GALGAY, Bankruptcy Judge.
The perfunctory interview received by the debtor because of his prior dealing with the creditor as the creditor's reference to existing files, evidenced a lack of reasonable reliance upon the debtor's materially false financial statement. Therefore, the unpaid portion of the debt was discharged. See Sec. 523(a)(2)(B) at ¶ 9228
[Opinion of the Court]
On February 26, 1980 pursuant to Bankruptcy Rule 515, the estate of Jack Lacey, defendant, was re-opened to determine the dischargeability of a debt owed to Avco Financial Services of New York, plaintiff. The complaint alleges that the defendant induced the plaintiff to grant a loan of $3,548.13 by executing and delivering a materially false financial statement in writing, and that the plaintiff relied upon the truth of the representations contained in the financial statement and was damaged thereby. Thus, the issue before this court is whether the plaintiff has shown by a preponderance of the evidence that the debt is exempted from discharge under Section 523(a)(2)(B) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(B). A hearing was held on June 29, 1980 and the following facts were adduced in evidence.
On August 27, 1976, Jack Lacey applied to the Avco Financial Services of New York for a loan of $3,548.15. The financial statement executed contemporaneous with the loan application listed only three (3) creditors: Household Finance Company, Bloomingdale's and Macy's with debts totalling $2,600. However, Schedule A-3, executed by the defendant in conjunction with a voluntary petition in bankruptcy on December 5, 1979, acknowledged additional debts in excess of $11,000.00 all incurred prior to August 27, 1976.
One employee of the Avco Financial Services testified that it was company policy to require a financial statement for a loan and to rely on the information presented. However, the area supervisor who claimed to rely on the statement in approving the loan admitted having no personal contact with the defendant during the transaction.
Mr. Lacey had been doing business with Avco Financial since 1956. He had paid off seven prior loans and had received from the loan company a good credit rating with them.
Section 523(a) excepts from discharge any debt incurred while obtaining money or credit by
(B) use of a statement in writing
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for obtaining such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made published with intent to deceive.
This new code section is a slight modification of Section 17(a)(2) of the Bankruptcy Act. In addition to incorporating the provisions of the prior law, Section 523(a)(2) requires that the creditor must not only have relied on the false statement in writing, but that the reliance was reasonable. In other respects, Section 523(a)(2) was not intended to change former law, but to codify the law in light of the cases decided under it. See 95 Cong. Rec. H 11095 (Sept. 28, 1978). Cases decided under Section 17a2 of the Bankruptcy Act therefore remain as good law in this area.
There is no question that the financial statement executed by Mr. Lacey omitting over $11,000.00 in outstanding debt was a materially false representation in writing. The listing of these same debts in the bankruptcy petition within three years of the loan application is probably sufficient to evidence an intent to deceive just as it was sufficient to fulfill the scienter requirement of former section 17(a)[2]. In re Hautman, 568 F.2d 651 (9th Cir. 1978). However, proof of the knowing submission of a false financial statement is insufficient to make a debt non-dischargeable under this section. The creditor must affirmatively show that he reasonably relied upon the fraudulent representations. The Code explicitly requires what was construed in the reading of Section 17(a)[2] by the courts. See HR Rep. No. 595, 95th Cong 1st Sess 363 (1977).
It is precisely in the area of reliance that the plaintiff fails to carry the burden of proof which is just as clearly his now as it was under the prior case law. See In re Taylor, 514 F.2d 1370 (9th Cir. 1975). The financial statement is a printed form routinely handed to each applicant. From the evidence presented, whenever an applicant had prior loans with the company, the interview was perfunctory. The reference to the existing file would also tend to evidence a reliance on the defendant's past payment record with the company rather than on any new financial statement.
I was impressed at the hearing with Lacey's credibility and am satisfied that Avco relied on the past credit history rather than the false financial statement. Even if there was reliance upon the statement, the claim by Avco Financial would be limited to the portion of the loan that was fresh cash, excluding any consolidation of an earlier loan. Section 523(a)(2)(B) codifies the reasoning of In re Danns, 558 F.2d 114 (2d Cir. 1977) rendering non-dischargeable only the portion of the renewed loan to which the misrepresentation would be material. However, since the evidence does not affirmatively show a reliance on the financial statement by the Avco Financial Company, the plaintiff's objection to the discharge of this debt fails.
Although the bankrupt made a material misrepresentation in writing in his financial statement, as the loan company has not proven a reliance to its detriment on that statement, the complaint does not satisfy the tests under Section 523(a)(2)(B). Therefore, the unpaid portion of the debt owed to Avco Financial is hereby discharged.
It is so ordered.