In re Gallagher
| Decision Date | 22 April 1987 |
| Docket Number | Bankruptcy No. 85-60820,Adv. No. 85-6085. |
| Citation | 72 BR 830 |
| Parties | In re Lee GALLAGHER, a/k/a Lee O. Gallagher; Lee Olivieri Gallagher; Lena Gallagher, Debtor. CALUMET NATIONAL BANK, Plaintiff, v. Lee GALLAGHER, a/k/a Lee O. Gallagher, et al., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
D. Baker, Gary, Ind., for debtor/defendant Lee Gallagher (Gallagher).
S. Burke, Munster, Ind., for plaintiff Calumet Nat. Bank (Calumet).
This matter is before us on the complaint of Calumet asking us to deny a discharge of Gallagher's debt to it on the ground that Gallagher submitted false financial statements.
This adversary proceeding was instituted by the complaint, filed August 15, 1985, to determine the dischargeability of Gallagher's indebtedness to Calumet.1 Pre-Trial Statements were filed and a Bench Trial was held on February 11, 1987. After receiving evidence and hearing oral argument, decision was reserved.
The facts are not unduly complicated. On December 1, 1982, Calumet lent Gallagher and her late husband, Dr. Gallagher, $10,000.00. The terms included a March 1, 1983 due date, and interest at sixteen percent (16%). The promissory note was signed by Gallagher and her husband. Thereafter, the note was renewed every ninety (90) days at varying rates, with little principal reduction. Dr. Gallagher died on April 9, 1985, and on May 26, 1985, the note, with a balance of $8,400.00, was not renewed by Calumet. Shortly thereafter, Gallagher filed Chapter 7 Bankruptcy.
Personal financial statements, signed by both Gallaghers, were provided to Calumet on November 30, 1982, October 10, 1983, and January 30, 1985. Gallagher, from knowledge acquired after her husband's death, does not now dispute Calumet's contention that the financial statements materially misrepresented the financial condition of the debtor and her late husband. Gallagher testified that she knew little about her family's financial affairs and nothing of her husband's financial affairs concerning his dental practice. For over thirty (30) years, Gallagher's husband controlled both family and business financial matters, and if her husband "asked her to sign, she signed." She was not sure whether the financial statements were completed when she signed them, although they do show that she completed some of the peripheral non-financial data2 on the January 30, 1985 financial statement.
She claims she never read the financial statements and did not know their purpose. From the evidence at trial, it is obvious to us that Gallagher did not complete the initial financial statement. Later financial statements, including the January 1985 financial statement, were completed by at least two (2), and possibly three (3), different individuals, one of whom was Gallagher. The quantitative data on all three financial statements was completed by the same individual, which could have been either Dr. Gallagher or his secretary. There was no testimony contradicting Gallagher's denial that she did not fill in any of the quantitative financial data on the financial statements. Gallagher thinks they were filled in by her husband. With no evidence to the contrary, we find that Gallagher's deceased husband completed the quantitative financial data on the financial statements.
Testimony from a former Calumet officer described the procedures he used to approve the initial loan to the Gallaghers. The proposed loan to the Gallaghers exceeded his lending authority, so, in accordance with bank procedures, he relayed the financial data from the November 30, 1982 financial statement to a senior officer. Based on that financial statement, the senior officer approved the loan. Inquiry by the Court informed us that a credit check was performed before the loan was made and had it been negative, the money would not have been lent to the Gallaghers. He further testified that he checked a reference source provided by the Gallaghers, and otherwise did not discover anything negative about the Gallaghers.
