In re Harmer, Bankruptcy No. 81C-03791
| Decision Date | 24 October 1984 |
| Docket Number | Civ. No. 82PC-0158.,Bankruptcy No. 81C-03791 |
| Citation | 61 BR 1 |
| Parties | In re John L. HARMER, Debtor. NORTH PARK CREDIT, Plaintiff. v. John L. HARMER, Defendant. |
| Court | U.S. Bankruptcy Court — District of Utah |
N. George Daines, Logan, Utah, for plaintiff.
Don B. Allen of Ray, Quinney & Nebeker, Salt Lake City, Utah, for debtor defendant.
This is a civil proceeding to determine the dischargeability of a debt. It is brought pursuant to Section 523(a)(2)(B) of the Code for a determination that the subject debt was incurred when the debtor obtained money through the use of a materially false written statement about the debtor's financial condition on which the plaintiff's assignor relied and which the debtor made or published with the intent to deceive.
This court has jurisdiction over this case by virtue of 28 U.S.C. 157. Moreover, the court finds that this is a "core matter" within the meaning of 28 U.S.C. 157(b)(1), as exemplified in 28 U.S.C. 157(b)(2)(I).
On December 30, 1981, debtor, John L. Harmer ("Harmer") filed a voluntary petition under Chapter 7 of the Code, and on February 18, 1982, plaintiff, North Park Credit ("North Park"), commenced this adversary proceeding against Harmer under Section 523 of the Code.
The factual developments leading to this civil proceeding took place over a five year period beginning in August of 1976. At that time the North Park Bank of Commerce ("Bank") had an influential customer named Marvin V. Fish ("Fish"), who recommended Harmer to the Bank as a politically prominent California attorney with an excellent reputation. Fish described Harmer as an attorney, legislator, business and political consultant, former California Lieutenant Governor, and unsuccessful candidate for the office of California Attorney General. Fish then arranged with the Bank's manager, Marvin Steed ("Steed") to meet with Harmer, who wished to borrow from the Bank the sum of $35,000.
Prior to the meeting with Steed, Harmer mailed to the Bank a letter dated July 23, 1976, stating:
Sincerely /s/ John L. Harmer
Enclosed with this letter were two documents. The first was a November 22, 1974 letter from Jones & Giles, certified public accountants, of San Gabriel, California to Lt. Governor John L. Harmer of Sacramento, California, stating:
The accompanying statement of assets and liabilities of Mr. and Mrs. John L. Harmer as of November 15, 1974 were not audited by us and accordingly we do not express an opinion on the statement.
Respectfully /s/ Jones & Giles
At the bottom of this same letter of Jones & Giles there was appended the following handwritten note:
This statement remains basicly sic unchanged except that the value of the home has increased as is reflected by the attached real property tax assessment — and the motel is now an operating facility of 75 rooms with an appraised value of $1.64 million.
/s/ John L. Harmer
The second document enclosed with Harmer's July 23 letter was the financial statement dated November 15, 1974, showing Harmer's net worth at $754,750.
On August 4, 1976, a meeting took place between Harmer and Steed. At that time, after a short visit between them, Harmer signed a promissory note, dated August 6, 1976, in the amount of $35,000, made in favor of the Bank. At this meeting, Harmer was asked to provide a more up-to-date financial statement. Notwithstanding this request, the Bank processed the loan and the sum of $35,000 was disbursed to Harmer. At some time thereafter, the Bank assigned this note to North Park Credit, plaintiff here.
Later, Harmer submitted to the Bank a second financial statement, dated August 10, 1976.
After Harmer filed a petition in bankruptcy, North Park brought this civil proceeding claiming that (1) Harmer submitted his August 10, 1976 financial statement for the purpose of obtaining the $35,000 loan of August 4, 1976; (2) that the financial statement on which the plaintiff reasonably relied was materially false and misleading in that it (a) overstated cash actually held, (b) gave misleading and incorrect dates concerning the real estate held by Harmer, (c) omitted the disclosure of notes owed and accounts payable, (d) significantly understated debts, notes payable, and real estate mortgages, and (e) gave a net worth of $754,750 which was totally false.
