In re Martin

• Decision Date: 28 August 2003
• Docket Number: Adversary No. 02-7181.,Bankruptcy No. 02-72273
• Citation: 299 B.R. 234
• Parties: In re Randolph S. MARTIN and Catherine Fox Martin, Debtors. Union Planters Bank, N.A., Plaintiff, v. Randolph S. Martin, Defendant.
• Court: U.S. Bankruptcy Court — Central District of Illinois

299 B.R. 234

In re Randolph S. MARTIN and Catherine Fox Martin, Debtors.

Union Planters Bank, N.A., Plaintiff, v. Randolph S. Martin, Defendant.

Bankruptcy No. 02-72273, Adversary No. 02-7181.

United States Bankruptcy Court, C.D. Illinois.

August 28, 2003.

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Gordon W. Gates, Springfield, IL, for debtor.

E. Franklin Childress, Jr., Memphis, TN, Emmet A. Fairfield, Springfield, IL, for plaintiff.

Mark T. Dunn, Bloomington, IL, for trustee.

OPINION

LARRY LESSEN, Bankruptcy Judge.

The issue in this adversary proceeding is whether a debt owed to Union Planters Bank, N.A. ("Plaintiff") should be determined nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B) because of a materially false financial statement submitted by Dr. Randolph S. Martin during the loan application process and refinancing of a 1980 Cessna Citation II 550 airplane.

The instant adversary proceeding arises out of a Complaint filed by the Plaintiff against the Defendant, Randolph S. Martin, the above named-debtor ("Debtor"), seeking a nondischargeable judgment in the approximate amount of $1,556,330.22 under 11 U.S.C. § 523(a)(2)(B) and Fed.R.Bankr.P. 4007(a).

By virtue of 28 U.S.C. § 157(b)(2)(I) this is a core proceeding. The court has subject matter jurisdiction of this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a).

The Plaintiff is a national bank with its headquarters located in Memphis, Tennessee, which, specializes in, among other banking and lending activities, aircraft lending. The Debtor, Randolph S. Martin, is a cardiologist practicing and residing in Springfield, Illinois. The Debtor and his wife filed a voluntary petition under Chapter 7 of the Bankruptcy Code on May 24, 2002 ("petition date"). The Court originally fixed August 16, 2002, as the last day for the filing of complaints objecting to discharge and for the determination of dischargeability of debts. On or about August 15, 2002, the Plaintiff filed a timely Motion pursuant to Fed.R.Bankr.P. 4007(c) seeking an order extending the time to file a dischargeability complaint which was duly granted in an Order entered August 16, 2002. On August 18, 2002, the Plaintiff timely filed the instant Complaint seeking to except a debt in the amount of $1,556,330.22 from the Debtor's discharge pursuant to 11 U.S.C. § 523(a)(2)(B). As of the petition date, the Debtor was indebted to the Plaintiff in the total amount of $1,556,330.22 by virtue of a personal guaranty executed by the Debtor guaranteeing the debts of an aircraft leasing business known as Martin Leasing, Inc. The Debtor owned 100% of Martin Leasing, Inc, and he served as president and the sole director of the corporation. Martin Leasing, Inc., is a single asset company formed solely for ownership of the Debtor's private airplane.

In order to secure the loan from the Plaintiff, the Debtor submitted a written Financial Statement dated April 30, 2001, containing a report of his assets and liabilities. The Debtor also submitted his 1999 and 2000 tax returns to the Plaintiff prior to the extension of credit. The Plaintiff also obtained an aircraft appraisal on December 13, 2001. On December 11, 2001, the Plaintiff obtained an Equifax credit report in order to examine the Debtor's credit history prior to extending credit. According to the Plaintiff's Credit Memo dated December 13, 2001, the Plaintiff approved the loan to the Debtor relying on the Debtor's Financial Statement dated April 30, 2001, the Equifax report, the Debtor's Beacon Score, and his tax returns for 1999 and 2000. On December 17, 2001, the Debtor, as President of Martin Leasing, Inc., executed a Promissory Note in favor of the Plaintiff in the principal amount of $1,575,560.00. The Debtor also executed a Guaranty Agreement on December 17, 2001, securing payment of the promissory note.

The Plaintiff approved a loan in the amount of $1,575,560. On December 24, 2001, the Plaintiff authorized a wire transfer of the loan proceeds in the amount of $1,560,000. (The difference — $15,560 — is made up of a $1,000 bank commitment fee plus $14,560 origination fee to Aviation Finance.) The Financial Statement dated April 30, 2001, failed to list over $23 million worth of contingent liabilities. Four months after the loan was made, the Debtor and his wife filed their voluntary Chapter 7 petition in bankruptcy.