On direct examination by Calumet's counsel, Gallagher testified she knew personally about the existence of some of the specific assets listed in the financial statements, however, she was generally ignorant about Dr. Gallagher's dental business and their personal financial affairs. For instance: NIPSCO and Gary National Bank stock, listed on the financial statements as being owned by Gallagher, were in fact owned by her mother with right of survivorship in Gallagher. Gallagher thought she owned them, but later understood that she was only to receive them upon her mother's death; she claims several "E" bonds listed on the financial statements were not found after her husband's death. She thinks he cashed them in, but she had no real evidence on the subject; she believes her house is worth $120,000.00; a post-petition appraisal, albeit a poor one, states the house was worth $75,000.00 on the date of her husband's death; a diamond is listed in the financial statement as being worth between $15,000.00 and $25,000.00. Gallagher testified that it was lost on the day of her husband's death and that she could not collect on the insurance for this loss because the insurance had lapsed for nonpayment of its premium.
Suffice it to say, the evidence goes on and on about what Gallagher believed and what reality was. She may have known they had loans, debts for their children's college education, and other general matters; however, we find that she did not know about the specifics of her husband's or her own financial affairs. Our finding is corroborated by the loan officer's testimony that characterized Gallagher's status as that of a wife who did the running around (errands) for a typical small business owner. She may have been fooled by her husband, maybe even by herself, and, while we hesitate for literary purposes to state this almost oxymoron, it is clear to us that Gallagher hadn't the foggiest idea what was going on in her financial environment.
Other evidence shows that the initial purpose of the loan was to consolidate bills and pay for a daughter's education. The renewal a year later expressed the loan's purpose to be for the dental business, while the January, 1985 renewal expressed the purpose was, again, to consolidate bills.
Gallagher's sole source of income and support was from her husband's dental practice. At no time, either prior to or during the time the loan was made and renewed, was Gallagher employed. In fact, with the exception of employment in her parent's store as a young woman, Gallagher never worked in the business world.
The former bank officer testified that it was his understanding that the revenues to repay the loan would come from Dr. Gallagher's dental business, and not from the debtor. Although the bank officer testified that he knew the loan was for the business and its expenses, we received no evidence or explanation as to why business profit and loss financial statements or even tax returns were not required by Calumet. The officer did testify, however, that the financial statements he did receive were those the bank required for a self-employed person.
The bank officer testified that from his experience loan applicants tended to place values higher than the actual market value on their personal assets. No independent verification, other than the credit and reference check, was conducted either at the time of the initial loan application or before the several renewals. Moreover, the Bank's counsel conceded during final argument that no independent verification was performed because it would be ridiculous to spend time or money on a $10,000.00 loan. From the face of the financial statements, we can glean that Dr. Gallagher's income rose from $38,000.00 in 1982, $42,000.00 in 1983, to $56,000.00 in 1985. Yet, no investigation was made by the bank as to how and why the financial statement values of "automobiles and other personal property" rose from $100,000.00 in 1982 and 1983 to $250,000.00 in 1985, or "other assets" of furs, silver, gold coins, pearls & ivory, and diamonds rose from $48,000.00 in 1982 and 1983 to $87,000.00 in January of 1985.
Early on the loan was in trouble. If not from the start, Calumet certainly knew the loan was in trouble by the second renewal in early 1983. The bank officer testified that he had talked to Gallagher about their inability to reduce principal and she explained generally that the dental office had expenses, U.S. Steel layoffs reduced the dental insurance income, the children were in college, and Dr. Gallagher could not come up with the money. He also testified that he knew times were bad. When asked by the Court why the loan was renewed several times after the cash flow problems appeared, the former bank officer replied that it was the bank's policy to salvage bad cases. Again, no investigations were made by Calumet to ascertain the true condition of the assets or liabilities listed in the financial statements despite their knowledge that the Gallagher's loan was in trouble for over two (2) years before the non-renewal.
Calumet, an unsecured creditor, contends that Gallagher, either intentionally or recklessly, caused to be published materially false financial statements, by showing: (1) assets that were either not in existence or conveniently disappeared on the day of her husband's death; (2) her net worth and overall financial condition was much better than it actually was; and (3) by only filling in the non-financial data and otherwise signing them without considering their contents.
Gallagher, with the benefit of hindsight, admits that the financial statements contain quantitative falsities, but contends that the debt to Calumet is dischargeable because: she did not cause materially false...
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