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USAmeriBank v. Strength

United States District Court, M.D. Alabama, Northern Division

October 20, 2017

USAMERIBANK, f/k/a ALIANT BANK, Plaintiff-Appellant,
v.
FREDDIE LEWIS STRENGTH, Defendant-Appellee.

          MEMORANDUM OPINION AND ORDER

          W. KEITH WATKINS CHIEF UNITED STATES DISTRICT JUDGE.

         Defendant-Appellee Freddie Lewis Strength received a loan from Plaintiff-Appellant USAmeriBank. Turns out, the financial statements Mr. Strength used to obtain the loan contained false information-Mr. Strength never owned the $1 million in real estate he listed as his. Mr. Strength defaulted and filed for Chapter 7 bankruptcy. This case is about whether, in the procedural context of a motion for default judgment, the debt can be declared non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) or (B) because it was based on fraud. Applying a preponderance of the evidence standard in a default judgment proceeding, the bankruptcy court said no, because the bank's reliance on Mr. Strength's financial statements was unreasonable. See USAmeribank v. Strength (In re Strength), 562 B.R. 799, 812 (Bankr. M.D. Ala. 2016); (Doc. # 7-14, at 23); (Doc. # 7-8, at 4). The bank appeals. The decision of the bankruptcy court is due to be reversed.

         I. JURISDICTION AND VENUE

         The bankruptcy court had jurisdiction of the adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334(b). It is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This court exercises jurisdiction to hear the appeal under 28 U.S.C. § 158(a)(1). Venue is proper under 28 U.S.C. § 158(a).

         II. BACKGROUND

         A. The Promissory Note and Financial Statements

         On September 18, 2009, Mr. Strength signed a commercial promissory note in favor of USAmeriBank[1] for $24, 416.00 in return for an unsecured loan. (Doc. # 7-3, at 3-4.) Mr. Strength was to repay the loan at ¶ 8.5% interest rate over the next five years.

         Mr. Strength submitted two financial statements to the bank. (Doc. # 7-3, at 5-8.) Because these statements form the basis of this dispute, they will be described in detail.

         1. May 21, 2008 Financial Statement

         The first financial statement was dated May 21, 2008. (Doc. # 7-3, at 5-6.) Beneath the date, the form listed a “HELPFUL HINT: The easiest way to fill out this form is to fill out page 2 with schedules first & then bring totals over to page 1 & fill in the rest of the information requested.” Below the hint were five general categories of information sought: “Individual, ” “Assets, ” “Liabilities and Net Worth, ” “Contingent Liabilities, ” and “Sources of Income.” Under “Individual, ” Mr. Strength listed his name, personal information, and employment as a realtor for ALFA Realty Company.

         Under “Assets, ” Mr. Strength listed $2, 898.77 in cash on hand at the bank; $1, 000, 000.00 in real estate; $14, 500.00 in automobiles; $25, 000.00 in cash value life insurance; and $129, 000.00 in bonds for titles. This comes to a total of $1, 171, 398.77.

         The form's notation for the real estate line said “See Schedule C (on 2nd page).” This referred to a box on the second page of the document that provided blanks for the description of the property, cost, market value, and mortgage information. Mr. Strength left Schedule C blank. Likewise, the form's notation for cash value life insurance referenced Schedule D, which provided blanks for the life insurance company, the value of the policy, collateral, and the beneficiary. Mr. Strength also left Schedule D blank.

         Under “Liabilities and Net Worth, ” Mr. Strength listed real estate mortgages totaling $49, 960.00. That line also referenced Schedule C, which, as noted, was left blank. Mr. Strength also left blank the box for total net worth. Had he filled it in, Mr. Strength's total net worth, as calculated from his listed assets minus his listed liabilities, would have been $1, 121, 438.77.

         The next section, “Contingent Liabilities, ” was also left blank.

         The final box was split into two categories: “sources of income” on the left and “monthly expenses” on the right. Under income, Mr. Strength listed a salary of $6, 591.00 and “Other (alimony, child support, SS, etc.)” in the amount of $9, 438.00. Mr. Strength left the monthly expenses category (mortgage, rent, insurance, car payments, installment notes, alimony/child support) blank.

