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

IN RE: GINGER KAYE KORNEGAY DEBTORCOUNTRY CREDIT, LLC PLAINTIFF

v.GINGER KAYE KORNEGAY DEFENDANT

CASE NO. 11-00067-KMS

ADV. NO. 11-00042-KMS

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF MISSISSIPPI

Dated: March 19, 2012

MEMORANDUM OPINION

This matter came before the Court for trial on January 24, 2012, (the "Trial") on the Complaint Objecting to Dischargeability of a Debt (Adv. Dkt. No. 1) filed by Country Credit, LLC ("Country Credit") and the Answer to Complaint (Adv. Dkt. No. 3) filed by Ginger Kaye Kornegay ("Kornegay"). At Trial, Clinton Ashley Atkinson represented Country Credit and J. Thomas Ash represented Kornegay. By stipulation, the parties introduced six exhibits. These exhibits and the testimony of the parties were the only evidence presented at Trial. The Court, having considered the evidence, finds that the obligation is excepted from discharge under 11 U.S.C. § 523(a)(2)(B)¹ 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)(I). Notice of the Trial was proper under the circumstances.

II. FINDINGS OF FACT

On January 7, 2011, Kornegay filed a voluntary petition for relief under Chapter 13 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Mississippi ("Court"). (Dkt. No. 1). On April 18, 2011, Country Credit filed an adversary complaint ("Complaint") (Adv. Dkt. No. 1) against Kornegay seeking a declaratory judgment that the indebtedness³ owed by Kornegay to Country Credit is nondischargeable under 11 U.S.C. § 523(a)(2)(B). ⁴ The Complaint asserts that Kornegay "failed to properly disclose all her debts when she applied" for the Renewal Loan. (Compl. 1, ¶ V).

A. The Renewal Loan

Kornegay was an existing customer of Country Credit when she contacted the company about a loan to pay for car repairs. Kornegay testified that, at the closing of the Renewal Loan, a Country Credit employee presented her with documents that were completed prior to her arrival, reviewed "how much I was getting, what I owed them, and then she "X"ed where I needed to sign and initial." Kornegay acknowledged that she did not read the documents before signing. She also testified that she was not asked any questions prior to signing; she was merely shown where to sign.

B. Alleged Misrepresentations and Omissions

According to Country Credit, Kornegay failed to disclose dependents and an outstanding debt on her application for the Renewal Loan. If the dependents and the debt had been disclosed, Country Credit would not have made the loan.

At the § 341 meeting of creditors,⁵ Kornegay represented that her two nephews lived with her.⁶ However, Kornegay's undisputed testimony at Trial established that on April 8, 2010,the date the Country Credit loan application was signed, she did not have any children living with her. ⁷ Country Credit also argues that Kornegay failed to disclose a debt owed to Hardy Wilson Hospital ("Hardy Wilson"). ⁸ Although Kornegay acknowledged that the debt was outstanding at the time she signed the application for the Renewal Loan, she testified that Hardy Wilson was not collecting on the debt and she only listed it on her bankruptcy schedules because her attorney advised her to list anyone she might owe.

C. Country Credit's Loan Approval Policies

Stephen Binning ("Binning"), an owner of Country Credit, described the application process in detail explaining that it was a process that he devised. According to Binning, information is gathered from the borrower in an application⁹ and then compared with the debtor's credit report. If the company decides to continue the application process, the potential borrower brings verification of income, residence, and other documents to the office where a Country Credit employee will show the potential borrower "the application that we [CountryCredit] have already filled out, they are shown that, we go over it again with them to verify that we've got the right numbers, the right information on there, everything on there is correct, and then we have them sign the [application and verification form]." A Country Credit employee uses the information obtained from the borrower to "work out a budget." The employee then reviews the budget with the borrower. Binning testified that:

"Obviously, you can tell by the way the budget is situated, the way I set it up, their net disposable income is just above the new Country Credit payment and that is to show that that is important; there is an important relationship between those two numbers. The net disposable income has to be greater than the new Country Credit payment. Otherwise, we can't make the loan. We won't make the loan."

