DOUGLAS D. DODD, UNITED STATES BANKRUPTCY JUDGE.
Tower Credit, Inc. sued for a determination that its claim against debtors Martin and Ora Carter is not dischargeable under 11 U.S.C. § 523(a)(2)(A) and (B). This memorandum opinion sets forth the reasons the obligation is nondischargeable.
Martin and Ora Carter applied to Tower on September 7, 2010 to borrow $2,000 to pay for home improvements.
The debtors eventually defaulted on the loan and Tower obtained a judgment against them in the Baton Rouge City Court.
The Carters' application recited that they wanted the loan to make unspecified "home improvements." This proved to be untrue: Ora Carter testified at the meeting of creditors that they used the money to open a restaurant.
The Carters also offered no evidence to corroborate that they'd borrowed money from Pioneer to open a restaurant. In fact, the only documentary evidence of the debtors' dealings with Pioneer refutes their contention. Specifically, the debtors' original schedules, as well as the amended schedules Ora Carter filed in her severed case, listed a debt to Pioneer for a loan in 2009, well before the defendants embarked on the restaurant project.
Stephen Binning, Tower's president, testified at trial concerning the 2010 loan to the Carters. Mr. Binning didn't take the debtors' application and the evidence left some doubt concerning his personal knowledge of Tower's dealings with them when they applied for the loan. However, Binning stated that the debtors either filled out the loan application or helped Tower staff to do so. In any case he identified the loan documents and verified that they bore the debtors' signatures.
Binning did not know of the debtors' plan to use the loan proceeds to open a restaurant rather than for home repairs until he questioned them at the meeting of creditors. The revelation prompted Tower to file the dischargeability complaint. According to Mr. Binning, Tower would not have made the loan had the debtors disclosed their plan to use the funds to open a restaurant. Binning explained that his company considered a loan for that purpose too risky. Tower needed to know that the debtors had a stable income in order to be able to repay their loan. Binning did not consider opening a new restaurant a sufficiently stable source of income to make the loan payments.
The Carters failure to reply to Tower's discovery requests also bears on the out-come of this proceeding.
Tower served interrogatories, requests for production of documents and requests for admissions on the defendants on June 4, 2015.
(1) that at the time of the Tower loan application they planned to use the loan proceeds to open a restaurant;
(3) that the assertion in their answer that they borrowed money from Pioneer to open the restaurant is a fabrication; and
(4) that they obtained the extension of credit by means of false representations, fraud and materially false financial statements with the intent to deceive.
The debtors never answered or objected to the requests for admission, nor did they respond to any of the other Tower discovery requests.
Tower alleges that the Carters' actions render their debt to Tower nondischargeable under 11 U.S.C. § 523(a)(2)(A),
"for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
Section 523(a)(2)(A) applies to debts obtained by fraud "involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made." Matter of Martin, 963 F.2d 809, 813 (5th Cir.1992).
To prevail under 11 U.S.C. § 523(a)(2)(A), Tower must prove that: (1) the Carters made a representation; (2) they knew the representation was false; (3) they made the representation with the intent to deceive Tower; (4) Tower actually and justifiably relied on the Carters' representation; and (5) Tower sustained a loss as a proximate result of its reliance on the representation. Matter of Acosta, 406 F.3d 367, 372 (5th Cir.2005).
The Carters have not argued or offered any evidence supporting relief from the consequences of their failure to respond to Tower's discovery requests. Because the Carters did not timely reply or object to Tower's requests for admissions, the matters listed in the requests were admitted. Fed. R. Bankr.P. 7036(a)(3). Thus, the defendants have admitted that the reason they gave for borrowing from Tower — to make home improvements — was false when they gave it, and also that they knew it was false because they planned to use the loan proceeds to open a restaurant. The Carters also have admitted that they made the false representation to obtain credit with the intent to deceive Tower. These admissions satisfy Tower's burden of proving the first three elements of section 523(a)(2)(A).
The next issue is whether Tower relied on the defendants' misstatement in deciding to extend credit to them. Tower must prove that in deciding to loan the Carters money, it justifiably relied on their misrepresentation to render its claim non-dischargeable under Bankruptcy Code section 523(a)(2)(A). Field v. Mans, 516 U.S. 59, 116 S.Ct. 487, 133 L.Ed.2d 351 (1995). Justifiable reliance is gauged by "`an individual standard of the plaintiffs own capacity and the knowledge which he has, or which may fairly be charged against him from the facts within his observation in the light of his individual case.'" In re Vann, 67 F.3d 277, 283 (11th Cir.1995), quoting PROSSER & KEATON ON TORTS § 108 at 751 (5th ed.1984) (emphasis in original). "`It is only where, under the circumstances, the facts should be apparent to one of the plaintiffs knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation on his own.'" Vann, at 283, quoting PROSSER & KEATON ON TORTS at 752.
The evidence established that the Carters had been Tower customers since June 2009. No evidence supported an inference that Tower had any reason to investigate any information the Carters gave it to obtain the 2010 loan. Accordingly Tower established that it justifiably relied on the information in the defendants' loan application and carried its burden of proving that the Carters' debt to it is non-dischargeable under 11 U.S.C. § 523(a)(2)(A).
Bankruptcy Code section 523(a)(2)(B) renders nondischargeable a debt "for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by —
A written statement is materially false under 523(a)(2)(B) if it "`paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.'" Matter of Norris, 70 F.3d 27, 30 (5th Cir.1995), quoting In re Jordan, 927 F.2d 221, 224 (5th Cir.1991) (Emphasis added).
In contrast to section 523(a)(2)(A), a declaration of nondischargeability under section 523(a)(2)(B) requires proof that the creditor reasonably relied on the debtor's false statements:
Matter of Coston, 991 F.2d 257, 261 (5th Cir.1993).
Tower proved that the debtors' loan application contained a materially false statement within the meaning of section 523(a)(2)(B). They misrepresented the reason for the loan, information that Binning indicated Tower normally would use to decide whether to grant the loan. The defendants do not challenge Tower's claim of reliance: they contend that their statement on the application was correct. The record belies their argument. The Carters' claim that Ora Carter merely mis-spoke at the meeting of creditors when she claimed that the defendants had used the Pioneer Credit loan to open a restaurant was not corroborated and not credible given its inconsistency with sworn testimony at the meeting of creditors. The debtors' reckless disregard for the truth of what was in the loan application further evidences their intent to deceive Tower with a false representation of the purpose for the loan. See Butski, 184 B.R. at 195, Coughlin, 27 B.R. at 636.
Tower also proved that it reasonably relied on the debtors' misrepresentation. No party offered any evidence suggesting that "red flag" that should have warranted Tower's further investigation of the information on the debtors' 2010 credit application, especially in light of the parties' prior relationship. Accordingly, Tower reasonably relied on information the debtors gave it in September 2010. The Carters' debt to Tower therefore is nondischargeable under section 523(a)(2)(B).
Tower Credit proved that Martin and Ora Carters' debt to it is nondischargeable under both 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(2)(B). The debt to Tower is nondischargeable under Bankruptcy Code section 523(a) in Martin Carter's chapter 13 case as well as in Ora Carter's chapter 7 liquidation. 11 U.S.C. § 1328(a)(2).
