IN RE BERCOT, (Bankr.D.Wyo. 1999)

PETER McNIFF, United States Bankruptcy Judge.

On August 11, 1999 the court held a trial on the complaint of CIT-CO Federal Credit Union (CITCO) seeking an exception to the chapter 7 discharge of the defendants, Larry Wayne Bercot and Dorothy Bercot. The court has considered the testimony and other evidence, the applicable law and the arguments of the parties, and finds and concludes as follows.

In its amended complaint, CITCO states a claim for relief against Larry Bercot alleging the nondischargeability of a $10,088.99 debt pursuant to 11 U.S.C. § 523(a)(2)(A), and two claims for relief against Dorothy Bercot for the nondischargeability of the same debt pursuant to § 523(a)(2)(A) (a)(2)(B). CITCO also prays for its attorney fees incurred in bringing this matter. The defendants seek an award of their attorney fees pursuant to § 523(d).

JURISDICTION

The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 157 and 1334. This is a core proceeding within the definition of § 157(b)(2)(I).

FINDINGS OF FACT

The parties were vehement in their disagreement over the facts and the conclusions they drew therefrom. The court has considered all of the evidence and finds the relevant facts as follows:

1. Mrs. Bercot opened an individual savings account at CITCO on December 12, 1995. She signed a Loanliner Application and Credit Agreement which sets out the terms for the life of the account. Mr. Bercot is not a party to the account and did not sign the documents.

2. When she filled out the application and opened the account, Mrs. Bercot listed one credit card obligation, an AT T card which is in her name only. She also listed the couple's mortgage debt which she described as "spouse pays." No other debts were indicated on the application. The preprinted text of the agreement provides that "updated financial information about yourself" will be provided "upon request."

3. That date, Mrs. Bercot borrowed $1,300. CITCO secured the note with deposits and shares. The loan was repaid. Over the next three years, Mrs. Bercot took out other loans. Some were paid off. Payments were timely. Some obligations were pre-approved by CITCO depending on the amount borrowed.

4. On April 4, 1997, Mrs. Bercot borrowed $8,600, secured by a 1992 Chevrolet. The vehicle was owned by her and Mr. Bercot. Therefore, Mr. Bercot signed the financing statement. He did not sign the note or any other documents.

5. On June 6, 1997, at Mrs. Bercot's request, a February 1997 unsecured loan with a 16% interest rate and the vehicle loan with an 11.5% interest rate were consolidated. The interest rate on the consolidated loan became 13.94%, and the February note was marked paid. By this refinance, CITCO collateralized the previously unsecured February advance and increased the vehicle loan interest rate. Mrs. Bercot's total payments were consolidated into one lower amount.

6. An internal CITCO document relating to the 1997 refinance shows debts listed from the original application, plus the CITCO obligations. There is no documentary evidence that a credit report was obtained. However, the loan officer testified that she asked Mrs. Bercot about the credit card bills on the credit report, and Mrs. Bercot replied that Mr. Bercot paid them. CITCO did not have Mrs. Bercot sign the Disbursement Voucher and Security Agreement.

7. On or about June 15, 1998, Mrs. Bercot approached CITCO for a $1,000 advance. There is no evidence she was asked the purpose of the loan at that time. Later, during discovery in this case, Mrs. Bercot apparently stated the purpose of the loan was to cover expenses for Mr. Bercot. Mr. Bercot was out of town on business, needed funds for travel, and the credit limits had been reached on the Bercots' several credit cards. However, of the $1,000 advance from CITCO, only a minor amount was used to cover Mr. Bercot's travel expenses.

The actual use of the loan funds was to cover overdraft charges in the couple's joint checking account amounting to $180, and a cash flow shortage until Mrs. Bercot's payroll check was deposited two days later. The overdrafts resulted from a check paid by the bank when funds were not available, triggering a chain reaction.

8. At the time of the 1998 loan, Mrs. Bercot was current on the 1997 secured loan. Mrs. Bercot was not asked to provide updated written financial information, and she did not sign the Disbursement Voucher and Security Agreement. She did not have a discussion with the loan officer concerning her financial situation, except to request the $1,000 loan. CITCO did not inquire into Mrs. Bercot's credit history or financial affairs.

