In re Stewart

Decision Date03 February 1982
Docket NumberBankruptcy No. 3-81-00094,Adv. No. 3-81-0603.
Citation19 BR 165
PartiesIn re Bill J. STEWART, Debtor. UNITED SECURITY BANK, Plaintiff, v. Bill J. STEWART, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of Tennessee

Leonard & McRee, Thomas M. Johnson, Bristol, Tenn., for plaintiff.

Waddy, Blankenship & May, Michael May, Kingsport, Tenn., for defendant.


CLIVE W. BARE, Bankruptcy Judge.

This adversary proceeding involves the dischargeability of debts. 11 U.S.C. § 523(a)(2)(A), (B). Trial was held October 19, 1981.


The debtor, Bill J. Stewart, from 1954 until December 1980, was at all times principally engaged in the insurance business. In 1966 he purchased a one-third interest in J.T. Parker Insurance Agency, Inc., with two other principals, Donald C. Wolford and George A. Jeter. Stewart served as president of the Agency until he sold his interest to the other principals in December 1980.

In 1972 Stewart entered into a partnership business with C.W. Hurst and sold recreational vehicles from his home. The business was part-time for both partners. In 1974 Stewart purchased Hurst's interest in the recreational vehicle business and the business was expanded and incorporated as Mall Auto and Trailer Sales and Leasing, Inc. (Mall Auto). From 1974 until 1978 Mall Auto was operated by a business manager, Billy C. Neely. In 1978 William P. Roller purchased 50% of the capital stock of Mall Auto and began operating the business as manager. In December 1979 Roller left the management of the business but retained his 50% stock interest. Stewart assumed management of Mall Auto but continued his primary occupation in the insurance business with the Parker Agency.

During Mall Auto's business life, financing was arranged primarily with the First National Bank of Sullivan County and the United Security Bank. In 1975 Bob N. Davidson, United Security's president and chief executive officer, solicited and obtained Mall Auto's banking business as the result of contacts with Stewart. The Bank's normal business contact was with Billy C. Neely, Mall Auto's general manager.

In May 1980, Fred Flick became chief executive officer at the United Security Bank. At that time Mall Auto's loans totaling some $110,000.00, as well as one or more of Stewart's personal loans, were in default. Flick did not personally know Stewart but contacted him by phone and arranged a meeting for July 1 at Stewart's place of business. At that meeting Flick requested a current financial statement and Stewart furnished him with a photocopy of a statement dated September 30, 1979. Ex. 10. After considerable discussion, the loans were renewed for a ninety day period.1 In October 1980 the Bank asked for payment but Stewart was unable to pay. Stewart requested that he be permitted to conduct a sale of Mall Auto's rolling stock. The sale was unsuccessful, however, and in December 1980 the Bank foreclosed its security interest in Mall Auto's inventory at public auction.

On January 7, 1981, the Bank instituted suit in the State Court against Mall Auto; Stewart; his wife, Joyce Stewart; William P. Roller; Judy Roller; and Stewart's son and daughter, Gary and Donna Stewart, averring that Stewart, his wife, his two children, and the Rollers had guaranteed the debts of Mall Auto. The Bank also separately instituted suit against Bill J. Stewart and Joyce Stewart for personal loans. On January 19, 1981, the Bank filed an involuntary petition in bankruptcy against Bill J. Stewart. 11 U.S.C. § 303. On April 23, 1981, an order for relief under Chapter 7 was granted.

On May 13, 1981, the state court entered an order dismissing Joyce T. Stewart as a defendant. Also, on the same date, the court entered a judgment against Mall Auto in the amount of $127,426.88. A default judgment had previously been entered against the Rollers. Gary Stewart and Donna Stewart were never served with process. Since Bill J. Stewart was at that time the debtor in a bankruptcy case, no judgment was entered against him. The Bank's complaint to determine the dischargeability of its debts was subsequently filed. 11 U.S.C. § 523; Bankruptcy Rule 701.


The first allegation of nondischargeability by the Bank relates to purported guaranties by Stewart's wife and children. The Bank alleges—

1. That Stewart presented to the Bank several guaranties bearing not only his own signature but also the signature of his wife, his son, and his daughter.

2. That Stewart's wife denies her signature on the guaranties.

3. That Stewart stated under oath that his children's signatures were not genuine.

4. That Stewart supplied the guaranties to the Bank with an intent to deceive and to influence the Bank to make loans to Mall Auto.

5. That the Bank reasonably relied upon the guaranties in making loans to Mall Auto.

The first guaranty is dated May 5, 1976, and bears the signature of Joyce L. Stewart (Stewart's wife) guaranteeing the payment of all notes and papers of Bill J. Stewart. Ex. 7.

