The plaintiff filed this adversary proceeding to determine the dischargeability of debts arising out of the parties’ divorce. The debtor-defendant moved for judgment on the pleadings on the basis that a federal court cannot enforce a divorce, alimony, or child-custody decree, and that §§ 523(a)(5) and (a)(15) are self-executing and do not require an adversary proceeding. The court pointed out that the plaintiff is not seeking to enforce a state-court decree, but rather is seeking to establish the character of the underlying obligations. The court also noted the debtor agrees that obligations under §§ 523(a)(5) and (a)(15) are excepted from discharge, but refuses to concede that any obligations imposed by the divorce decree satisfy either of those sections.

The court denied the debtor’s request for abstention because the complaint involves core bankruptcy claims, rather than state-law claims, so mandatory abstention would not be appropriate. Likewise, few factors favor permissive abstention, as state-law issues are not predominant in this proceeding.

On the matter of dischargeability, the court identified four categories into which the obligations at issue would fall: 1) not a claim; 2) a claim arising after conversion of the case from Chapter 13 to Chapter 7; 3) a pre-petition debt excepted from discharge; or 4) a discharged pre-petition debt. The parties were directed to meet and confer to attempt to stipulate which obligations are excepted from discharge, and to file a status report identifying the appropriate category for each obligation.

The court denied confirmation of a Subchapter V plan because it did not meet the best interests of creditors test under § 1129(a)(7) by failing to account for the present value of deferred payments to unsecured creditors. The plan also did not correctly calculate projected disposable income under § 1191(c)(2) because it was ambiguous as to whether proposed payments to the owners are for wages, management services, or equity distribution, each of which affects the disposable income calculation. The court gave the debtor an opportunity to correct these defects in an amended plan.

The bankruptcy court denied the plaintiff’s Rule 52(b) motion to amend its findings of fact and conclusions of law holding that most of the debt owed to her by the defendant is dischargeable under § 523(a)(2)(A). The motion to amend did not identify any manifest errors of law or fact; it simply reargued positions the court had already considered and rejected.

In denying the motion, the court clarified its findings that the defendant’s statement about wanting to be debt-free was a statement respecting his financial condition, which is an element of § 523(a)(2)(B) and was not pleaded in this case. Additionally, the court explained that the “debt-free” statement was not actionable because it was not a statement of fact, nor did it show an intent not to repay the plaintiff at the time the loan was made.

The court excepted a portion of the debt owed to a lender under § 523(a)(2)(B) because the bank reasonably relied on the debtor’s written financial statements, one of which the debtor signed with reckless indifference to or in reckless disregard of its accuracy.

The debtor, a former bank loan officer, owned and operated an aviation and aerial spraying business. He periodically submitted written financial statements and borrowing base certificates for his business to the bank to permit the bank to monitor its personal property collateral position. One of the categories of personal property collateral was accrued rebates on chemicals used in the aerial spraying side of the business, which accounted for 26% of the business’s assets. The business used a software program to generate reports on rebates and inventory, and those reports were used in creating the borrowing base certificates.

The debtor decided to sell the business and he put together detailed financial information for an interested buyer. In the course of reviewing the inventory report and accounting journal entries, the debtor could not reconcile the rebate numbers. Despite much investigation, the debtor was unable to determine how and why the financial information was inaccurate. The information was so inaccurate that the debtor characterized the errors as “devastating.”

Nevertheless, the debtor did not inform the bank of his concerns. He signed a borrowing base certificate the day after discovering significant errors in the financial information and continued to borrow and repay funds on the business’s line of credit. The business filed its bankruptcy case the following month, and the debtor filed his bankruptcy case a few months later. The bank was able to recover only a tiny percentage of the accrued rebates listed in the final borrowing base certificate.

The bank objected to the dischargeability of the debt under § 523(a)(2)(B), which excepts from discharge debts for money or credit obtained by use of a materially false written statement concerning the debtor’s or an insider’s financial condition, which the debtor made with intent to deceive and on which the creditor relied. The parties stipulated that the income statements, balance sheets, and borrowing base certificates submitted by the debtor to the bank “contained errors of material facts . . . rendering [them] materially false.” The only elements for the court to decide were whether the bank reasonably relied on the documents and whether the debtor intended to deceive the bank.

The court found the bank reasonably relied on the financial statements and borrowing base certificates, regularly reviewing them and asking the debtor questions when necessary. The debtor was unable to detect the inaccuracy of the financial information until he dug into the accounting records, and even then was unable to determine the reason for the inaccuracy, so the bank would have had no reason to suspect a problem.

The court also found the debtor acted with reckless indifference to or with reckless disregard of the accuracy of the information he provided to the bank with the materially false borrowing base certificates and financial statements submitted after he learned of the discrepancies in the asset report. Rather than alerting the bank or stopping the automatic borrowings on the line of credit, the debtor signed and submitted what he knew to be materially false documents. This constitutes an intent to deceive. As a result, the court discharged the amount of debt represented by line-of-credit advances prior to the debtor discovering the problems with the financial information, but excepted from discharge $191,000 borrowed after the debtor became aware of the accounting inaccuracies.