In re Iaquinta
| Decision Date | 28 April 1989 |
| Docket Number | Bankruptcy No. 87 B 16734,Adv. No. 88 A 00118. |
| Citation | 98 BR 919 |
| Parties | In re John IAQUINTA, Debtor. FIRST STATE BANK OF ALSIP, Plaintiff, v. John IAQUINTA, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Harold Rosen, Mark E. Burt, Wolin & Rosen, Chicago, Ill., for defendant John Iaquinta.
Naomi H. Schuster, Sosin & Schuster, Ltd., Alsip, Ill., for plaintiff First State Bank of Alsip.
This adversary proceeding comes before the Court on the amended complaint of First State Bank of Alsip (the "Bank") for a determination of the dischargeability of certain debts owed it by debtor defendant John Iaquinta ("Iaquinta") for violations of Section 523(a)(2)(A) and (a)(6) of the Bankruptcy Code. For the reasons set forth below, the Court having considered all the pleadings and evidence adduced at trial by way of testimony and exhibits, does hereby sustain the Bank's dischargeability complaint against Iaquinta based on section 523(a)(6) but denies the relief sought under section 523(a)(2)(A).
The Court has jurisdiction to entertain this adversary proceeding pursuant to 28 U.S.C. § 1334 and General Orders of the United States District Court for the Northern District of Illinois. This adversary proceeding constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(I).
The Bank is engaged in business as an Illinois banking corporation with its principal banking house in Alsip, Illinois. Iaquinta was a shareholder and officer of Rocket Auto Sales, Inc. ("Rocket"). Rocket started business in 1983 and was engaged in the business of buying and selling used cars. It was formed, operated, and controlled by Iaquinta and his brother Peter. On or about August 2, 1983, Iaquinta executed a note and security agreement (the "first note") in favor of the Bank for the sum of $14,500.00. A certain 1983 Oldsmobile Toronado was secured under the first note.1 About a year later on October 13, 1984, the Bank loaned Iaquinta the sum of $15,000.00. Iaquinta executed a note and security agreement (the "second note), secured by a 1979 Mercedes Benz 300SD. Subsequently, on August 29, 1986, the Bank loaned Iaquinta $3,000.00. Iaquinta executed a third note and security agreement (the "third note") and granted the Bank a security interest in a 1981 Oldsmobile Cutlass Brougham. Finally, on March 9, 1987, the Bank loaned Iaquinta and Rocket $13,854.97. Iaquinta individually and as president of Rocket executed a fourth note and security agreement (the "fourth note") in favor of the Bank secured by collateral consisting of a 1984 Oldsmobile Cutlass Supreme, a 1979 Mercedes Benz 240D, a 1979 Mazda RX7 and a 1979 Jeep CJ7.
Both Iaquinta and Rocket experienced financial reverses and Iaquinta filed a Chapter 7 petition on November 12, 1987. On February 16, 1988, the Bank filed its original complaint to determine dischargeability under section 523(a)(2)(A). Subsequently, the complaint was amended to include a cause of action under section 523(a)(6).
The substance of the amended complaint under section 523(a)(2)(A) is that Iaquinta misrepresented that he had or would acquire good and marketable title to the collateral and the Bank relied on such representation. The amended complaint further alleges pursuant to section 523(a)(6), Iaquinta, without the Bank's consent, knowledge or authority, sold the vehicles without substituting titles or remitting proceeds, thereby injuring the security interests in the collateral. The Bank seeks as damages the full balances owed on all four notes. The damages claimed exceed $25,000.00 plus accrued interest, costs and attorneys' fees. Iaquinta denied the substantive allegations of the amended complaint.
The party seeking to establish an exception to the discharge of a debt bears the burden of proof. In re Martin, 698 F.2d 883, 887 (7th Cir.1983). The standard of proof under section 523(a)(2), (a)(4) and (a)(6) is one of "clear and convincing evidence." In re Bogstad, 779 F.2d 370, 373 (7th Cir.1985). The discharge provisions of section 523 are construed strictly against a creditor and liberally in favor of a debtor. In re Pochel, 64 B.R. 82, 84 (Bankr.C.D.Ill. 1986). See generally 3 Collier on Bankruptcy, § 523.084 (15th ed. 1988).
