MARGARET A. MAHONEY, Bankruptcy Judge.
This case is before the Court on the Debtor's Motion to Alter or Amend a prior Order declaring certain debts of the United States nondischargeable. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. The Court has the authority to enter a final order pursuant to 28 U.S.C. § 157(b)(2). For the reasons indicated below, the United States' requested relief is due to be GRANTED to the extent that the Court wishes to clarify some of its factual findings and otherwise DENIED.
On February 16, 2012, this Court held that the Debtor made fraudulent representations within Affidavits of Individual Surety that he submitted in conjunction with ten
1. The Affidavits were "completely filled out" and "properly completed." For clarity, the Court will detail the contents of the Affidavits. The Affidavits are one page form documents. At the top of each Affidavit, the State and County where the Affidavit was executed is filled in followed by the social security number of the individual testifying. In the Debtor's case, the State of Alabama and Baldwin County are filled in and the Debtor's social security number (which is redacted on the Court's copies) is detailed. Below that, the following statement is included:
(emphasis supplied).
After the statement, twelve enumerated informational boxes are included. Boxes 1 through 6 request the affiants name, home address, type and duration of occupation, name and address of employer, name and address of individual surety broker used (if any), and telephone number. The Debtor consistently included the requested information, where applicable, in those boxes. Box 7 states: "The following is a true representation of the assets I have pledged to the United States in support of the attached bond." Box 7 has two subparts. Subpart (a) says "Real Estate (Include a legal description, street address and other identifying description; the market value; attach supporting documents including recorded lien; evidence of title and the current tax assessment of the property. For market value approach, also provide a current appraisal.) (emphasis in original). The Debtor responded to that request by typing "Investment Real Estate Properties with clear title" followed by some combination of the following properties: (1) "Lots 5, 6, 7, & 8 Rosalia Ave. Lillian, AL—$156,000," (2) "4719 Albatross Drive Granbury, TX— $150,000," and (3) "Baton Rogue [sic], LA—$140,000." Sometimes the properties included the dollar valuation and sometimes they did not. No evidence was presented to the Court that any additional documents were included with the Affidavits in response to the parenthetical in Box 7, subpart (a). Subpart (b) of Box 7 asks the affiant to include "Assets other than real estate (describe the assets, the details of the escrow account, and attach certified evidence thereof) (emphasis in original). On many of the Debtor's affidavits, subpart (b) was left blank. On a few, the Debtor referred to an attached "Financial Statement" and stated "ABBA Bonding Net Worth" followed by an estimation that exceeded $120 million.
Box 8 asks the affiant to "Identify all mortgages, liens, judgements [sic], or any other encumbrances involving subject assets including real estate taxes due and payable." On every Affidavit submitted by the Debtor it is typed "None at this time." Box 9 states: "Identify all bonds, including bid guarantees, for which the subject assets have been pledged within 3 years prior to the date of execution of this affidavit." The Debtor answered that request with the number "0". Below box 9 it states: "Documentation of the Pledged Asset Must be Attached." Box 10 requests the Debtor's signature. The Debtor's signature appears on every Affidavit. Box 11 seeks the "Bond and contract to which this affidavit relates." The government agency contract number is filled in on the Debtor's Affidavits. Box 12 is for notary purposes. It states "Subscribed and sworn to before me as follows" and asks for the date the oath was administered, the city and state it was administered, the name of the official administering the oath, the signature of that official, and the date their commission expires. The Debtor's Affidavits were sworn to and notarized by Jolie M. Douglas. They contain her signature and a notary stamp. Also present is ABBA Bonding's seal.
2. It is clear to the Court that the Debtor knowingly made misrepresentations regarding collateral that he pledged in support of surety bonds. The Debtor falsely stated that he owned the pledged real estate free and clear of liens. The Debtor also falsely stated that the real estate had not been pledged to any other bond contract within the three years prior to the execution of any Affidavit. The Debtor made those misrepresentations numerous times to numerous agencies. The Debtor's intent in making those false representations regarding the collateral was to be approved as surety. Bond premiums of varying amounts were paid to the Debtor for his bonds. Those amounts were stated on the bonds.