The second guaranty is dated July 11, 1977, and guarantees the payment of all notes or papers of Mall Auto. The statement admittedly is signed by Bill J. Stewart and also bears the signatures of Gary Stewart and Donna Stewart (Stewart's children). Ex. 2.

A third guaranty is dated October 4, 1978, guarantees the payment of all notes or papers of Bill Stewart up to the sum of $15,000, and bears the signature of Stewart's wife, Joyce L. Stewart. Ex. 8.

Joyce L. Stewart denies that her signatures are genuine. "I have never executed any guaranties to United Security Bank." Mrs. Stewart also denies that she executed two notes payable to the Bank, one in the amount of $15,000.00 dated October 4, 1978, and one in the amount of $3,750.00 dated May 5, 1976, Col. Ex. 11, which bear her signature. Mrs. Stewart further denies that she ever authorized anyone to sign her name to these notes or to any document. Tr., p. 46.

Neither Gary Stewart nor Donna Stewart, Stewart's children, were called as witnesses. Mrs. Stewart testified that the signatures on the July 11, 1977, guaranty, Ex. 2, "do not appear to be the signatures of my children."

Bill J. Stewart testified that he never signed his wife's name to any guaranty or any note. Tr., p. 72.

On the basis of this testimony the Bank asks this court to conclude that the signatures of the wife and children are forgeries and that Stewart forged or caused the signatures to be forged to the documents. That someone forged Mrs. Stewart's signature to the documents cannot be disputed. The question is whether the proof adduced by the Bank is sufficient for the court to conclude that Stewart was the person responsible for the forgeries. There appears no doubt but that Mrs. Stewart's guaranty was relied upon by the Bank in making and renewing the loans, both to Stewart individually and to Mall Auto. The Bank correctly points out that the $15,000.00 note, dated October 4, 1978, Col. Ex. 11, bears the signature of Joyce L. Stewart and Bill Stewart; that Bill Stewart admitted that the signature on the note was his signature and was genuine; that a notation on the note shows that the proceeds of the loan were to be used to settle his step-father's estate. A handwritten notation on the note states that the "wife's guaranty" secures the loan. The date of the note and the date of the guaranty, Ex. 8, are the same.


The second allegation of nondischargeability relates to financial statements furnished by Stewart.

Stewart's business relations with the United Security Bank began in 1975. He negotiated numerous loans for both personal and business use. In the course of negotiating these loans, Stewart furnished the Bank a number of financial statements. The statements are dated July 15, 1975, Ex. 3; September 30, 1976, Ex. 4; September 30, 1978, Ex. 5; and September 30, 1979, Ex. 10. The statements are somewhat similar in the disclosed information. As far as this proceeding is concerned, the most critical statement is dated September 30, 1979, a photocopy of which was furnished to Mr. Flick, United Security's president, at the meeting with Stewart on July 1, 1980.

Each of the statements reflect that Stewart is the owner of 100 shares of J.T. Parker Company stock of the market value of $230,000.00 or more. Introduced as Ex. 6, however, is a Buy-Sell Agreement entered into between Stewart and the two co-owners, Wolford and Jeter, dated April 1, 1967, limiting the value of the stock as to each principal to $60,000.00 in 1975, and to $90,000.00 in 1980. The Bank insists that Stewart, an experienced businessman of many years' experience, and with full knowledge of the purpose of financial statements, nevertheless inflated the value of the stock by over $170,000.00.

The Bank also insists that Stewart listed his residential property as being "solely owned," when, in fact, the property was held by him and his wife as tenants by the entirety. In addition to this misstatement the Bank alleges that the financial statement of September 30, 1979, lists a $75,000.00 mortgage against the property as $37,500.00.

The Bank further alleges that Stewart listed real estate located at 449 E. Market Street, 451 E. Market Street, and three adjoining lots as his personal property when, in fact, the property belonged to the J.T. Parker Insurance Agency.

At his meeting with Stewart on July 1, 1980, concerning the delinquent loans, Flick asked Stewart to furnish the Bank a current financial statement. Stewart thereupon gave Flick a photocopy of a statement dated September 30, 1979.2 Flick testified that he and Stewart reviewed the statement "item by item." Tr. p. 10. Stewart told Flick that the statement was still basically accurate, that there had been no material change. Flick asked Stewart to sign the copy of the statement, which he did. Ex. 10. Flick signed as witness and noted the date and time: "7/1/80, 10:20 a.m."

Flick and Stewart also discussed Stewart's plans to take care of...

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