United States District Court, M.D. Alabama, Northern Division
MEMORANDUM OPINION AND ORDER
KEITH WATKINS CHIEF UNITED STATES DISTRICT JUDGE.
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.
JURISDICTION AND VENUE
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.
The Promissory Note and Financial
September 18, 2009, Mr. Strength signed a commercial
promissory note in favor of USAmeriBank 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.
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.
May 21, 2008 Financial Statement
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.
“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.
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.
“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.
next section, “Contingent Liabilities, ” was also
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.
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
May 22, 2009 Financial Statement
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.
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.
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.
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).
The First Evidentiary Hearing
first evidentiary hearing, the bank sought a default judgment
of $43, 563.22. (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.)
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
[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
[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.)
The First ...