3. The pledged collateral was meant to act as security for the Debtor's surety bonds. It is a fact that the Affidavits request the affiant to detail assets pledged in support of the attached bond. This is so because the pledged assets give the United States property to look to in the event of contractor default. Carole Bryant of the National Park Service ("NPS") testified that performance and payment bonds acted as "security for the government so that the contractor will fulfill its contract obligations" and that question 7, 8, and 9 of the Affidavits show "what the surety is pledging...as collateral for their bonds." Ms. Bryant explained that she reviewed questions 7, 8, and 9 of the Affidavits to make sure that "something [was] stated in those blocks" because they were important "for the bonds to be valid." Crystal Dobbins, a contracting officer for the Department of Veterans Affairs echoed that testimony: "The Affidavit of Individual Surety...lists what they're pledging for the bond to be valid." Barbara Marthe of General Services Administration ("GSA") stated that she "looked at the items that they were putting up as collateral" and explained that she "looked at [question] 8 and 9, particularly 9" on the Affidavit. Ms. Marthe explained that her responsibility was to make sure an Affidavit, "which showed what was being put up for the money for [the] contract," was present, signed, and sealed. Jim Read, a contracting officer for the NPS, stated that pledged assets would be important because they "ensure that the contract will be completed, as per the terms...and conditions of the contract." Sheri Slavens of the NPS stated that questions 7 and 8 of the Affidavits are important "to assure us that there is [sic] substantial assets to cover the bond." It is clear to the Court that it was important to the contracting officers that assets were pledged within the Affidavits in support of the bonds.
4. The contracting officers did not record any liens in favor of the government based on the bond surety agreements with the Debtor.
5. The Court found in its previous Opinion that "Without [the Debtor's false misrepresentations in the Affidavits], the Debtor's surety application would not have been approved." That factual finding is supported by the evidence. As stated above, the contracting officers explained that the pledged collateral in the Affidavits was important because it made the bonds valid and gave security to the United States. The contracting officers testified that they reviewed the Affidavit and made sure the informational boxes were filled in. Further, it cannot be argued that a bond surety was not necessary for the government contracts. Therefore, based on those facts, it is logical to infer that if box 7, 8, and 9 of the Affidavits had been blank, the Debtor's bonds would not have been accepted.
6. The Debtor's misrepresentations regarding the pledged collateral were made in sworn affidavits submitted to government agencies. The Affidavits stated that they were intended to induce the United States to accept the affiant as surety. The contracting officers who were deposed in connection with this case testified regarding the importance that the Affidavits were signed, sealed, and notarized. In fact, several of the contracting officers explained that the Affidavit was particularly important because the Debtor's bond surety application was an individual surety application, as opposed to a corporate surety application. Those contracting officers testified that, in their experience, individual surety applications were rare. Barbara Marthe of the GSA, a contracting officer for 10 years at the time she reviewed one of the Debtor's Affidavits, explained that 99% of the bond contracts she reviewed at that time involved corporate sureties. She explained that there is an approved list of corporate sureties that is accessible to contracting officers in making their approval decisions. The list is available through the United States Department of the Treasury. However, no such list exists for individual sureties. Therefore, Ms. Marthe explained that contracting officers rely on the Affidavits because they are "just as good as if you were doing a corporate, and you looked it up online, so that...meant the same thing." She stated that "when it's an individual surety, you always have an affidavit to prove it's legitimate." Ms. Marthe "figured [the Affidavit] was a legal document." Sheri Slavens of the NPS and Tracy Maes of GSA echoed Ms. Marthe's testimony regarding individual sureties.
7. The testifying contracting officers did not know that the pledged properties had been pledged multiple times. They stated that at the time the Affidavits were reviewed, it was not common for contracting officers to compare different Affidavits submitted by the same surety. They further explained that most contracting officers handle many bond contracts in any given year.