Harmer denied all the material allegations of the plaintiff's complaint, and asserted in defense that the financial statements together with additional information provided by Harmer to the Bank accurately and correctly reflected his financial condition. On these grounds, Harmer moved for the dismissal of the complaint. That motion was denied, and a trial was held on the merits.
The sole question presented to the court is whether or not the facts adduced at trial demonstrate, by a clear and convincing standard of evidence, that the debtor obtained money, property, credit, or services by the use of a materially false statement, in writing, respecting the debtor's financial condition, made by the debtor with the intent to deceive, and reasonably relied upon by the plaintiff in advancing to the debtor loan funds in the principle sum of $35,000.
After due consideration, it is the opinion of this court, for the reasons set forth here, that (a) the plaintiff has established its prima facie case for nondischargeability by clear and convincing evidence, (b) the debtor has failed to assert credible defenses, (c) the debtor did, within the purview of Section 523(a)(2)(B), obtain money from the plaintiff's assignor by the use of materially false statements, and (d) the debtor's debt to the plaintiff is not dischargeable in bankruptcy.
Section 523 of the Code provides, in pertinent part, that a discharge does not affect any debt:
11 U.S.C. Section 523(a)(2)(B).
The burden of proof is on the creditor,1 who must prove his case by a "clear and convincing" standard of evidence.2 In establishing a prima facie case for determining the dischargeability of a debt under the provision quoted above, the creditor must show that the debtor (1) obtained money, property, credit, or services by the use of a materially false statement, (2) in writing, (3) respecting the debtor's financial condition, (4) made with intent to deceive, and (5) reasonably relied upon by the creditor to advance the money, property, credit or services.3
The creditor need not prove the element of intent to deceive. This will be presumed to be true once the creditor has carried the burden of persuasion on all the other elements of his prima facie case. At that point, the burden of going forward with evidence on the intent element shifts to the debtor, who by the mere introduction of evidence that rebuts the presumed fact of intent will cause that presumption to disappear.4
In this case, there is no question that Harmer submitted to the Bank written financial statements respecting the debtor's financial condition and obtained a $35,000 loan as a result. The questions remaining for disposition are (1) whether either or both of the financial statements were materially false, (2) whether either or both of them were reasonably relied upon by the lender to advance money, property, credit, or services, and (3) whether either or both of them were submitted by the debtor with the intent to deceive the creditor.
Courts have attempted to set forth a meaningful definition of the term "materially false" as it is used in Section 523(a)(2)(B). In a number of cases, they have interpreted "materiality" in terms of dollar amounts.5 In one case, "materially false" was said to mean a "substantial and important untruth";6 in another case, it was said to mean "actually false," or simply "false" or "untrue";7 and in yet another case, "materially false" was said to mean any discrepancy between the debtor's actual financial status and the picture of it painted by his financial statement.8 In a long line of cases, it has been held that the omission, concealment, or understatement of any of the debtor's liabilities constitutes a "materially false" statement.9
In this case, the court was presented with an extreme case of material falsity. The financial statement dated November 15, 1974, which Harmer submitted to the Bank prior to the date the loan was made, listed assets of $1,959,450, liabilities of $1,204,700, and a net worth of $754,750. Harmer advised the lender that this was "basicly sic" true. But, in fact, Harmer's net worth at the time was, at best, only $74,000.
The second financial statement, dated August 10, 1976, showed a decline in net worth from almost three-quarters of a million dollars to $353,000, with assets totaling $1,589,000, and liabilities totaling $1,236,000. However, in his testimony at trial, Harmer contradicted his second financial statement, stating that his net worth was as follows:
Case $ 3,000
Home Equity 70,000
Motel Equity 55,000
Stock 40,000
Notes 21,000
_______
Total 189,000
Moreover, the evidence adduced at trial clearly and convincingly showed that Harmer had omitted from both financial statements judgment liens against his residence...
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