Matter of Stratton

• Decision Date: 12 May 1992
• Docket Number: Bankruptcy No. 91 B 9129,Adv. No. 91 A 823.
• Citation: 140 BR 720
• Parties: In the Matter of Sharon K. & Scott M. STRATTON, Debtors. SOUTHWEST FINANCIAL BANK & TRUST COMPANY OF ORLAND PARK, Plaintiffs, v. Sharon K. & Scott M. STRATTON, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

140 B.R. 720 (1992)

In the Matter of Sharon K. & Scott M. STRATTON, Debtors SOUTHWEST FINANCIAL BANK & TRUST COMPANY OF ORLAND PARK, Plaintiffs, v. Sharon K. & Scott M. STRATTON, Defendants.

Bankruptcy No. 91 B 9129, Adv. No. 91 A 823.

United States Bankruptcy Court, N.D. Illinois, E.D.

May 12, 1992.

John B. Petrulis, Frankfort, Ill., for defendants.

Carol S. McMahan, Carroll, Hartigan & McCauley, Ltd., Chicago, Ill., for plaintiffs.

MEMORANDUM, OPINION AND ORDER

ROBERT E. GINSBERG, Bankruptcy Judge.

FACTS

This matter comes before the court on Southwest Financial Bank & Trust Company of Orland Park's complaint to determine the dischargeability of debts owed to the Bank by Sharon and Scott Stratton under § 523(a)(2)(B).

The Bank claims that the debts the debtors owe it are not dischargeable because the debtors induced the Bank to make the loans by using false financial statements. The Bank presented its evidence at trial. At the close of the plaintiff's case, the debtor moved for judgment under F.R.Civ.P. 52(c), made applicable to these proceedings by F.R.Bkrtcy.P. 7052, on the grounds that the Bank failed to prove all of the elements required for a determination that the debt these debtors owe the Bank is not dischargeable.

The evidence at trial showed that in a series of loan transactions the debtors borrowed a total of $105,844 from the Bank. As part of the loan application and approval process the debtors completed four different personal financial statements and submitted each to the Bank. The forms asked the debtors to supply information regarding their assets and liabilities, including secured and unsecured notes payable to banks and others, accounts and bills due, real estate mortgages, and other debts. The debtors never disclosed in any of the financial statements the fact that Scott Stratton owed some $63,000 in student loans. The Bank approved the various loans to the debtors, ostensibly based on the information contained in the debtors' financial statements, prior payment history, and the need for a chiropractor in the community.

The debtors filed a Chapter 7 petition on April 29, 1991, listing the student loans as a liability. The Bank argues that the debtors' remaining obligation of $100,280 to the Bank should not be discharged under the Bankruptcy Code because the debtors' written financial statements were materially false, the Bank reasonably relied on the financial statements in approving the loans to the debtors, and the debtors intended to deceive the Bank by omitting Scott Stratton's student loan obligations from the financial statements. The debtors, on the other hand, take the position in their pleadings that they omitted the student loan information after discussing the matter with Bank officers, because the loans were in deferral and were thus not current liabilities. Therefore, they did not have the requisite intent to deceive the Bank. The matter came before the court for trial. The Bank put on its evidence and rested. At the close of the Bank's evidence, the debtors moved for judgment in their favor. For the reasons stated below, the court grants the debtors' motion and enters a judgment that the debts the debtors owe the Bank are dischargeable and are discharged in this Chapter 7 case.

JURISDICTION AND PROCEDURE

This court has jurisdiction over this dispute under 28 U.S.C. § 1334(b) as a matter arising under § 523(a) of the Bankruptcy Code. This matter is before the court for determination under Local Rule 2.33 of the United States District Court for the Northern District of Illinois automatically referring bankruptcy cases and proceedings to this court for hearing and determination. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) as a matter concerning the dischargeability of a particular debt.

DISCUSSION

Section 523(a)(2)(B) of the Bankruptcy Code provides that a discharge from a debt will not be granted:

(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....

