Country Credit, LLC v. Tillman (In re Tillman)

IN RE: ANDREW DEVELLIUS TILLMAN & MARION SHUNDRA TILLMAN DEBTORSCOUNTRY CREDIT, LLC PLAINTIFF

v.ANDREW DEVELLIUS TILLMAN & MARION SHUNDRA TILLMAN DEFENDANTS

CASE NO. 11-04315-KMS

ADV. NO. 12-00031-KMS

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF MISSISSIPPI

Dated: November 30, 2012

CHAPTER 13

MEMORANDUM OPINION

This matter came before the Court for trial on October 31, 2012, (the "Trial") on the Amended Complaint Objecting to Dischargeability of a Debt (Adv. Dkt. No. 25) filed by creditor-plaintiff Country Credit, LLC ("Country Credit") and the Answer to Complaint (Adv. Dkt. No. 24) filed by debtors-defendants Andrew Devellius Tillman ("Mr. Tillman") and Marion Shundra Tillman ("Mrs. Tillman") (collectively referred to as the "Tillmans"). At Trial, Clinton Ashley Atkinson represented Country Credit and Richard R. Grindstaff represented the Tillmans. By stipulation, the parties introduced 12 exhibits. The exhibits and testimony of witnesses¹ were the only evidence presented at Trial. The Court, having considered the evidence, including the post-trial memorandum (Adv. Dkt. No. 32) filed by Country Credit, finds that the obligation owed to Country Credit by Marion Tillman is nondischargeable and the obligation owed to Country Credit by Andrew Tillman is dischargeable for the reasons set forth below.²

I. JURISDICTION

The Court has jurisdiction of the parties to and the subject matter of this Adversary pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (I).

II. FINDINGS OF FACT

Andrew and Marion Tillman are joint debtors in the above styled Chapter 13 bankruptcy case that was filed on December 13, 2011. Each debtor owes a separate debt to Country Credit based on his or her individual loan. Neither debtor is liable for the other's obligation to Country Credit; the debts were incurred individually in separate transactions. Country Credit initiated the instant adversary proceeding alleging that the debts owed to it by each debtor are nondischargeable under 11 U.S.C. § 523(a)(2)³ because the debtors failed to disclose payday loans allegedly outstanding at the time each debtor obtained their respective loan, it reasonably relied on the representations in each debtor's loan application, and that had it known about the alleged misrepresentation, it would not have made the loan to either debtor.

Debt of Marion Tillman

On October 1, 2009, Marion Tillman executed a promissory note and security agreement in favor of Country Credit in return for a loan in the principal amount of $2,690.70. This was not her first loan with Country Credit.⁴ In connection with the transaction, Mrs. Tillman signed an application dated September 29, 2009 and completed by a Country Credit employee; and, onOctober 1, 2009, she signed an application guarantee document,⁵ attesting that all of her debts, including any outstanding payday loans, were disclosed on her application. The application does not reflect any outstanding payday loans as of the date of the application. (Ex. P-1). However, the evidence at Trial established that Mrs. Tillman obtained a payday loan from Brookhaven Check Cash on August 31, 2009. (Ex. P-4). On September 30, 2009, the day before signing the Country Credit promissory note and security agreement, Mrs. Tillman paid off the August payday loan and obtained another payday loan with Brookhaven Check Cash. (Ex. P-5). Thus, Mrs. Tillman falsely represented that she did not have a payday loan outstanding at the time she obtained her loan from Country Credit by signing an agreement guarantee document.

Debt of Andrew Tillman

On February 5, 2010, Andrew Tillman executed a promissory note and security agreement in favor of Country Credit for a loan in the principal amount of $2,421.74. This was not his first loan with Country Credit. In connection with the transaction, Mr. Tillman signed an application and application guarantee document, attesting that all of his debts were disclosed on his application, including any payday loans. The application did not identify any outstanding payday loans as of the date of the application. (Ex. P-7).

Country Credit's Policy on Payday Loans

Stephen Binning, an owner of Country Credit, represented that failing to disclose outstanding payday loans is a material misrepresentation about a debtor's financial condition because the existence of a payday loan is the single most determinative factor about the debtor'sability to repay debts. According to Binning, the existence of a payday loan on an application is the clearest trigger for default⁶ and for this reason, Country Credit does not extend loans to individuals with payday loans.⁷

III. CONCLUSIONS OF LAW

A. § 523(a)(2)

Generally, "all debts arising prior to the filing of the bankruptcy petition will be discharged." United States v. Coney, 689 F.3d 365, 371 (5th Cir. 2012) (citing In re Bruner, 55 F.3d 195, 197 (5th Cir. 1995). "However, to ensure that the Bankruptcy Code's 'fresh start' policy is only available to 'honest but unfortunate debtor[s],' Congress has provided that certain types of liabilities are excepted from the general rule of discharge." Id. In particular, § 523(a)(2)(A) and (a)(2)(B) are intended to protect victims of fraud. In these instances, "Congress evidently concluded that the creditors' interest in recovering full payment of debts in these categories outweighed the debtors' interest in a complete fresh start." Norris v. First Nat'l Bank in Luling (In re Norris), 70 F.3d 27, 29 (5th Cir. 1995).