8. In its previous opinion, this Court used the following language to describe the Debtor's misrepresentations: "financial ability," "directly to the heart of the debtor's ability, or lack of ability to pay in the event of contractor default," "qualifications to be a surety," and "ability to adequately serve as surety." The Court also held that the Debtor did not pay the NPS Big Bond Phase II claim because he lacked the financial ability to do so (because he was in bankruptcy). Upon reconsideration, the Court holds that those statements do not accurately describe the Debtor's misrepresentations and are not supported by the facts. The Debtor's misrepresentations were specifically regarding collateral that he pledged in support of his bonds. The Debtor did not testify regarding those representations. The only evidence before the Court that sheds light on the purpose of those representations was provided by the contracting officers through their testimony. The contracting officers testified that the pledged collateral was intended to serve as security for the government agencies. Indeed, they explained that the pledged collateral made the bonds valid. Therefore, the Court finds that the Debtor's misrepresentations were specifically regarding the collateral that he pledged as security for his bonds. The evidence does not support a finding that the representations spoke to the Debtor's ability to pay otherwise. Consequently, the Court's findings that the Debtor's misrepresentations regarded his ability to pay are vacated.
9. The Debtor's Affidavits did not pledge collateral with a stated value that was equal to the penal sum of the bonds.
10. The Debtor chose not to testify in his defense. The Debtor offered no explanation for the false statements in his Affidavits.
11. Most of the contracting officers testified that, in their opinion, the government had suffered no loss because no claims had been made against the Debtor's bonds.
12. The Court takes judicial notice that the claims of the United States have not been paid by the Trustee.
The Debtor makes several arguments for reconsideration by this Court. They will be addressed in turn.
The Debtor argues that this case should be analyzed under 11 U.S.C. § 523(a)(2)(B) instead of § 523(a)(2)(A). He also argues that the Court treated this as a case under § 523(a)(2)(B) in its previous opinion. The United States explicitly chose to bring its case pursuant to § 523(a)(2)(A). The relevant statutory language states the following:
11 U.S.C. § 523(a)(2)(A) and (a)(2)(B) (emphasis added). Two aspects of § 523(a)(2) warrant discussion. First, a plaintiff under § 523(a)(2)(A) need only satisfy the lesser, subjective standard of justifiable reliance as opposed to reasonable reliance, which is required by § 523(a)(2)(B). Field v. Mans, 516 U.S. 59 (1995). The United States would shoulder a greater burden traveling under § 523(a)(2)(B). Second, a cause of action under § 523(a)(2)(B) requires the use of a statement in writing that respects the debtor or an insider's financial condition. Section 523(a)(2)(A) specifically excepts from its coverage statements respecting a debtor or insider's financial condition.
The Debtor's argument depends on how this Court interprets the statutory term "financial condition." Financial condition is not defined in the Bankruptcy Code and courts are divided over the breadth of the term. In re Bogdanovich, 292 F.3d 104 (2d Cir. 2002) (detailing cases). The Bogdanovich court succinctly detailed the split as follows:
Id. at 112 (internal citations omitted) (emphasis added). The 11
The Bankruptcy Court for the Southern District of Florida adopted the narrow or strict view in In re Dato, 410 B.R. 106 (Bankr. S.D. Fla. 2009). In that case, it was alleged that the Debtor made oral misrepresentations regarding (1) the quality and likelihood of collection on a single account receivable and (2) the ownership of certain generators in order to induce the plaintiff to alter the terms of a security agreement. The bankruptcy court looked to the legislative history of § 523(a)(2)(B) and determined that § 523(a)(2)(B) was intended to address a discrete abusive lending practice and that the narrow or strict view "would limit the reach of section 523(a)(2)(B) only to instances where a borrower is presenting information intended to pass as an overall view of his financial condition, as contemplated by Congress." Applying the narrow view to the facts of the case, the bankruptcy court held that the "alleged misrepresentations are regarding a few single assets of the Debtor, and do not rise to the level of a representation of the Debtor's overall financial condition, as required by the strict view." Accordingly, the Court found that the representations made by the Debtor fell within the ambit of § 523(a)(2)(A). See also In re Joelson, 427 F.3d 700 (10
This Court agrees with those courts adopting the narrow view of the term financial condition. Only those statements regarding a debtor or insider's overall financial health or net worth, as opposed to statements regarding specific assets, qualify as statements of financial condition. The narrow view better effectuates one of the primary policies of bankruptcy to provide a fresh start to "honest but unfortunate debtor[s]," Grogan v. Garner, 498 U.S. 279, 287 (1991), by eliminating the circumstance where fraudulent misrepresentations are discharged in bankruptcy simply by virtue of being orally made and regarding anything that could be construed to inform any financial aspect of a debtor.
