Opinion
CASE NO. 00-00370-AJM-7, Adversary Proceeding No. 00-229
January 14, 2000
Bruce Metzger, Attorney for the Plaintiff.
Charles R. Hyde, Jr., Attorney for Debtors in main bankruptcy case.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Plaintiff, Perfect Circle Credit Union (the "Plaintiff") filed its Complaint Objecting to Dischargeability of Debt on April 28, 2000. Trial on that Complaint was held on August 1, 2000 wherein the Plaintiff appeared by counsel, Bruce Metzger; Nelson and Anita Harrison (the "Defendants") appeared pro se. At the conclusion of the trial, the Court took the matter under advisement. The Court, having considered the testimony of the witnesses, the arguments of counsel, and all evidence admitted at trial, now makes its findings of fact and conclusions of law in accordance with Fed.R.Bankr.P. 7052.
Findings of Fact
1. In January, 1998, the Defendants sought to obtain an unsecured $5000 loan (the "$5000 Loan") from the Plaintiff. As part of the loan process, the Defendants were required to complete a loan application, which, in part, required the Defendants to list their outstanding debt. The Defendants listed a total of six (6) debts on their loan application.
2. Lynn Seifer, the senior loan officer at the Plaintiff's Hagerstown branch in January, 1998 who handled the $5000 Loan application, testified that in the course of processing loan applications, the Plaintiff routinely conducts a credit check of the applicant. In the course of approving loan applications, the Plaintiff reviews the aggregate monthly minimum payment of the debt listed on the loan application, and compares it to the applicant's monthly gross income, thus arriving at a debt-to-income ratio. The maximum debt ratio allowable for approval of a loan by Seifer was 45%. If the debt ratio exceeded 45%, the loan could be approved only by one of Seifer's superiors, one of which was Kim Welch, who at the time was vice-president of lending at the Plaintiff's Hagerstown branch.
3. Seifer testified that routine protocol was followed in processing the $5000 Loan application, and in conducting the credit check, the Plaintiff discovered four debts that the Defendants had not listed on the loan application. These four debts were calculated in arriving at a debt ratio of 44%, close to the maximum, but still within Seifer's authority to approve.
4. The Defendants obtained the $5000 Loan, of which $4214.30 was used to pay off an existing loan with the Plaintiff, with the remaining $795.70 paid in cash to the Defendants.
5. Defendant Nelson Harrison underwent hand surgery in February, 1998. He testified that, when he returned to work approximately five (5) months later, his hourly rate would have been between $15 and $17. He applied for workmen's compensation benefits in March, 1998.
6. Not all of the hand surgery charges were covered by insurance and the Defendants began receiving bills from Hand Surgery Associates in April, 1998, and made payments on these bills periodically. In August, 1998, Defendant Nelson Harrison's workmen's compensation claim was denied. Defendant Nelson Harrison testified that there was a one-year period in which to appeal the denial of benefits and that he had "no doubt" that "it would be taken care of", apparently meaning that he intended to appeal and that he believed the appeal would be successful.
7. In July, 1998, one month before the denial of benefits, the Defendants applied for and obtained a personal loan from Wufface Credit Union. In September, 1998, one month after the denial of benefits, the Defendants applied for and obtained a credit card from Wachovia which had a credit limit of $4500 and an 18% annual interest rate.
8. In October, 1998, the Defendants sought to obtain another unsecured loan from the Plaintiff. It was the Plaintiff's policy to limit unsecured loans to a $5000 maximum. Because the Defendants had not paid off the $5000 Loan, it was decided that the Defendants instead could apply for a credit card.
9. To that end, the Defendants filled out an application for approval of a Visa Gold Card to be issued through the Plaintiff with a $12,000 credit limit. The only debts listed by the Defendants on this credit card application were: Delta Funding (the first mortgagee on the Defendants' residence); Fifth Third Bank (second mortgagee on the residence); MBNA; Lane Bryant and Kohl's.
10. Again, as with the $5000 Loan, the Plaintiff conducted a credit check and discovered that three creditors — Wufface Credit Union, Associates, and Star Bank — had not been listed by the Defendants on the Visa Gold Card application.
11. Unlike the $5000 Loan, the Plaintiff had no authority to approve the Visa Gold Card application where the debt ratio exceeded 45%, due to Visa's credit guidelines. In the discussions between Kim Welch, the Plaintiff's representative who worked with the Defendants in obtaining the Visa Gold Card, and the Defendants, it was understood that $5000 of the available $12,000 limit would be used to pay off the existing $5000 Loan. Thus, in determining the debt ratio, the Plaintiff did not include the $5000 Loan (assuming that it would have been paid off) but did include both the debts listed by the Defendants on their Visa Gold Card application and the debts discovered in the credit check other than the Star Bank debt (which was low enough to be paid off in a few months). The resulting debt ratio was 42%, within the acceptable limits imposed by Visa. Accordingly, based on this information, the Plaintiff approved the Visa Gold Card with a credit limit of $12,000.
Apparently, the Defendants failed to pay off the $5000 Loan in full, because their bankruptcy schedules list two debts owed to the Plaintiff: (1) the "charge account" (e.g. Visa Gold Card) in the amount of $11,600 and (2) the "personal loan" (e.g. the $5000 Loan) in the amount of $2200.
12. On January 14, 2000, the Defendants filed their voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Among the debts listed on their schedules were Hand Surgery Associates in the amount of $1500 (incurred February, 1998); National Finance Center ("NFC") in the amount of $4400 (incurred December, 1993); another NFC debt in the amount of $2500 (incurred October, 1996) and Wachovia in the amount of $4500 (incurred July 1996) (collectively, the "Undisclosed Debts"). None of these debts had been listed on either the $5000 Loan application or the Visa Gold Card application. Both NFC debts were being paid by the Defendants via automatic payroll deduction.
