The debtor operated a farming business. The creditor extended two loans to the debtor, allegedly based on the debtor’s written statements regarding ownership and the existence of farm equipment. The first loan was secured by equipment that was later determined not to exist, and the second loan was secured by existing equipment. Later, the debtor filed for bankruptcy under Subchapter V. The debtor then filed a motion to convert his bankruptcy case to Chapter 7, but the creditor filed a complaint to determine the dischargeability of the two debts. The first count “sought a determination that the debts owed to it be excepted from the debtor's discharge under § 523(a)(6) for willful and malicious injury by the [d]ebtor.” The second count “sought a determination that the debts be excepted from discharge under § 523(a)(2)(B) as obtained using false statements in writing respecting the [d]ebtor's financial condition.” The creditor argued the loans had been obtained based on “materially false written statements” relating to the existence and value of the collateral, and that by providing the false documents that the creditor relied on in providing the loan, the debtor had willfully and maliciously injured the creditor. The debtor admitted he was indebted to the creditors but disputed the amount of debt he owed and denied responsibility for the false information submitted to the creditor. The debtor claimed to have relied on one of the creditor’s employees who assisted him with the loan applications.
In Farm Credit Servs. of Am., PCA v. Woodrum (In re Woodrum), No. 23-70583, Adv. No. 23-07036, 2025 WL 601718, 2025 Bankr. LEXIS 400 (Bankr. C.D. Ill. Feb. 24, 2025) (opinion not yet released for publication), the bankruptcy court held that the first debt was excepted from discharge under § 523(a)(2)(B), but the second debt was not excepted from discharge under either § 523(a)(2)(B) or § 523(a)(6). As for the first loan, the court found that the debtor made materially false statements in the first loan application. Specifically, the equipment listed as collateral did not exist. The court noted, as threshold matters to § 523(a)(2)(B), that the false statements were made in writing and respected the debtor’s financial condition. The court emphasized that it was not relevant whether the debtor prepared the documents containing the false statements or signed the writing because he adopted the false statements when he caused the documents to be submitted to the creditor on his behalf. Additionally, statements about “the existence or value of an individual asset ‘bears on a debtor’s overall financial condition’” and therefore are statements respecting the debtor’s financial condition. Lamar, Archer & Cofrin, LLP v. Appling, 584 U.S. 709 (2018). Next, the court found that the false statements were material by applying the “but for” test. An employee of the bank testified that the first loan would not have been made but for the debtor’s representation that he owned the equipment in which the creditor could obtain a security interest to fully secure the debt. The court then determined that the creditor reasonably relied on the false statements because it had required proof of the equipment before it decided to make the loan. Further, the court inferred that the debtor had a clear intent to deceive because the creditor had a reckless disregard for the accuracy of the information provided to the creditor. In fact, the debtor ignored concerns raised as to the authenticity of the documents submitted. Therefore, the first debt met all elements and was excepted from discharge under § 523(a)(2)(B) as one “obtained by the use of false statements in writing respecting the [d]ebtor’s financial condition.” Regarding the second loan, the court found no evidence that the creditor relied on any false statements, since the second loan was secured by entirely separate collateral that existed and was unrelated to the earlier loan. The false statements made in connection with the first loan were not connected to the second loan; therefore, the court held the second loan was not excepted from discharge under § 523(a)(2)(B). The court also found that for both debts the creditor failed to prove the necessary elements under § 523(a)(6). Specifically, the creditor failed to show that the debtor acted in a manner that was “willful” or, in other words, with the intent to cause injury to the creditor. Therefore, the court ultimately held that the first debt was excepted from discharge under § 523(a)(2)(B), but the second debt was not excepted from discharge.
By Annette Addo-Yobo [email protected]
Edited By Olivia Lewis [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott [email protected]