Here, the Debtor made misrepresentations regarding specific pieces of collateral. Under the narrow view, those statements are not statements regarding the Debtor's financial condition because they do not speak to the Debtor's overall financial health. Rather, they specifically address the qualities of the collateral the Debtor pledged in support of his bonds. See In re Sansoucy, 136 B.R. 20, 23 (Bankr. D.N.H. 1992) ("[A]n oral misrepresentation that certain collateral was free and clear of any liens [i]s actionable under 523(a)(2)(A)."). The Debtor appears to agree with the Court's analysis on this issue. In an earlier filing in this case, the Debtor stated:
(Opposition Response Filed by Morris C. Sears, Adv. Proc. 09-01070, Doc. 53 at pp. 3-4). Thus, though the misrepresentations are written, they do not fall within § 523(a)(2)(B) and are properly adjudicated pursuant to § 523(a)(2)(A).
The Debtor argues that the United States failed to establish that the contracting officers actually relied upon the Debtor's Affidavits. The Debtor is correct that actual reliance must be proven by a objecting creditor under § 523(a)(2)(A). In re Johannessen, 76 F.3d 347, 350 (11
The Debtor argues that the Affidavits were incomplete and that "[o]ne simply cannot rely upon a document that is patently incomplete." To the extent that the Debtor's argument goes to the actual reliance requirement, arguments regarding whether the contracting officers should have known the falsity of the Debtor's representations speak to whether the reliance was justified, not whether there was actual reliance. In re Spadoni, 316 F.3d 56, 58-59 (1
The Debtor cites In re Pauley, 205 B.R. 510 (Bankr. W.D. Mich. 1997), in support of his argument that the United States did not actually rely on the Affidavits. The bankruptcy court in Pauley determined that in the securities fraud context actual and justifiable reliance must be demonstrated in order to support a nondischargeability judgment pursuant to § 523(a)(2)(A). The Debtor argues that Pauley stands for the proposition that "but for" reliance must be demonstrated in order to show actual reliance. The Debtor also cites In re Lapic, 2009 WL 2413262, at *36 (Bankr. D. Conn. August 4, 2009) and In re Guillen, 2007 WL 2009773, at *5 (Bankr. D. Conn. July, 6 2007) for the same proposition. In the context of this case, the Debtor insists that in order for the United States to prove actual reliance, it must show that but for the Debtor's representations, the Debtor's bonds would not have been accepted. While a "but for" showing could establish actual reliance, proof of actual reliance does not necessitate a "but for" showing. As stated by the Fifth Circuit:
In re Mercer, 246 F.3d 391, 413 (5th Cir. 2001).
The facts of this case support that the contracting officers "in fact" relied upon the sworn Affidavits.
The Debtor takes issue with this Court's determination that the United States reliance was justifiable.
In re Vann, 67 F.3d at 283 (internal citations omitted).
Justifiable reliance is a subjective standard. As noted by the Vann court, it considers what was actually known to an individual based on their characteristics and circumstances. The facts in this case indicate that the contracting officers who accepted the Debtor's bonds did not know that the representations in the Affidavits were false. The contracting officers testified that they rarely dealt with individual sureties. Instead, they primarily handled corporate bond sureties where they had access to the Department of Treasury's list in order to verify a potential surety. The contracting officers indicated that they checked to make sure a signed and notarized Affidavit was attached to the bonds and that the informational boxes were filled out. Several contracting officers explained that, according to their understanding, with individual sureties the presence of an executed Affidavit was just as good as finding a corporate surety's name on the Department of Treasury's list of approved sureties.
Further, the evidence shows that it was not a typical practice for contracting officers to compare different affidavits of individual surety submitted by the same affiant. It was also not common for contracting officers to inquire of other contracting officers regarding individual bond surety applicants. The fact that so many different contracting officers were deceived by the Debtor's misrepresentations supports the typicality of this practice. Moreover, the contracting officers reviewed many bonds and would not easily remember a representation in one Affidavit versus a representation in another. Therefore, it was not obvious to the contracting officers that the Debtor's Affidavits were untrue. Under the justifiable reliance standard, no investigation is necessary when the falsity of the representations is not obvious. Field v. Mans, 516 U.S. 59, 71-72 (1995).
