Tower Credit, Inc. v. Hickerson (In re Hickerson)

IN RE: GWENDOLYN HICKERSON DEBTOR

TOWER CREDIT, INC. PLAINTIFF v. GWENDOLYN HICKERSON DEFENDANT

CASE NO. 18-10469

ADV. NO. 18-1035

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF LOUISIANA

May 30, 2019

CHAPTER 7

MEMORANDUM OPINION

Tower Credit claimed that Gwendolyn Hickerson's debt to it is nondischargeable under 11 U.S.C. §523(a)(2)(B) because she misled the lender on two loan applications. Ms. Hickerson failed to file Rule 26 disclosures or respond to Tower's Requests for Admission, and so is deemed to have admitted that she intended to deceive Tower in borrowing the money. Faced with that, she gamely contends that the debt still should be dischargeable because Tower unreasonably relied on her loan applications. For the reasons that follow, Tower's complaint is dismissed.

FACTS

Gwendolyn Hickerson¹ applied for her first Tower Credit loan in 2011. A Tower employee completed Hickerson's application, which lists among her obligations a debt to "F&C" for a 2000 Chevy Malibu, as well as debts to Credit Acceptance, the Department of Educationand Sallie Mae.² The application also disclosed an outstanding November 2010 loan to Tower secured by a 2002 Toyota Camry.³

The debtor's budget for the 2011 loan application⁴ represented that she paid no rent. It also stated that she had no food or utilities expenses; indeed the only expenses it reflected were $95 for a cell phone, $50 for clothing, $100 for transportation (gas and maintenance), $40 for charitable contributions and $230 for car insurance. The debtor's net disposable monthly income was $333 according to Tower's calculation, enough to make the $313.01 monthly payments on the loan she sought.

After the debtor signed the loan application form certifying the accuracy of all information on it, Tower loaned her $5,778.25.⁵ Later the debtor defaulted on the loan and Tower sued her, obtaining a judgment in May 2013 for $4,728.81, plus attorney's fees, court costs and annual interest of twenty-nine percent.⁶

Nearly a year and a half later, and despite the prior default and judgment,⁷ Gwendolyn Hickerson again approached Tower for a loan "to catchup [sic] car note."⁸ The October 2014 loan application claimed that the debtor and her boyfriend split monthly rent of $640 for an apartment they shared, the debtor's share being $320. The application again listed debts to the Department of Education and Sallie Mae, as well as the debtor's 2011 outstanding loan to Tower (by then ripened into a judgment), and a September 2012 debt to Tower secured by the 2002 Toyota Camry, her mother's vehicle.

The budget worksheet for the 2014 loan⁹ claims that the debtor's total monthly expenses were $704, comprising her half of the apartment rent, $50 for electricity, $30 for telephone service, $125 for food, $110 for car insurance and $69 for student loan payments. The worksheet for this loan showed net monthly disposable income of $348. The debtor again signed a budget worksheet certifying that "all statements made about your income and expenses are correct and complete."¹⁰ Gwendolyn Hickerson also defaulted on the second note to Tower, which sued her and obtained a second judgment¹¹ in June 2017.

Tower now claims that the debtor lied during the 2011 loan application process by not disclosing that she gave her mother between $400 to $500 each month to defray her mother's expenses, including some relating to her cancer treatment. Tower maintains that had GwendolynHickerson disclosed the payments to her mother, they would have revealed that she was unable to repay the proposed loan in 2011. Tower contends that it only learned of her deception during a Fed. R. Bankr. P. Rule 2004 examination after she filed bankruptcy in 2018.

Tower also complains that the debtor deceived it into making the 2014 loan. It alleges that at the same Rule 2004 exam during which it learned of the payments to her mother at the time of her 2011 loan, it also learned that the debtor in fact lived alone when she contracted the second loan, and so was alone liable for the monthly rent. It also argues that the debtor's bankruptcy schedules¹² revealed outstanding payday loans she did not disclose to Tower when she applied for the 2014 loan and that it would not have made the loan had it known of them.

