In re Catherman

• Decision Date: 08 July 2005
• Docket Number: No. 04-3292.,04-3292.
• Citation: 331 B.R. 333
• Parties: In re William/Georgia CATHERMAN, Debtors. Yvan Cote, et al., Plaintiffs, v. William Catherman, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

331 B.R. 333

In re William/Georgia CATHERMAN, Debtors Yvan Cote, et al., Plaintiffs, v. William Catherman, Defendant.

No. 04-3292.

United States Bankruptcy Court, N.D. Ohio.

July 8, 2005.

COPYRIGHT MATERIAL OMITTED

Duane L. Galloway, Sandusky, OH, for debtors.

MEMORANDUM OPINION AND DECISION

RICHARD L. SPEER, Bankruptcy Judge.

This cause comes before the Court after a Trial on the Plaintiff/Creditor's complaint to determine dischargeability of debt. The Creditor brings this suit pursuant to the statutory exception to discharge under 11 U.S.C. § 523(a)(2)(A). The Court has now had the opportunity to review the arguments of Counsel, the exhibits, as well as the entire record of the case. Based on that review, and for the following reasons, the Court finds that the Creditor has not met his burden under § 523(a)(2)(A); and thus the debt at issue is Dischargeable.

FACTS

The following facts are undisputed: the Debtor, William H. Catherman, worked for the Creditor's brother at Bay Window and Door. Because of slow business during the winter months, in early December of 2002, the Debtor borrowed the sum of $6,000.00 for living expenses from the Creditor.¹ There was no security for the loan.

In January 2003, the Debtor's mother passed away causing him to incur additional debt for funeral expenses. In early March 2003 the Creditor extended another loan to Debtor in the amount of $4,700.00, via a check marked "funeral." The Parties consolidated the two loans into a single promissory note (hereinafter "note") for a total of $10,700.00. (Ex. A.). When arranging for the second loan, the Creditor requested that the Debtor's wife co-sign. However, when the Parties later met to sign the note, the Debtor said that his wife would not sign. Instead, the Debtor offered as alternative consideration the following supplemental term:

In event of my death before loan paid off —

Balance be paid by money received Matrix Direct Life Insurance Policy # 41871001.

(ex. D).

The Parties attached this term (hereinafter, "supplementary term") to the note. There is no evidence that the Creditor was ever named as a beneficiary on the life insurance policy. The note included a payment schedule of $300 per month for four years on which the Debtor began making payments. Neither the note nor the supplementary term mentions the purpose for the loan. There is also no mention of security for the loan in either document.

A few months after the Parties signed the agreement, the Debtor became unemployed when his employer, Bay Window and Door, ceased operations. The Debtor has since been unsuccessful in obtaining further employment despite some efforts. The Debtor made his final payment to the Creditor in July of 2003. In May 2004, the Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code. Among the Debtor's unsecured claims, the Debtor listed the funeral home (app.$2,000.00) and the remaining debt due the Creditor in this case (app.$10,000.00).

The circumstances surrounding the second loan give rise to the § 523(a)(2)(A) claim. The Creditor avers that the Debtor intentionally misrepresented (1) that the purpose of the loan was to pay his obligation to the funeral home, and (2) that his life insurance would secure the loan. The Debtor denies ever representing that the funds were primarily for funeral expenses and also denies that he ever offered any security on the loan.

LAW

11 U.S.C. § 523.

(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[.]

DISCUSSION

Proceedings, such as this, brought pursuant to 11 U.S.C. § 523(a)(2)(A) to determine the dischargeability of a particular debt, are deemed "core proceedings" over which this Court has subject matter jurisdiction and the authority to enter final orders. 28 U.S.C. § 157(b)(2)(I).