The Debtor argues that a creditor cannot rely on a "facially incomplete document." The Affidavits were not facially incomplete. The Affidavits contain answers to every requested question. It is true that the Affidavits require attached documentation and the evidence does not show that the requested documentation was attached. However, not one of the contracting officers testified that they took into account the parenthetical in box 7, subpart (a). This fact, coupled with the fact that the contracting officers rarely dealt with individual sureties, demonstrates that the contracting officers as a whole were subjectively unfamiliar with the parenthetical requirements detailed in box 7, subpart (a). Indeed, as the Debtor urges, none of the contracting officers required attached documentation in order to approve the Debtor's bonds. What was important to the contracting officers was that the Affidavit was attached to the bonds, that the boxes on the Affidavit were filled in, that property was pledged, and that, most significantly, it was signed and attested to by a notary.
The United States has proven justifiable reliance on the Affidavits in this case.
This Court found in its previous opinion that the Debtor made false representations with the intent to deceive in the Affidavits in order to induce the United States to accept him as bond surety. The Court also found that although the Debtor investigated and paid many of its obligations under the bond surety agreements, those actions did not negate his fraudulent intent. The Debtor urges this Court to reconsider its ruling that subsequent performance or payments negates circumstantial intent to defraud.
The fraudulent intent inquiry is necessarily factual and requires "the Court to examine the totality of the circumstances." In re Dennis, 444 B.R. 210, 216 (Bankr. N.D. Ala. 2011). As such, a debtor's subsequent performance under the terms of an agreement alleged to be fraudulently entered can be probative as to a debtor's intent in entering the agreement. For instance, in In re Hilley, 124 Fed. Appx. 81, 83 (3
In this case, unlike in Hilley, the evidence shows that the Debtor intentionally made misrepresentations numerous times in order to be approved as bond surety. No implied misrepresentations are present here. In Hilley, there was some question as to the truth or falsity of the debtor's representation that he would repay the loan. Here, the misrepresentations were patently false and stated in sworn documents. Moreover, the Debtor has not offered any evidence contesting the falsity of the representations or provided an explanation as to why he made false representations. The Debtor does not argue that he mistakenly made untrue statements under oath. Indeed, such an argument would be hard to believe given the number of times that the Debtor submitted different Affidavits containing the same misrepresentations.
Further, the Debtor's argument that performing under the agreement negates other evidence of his fraudulent intent misconstrues the issue. The Debtor's goal was to be approved as bond surety, and he made misrepresentations in order to achieve that goal. The Debtor did not make misrepresentations regarding whether he intended to perform under the agreement. Whether or not the Debtor performed pursuant to the surety agreements after fraudulently obtaining the bond contracts is not relevant to the Debtor's deception in being approved as bond surety.
The Debtor's argument was addressed in In re Demarest, 176 B.R. 917 (Bankr. W.D. Wash. 1995). There, the debtors entered into a sale agreement of their home, which was encumbered by a deed of trust. The agreement required the home to be free of encumbrances. The deed of trust was supposed to be satisfied at closing, but, through an oversight, was not. The debtors became aware of the error, but did not mention it and received the proceeds of the sale that included the sale price and the money that was intended to pay off the deed of trust. The debtors used the additional money for various business purposes, but continued to pay the lender who held the deed of trust. Eventually, the deed of trust lender filed a foreclosure action on the property. The buyer of the property paid off the deed of trust lender in exchange for an assignment of the deed of trust and note and sued the debtors. The debtors filed for Chapter 7 bankruptcy protection and the buyer filed a § 523(a)(2)(A) action regarding the debt. The debtors argued that because they intended to pay back the money they kept, and made some payments, they lacked the requisite fraudulent intent. The bankruptcy court disagreed, stating the following:
Demarest, 176 B.R. at 920.
It is clear to the Court that the Debtor submitted multiple Affidavits, under oath, containing misrepresentations. It is also clear that the Debtor knew that the information in the Affidavits was false. The Debtor's intent to deceive the United States can be inferred from the volume and pattern of his misrepresentations. In re Firestone, 26 B.R. 706, 717 (Bankr. S.D. Fla. 1982); In re Dennis, 444 B.R. at 216. It is not necessary to prove that the Debtor intended to cause the United States losses. In re Spicer, 155 B.R. 795, 802 (Bankr. D. Col. 1993). Rather, all that is required is a showing of intent to induce the creditor to rely on misrepresentations made by the debtor in question. In re Reuter, 427 B.R. 727, 753 (Bankr. W.D. Mo. 2010). The Court is satisfied that the Debtor made misrepresentations with the intent to deceive and the Debtor's subsequent actions with regard to the bond contracts do not negate that intent.