On June 30, 2003, this Court conducted a trial to determine whether the debt owed to the Plaintiff should be deemed nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B). During the trial, the Court heard testimony from the Debtor; Timothy Young, the agent of the Debtor who procured the financing for the subject debt; Michael Holland, the Vice-President for Aircraft Lending for the Plaintiff; Deborah Culler, the Senior Credit Underwriter for the Plaintiff; and Donald J. Mallette, a business partner of the Debtor with experience in the airline industry. The deposition of Mr. Keith Bentley, who provided accounting and consulting services to the Debtor, was also admitted into evidence.

It is undisputed that the Debtor did not disclose over $23 million worth of contingent liabilities in the April 30, 2001, Financial Statement submitted to the Plaintiff. Deborah Culler unequivocally testified that, had the existence of the $23 million worth of contingent liabilities been disclosed, the Plaintiff would not have made the subject loan.

The Financial Statement was also inaccurate in other respects. The Debtor had listed as an asset an ownership interest valued at $100,000 in a condominium in Fort Lauderdale, Florida. The Debtor admitted that said condo was purchased for the Debtor's mother and that he never had title to it and that it was never in his name. The Debtor also listed as an asset a Harley Davidson motorcycle. Debtor admitted that he had sold the motorcycle sometime prior to the time he presented the Financial Statement to Plaintiff.

While admitting the inaccuracies and omissions, the Debtor maintains that he had no intent to deceive the Plaintiff. The Debtor also questions whether the Plaintiff reasonably relied upon the Financial Statement in making the loan.

Section 523(a)(2)(B) of the Bankruptcy Code excepts from discharge certain debts arising out of the debtor's issuance of false financial statements and specifically provides as follows:

(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 —

. . . . .

(B) use of a statement in writing —

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive(.)

11 U.S.C. § 523(a)(2)(B).

A plaintiff seeking an exception to discharge under Section 523(a)(2)(B) of the Code must prove all the elements by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Matter of Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994); Matter of McFarland, 84 F.3d 943, 946 (7th Cir.1996), cert. denied, 519 U.S. 931, 117 S.Ct. 302, 136 L.Ed.2d 220 (1996); In re Morris, 223 F.3d 548, 552 (7th Cir.2000). The failure of a plaintiff to prove any one of the above elements contained in Section 523(a)(2)(B) will result in a dismissal of the dischargeability complaint. Exceptions to discharge are to be strictly construed against the objector and liberally in favor of the debtor. Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915); Grogan, supra, 498 U.S. at 285, 287, 111 S.Ct. 654. See also Matter of Scarlata, 979 F.2d 521, 524 (7th Cir.1992); Matter of Zarzynski, 771 F.2d 304, 306 (7th Cir.1985).

As long as the statement is written, signed, adopted, or used by a debtor, the basic precondition concerning the writing requirement to the nondischargeability complaint under Section 523(a)(2)(B) is met. See, e.g., In re Napier, 205 B.R. 900, 905 (Bankr.N.D.Ill.1997); In re Batie, 995 F.2d 85 (6th Cir.1993); In re Kerbaugh, 162 B.R. 255 (Bankr.D.N.D.1993). No requirement exists for the use of an official form normally utilized by a creditor seeking to discharge a debt under Section 523(a)(2). See, e.g., In re Howard, 73 B.R. 694, 707 (Bankr.N.D.Ind.1987) (stating that the writing requirement is sufficiently broad enough to include any statement in writing made by the debtor and does not require a bank or financial institution application). As long as the written statement represents the Debtor's financial condition, the statutory requirement of a statement in writing is met.

The first element of Section 523(a)(2)(B) is satisfied because the Debtor, on or about November 26, 2001, submitted the Financial Statement dated April 30, 2001, for use by the Plaintiff in determining whether to make the subject loan. Although dated April 30, 2001, the Financial Statement was offered as evidence of the Debtor's "current" financial condition.¹ The Financial Statement was received by the Plaintiff prior to the extension of credit.

A financial statement is materially false if the information offers a substantially untruthful picture of the financial condition of the debtor that affects the creditor's decision to extend credit. Matter of Bogstad, 779 F.2d 370, 375 (7th Cir.1985); In re Bryson, 187 B.R. 939, 962 (Bankr.N.D.Ill.1995). The measuring stick of material falsity is whether the financial institution would have made the loan if the debtor's true financial condition had been known. Bogstad, supra, 779 F.2d at 375; see also In re Eckert, 221 B.R. 40, 44 (Bankr.S.D.Fla.1998) (citing Matter of Stratton, 140 B.R. 720, 722 (Bankr.N.D.Ill.1992)). A huge discrepancy in the actual net worth...