Generally speaking, § 523(a)(2)(A) excepts from discharge debts incurred by a dishonest act. This statutory exception to discharge is at the center of the fundamental bankruptcy policy which holds that only the honest but unfortunate debtor is entitled to a discharge of his or her debts. Cohen v. de la Cruz (In re Cohen), 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). Under § 523(a)(2)(A), a creditor seeking to except a debt from discharge must prove that:

(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth;

(2) the debtor intended to deceive the creditor;

(3) the creditor justifiably relied on the false representation; and

(4) its reliance was the proximate cause of loss.

Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir.1998). The creditor has the burden of establishing each of these elements by a preponderance of the evidence. Id. at 281. The Court will now address these elements as they relate to the instant case.

To show that the Debtor's representation satisfies the first element, that of making a false representation, the Creditor argues that the Debtor misrepresented that the loan was to pay a debt for his mother's funeral. The Debtor, while not disagreeing with the Creditor that the loan was at least partially to pay the funeral debt, claims never to have represented the funeral debt to have been the primary purpose for the loan. Rather, the Debtor's version is that the loan was for various debts, including the funeral. And in support of this account, the evidence shows that the Debtor did, in fact, pay a small amount ($108.00) on the funeral. Therefore, the Court takes the Creditor's argument to mean that the Debtor falsely represented that the loan was to be used primarily for the funeral debt.

Other than the Creditor's testimony, the only documentary evidence in support of the Creditor's position is the check for $4,700.00 which the Creditor gave the Debtor for the loan. The Creditor wrote "funeral" on the memo line of the check, which the Creditor claims indicates the primary purpose for the funds. But, based upon the weight of the following, the Court cannot find that any misrepresentation was made by the Debtor as to the primary purpose of the loan.

First, the Debtor's representation would have been truthful because he did have outstanding debts for his truck, his mortgage, and credit cards in addition to the funeral. The Creditor even admitted that he was aware of the Debtor's various financial hardships, through his relationship with his brother, the Debtor's employer, and through having previously extended credit to him. Second, the only documentary evidence that shows the loan was for the funeral is the check, but even that does not show that the loan was primarily for the funeral. In contrast, no purpose for the funds was listed in either the promissory note or the handwritten supplement, where it could easily and more appropriately have been included.

In conclusion, the evidence put forth by the Creditor is insufficient to show that the Debtor represented that the loan was primarily for the funeral. Thus, the Creditor has not met his burden in showing that the Debtor made a false representation concerning the purpose for the loan. As for the representation about the life insurance operating as security for the loan, as will become clear below, this point is more appropriately addressed under the element of intent.

A creditor must establish that it was the debtor's intent to deceive him into extending credit through a false representation. Weeber v. Boyd (In re Boyd), 322 B.R. 318, 324 (Bankr.N.D.Ohio 2004). Whether a debtor possessed an intent to defraud a creditor within the scope of § 523(a)(2)(A) is measured by a subjective standard. Rembert, 141 F.3d at 281. The inquiry, then, is whether a debtor subjectively intended to fulfill a promise at the time he made it. Id. Because a debtor rarely, if ever, admits to acting with the intent to deceive, the Court must consider circumstantial evidence concerning the debtor's state of mind at the time of the alleged deception. Binger v. Bloomfield (In re Bloomfield), 293 B.R. 148, 153 (Bankr.N.D.Ohio 2003). This may include inquiry into such factors as the timing of events, the financial sophistication of the debtor, whether or not the debtor was employed at the time he made the charges, and the debtor's conduct in light of subsequent events. Id.; see also Rembert, 141 F.3d at 282 (listing factors to consider when determining whether a debtor intended to repay credit card debt). A debtor's efforts, such as incremental payments in fulfillment of an obligation, are strong evidence against intent to deceive. In re Boyd, 322 B.R. at 324-25. In summary, the Court must ascertain a debtor's subjective intention by examining the totality of the circumstances. Rembert, 141 F.3d at 282.

Here the Creditor avers that the Debtor intended to deceive by representing that the insurance policy would secure the loan. This argument necessarily presupposes that the Debtor understood how to effectuate a security agreement. On this point, the evidence tends to show that the Debtor was unaware of what was necessary to create an assignment of insurance as security for a loan. The...