Debtor Lies on Loan Application; Gets Discharge Anyway

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By Daniel Gill

Aug. 9 — A Chapter 7 debtor lied in a loan application about owning a million dollar property and failed to respond to the bank's fraud complaint, but still his debt was discharged in bankruptcy ( USAmeriBank v. Strength (In re Strength), 2016 BL 255970, Bankr. M.D. Ala., No. 16-30173-WRS, 8/8/16 ).

Judge William R. Sawyer of the U.S. Bankruptcy Court for the Middle District of Alabama found that the bank did not “reasonably rely” on the debtor's financial statement. The court on Aug. 8 denied USAmeriBank's motion for default judgment, instead entering judgment for debtor Freddie Lewis Strength.

The result of the judgment is that the debtor, despite signing a false financial statement with the intent to deceive the bank regarding assets he claimed to own (but didn't), will see the bank's claim wiped out by his bankruptcy case.

Strength filed a Chapter 7 bankruptcy case on Jan. 22, 2016. In Chapter 7, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out dischargeable debts (that is, those debts not subject to an exception).

Section 523(a) of the Bankruptcy Code allows creditors to file suit to have their individual debts declared to be non-dischargeable. In this case, the court considered whether a loan the bank made to Strength for about $24,000 should be declared non-dischargeable pursuant to Section 523(a)(2)(B), which creates a discharge exception for debts the debtor incurs using a materially false statement regarding the debtor's financial condition, with the intent to deceive the creditor.

When Strength borrowed the money from the bank in 2009, he submitted a financial statement with his loan application which asserted that he owned “$1 million worth of unencumbered real estate,” the court said. The debtor later admitted under oath that he never owned such property.

Based on that statement, the bank filed its complaint to have the claim declared non-dischargeable, and the debtor never filed an answer or other response to the complaint. The bank moved the court for default judgment.

The court said that the debtor “certainly does not deserve to discharge this debt,” because he “clearly lied to, and intended to deceive, USAmeriBank.” Nevertheless, the court couldn't find for the bank.

Although the bank established three of the four elements required to satisfy 11 U.S.C. §523(a)(2)(B), the bank did not “reasonably rely” on the false financial statement, the court said.

The bank “failed to conduct any investigation of a representation that clearly warranted scrutiny, and has not adequately explained why,” the court said. The bank didn't even ask for the address of the supposed million dollar property.

“Congress requires that reliance on financial statements be reasonable, meaning that lenders cannot loan money blindly and must exercise a level of prudence,” the court said.

USAmeriBank was represented by Burton W. Newsome, Newsome Law, LLC, Birmingham, Ala. The debtor did not appear or file any documents in the case.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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