9. However, CITCO obtained an updated credit report. The credit report shows credit card obligations not listed on the loan application in 1995. The Bercots also owed about $13,000 in unsecured medical bills which were not on the credit report. Mrs. Bercot's medical bills were relatively minor, less than $1,000. She also owed $325 to the Internal Revenue Service. Mr. Bercot had incurred a substantial hospital bill with Mrs. Bercot's employer.

10. CITCO advanced the loan funds, and at CITCO's suggestion, the secured note was refinanced to include the new advance. The payment amount went up and the rate increased slightly.

11. Of the credit cards the Bercots had between them in June 1998, Mrs. Bercot was liable on an AT T card disclosed to CITCO in 1995. She was a codebtor on five others undisclosed on the 1995 application. The credit card invoices show that some of the cash advances were taken at gambling establishments. The invoices also show that at the time of the 1997 and 1998 refinances, the debtors were making minimum payments on each of the cards, that on occasion late charges were incurred, and that most of the cards had reached their credit limit.

12. The debtors, to some extent, maintained separate finances. At some time in the past, Mrs. Bercot told CITCO that Mr. Bercot paid some debts. She never stated that they were separately liable in a legal sense. Although they maintained a joint checking account, Mrs. Bercot wrote the checks. The debtors filed separate federal income tax returns.

13. On June 28, 1998, Mr. Bercot suffered a mental breakdown and checked himself into the psychiatric ward of the Veterans' Administration Hospital. Mr. Bercot has suffered from post-traumatic stress disorder since the 1970s. Mr. Bercot had steady employment for eleven years, but on June 28, 1998, while in the V.A. Hospital, he resigned from his job by sending an e-mail to his employer.

14. On July 16, 1998, Bercots paid their bankruptcy counsel a fee. On July 23, 1998, the Bercots filed their voluntary chapter 7 petition. At the time of the trial, Mr. Bercot had not yet been released to return to work. Both debtors testified that after Mr. Bercot quit his job, they were unable to make the minimum payments required on their obligations.

CONCLUSIONS OF LAW

CITCO's complaint is brought under 11 U.S.C. § 523(a)(2)(A) (B). The plaintiff has the burden to prove the elements of each claim for relief by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 659 (1991). Exceptions to discharge are construed narrowly. In re Dunston, 146 B.R. 269 (D.Colo. 1992).

Section 523(a)(2)(A)

The § 523(a)(2)(A) claim is brought against both debtors. Under that section, "[a] discharge under section 727 . . . does not discharge an individual debtor from any debt for money . . . to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's . . . financial condition." Statements concerning a debtor's financial condition are not actionable and, therefore the misrepresentation or actual fraud must relate to other matters.

All doubts are to be resolved in the debtor's favor. In re Kukuk, 225 B.R. 778 (10th Cir. BAP 1998). The creditor must establish that a debtor made a materially false representation with the intent to deceive the creditor, the creditor justifiably relied on the representation, and thereby, sustained a loss. Field v. Mans, 516 U.S. 59 (1995). Fraudulent intent may be deduced from the facts and circumstances of the case. In re Calder, 907 F.2d 953, 956 (10th Cir. 1990).

CITCO contends the entire 1998 refinanced secured loan is nondischargeable based on alleged fraud by Mrs. Bercot, with Mr. Bercot as an "accomplice." The evidence of this alleged scheme is unclear. There is no evidence that Mrs. Bercot made any representations to CITCO, false or otherwise.

Nevertheless, CITCO contends the Bercots did not intend to repay the funds. They allege the Bercots borrowed the money knowing they could not repay the loan and while intending to file bankruptcy. Of course, that argument undercuts the contention that the entire refinance is nondischargeable, rather than just the 1998 loan advance.

CITCO's argument is similar to that made in cases concerning credit card nondischargeability. The Tenth Circuit Bankruptcy Appellate Panel has addressed these issues. A debtor's intent cannot be inferred solely by the fact that the debtor does not repay the debt and seeks bankruptcy protection instead. Further, a hopeless financial situation is not determinative of fraudulent intent. In re Kukuk, 225 B.R. at 787.

Even if an unsecured advance under a loan agreement can be analogized to the credit card cases, in this case the argument fails. The Bercots may or may not have been fully aware of their precarious financial situation. At the time of the $1,000 advance, Mr. Bercot was employed at the same job he had held for 11 years. The debtors were managing to make minimum payments on their debts.