Country Credit asserts that the debts owed to it by Mr. and Mrs. Tillman, individually, are excepted from discharge under § 523(a)(2)(A) and (a)(2)(B).⁸ The Fifth Circuit recentlynoted the distinctions between these two provisions in Bandi v. Becnel (In re Bandi), 683 F.3d 671, 674-75 (5th Cir. 2012):

Some debts for value obtained by means of a fraudulent statement are dischargeable under § 523(a)(2), and others are not. Debt for property or other value obtained by fraud is broadly rendered nondischargeable by § 523(a)(2)(A), but that subsection carves out certain debt that follows a transfer of value or extension of credit obtained by "a statement" regarding the debtor's "financial condition" and makes that debt dischargeable. However, certain other debt that follows a transfer of value or extension of credit obtained by "a statement" regarding the debtor's "financial condition" is rendered nondischargeable by § 523(a)(2)(B). Under this subsection, if a statement respecting the debtor's or an insider's financial condition is in writing, materially false, reasonably relied upon by the creditor, and the debtor made the statement with intent to deceive, the debt obtained by the fraud is not discharged.

. . . .

The Supreme Court has described these two subsections as "two close statutory companions barring discharge," the first of which pertains to fraud "not going to financial condition" and the second of which pertains to "a materially false and intentionally deceptive written statement of financial condition upon which the creditor reasonably relied."

In re Bandi, 683 F.3d at 674-75.

In order to prevail on its claims under § 523(a)(2)(B), Country Credit bears the burden of proving each of the four required elements by a preponderance of the evidence.⁹ Grogan v. Garner, 498 U.S. 279, 287-88 (1991); Gen. Elec. Capital Corp. v. Acosta (In re Acosta), 406F.3d 367, 372 (5th Cir. 2005). The individual debts are nondischargeable to the extent each debt was obtained by the use of a statement in writing:¹⁰

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;¹¹

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive.

§ 523(a)(2)(B); In re Norris, 70 F.3d at 29. To prevail on its claim under § 523(a)(2)(A), Country Credit must prove by a preponderance of the evidence that the debt owed to it was obtained by false pretenses, a false representation,¹² or actual fraud,¹³ other than a statement respecting the debtor's or an insider's financial condition."¹⁴

Although the preponderance of the evidence standard governs Country Credit's burden, the Court must strictly construe exceptions to discharge against the creditor and liberally construe them in favor of the debtor. In re Futch, 2011 WL 576071, at *16; Fezler v. David (In re Davis), 194 F.3d 570, 573 (5th Cir. 1999); Hudson v. Raggio & Raggio (In re Hudson), 107 F.3d 355, 356 (5th Cir. 1997); Jordan v. Se. Nat'l Bank (Matter of Jordan), 927 F.2d 221, 224 (5th Cir.1991) (rationale of reading nondischargeability provisions narrowly "is to help preserve the Code's basic policy of giving an honest debtor a fresh start").

1. Country Credit failed to sustain its burdens under § 523(a)(2)(A) and (a)(2)(B), therefore, the debt of Mr. Tillman is dischargeable.

a. § 523(a)(2)(B)

Country Credit failed to sustain its burden to prove that Mr. Tillman made a materially false statement in writing under § 523(a)(2)(B). Mr. Tillman testified that he first obtained payday loans after obtaining his renewal loan with Country Credit and therefore his application does not contain any false statements. In support of its allegation that Mr. Tillman falsely represented that he did not have any outstanding payday loans at the time he obtained the loan, Country Credit relies on vague statements made by Mrs. Tillman at the Tillmans' § 341 meeting of creditors.¹⁵ However, her statements do not establish by a preponderance of the evidence thatMr. Tillman had any outstanding payday loans at the time he obtained his loan from Country Credit. Mrs. Tillman's representation that she and Mr. Tillman had been dealing with payday lenders "over two or three years" does not establish that Mr. Tillman had a payday loan on February 5, 2010. (emphasis added). In addition, contrary to Country Credit's counsel's...