         Page two of the form contained a list of schedules in which an applicant could list the details of the general categories requested on page one. Mr. Strength did not do this; he left Schedules A-E blank. Below the schedules was a “General Information” section in which Mr. Strength indicated that he was not a partner in a firm, had never been a defendant in a lawsuit, and had never filed for bankruptcy. Below that was the fine print, by which Mr. Strength agreed that the financial statement constituted a “continuing statement . . . until replaced by a new statement, ” and that the bank could investigate his credit and employment history.

         2. May 22, 2009 Financial Statement

         The second financial statement was from a year and a day later: May 22, 2009. (Doc. # 7-3, at 7-8.) The form remained the same, as did much of the information Mr. Strength provided. Mr. Strength's “Business/Employer” changed to “ALFA Realty-Retired”; his cash on hand at the bank remained exactly $2, 898.77; his real state remained valued at $1, 000, 000, his automobiles at $14, 500, his life insurance at $25, 000.

         Some information was updated. Gone was the $129, 000 in bonds for titles. And unlike in the earlier statement, Mr. Strength provided corresponding information in the schedules for his bank account assets, life insurance, and mortgages. He still left Schedule C-“Real Estate Owned”-blank. Mr. Strength also updated the “Liabilities and Net Worth” section with an additional $23, 714.23 loan from the bank. This brought his total listed liabilities to $73, 674.24, and his total net worth to $968.724.53.

         Finally, in the “Sources of Income” section, Mr. Strength's listed salary increased to $12, 755.00. There also was a new category of “Rental Income” of $13, 400.00 that took the place of the previous statement's catchall of “Other” and its listing of $9, 438.00.

         B. Procedural History

         Mr. Strength filed for Chapter 7 bankruptcy on January 22, 2016. (Doc. # 7-3, at 1.) According to the bank, Mr. Strength admitted at the meeting of his creditors that he never owned the $1 million in real estate he listed on the financial statements. The bank instituted this adversary proceeding on March 22, 2016, seeking to have the debt excepted from the bankruptcy discharge under 11 U.S.C. § 523(a)(2)(A) and (B). (Doc. # 7-3.) After Mr. Strength failed to defend, the bank moved for an entry of default and default judgment under Federal Rule of Bankruptcy Procedure 7055, which incorporates Federal Rule of Civil Procedure 55. (Doc. # 7-4.) The clerk entered default (Doc. # 7-5), and the bankruptcy court set an evidentiary hearing on the motion for default judgment (Docs. # 7-6, 7-7).

         1. The First Evidentiary Hearing

         At the first evidentiary hearing, the bank sought a default judgment of $43, 563.22.[2] (Doc. # 7-11, at 7-8.) It presented one witness: Cynthia Joiner, the bank's vice president of collections and special assets. Ms. Joiner testified that the bank relied on Mr. Strength's two financial statements in determining whether to issue him the loan. She said the bank only learned that Mr. Strength never owned the $1 million in real estate after he defaulted on the loan and filed for bankruptcy. (Doc. # 7-11, at 5-6.)

         The Bankruptcy Judge asked Ms. Joiner about whether the bank's reliance on Mr. Strength's financial statements alone was reasonable:

[The Court]: [The financial statement] says a million dollars in real estate?
[Ms. Joiner]: Yes.
[The Court]: And then you look to Schedule C on the next page and I don't see any detail there. Was any followup done on that?
[Ms. Joiner]: Unfortunately, it's very common that customers do not completely fill out the form and when we are making a loan, unless we have an issue that we've had a problem in the past with collection or other issues, we normally take him at his face value when he certifies that it is correct.
[The Court]: Okay. So nobody-so at the time you got the financial statement or at the time you made the loan[, ] nobody said what's this million dollars you got for land, what is it or where is it?
[Ms. Joiner]: They would not. But, we also had tax returns that would have shown whether he had income or not from the sale of those, that he was a real [estate] agent at the time, and sometimes brokers will own property, sell property, own property, sell property. So we would have had his tax return to look at his income and we would have used the financial statement to verify that he had assets to back up his repayment of our loan.

(Doc. # 7-11, at 9-10.)

         2. The First ...


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