Not until Mr. Bercot suffered a breakdown and quit his job did the debtors become hopelessly overwhelmed by the debt load. That occurred after the loan was incurred. There is no evidence Mr. Bercot even knew about the CITCO advance or the snowballing overdraft problem.

Financial problems are not fraud. Evidence of previous gambling is not evidence of fraud. Even if, as CITCO argues, the Bercots have no credibility, there is no evidence of bankruptcy planning prior to the $1,000 loan.

CITCO also contended that the statutory presumption of nondischargeability in this case is applicable, despite the court having previously ruled otherwise. The presumption of § 523(a)(2)(C) is inapplicable because the cash advance made on June 16, 1998 did not "aggregate more than $1,000," as required by the statute.

The facts in this case do not support a conclusion that the debtors did not intend to repay the loan advance. There is no evidence of a fraudulent scheme between the debtors, nor any evidence of a fraudulent misrepresentation. The objection to the dischargeability of the loan to CITCO under § 523(a)(2)(A) is denied.

Section 523(a)(2)(B)

CITCO also objects that the debt should not be discharged as to Mrs. Bercot under § 523(a)(2)(B). Pursuant to that section, a chapter 7 discharge "does not discharge an individual debtor from any debt for money . . . to the extent obtained by use of a statement in writing that is materially false respecting the debtor's . . . financial condition on which the creditor . . . reasonably relied; and that the debtor caused to be made . . . with intent to deceive."

At the time of the 1998 advance and refinance, Mrs. Bercot did not update the financial information. There is no written financial information from 1998. Thus, to prove the elements of the § 523(a)(2)(B) claim, CITCO must show, among other things, that Mrs. Bercot adopted the 1995 information in connection with the 1998 advance, and that the 1995 information was materially false.

Mrs. Bercot denied she was asked about the financial information in the credit report or the 1995 application at the time of the 1998 advance. CITCO did not present evidence to the contrary, except that the usual procedure is to ask if there have been changes.

The only written document Mrs. Bercot ever signed detailing her financial condition is the 1995 credit agreement. She listed her own credit card and indicated her husband paid the mortgage. Prior to the 1998 $1,000 advance, Mrs. Bercot was asked about the credit card debts on her credit report. She replied that her husband paid those debts. At the trial, she testified that she and her husband each had credit card obligations which they separately considered their respective responsibility. These statements are not adoptions of prior written financial information, and appear accurate anyway.

The court also concludes any reliance by CITCO on a three year old financial statement is not reasonable. The claim for exception to the discharge under § 523(a)(2)(B) will be overruled.

Section 523(a)(d)

The debtors seek an award of their attorney fees incurred in defense of this adversary proceeding under § 523(d). That section provides:

If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.

Under § 523(d), the debtor has the burden to show the debt was a consumer debt. In re Sales, 228 B.R. 748, 752 (10th Cir. BAP 1999). They have done so. The funds were used to cover overdrafts and grocery bills, and possibly for Mr. Bercot's work related out of town travel expenses for gas and food. Both debtors were employed, not engaged in business.

The creditor has to prove the complaint was substantially justified. Id. The court concludes an award of fees is warranted here. CITCO's case against Mr. Bercot was not even a close call. He was not a signatory on the account or a debtor on the note. He did not sign any documents except the financing statement in 1997. He never had contact with any of the CITCO loan officers.

Nothing in the original complaint alleged facts to support a claim of fraud or a fraudulent scheme between the debtors. In fact, the court dismissed the complaint as to Mr. Bercot on May 24, 1999. After CITCO pleaded to amend its complaint, and based on CITCO's representations that such information was provable, the court permitted CITCO to amend the complaint. The amended complaint does not contain specific facts of this alleged scheme of fraud.

The court gave CITCO every opportunity to prove its case. No evidence of fraud was produced. Failing to uncover any evidence of these allegations during discovery, CITCO began a search of the debtors' credit card charges. They discovered that one of the Bercots took cash advances at gambling establishments.

Suddenly, the Bercots' moral standards became an issue in the case. Allegations that the debtors were "liars"; should have seen the mental breakdown coming (like an epileptic seizure); gamblers who were not as "holy" as portrayed; and who should have taken care of their family instead of taking gambling junkets, did nothing to further the case. Despite all of that, CITCO failed to establish its case.

The litigation was unjustified, particularly as to Mr. Bercot, and there is no reason whatsoever that an award of fees would be unjust. The court will issue a judgment in accordance with these findings and conclusions.