McFarland, Matter of
| Citation | 84 F.3d 943 |
| Decision Date | 23 May 1996 |
| Docket Number | No. 95-1874,95-1874 |
| Parties | Bankr. L. Rep. P 76,966 In the Matter of Dorothy McFARLAND, Debtor-Appellee. Appeal of SOUTH DIVISION CREDIT UNION. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Lauren Newman (argued), Robert J. Walinski, Walinski & Trunkett, South Div. Credit Union, Chicago, IL, for Appellant.
Melvin J. Kaplan, Bennett A. Kahn (argued), Chicago, IL, for Debtor-Appellee.
Before COFFEY, MANION, and KANNE, Circuit Judges.
South Division Credit Union filed an adversary complaint in a chapter 7 bankruptcy proceeding alleging the nondischargeability of the balance on a promissory note executed by the debtor, Dorothy McFarland. The bankruptcy court determined that only a fraction of the total balance was nondischargeable under the relevant statute, and the district court affirmed. South Division Credit Union v. McFarland, 179 B.R. 87 (N.D.Ill.1995). The district court found that the statutory language requires only that the amount of additional credit extended to the debtor in such a transaction is nondischargeable. This appeal followed, and it presents us with the question whether the discharge exception prescribed by 11 U.S.C. § 523(a)(2)(B) encompasses the entire amount of a loan whose proceeds are used in part to extinguish the debtor's obligation on a previous loan from the same creditor.
The material facts are undisputed. McFarland had been a longtime Credit Union customer when she executed a promissory note on May 29, 1991, in the amount of $7,669.97 with a maturity date of February 28, 1995. She consistently made timely payments on this note. On May 11, 1993, McFarland applied for a loan from the Credit Union in the amount of $9,257.17 and subsequently executed a promissory note for this amount. The loan secured by the May 1993 note comprised a disbursement of $3,500 to McFarland and the satisfaction of her obligation on the May 1991 note, which then had a balance of $5,757.17.
The record suggests that this was the typical method by which the Credit Union extended additional credit while simultaneously refinancing existing debt. McFarland executed five separate promissory notes between December 10, 1990, and May 11, 1993. We itemize the notes below using the terms that appear on the face of the notes:
Origination Loan Disbursed to Credited Maturity
date amount McFarland to account 1 date
12/10/90 $6,948.54 $ 900.00 $6,048.54 07/09/94
02/13/91 $7,549.96 $ 835.00 $6,714.96 02/13/95
05/29/91 $7,669.97 $ 500.00 $7,169.97 02/28/95
05/05/92 $7,233.36 $1,000.00 $6,233.36 05/01/96
05/11/93 $9,257.17 $3,500.00 $5,757.17 05/01/98
The terms of these promissory notes demonstrate that the proceeds of each note were used to pay off whatever balance McFarland owed the Credit Union on the most recent note. The remaining sum represented the amount of additional credit that the Credit Union extended to her on the same terms as those covering the refinancing of her outstanding balance. The Credit Union disbursed the additional credit to McFarland in the form of cash payments. Each promissory note referenced the same member, account, and contract numbers and the same secured collateral of $300.00 that was contained in McFarland's account with the Credit Union.
McFarland applied for the May 1993 loan by providing the Credit Union with a financial statement that purported to list her assets and liabilities. She failed to include in that statement her liability as cosigner on a $7,000 promissory note to the Overland Bond Company (the "Overland note") and the fact that she owed the Internal Revenue Service $1,500. The Credit Union made the May 1993 loan because the incomplete information McFarland provided showed a debt-to-income ratio of 42 percent, below the Credit Union's limit of 45 percent. Had McFarland disclosed her liability on the Overland note or her debt to the IRS, the Credit Union would have calculated her debt-to-income ratio as exceeding 45 percent and denied her application. Had that occurred, the May 1991 note would have remained in force with a maturity date of February 28, 1995.
McFarland filed for liquidation under chapter 7 of the Bankruptcy Act of 1988, 11 U.S.C. § 701 et seq., on September 8, 1993, in the Northern District of Illinois. At that time, the May 1993 note had an outstanding balance of $8,712.28. The Credit Union filed an adversarial complaint in the bankruptcy proceeding seeking a determination that the entire balance of $8,712.28 was nondischargeable pursuant to the fraud exception contained at 11 U.S.C. § 523(a)(2)(B). The bankruptcy court conducted a hearing on June 15, 1994, at which it heard testimony from McFarland and Eileen Ivanauskas, collection administrator at the Credit Union. Immediately following the parties' closing arguments, the bankruptcy court ordered that $3,500 of the balance was nondischargeable pursuant to § 523(a)(2)(B).
The Credit Union appealed to the district court pursuant to 28 U.S.C. § 158(a), and the district court affirmed the bankruptcy court in a memorandum opinion and order dated March 9, 1995. 179 B.R. 87. The district court focused upon the statutory requirement that a debt be nondischargeable "to the extent obtained" by a materially false statement. It found that McFarland had obtained only the $3,500 additional credit by virtue of her false financial statement and that the Credit Union did not assume any risk on McFarland's existing balance of $5,757.17 when it used that portion of the loan proceeds to retire the May 1991 note.