Section 523(a)(2)(A) provides as follows:
11 U.S.C. § 523(a)(2)(A).
In order to except Iaquinta's debt from discharge under this section, the Bank must establish three elements: (1) Iaquinta obtained the money or credit through representations either knowingly false or made with such reckless disregard for the truth as to constitute willful misrepresentation; (2) Iaquinta possessed an actual intent to defraud; and (3) the Bank actually and reasonably relied upon the false representation. In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985); In re Garman, 643 F.2d 1252, 1256 (7th Cir.1980). For purposes of section 523(a)(2)(A), the timing of the fraud is critical. To recover under section 523(a)(2)(A), the Bank must prove by clear and convincing evidence that Iaquinta's fraud existed and occurred at the time the notes were executed. In re Vissers, 21 B.R. 638, 640 (Bankr.E.D.Wis. 1982); 3 Collier on Bankruptcy ¶ 523.08 at 523.49 (15th ed. 1988).
The evidence relative to Iaquinta's alleged fraudulent conduct focused on the representations made as to the ownership of three of the motor vehicles. At the time Iaquinta executed the notes and security agreements, he represented to the Bank that he had or would acquire good and marketable title to the collateral. However, Iaquinta admitted he never acquired title in his name to any of those vehicles. Iaquinta contends that he had no intent to defraud. Moreover, he states the course of dealings between the parties should govern notwithstanding the terms of the written documents. The course of dealings between the parties was informal and loose at best. The Bank never took action to monitor its collateral and apparently failed to discover that all of its security interests were unperfected.
From his testimony, the Court finds that Iaquinta was very experienced in buying and selling automobiles and knew the effect of granting a security interest in collateral. Iaquinta made no showing that his actions in failing to acquire title to any of the vehicles were merely inadvertent. Iaquinta's misrepresentations in that regard were either knowingly false or made with such willful disregard for the truth as to constitute willful misrepresentations. The Court can therefore reasonably infer his actual fraudulent intent. Furthermore, the granting of a subsequent security interest in one of the vehicles to another bank, is additional evidence of fraudulent intent.
The Bank's proof on the third element, however, is fatally insufficient. Actual reliance may be shown by unchallenged testimony that a creditor would not have extended that credit had it known the truth. In re Kreps, 700 F.2d 372, 376 (7th Cir.1983). Although the Bank may have actually relied on the representations at the time the notes were executed, it has not met the reasonable reliance test. The standard for measuring the reasonableness of a creditor's reliance is an objective one. In In re Mitchell, 70 B.R. 524 (Bankr.N.D.Ill. 1987), Judge Schmetterer set out a three-prong test to decide whether a creditor's reliance was in fact reasonable. Although Mitchell was a section 523(a)(2)(B) case, the Court finds that the reasonable reliance test set forth therein is applicable to section 523(a)(2)(A) as well. The following three factors must be considered when determining if reliance was reasonable: 1) the creditor's standard practices in evaluating credit worthiness; 2) the standards or customs of the creditor's industry in evaluating credit worthiness; and 3) the surrounding circumstances existing at the time of the debtor's application for credit. Mitchell, 70 B.R. at 527-528.
The evidence did not clearly establish what the Bank's standard practices were in evaluating credit worthiness of borrowers like Rocket and Iaquinta. See In re Ardelean, 28 B.R. 299, 301-302 (Bankr.N. D.Ill.1983). Furthermore, the proof did not include a showing that the Bank conducted any commercially reasonable investigation of Rocket or Iaquinta in accordance with usual standards or customs of the commercial banking industry. Moreover, the Bank failed to 1) take any steps to verify ownership of the vehicles; 2) take any action to perfect its security interests; or 3) obtain the motor vehicle titles themselves.
Ray Wentler ("Wentler") testified as a Bank officer that money was lent to Iaquinta even though the Bank did not have the titles because Iaquinta was a good customer. The requirement that the loans be secured rather than unsecured should have routinely spurred some investigation and action on the Bank's part. See, e.g., Bogstad, 779 F.2d at 372-373 n. 4. The only action taken by the Bank prior to the filing of the bankruptcy petition was having Iaquinta sign the loan documents. If reasonableness requires verification, then a creditor cannot be said to have acted reasonably if no verification took place. In re Smigel, 90 B.R. 935, 937-940 (Bankr.N.D.Ill.1988). The exception potentially excusing some investigation of credit worthiness due to a longstanding favorable credit relationship between the parties appears inapplicable. See Garman, 643 F.2d at...
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