The debtor failed to respond to Tower's Requests for Admission.¹³ Pursuant to Fed. R. Civ. P. 36,¹⁴ which Fed. R. Bankr. P. 7036 makes applicable here, the debtor is deemed to have admitted that:

1. she owed payday or check cashing loans when she applied for her 2011 and 2014 loans from Tower;

2. she claimed on her 2011 and 2014 loan applications that she owed no pay day loans;

3. she had a rental expense of between $400 and $500 when she applied for the 2011 loan;

4. she had a rental expense of $650 when she applied for the 2014 loan;5. on both her 2011 and 2014 loan applications, she claimed that she was paying less rent than she actually was paying;

6. she obtained the loans by use of false pretenses, false representations, and actual fraud; and

7. she intended to deceive Tower by using a materially false written statement respecting her financial condition.

ANALYSIS

Tower relies on Bankruptcy Code section 523(a)(2)(B), making nondischargeable debts "for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained 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 such ... credit reasonably relied; and

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

A written statement is materially false for purposes of applying section 523(a)(2)(B) if it "'paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.'"¹⁵

The debtor is deemed to have admitted that she owed payday loans in both 2011 and 2014 when she sought the loans from Tower. Failure to disclose payday loans can constitute a material omission from a loan application within the meaning of 523(a)(2)(B). See GulfSouthCredit, Inc. v Perry (In re Perry), 547 B.R. 650 (M.D. La. 2016). Stephen Binning testified that Tower would not have made the loans to Gwendolyn Hickerson had it known of her outstanding payday loans. He also testified that Tower's policy was to not loan to borrowers with outstanding payday loans unless they borrow enough to pay off those loans. Accordingly, the omission of the payday loans from the debtor's 2011 and 2014 credit applications was material.

Even though the debtor is bound by her deemed admissions, Tower still must prove that it reasonably relied on the debtor's applications when it made both the 2011 and 2014 loans. In the Fifth Circuit:

The reasonableness of a creditor's reliance ... should be judged in light of the totality of the circumstances. 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; and whether even minimal investigation would have revealed the inaccuracy of the debtor's representations.¹⁶

A basic principle of bankruptcy law is that exceptions to discharge are to be strictly construed against the creditor and liberally construed in favor of the debtor to facilitate the debtor's "fresh start."¹⁷ Given this, the Fifth Circuit's mandate is clear: lenders cannot blithely rely on statements in loan applications in the face of facts that should indicate the borrower's statements are not trustworthy.Tower did not reasonably rely on the debtor's 2011 loan application.

Tower maintains that it relied on the information on the debtor's 2011 loan application to assess her creditworthiness, but—due to an inadvertent error by a Tower employee—Tower's professed reliance is not credible. Testimony elicited at trial established that Tower's own employee, who completed the application the debtor signed, included erroneous information on the application. Specifically, the debtor's application mistakenly included information pertaining to a 2010 loan Tower had made to another borrower—the debtor's mother—which required a monthly payment of $291.¹⁸ Despite its belief that the debtor owed it $291 each month for an outstanding prior loan, that monthly payment was conspicuously absent from debtor's budget worksheet for her 2011 loan.¹⁹

Tower should have seen by comparing the loan documents that the debtor's budget did not include the $291 loan payment it mistakenly listed as the debtor's obligation. Including that payment in Tower's calculation of the debtor's budget would have made plain that the debtor lacked the money to pay Tower $313.01 every month on the loan she sought.²⁰ Additionally, had Tower examined the loan documents it claims to have relied on in making the loan, it either would have discovered its error in including the 2010 loan information or it would have recognized that the debtor's proposed budget did not include payments on the loan it thought she owed.²¹ The fact that Tower neither discovered the erroneous information on the application or,even more surprisingly, failed to notice the absence of payments on a loan it believed the debtor owed it²² undermines Tower's insistence that it reasonably relied on the loan application to extend credit to the defendant. Even "minimal investigation" would have revealed the inaccuracy of the representations.²³ Accordingly, Tower has failed to carry its burden of proving that it reasonably relied on the debtor's statements in the 2011 loan application.

Tower did not reasonably rely on the debtor's 2014 loan application.

Despite holding a judgment against the debtor for her defaulted prior loan, in 2014 Tower once again...