Summary of a Recent
Judicial
Development in
Secured Transactions
Nondischargeability of Debt
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Green, 355 B.R. 302 (Bankr. E.D. Okla. 2006), the United States Bankruptcy Court for the Eastern District of Oklahoma held that the defendants' debt resulting from fraudulently obtained loans was exempted from discharge.
Background
In obtaining financing, the defendants falsely listed ownership of $100,000 worth of real estate as part of their assets. Id. at 305. They claimed that the loan officer that drew up the documents (their nephew) knew they did not own the property. Id. Their loan agreement contained a specific prohibition against selling or transferring assets without consent of the Bank. Id. at 306. The defendants admittedly violated the agreement by selling livestock in their daughter's name and using the proceeds to purchase hay and make payments on another loan. Id. They also stipulated that they sold livestock during their Chapter 7 bankruptcy, converted the proceeds to their own use to pay an unsecured creditor, and did so without the knowledge or permission of the plaintiff or the bankruptcy trustee. Id.
Their nephew, the loan officer, gave the defendants another $55,000 to make a down payment on a convenience store, but did not require them to sign any additional loan agreements or documents. Id. The defendants claimed they did not know where the money came from. Id. The defendants later discovered that a loan had been taken out from the Bank in their son's name, but because their son had not taken out any loan from the Bank they determined that loan must have been for the $55,000 fronted to them by the loan officer. Id. at 307. They paid off that loan using their retirement fund. Id. Later, when they mentioned that they needed $36,000 to pay off their gasoline supplier, their nephew transferred the money to their account. Id. Those funds were later traced to a loan to an unrelated individual, the proceeds of which were used to purchase a cashier's check payable to the debtors. Id. This individual testified that he had never borrowed the $36,000, but suspected that the loan document had been submitted to him for his signature along with his real loan documents. Id. The defendants subsequently filed for bankruptcy, and the Bank sought declaration of their debts as nondischargeable. Id.
Arguments
The Bank argued that the defendants' debts were nondischargeable under 11 U.S.C. § 523(a)(2)(B) and 11 U.S.C. § 727(a)(2). Id. at 308-09.
Analysis and Holdings
Nondischargeability under 11 U.S.C. § 523(a)(2)(B)
The court found that the defendants had knowingly made false representations about their financial condition in order to obtain financing, that the Bank reasonably relied on the misrepresentation, and that the defendants' conduct indicated an intent to deceive. Id. at 308-09. The court therefore held that the debt in connection with the original loan should be excepted from discharge pursuant to § 523(a)(2)(B). Id. at 309. Regarding the $36,000 transfer for gasoline payments, the court found that there was no evidence of any representations made by the defendants, other than mentioning that they owed money to their gasoline supplier, and that was not sufficient to support a finding of nondischargeability. Id.
Nondischargeability under 11 U.S.C. § 727(a)(2)
The court noted that a finding of dischargeability under § 727(a)(2) requires a finding of actual fraudulent intent. Id. at 310. After considering the "badges of fraud" enumerated by the Second and Ninth Circuit Appellate Courts, the court determined that the defendants did not transfer the livestock with the intent to hinder, delay, or defraud the Bank. Id. Therefore the court held that the debt was not excepted from discharge by § 727(a)(2). Id. at 311.
The case was decided on October 19, 2006.