In re Zecevic

• Citation: 344 B.R. 572
• Decision Date: 12 April 2006
• Docket Number: Bankruptcy No. 05 B 30691.,Adversary No. 05 A 02575.
• Parties: In re Brano ZECEVIC and Phyllis Zecevic, Debtors. Attorneys' Title Insurance Fund, Inc., Plaintiff, v. Brano Zecevic, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

344 B.R. 572

In re Brano ZECEVIC and Phyllis Zecevic, Debtors Attorneys' Title Insurance Fund, Inc., Plaintiff, v. Brano Zecevic, Defendant.

Bankruptcy No. 05 B 30691.

Adversary No. 05 A 02575.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

April 12, 2006.

COPYRIGHT MATERIAL OMITTED

John B. Stanis, Masuda, Funai, Eifert & Mitchell, Ltd., Schaumburg, IL, Gary Vist, Masuda, Funai, Eifert & Mitchell, Ltd., Chicago, IL, for Plaintiff.

Steven L. Popuch, Esq., Chicago, IL, for Debtor in bankruptcy matter.

Brano Zecevic, Chicago, IL, pro se.

MEMORANDUM OPINION DENYING DEFAULT JUDGMENT

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary relates to the bankruptcy case of Brano Zecevic ("Debtor" or "Defendant"). Attorneys' Title Insurance Fund, Inc. ("Plaintiff' or "Attorneys' Title") brought the instant Adversary proceeding objecting to dischargeability of Plaintiff's debt to it under the fraud exception 11 U.S.C. § 523(a)(2)(A). The Plaintiff stands in the shoes as assignee or subrogee of LaSalle Bank NA who, it asserts, was defrauded by Defendant.

Debtor failed to answer. Plaintiff then moved under Fed.R.Bankr.P. 7055(a) for entry of default judgment. An order of default was entered. Plaintiff sought to prove up its case by affidavit and proposes findings of fact and conclusions of law seeking a judgment by default that its debt is nondischargeable because the Debtor allegedly committed fraud by drawing $105,000 on a line of credit from his creditor, LaSalle Bank NA ("LaSalle"). The credit line was originally granted in April of 2002, then secured by real estate collateral and the original debt was paid off in January of 2004 when the collateral was sold. After the collateral was sold, LaSalle nonetheless kept the credit line alive and Debtor drew on it. Debtor drew on the credit line to extent of the $105,000 here in issue. His Chapter 7 bankruptcy was filed in August of 2005. The insurance company Plaintiff paid LaSalle its loss after this bankruptcy was filed, and was subrogated to LaSalle's rights.

The default Complaint and the prove-up affidavit and proposed findings of fact and conclusions of law filed on this record do not demonstrate even prima facie a basis for relief. From this record it appears that LaSalle Bank knew that its collateral was sold but continued to honor Debtor's draw on his line of credit. No fraud was established as to Debtor's continued draws on that credit. For reasons discussed below more fully Plaintiff's motion is denied.

JURISDICTION

This court has jurisdiction over this matter under 28 U.S.C. § 1334(a) and 28 U.S.C. § 157. This matter is referred here by District Court Internal Operating Procedure 15(a), and is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue lies in this district pursuant to 28 U.S.C. § 1409(a).

ALLEGATIONS OF THE COMPLAINT AND AFFIDAVIT

1. On August 5, 2005 Debtor and his spouse, Phyllis Zecevic, jointly filed a Chapter 7 bankruptcy petition.

2. On November 7, 2005 Plaintiff filed this Adversary proceeding against Debtor.

3. AITF is a corporation incorporated under the laws of the State of Florida, having its principal place of business in Orlando, Florida. (Compl. ¶ 1.)

4. On or about April 9, 2002, Debtor entered into Credit Agreement and Disclosure ("Credit Agreement") with LaSalle. The Credit Agreement imposed a credit limit of $105,000. (Compl. ¶ 3.)

5. The only Borrower listed under the Credit Agreement is the Debtor. (Ex. 1 to Compl.)

6. On or about April 9, 2002, together with and as part of the execution of the Credit Agreement, Debtor executed a mortgage agreement in favor of LaSalle for real property located at 1757 East Touhy, Des Plaines, IL 60018 (the "Property"), granting to LaSalle a mortgage on the Property ("Mortgage") to secure the then-current and future amounts owed by Debtor under the Credit Agreement. (Compl. ¶ 4.)

7. On or about January 29, 2004 Debtor sold the Property without terminating the Credit Agreement. (Compl. ¶ 5.)

8. When the Property was sold, ATIF issued title insurance policies insuring that the purchasers of the Property would have good title, free and clear of all liens. In order to fulfill its obligations under those title insurance policies, ATIF was forced to pay LaSalle the $105,000 owed by the Debtor under the Credit Agreement. In consideration for that payment, on or about March 17, 2005 the Credit Agreement was assigned from LaSalle to ATIF. (Compl. ¶ 6.)