Once the budget is signed, and if everything is acceptable to Country Credit, the loan documents are printed, the terms are reviewed with the borrower and the borrower signs the note and related documents.

Misty King ("King"), Manager of Country Credit, testified that the number of dependents living in the household is important because it factors into the food and clothing expenses of the debtor and could "make or break the loan." According to King, Country Credit's normal practice is to add $100.00 per dependent to the budget for food expenses. King testified that if Kornegay had disclosed two dependents, Country Credit would not have approved the loan based on the data appearing in her budget because it would have resulted in a "negative net disposable income, [such that] she would not have enough money at the end of the month to afford the note."¹⁰ Regarding the outstanding debt with Hardy Wilson, King did not specifically testify that Country Credit would have denied the loan if the debt had been disclosed but testified that it would be something that she needed to know before making the decision to approve the loan.

III. CONCLUSIONS OF LAW

A. 11 U.S.C. § 523(a)(2)(B)

Section 523(a)(2)(B) excepts from discharge any debt:

for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by --

use of a statement in writing¹¹ --

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;¹²

(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

11 U.S.C. § 523(a)(2)(B); Matter of Norris, 70 F.3d 27, 29 (5th Cir. 1995). To except the debt of Kornegay from discharge under § 523(a)(2)(B), Country Credit bears the burden of proving each of the required elements by a preponderance of the evidence.¹³ See Grogan v. Garner, 498 U.S. 279, 287-88 (1991); see also Young v. Nat'l Union Fire Ins. Co. of Pittsburg (In re Young), 995 F.2d 547, 549 (5th Cir. 1993); Gen. Elec. Capital Corp. v. Acosta (In re Acosta), 406 F. 2d 367, 272 (5th Cir. 2005). Exceptions to discharge must be strictly construed against the creditor and liberally construed in favor of the debtor. Lanier v. Futch (In re Futch), Adv. No. 09-00144-NPO, 2011 WL 576071, at *16 (Bankr. S.D. Miss. Feb. 4, 2011); see Mammel v. Pierce (In re Pierce), Adv. No. 10-3408, 2011 WL 2312037, at *1 (Bankr. N.D. Tex. June 10, 2011); 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").

Country Credit established that Kornegay's loan application contained materially false statements about her financial condition, specifically that Kornegay failed to disclose an outstanding debt owed to Hardy Wilson. Kornegay testified that she did not read the loan documents. However, her indifference to the accuracy of the application indicates reckless disregard from which "intent to deceive [is] inferred."¹⁴ Byrd v. Bank of Miss., 207 B.R. 131, 138 (S.D. Miss. 1997) ("intent to deceive may be inferred from the totality of the circumstances") (citing Jordan, 927 F.2d 221 (5th Cir. 1991); FDIC v. Lefeve (In re Lefeve), 131 B.R. 588 (Bankr. S.D. Miss. 1991); see also Young, 995 F.2d at 549 (intent to deceive may be inferred from use of a false financial statement to obtain credit)).

Country Credit also proved that it reasonably relied on the misrepresentations in Kornegay's loan application. The Fifth Circuit has articulated that in determining whether reliance was reasonable under § 523(a)(2)(B), "the bankruptcy court may consider, among other things, whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; whether there were any 'red flags' that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; andwhether even minimal investigation would have revealed the inaccuracy of the debtor's representations." Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir. 1993) (internal citations omitted); see also Byrd, 207 B.R. at 137. Although the testimony established that Country Credit did not follow its customary practice of reviewing the loan application for accuracy with the borrower before signing, no evidence was offered to establish that any "red flag" existed to alert Country Credit to the inaccuracy or to warrant further investigation.

The Court finds that Kornegay made a misrepresentation on her application for the Renewal Loan by omitting the debt to Hardy Wilson, that the intent to deceive can be inferred from Kornegay's actions and that Country Credit reasonably relied on the misrepresentation. Consequently, the debt owed to Country Credit is non-dischargeable. ¹⁵

B. Attorney's...