It is clear that the burden of proof was on the Bank to prove by a preponderance of the evidence all four elements of § 523(a)(2)(B) in order to have the debts these debtors owed to it found not dischargeable under § 523(a)(2)(B).¹ Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

The Bank proved by the preponderance of the evidence that the personal financial statements the debtors submitted to the Bank were materially false in that they omitted some $63,000 of student loans owed by Scott Stratton. Clearly, a debt of $63,000 is material to the Bank in making a loan decision. Matter of Bogstad, 779 F.2d 370 (7th Cir.1985) (a materially false statement is one that contains an important or substantial untruth. 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). The testimony of Jeff Vail, the Bank officer the debtors dealt with, was sufficient to establish the materiality of the student loans. The loan documents themselves contained financial statements that on their face were false by failing to disclose the student loans the debtors admitted were owed when the financial statements were prepared and submitted to the Bank.

The Bank also proved the next element by a preponderance of the evidence, i.e., that the personal financial statements concerned the "debtor's or an insider's financial condition." From Scott Stratton's point of view, the financial statements clearly concerned his, i.e., "the debtor's" financial condition. From Sharon Stratton's point of view, it is uncontested that even if she were not personally liable for the student loans, the financial statement she signed related to "an insider's financial condition." Clearly, Scott Stratton was an "insider" as to Sharon Stratton. 11 U.S.C. § 101(31), and the financial statement purports to set out Scott Stratton's financial condition in full.

The Bank proved the third element of the exception to discharge, that the Bank reasonably relied on the debtors' personal financial statement. Jeff Vail, the Bank officer who handled these loans, testified at trial that he had reviewed the debtors' file, including the personal financial statements, before approving the bank's loan to the debtors. Vail also testified that if the Bank had known about the student loans, the Bank officers charged with the decision to make the loan would have been unlikely to approve the loan, since the inclusion of the student loans would have given the debtors a negative net worth and would have strongly indicated that the debtors would be unable to make the payments on an additional loan.²

Thus, the Bank has proved the first three elements of the exception to discharge by a preponderance of the evidence. But this is not where the Bank's burden of proof ends. The Bank must also prove by a preponderance of the evidence that in omitting the student loans from the personal financial statements the debtors intended to deceive the bank into making the loan or acted with reckless disregard for the truth of their financial statement. See, North Community Bank v. Boumenot, 106 B.R. 149 (Bankr.N.D.Ill.1989) (showing reckless disregard for the truth can satisfy the intent requirement of § 523(a)(2)(B).). The Bank did not offer any evidence worth noting on this element at trial. The Bank argues it is unnecessary for it to adduce evidence with respect to the debtors' intent because the fact that the debtors intended to deceive the Bank into extending the loan can be inferred from the evidence presented to prove the first three elements of the exception to the discharge. In effect the Bank is saying, "Because we proved the first three elements required by § 523(a)(2)(B), we do not have to prove the fourth element."

This argument is without merit. The element of intent is a separate and distinct statutory requirement that must be proved by the Bank to except the debtors debt to it from discharge. 11 U.S.C. § 523(a)(2)(B)(iv). See, e.g., In re Chapman, 1991 WL 247602 (N.D.Ill.); In re Glen, 115 B.R. 837, 841 (Bankr.E.D.Pa. 1990); In re Burnett, 129 B.R. 299, 301 (Bankr.M.D.Fla.1991).

It is true, as the Bank argues, that intent to deceive can rarely be proved by direct evidence and usually must therefore be inferred from the surrounding circumstances. In re Leger, 34 B.R. 873 (1983). And, it is also true that demonstration of a reckless disregard for the truth will also satisfy the intent requirement. North Community Bank v. Boumenot, 106 B.R. 149 (Bankr.N.D.Ill.1989); In re Masegian, 134 B.R. 402 (Bankr.E.D.Cal.1991). However, the Bank has failed to produce sufficient evidence of the surrounding circumstances to prove to this court by a fair preponderance of the evidence that the debtors intended to deceive the Bank or that the debtors acted with a reckless disregard for the truth. The fact is that there is virtually no evidence of intent...