The Debtor argues that the United States suffered no actual loss that was proximately caused by the Debtor's misrepresentations. In its previous opinion, the Court found that the United States had suffered two categories of damage as a result of the Debtor's misrepresentations: (1) the bond premiums actually paid by the United States for the Debtor's bonds associated with ten different bond contracts and (2) a $1,055,724.10 claim made by the National Park Service ("NPS") with regard to the Big Bend Phase II project in which the Debtor issued bonds as surety.
11 U.S.C. § 523(a)(2)(A) excepts from discharge any debt for money to the extent that it is obtained by fraud. Cohen v. De La Cruz, 523 U.S. 213, 218 (1998). Stated differently, "[t]he dischargeability provision applies to all debts that `arise out of' fraud." Archer v. Warner, 538 U.S. 314, 321 (2003). Court's in the 11
Courts take an expansive view of the debts that are considered nondischargeable by virtue of being obtained by fraud or false representations. Cohen, 523 U.S. at 221 ("The most straightforward reading of § 523(a)(2)(A) is that it prevents discharge of `any debt' respecting `money, property, services, or an extension, renewal, or financing of credit to the extent obtained by...false pretenses, a false representation, or actual fraud.'"). This is so because "the malefic debtor may not hoist the Bankruptcy Code as protection from the full consequences of fraudulent conduct." In re Bilzerian, 153 F.3d 1278, 1282 (11
498 U.S. at 287. Stated another way, "Congress intended § 523(a)(2) to protect creditors who were tricked by debtors into loaning them money or giving them property, services, or credit through fraudulent means." In re Rountree, 478 F.3d 215, 219-220 (4
As to the bond premiums, the United States has demonstrated that it was damaged as a result of the Debtor's misrepresentations. The Debtor pledged property to the United States in support of his bonds. He misrepresented to the United States that the property was free and clear of liens and that it had not been pledged to other projects within the previous three years. Based upon those representations, the United States paid bond premiums of various amounts to the Debtor. As evidence, the United States presented the Debtor's bonds which recite the amount of the bond premium paid on each bond. In effect, the United States paid for worthless bonds that were not backed by the stated collateral. The reason the United States paid for those worthless bonds was because of the Debtor's misrepresentations. The Debtor obtained money from the United States by fraud, and the United States was damaged in the amount it paid for the bond premiums. However, because reliance must also be shown, only those bond contracts where the United States presented evidence of reliance will result in nondischargeable debts. Those bond contracts are detailed in the Court's previous opinion and judgment. Further, this result is in line with the United States Supreme Court's interpretation of § 523(a)(2)(A) in Cohen v. De La Cruz, 523 U.S. at 224, where it held that not only was money actually obtained through fraud nondischargeable, but that punitive damage awards included in judgments based upon that fraud were nondischargeable as well as arising out of that fraud.
As to the NPS claim regarding the Big Bend Phase II project, the United States has shown that it suffered damage as a result of the Debtor's misrepresentations. In its previous opinion, the Court erroneously relied upon its finding that the Debtor had misrepresented its ability to pay in making its determination that the NPS debt was nondischargeable. Upon reconsideration, the Court finds that the Debtor's misrepresentations were not about the Debtor's ability to pay, but rather, were specifically about collateral he pledged in support of his bonds. However, that fact does not change the result. The Debtor pledged collateral in support of the bonds that the NPS accepted for the Big Bend Phase II project. When Diamante defaulted as contractor, the United States was required to pay all the costs associated with finishing the job. The United States proof of claim is evidence of those amounts. To date, the United States has not been paid those amounts by the bankruptcy Trustee. If the Debtor had not filed bankruptcy, the United States could have looked to the pledged property to satisfy their losses. This is a sufficient causal link for § 523(a)(2)(A) purposes. It is of no moment that the reason that the United States could not make a claim against the properties was because the Debtor was in bankruptcy. This is merely a convenient shield of the Debtor's own making that will not absolve his fraud.
Therefore, IT IS ORDERED
