Niemeier, 227 F.2d 287 (10th Cir. 1955); Wolfe v. Tri-State Insurance Co., 407 F.2d 16 (10th Cir. 1969). This Court found that the same rule of law should apply to objections to the dischargeability of a debt procured by false representations or pretenses under §...