This appears to be a typographical error in the schedules, since the undisputed testimony at trial indicated that the Wachovia credit card was not obtained until September, 1998. Therefore, the Court will operate on the premise that September, 1998 was the earliest the Wachovia debt could have been incurred.
Conclusions of Law
1. The Plaintiff alleges that both the $5000 Loan debt and the Visa Gold Card debt owed to it by the Defendants are nondischargeable under Bankruptcy Code § 523(a)(2)(B). Under this section, the Plaintiff must prove by a preponderance of the evidence that the Defendants made, with intent to deceive, a materially false written statement regarding their financial condition, and that the Plaintiff relied on that statement. Matter of Sheridan, 57 F.3d 627, 633 (7th Cir. 1995).
2. A "materially false" written statement regarding one's financial condition has been defined as one that "substantially untruthful picture of the debtor's financial condition by representing information of a type that would normally effect the decision to grant credit". In re Howard, 73 B.R. 694, 703 (Bankr.N.D.Ind. 1987). The omission, concealment, or understatement of a debtor's material liabilities constitutes a "materially false statement". Howard, 73 B.R. at 703; In re Harris, 203 B.R. 117, 122 (Bankr.N.D.Ill. 1996).
3. The intent to deceive can be logically inferred if it is proven that the debtor knew or should have known that the representation or omission would induce the creditor to extend credit or if it is shown that the debtor had a reckless indifference for the accuracy of the information on the financial statement. Harris, 203 B.R. at 122.
4. As for the "reasonable reliance" element of § 523(a)(2)(B), there is no duty upon the creditor to go beyond that which is acceptable in normal industry or lending practice in determining whether the statements made by the debtor are truthful. See, In re Perk, 227 B.R. 846, 849 (Bankr.S.D.Ind. 1998); see also, Howard, 73 B.R. at 706.
5. The Defendants applied for the $5000 Loan in January, 1998. As of that date, two of the four Undisclosed Debts — Hand Surgery Associates and Wachovia — had not even been incurred. Therefore, the only omitted debts with respect to the $5000 Loan application were the NFC debts, which were being paid via automatic payroll deduction. Lynn Seifer testified that, in the course of her experience, applicants normally remembered what was deducted from their paychecks and therefore usually included those debts on their loan applications. There was also testimony that, had the NFC debts been disclosed and added to the calculation in determining the debt ratio, the resulting debt ratio would have been 47% — over the Plaintiff's acceptable limit of 45%, but still capable of approval by Lynn Seifer's superiors, one of which was Kim Welch. However, Kim Welch testified that, even with a 47% debt ratio, the $5000 Loan most likely still would have been approved, given the Defendants' previous member and payment history.
6. Since there was a likelihood that the $5000 Loan would have been approved even had the Plaintiff known about the two NFC debts, it cannot be said that the Defendants, by their failure to list such debts, induced the Plaintiff to extend credit it otherwise would not have extended. Accordingly, the Court concludes that the Plaintiff did not reasonably rely on the statements made in the $5000 Loan application and therefore the $5000 Loan is dischargeable under § 523(a)(2)(B).
7. The Visa Gold Card debt is another matter. By the time the Defendants completed their application for the Visa Gold Card in October, 1998, all of the Undisclosed Debts had been in existence. The Wachovia card had just been obtained in the preceding month, and it is difficult to imagine how that debt could have been omitted, even if the outstanding balance on it was minimal at that point. There was testimony that it is the credit limit under a particular card and not its outstanding balance that is determinative in calculating the debt ratio, and therefore, the $4500 credit limit on the Wachovia card, along with the other Undisclosed Debts, would have resulted in a debt ratio of 50%, certainly out of Visa's acceptable 45% range for the Visa Gold Card. And, due to Visa's policy of not extending credit to applicants with debt ratios over 45% — with no exceptions — the Visa Gold Card application would not have been approved and the Visa Gold Card would not have been issued.
8. There was testimony that, given the 50% debt ratio, the Plaintiff would have been very reluctant to issue the Defendants even a "classic" credit card with a $5000 credit limit because the credit limit on the Wachovia card ($4500) would have been raised a red flag and most likely would have had to have been paid off before extending credit even under the classic card. Furthermore, Defendant Nelson Harrison testified that he was "desperate" from his surgery and that he applied for the Visa Gold Card because it had a lower interest rate than the Wachovia card, perhaps implying that he intended to transfer the Wachovia balance to the Visa Gold Card. However, the Wachovia card was never canceled, but rather was used to its credit limit since the Defendants have listed it in their bankruptcy schedules as an unsecured debt in the amount of $4500. Given these facts, the Court concludes that the Defendants were aware of the Undisclosed Debts but were recklessly indifferent to the accuracy of the Visa Gold Card application. Furthermore, the Plaintiff reasonably relied on the information supplied by the Defendants on the Visa Gold Card application, and, had the Plaintiff known of the Undisclosed Debts, it would not have approved the Visa Gold Card application and would not have extended $12,000 of unsecured credit to the Defendants. See, Matter of McFarland, 84 F.3d 943, 947 (7th Cir. 1996) (finding debt nondischargeable under § 523(a)(2)(B)). Therefore, the Visa Gold Card debt is nondischargeable under § 523(a)(2))(B).
9. The appropriate judgment entry will follow.