In liquidation cases under Chapter 7, the court is required to grant qualified debtors discharges from debts except as provided by 11 U.S.C. § 523. See 11 U.S.C. § 727(b). In a nutshell, discharge operates to void a judgment predicated upon the debtor's personal liability to the extent the judgment encompasses any portion of the discharged debt and also enjoins the commencement of any action seeking such a judgment. See 11 U.S.C. § 524. Discharge essentially places a debtor in a safe harbor with respect to discharged debt(s).
The Bankruptcy Code exclusively governs the determination of whether a debt is nondischargeable, Brown v. Felsen, 442 U.S. 127, 129-30, 99 S.Ct. 2205, 2208-09, 60 L.Ed.2d 767 (1979), and the exceptions to discharge are set out at 11 U.S.C. § 523. The statutory provision at issue concerns the discharge exception for debts incurred through materially false written statements:
A discharge under section 727, 1141, 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....
The Bankruptcy Code also describes procedures for resolving controversies concerning (non)dischargeability. Either the creditor or the debtor may file a complaint under § 523(c), which requires the district court 2 to provide notice and a hearing to determine whether a debt qualifies for the exception described by § 523(a)(2)(B). 11 U.S.C. § 523(c); BANKR. R. 4007. Debts that might otherwise qualify under § 523(a)(2)(B) are presumed dischargeable unless a creditor files a complaint and proves otherwise. 3 COLLIER ON BANKRUPTCY p 523.05B, at 523-18 (15th ed. Feb.1996). The creditor bears the burden of proving by a preponderance of the evidence that the debt meets the statutory exception requirements. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991); In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994).
Because this appeal concerns the district court's legal interpretation of § 523(a)(2)(B), our review is de novo. In re Sheridan, 57 F.3d 627, 633 (7th Cir.1995). Certain courts have construed the statutory exceptions to discharge "in favor of the debtor" and have required that reasons supporting nondischargeability "be real and substantial, not merely technical and conjectural." In re Tully, 818 F.2d 106, 110 (1st Cir.1987) (citation omitted). See also In re Miller, 39 F.3d 301, 304 (11th Cir.1994) (collecting authority). However, this interpretive gloss, whatever its pedigree in the statute's legislative history, is insufficient to support a construction of § 523(a)(2)(B) that does not give due regard to the statute's plain meaning, which is the starting point for our inquiry. See In re Witkowski, 16 F.3d 739, 745 (7th Cir.1994).
There are two causation requirements for nondischargeability of "an extension, renewal, or refinancing of credit" under § 523(a)(2)(B). The first is set forth in the "to the extent obtained by" language. The second causation element is incorporated in the requirement that the creditor rely on the materially false statement. See In re Goodrich, 999 F.2d 22, 24 (1st Cir.1993).
In our analysis and review, we cannot focus only on the former requirement and ignore the plain meaning of the language immediately preceding it. Such an approach would offend the venerable canon that one must read a statute as a whole and give meaning to each of its constituent parts. See United States v. Nordic Village, Inc., 503 U.S. 30, 35-36, 112 S.Ct. 1011, 1015, 117 L.Ed.2d 181 (1992); Trustees of the Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v. Leaseway Transp. Corp., 76 F.3d 824, 828 (7th Cir.1996).
Read as a contextual whole and as applicable to the facts of this case, § 523(a)(2)(B) provides that dischargeability is...
To continue reading
Request your trial
-
In re Burke
...establish an exception to discharge is a preponderance of the evidence. Grogan, 498 U.S. at 291, 111 S.Ct. 654. See also In re McFarland, 84 F.3d 943, 946 (7th Cir.1996); In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994). Exceptions to discharge are to be construed strictly against a credit......
-
Associated Mortg. Corp. v. Weaver (In re Weaver)
..., 999 F.2d 22, 25–26 (1st Cir.1993) ; Wolf v. Campbell (In re Campbell) , 159 F.3d 963, 966–67 (6th Cir.1998) ; In re McFarland , 84 F.3d 943, 947 (7th Cir.1996) ; Norris v. First Nat'l Bank in Luling (In re Norris) , 70 F.3d 27, 30 (5th Cir.1995). Other courts have imposed such a requireme......
-
Attorneys' Title Guaranty Fund, Inc. v. Wolf (In re Wolf)
...by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re McFarland, 84 F.3d 943, 946 (7th Cir.1996). To further the policy of providing a debtor a fresh start, exceptions to the discharge of a debt are to be construed str......
-
Attorneys' Title Guar. Fund, Inc. v. Wolf (In re Wolf)
...a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; see also In re McFarland, 84 F.3d 943, 946 (7th Cir.1996). To further the policy of providing a debtor a fresh start, exceptions to the discharge of a debt are to be construed stric......