Bankruptcy: Dischargeability of Debt - False Financial Statement

     In the case of Chopp & Co. v. Luria, the United States Bankruptcy Court at Alexandria, Virginia, concluded that a bankrupt builder's omission from a supplier's credit application of a bank's earlier consent judgment against the builder was not made with the "intent to deceive" and the builder's debt to the supplier was not exempt from discharge pursuant to Bankruptcy Code §523 (a)(2)(B). 

     The Court found as fact that the debtor signed a credit application which he knew was being submitted to the creditor. The Court further found as fact that the credit application incorrectly represented that the debtor had no judgments entered against him within the last five years when, in fact, there had been a substantial judgment docketed against the debtor within one year of the credit application. The Court also found as fact that the consent order was entered under a workout agreement on a separate loan. The Court further found as fact that the debt had been fully paid off, the judgment did not show up on the builder's credit report, and there was no evidence that the builder knew that the consent order had ever been entered. The Court noted that the judgment at issue arose from a financial workout agreement between the bank, the debtor and other related parties on a large mortgage loan. As part of the agreement, under which the bank was to be paid in full, the debtor and his related entities executed the judgment order by consent. Under the agreement the loan was to be paid by new financing and by sales of property. The consent judgment essentially served as backup protection to the bank if its loan was not fully paid by a set date. This deadline passed without full payment because of delays in settlement under contracts for sale of realty by the debtor's business entities. The contemplated settlement eventually took place, and the bank's judgment had been paid in full six months before the debtor made the credit application at issue.

     Considering all of these facts in light of the applicable law, the Court had to determine, in order to find that the debt was nondischargeable, that the debtor's statement was materially false, that the creditor reasonably relied on the statement, and that the debtor had the intent to deceive the creditor.

     In regard to the "materially false requirement", the Court ruled that "..the omission of such a substantial judgment from debtor's credit application was plainly a materially false statement..".

     Upon considering reasonable reliance, the Court ruled that "...the evidence demonstrates that plaintiff had a very conservative policy on extending credit and that its policy has resulted in lower than average bad debts. Based upon plaintiff's unrefuted evidence, it seems likely that plaintiff would have denied open account credit to debtor's corporation if the judgment had been disclosed...". "..plaintiff's reliance on debtor's credit application was objectively reasonable and was actually relied upon by plaintiff in extending credit...".

     In regard to the "intent to deceive" requirement, however, the Court found that the evidence failed to establish that debtor actually knew that the judgment had been docketed. The Court then looked to see if the intent could be imputed through reckless indifference. Given the workout arrangements, given the fact that the judgment was paid within three months of entry, given the fact that no adverse information appeared on the debtor's credit report, and given the fact that there was no evidence that the debtor had been informed of the bank's entry of the judgment, the Court stated that it was unwilling to infer from the circumstantial evidence that the debtor recklessly failed to disclose the judgment. Accordingly the Court concluded that the debtor did not publish the financial statement with intent to deceive plaintiff.

Bankruptcy: Dischargeability of Debt - False Financial Statement in Chapter 7 Case

     Judge Tice, United States Bankruptcy Court in Richmond, denied discharge of a debt in a Chapter 7 case. The case was Global Express Money Orders, Inc. v. Davis. In Davis, the debtor previously had a convenience store that sold the creditor’s money orders through the store. The debtor still owed the creditor ($71,168.55) for some of these money orders. At issue was the debtor’s financial statement provided to the creditor at the commencement of the business between them. 

     The Court found that the debtor’s financial statement was materially false. In fact, at trial the debtor did not seriously question the inaccuracy of the statement. Rather, he tried to distance himself from its preparation and delivery to the creditor. In the financial statement the debtor provided false information as to cash in a checking account, the value of his personal residence and a beach condominium, the value of his equity in certain investments, value of mutual funds and an expected federal tax refund.
     The Court further found that the creditor required the personal financial statement of debtors as a condition precedent of the business arrangement; that the debtor, with intent to deceive, published the materially false financial statement and caused it to be delivered to the creditor; and that in contracting with the creditor and allowing the entity to incur substantial indebtedness, the creditor reasonably relied upon materially false asset entries in the financial statement, which debt was indemnified by the debtor personally.
     The Court rejected the debtor’s argument that the creditor failed to prove that he prepared the financial statement and authorized its delivery, i.e., publication with intent to deceive, to the creditor. The Court determined that the evidence showed that in the debtor’s presence and with his knowledge, the financial statement was delivered to the creditor by an (unknown) employee of the debtor’s business. The Court ruled that this evidence was sufficient to require some better explanation from the debtor than he provided. The Court stated that it did not believe the debtor’s evasive testimony that he was too busy to be bothered, and knew nothing about the contents of the financial statement or the circumstances surrounding its delivery to the creditor. The Court determined that at the very least, the debtor recklessly allowed his financial statement to be used by the creditor for its consideration of the business transaction, and his reckless indifference was sufficient to satisfy the publication with intent to deceive element of Bankruptcy Code §523(a)(2)(B).
     As to damages, the debtor argued that the loss of payment of the trust balance due was not damage or loss resulting from his publication of the false financial statement, as required by the statute. Rather, the debtor stated that the loss resulted from the failure of store employees to separate money order sales. Moreover, according to the debtor, his stores were not generating enough revenue to pay the current liabilities, and there was no evidence that he personally took funds or caused the shortage. However, the Court found it ironic that the debtor could argue that it was his employees who failed to comply with the trust agreement requirement for segregating trust fund receipts of the creditor. The debtor agreed to indemnify the creditor for his business’s indebtedness under the trust agreement, and his inability to make good on the indemnity was a direct result of his financial problems and ensuing bankruptcy. Although the Court stated that causation was not a necessary or proper element of the false financial statement issue, the Court simply found that the debtor’s false financial statement was a proximate cause of the loss.