Summary of a Recent
Judicial Development in
Bankruptcy

Bankruptcy Court Permits Farmer to
Discharge Debt Owed to Bank

Ross H. Pifer
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Mau, 293 B.R. 919 (Bankr. C.D. Ill. 2003), the United States Bankruptcy Court for the Central District of Illinois held that a farmer's debts to a bank were dischargeable in bankruptcy where the bank had not satisfied its burden of proving nondischargeability.

Background

Debtor Daniel F. Mau was a farmer who filed a voluntary Chapter 7 bankruptcy petition on January 29, 2002. See id. at 920-22. At the time of the filing, debtor owed a total of $256,454.74 to Lincoln Land FS, Inc. (Lincoln). See id. at 922. Debtor had been the co-signor on lines of credit extended by Lincoln to Mau Farms, Inc. (Mau Farms), on April 12, 2000, and on September 25, 2000. See id. Prior to the extension of credit, Mau Farms submitted documentation to Lincoln indicating that Mau Farms owned the equipment that served as security for the lines of credit. See id. at 921. Debtor, however, also submitted documentation to Lincoln indicating that the equipment was owned by debtor and his brother, Martin Mau. See id. Upon questioning by Lincoln's farm supply credit manager, debtor stated that he and his brother were dividing the corporation along with the equipment, that he would be the sole shareholder in the corporation, and that he would "be running everything through the corporation" in the 2000 crop year. Id. at 921-22.

Arguments

Lincoln argued that the debt owed to it was nondischargeable under 11 U.S.C. § 523(a)(2)(A), which excludes from bankruptcy discharge any debt "for money, property, service, or an extension, renewal, or refinancing of credit, to the extent obtained by false premises, a false representation, or actual fraud, other that a statement respecting the debtor's or an insider's financial condition." Id. at 923. Lincoln also argued that the debt was nondischargeable under 11 U.S.C. § 523(a)(6), which excludes from bankruptcy discharge any "debt for willful and malicious injury by the debtor to another entity of to the property of another entity." Id. at 922.

Analysis and Holding

The court explained that for Lincoln to prevail on its claim under 11 U.S.C. § 523(a)(2)(A), it must

prove by a preponderance of the evidence that (i) the debtor made false statements which he knew to be false, or which were made with such reckless disregard for the truth as to constitute willful misrepresentations; (ii) the debtor possessed the requisite scienter, i.e. he actually intended to deceive the plaintiff; and (iii) to his detriment, the plaintiff justifiably relied on the representations.

Id. at 923. The court found that the only evidence to support the bank's claim was the representation made by the debtor that he would "run everything through the corporation." Id. The court stated that this representation "was subject to interpretation" and did not meet Lincoln's burden of proof of proving falsehood. Id. at 924.

The court explained that for Lincoln to prevail on its claim under 11 U.S.C. § 523(a)(6), it "must prove three elements by a preponderance of the evidence: (1) that the . . . [debtor] caused an injury; (2) that the . . . [debtor's] actions were willful, and (3) that the . . . [debtor's] actions were malicious." Id. at 922. The court found that Lincoln had not proven debtor's actions to be willful under the standard delineated by the United States Supreme Court in Kawaauhau v. Geiger, 523 U.S. 57 (1998), which requires that "a plaintiff must show that the defendant actually intended to harm him and not merely that the defendant acted intentionally and he was thus harmed." Id. Furthermore, the court found that Lincoln had not proven the debtor's actions to be malicious, by showing that his actions were "undertaken without just cause or excuse." Id. at 923. The court concluded that debtor's actions "might be considered reckless," but that reckless behavior did not satisfy Lincoln's burden of proof. See id.

The case was decided on May 28, 2003; this summary was posted Oct. 13, 2004.