9. As a result of the sale of the Property, the Mortgage, which secured the Credit Agreement, was extinguished. (Compl. ¶ 7.)

10. After the sale of the Property, Zecevic continued to draw funds under the Credit Agreement. (Compl. ¶ 8.)

11. Debtor proceeded to make withdrawals against the credit line until his indebtedness to LaSalle reached the principal amount of $105,000. (Compl. ¶ 9.)

On November 7, 2005 Plaintiff filed a Motion for Default, Affidavit, and Statement of Facts and Conclusions of Law in Support of Motion for Default Judgment. What the Complaint does not say but the record demonstrates clearly is that when LaSalle lost its collateral, it carelessly failed to cancel the credit line though it had a contractual right to do so. It thereby allowed Debtor to continue to draw on the credit line though it knew that credit was wholly unsecured.

DISCUSSION

Service of Process

Bankruptcy Rule 7004(b)(9) provides that in adversary proceedings service upon the debtor may be made within the United States by first class mail prepaid. Bankruptcy Rule 7004(b)(9) does not require proof of actual receipt; it requires only that the summons and complaint be mailed to both the debtor and debtor's attorney. In re Vincze, 230 F.3d 297, 299 (7th Cir.2000) (finding that because creditor mailed complaint and summons to debtors' attorney and to the address listed in debtor's bankruptcy petition creditor's service of process was sufficient, even if debtors were out of the country and did not actually receive notice of the complaint and summons). Service is effective on a debtor even if mailed to the wrong address if the address to which the complaint and summons is mailed is the last listed by the debtor in a filed writing. Id. (citing In re Coggin, 30 F.3d 1443, 1450 (11th Cir. 1994)).

In this case, Plaintiff mailed the complaint and summons to the address listed on Debtor's bankruptcy schedules. Debtor moved and left no forwarding address. Under Seventh Circuit standards, service is effective because the complaint and summons was mailed to Debtor at his last listed address. A copy of the complaint and summons was also sent to Debtor's attorney who did not appear in this Adversary proceeding. (A debtor's attorney does not under Local Bankruptcy Rule 2090-5(B) appear in a related Adversary proceeding unless an appearance is filed therein.)

Standard for Entry of Default Judgment

Rule 7055(b)(2) Fed.R.Bankr.P. governs default judgments entered by a bankruptcy judge. Granting a motion for the entry of a default judgment lies within the sound discretion of the trial court. Merrill Lynch Mortgage Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir.1990) (citing Dundee Cement Co. v. Howard Pipe & Concrete Products, Inc., 722 F.2d 1319, 1322 (7th Cir.1983)). In the bankruptcy context, where a debtor has a presumptive right to a discharge, default judgment motions should not be granted unless the movant shows that its debt is nondischargeable as a matter of law. Valley Oak Credit Union v. Villegas, 132 B.R. 742, 746 (9th Cir. BAP 1991) (court must determine whether plaintiff is entitled to judgment); In re McArthur, 258 B.R. 741, 746 (Bankr. W.D.Ark.2001) (noting that bankruptcy courts have taken a conservative approach and sometimes refrain from granting default judgment motions which deprive debtor of discharge).

Thus, the issue here is whether Plaintiff has shown at least prima facie facts meeting the legal requirements to except a debt from discharge under 11 U.S.C. § 523(a)(2)(A).

Section 523(a)(2)(A)

Section 523(a)(2)(A) provides in relevant part:

(a) A discharge under section 727 ... 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 —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.

A party seeking to except a discharge for fraud must establish each element of § 523(a)(2)(A) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Martin, 698 F.2d 883, 887 (7th Cir.1983). The statute is narrowly construed so as not to undermine the Code's purpose of giving the honest but unfortunate debtor a fresh start. In re Scarlata, 979 F.2d 521, 524 (7th Cir.1992).

Section 523(a)(2)(A) excepts debts from discharge that are based on either intentional misrepresentation or fraud. McClellan v. Cantrell, 217 F.3d 890, 893-94 (7th Cir.2000) Section 523(a)(2)(A) is not limited to false representations but includes actual fraud. Fraud has been defined as the following:

[A] generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth. No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.

McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir.2000).

To make out a claim under § 523(a)(2)(A), a creditor must usually prove that (1) the debtor made a false representation of fact (2) which the debtor (a) either knew to be false or made with reckless disregard for its truth and (b) made with an intent to deceive, and (3) the creditor justifiably relied on the false...