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.

The bankruptcy court excepted part of a judgment debt from discharge under § 523(a)(2)(A).

The parties met in Arizona and dated briefly before the defendant moved back to Nebraska. The parties have differing perspectives on whether they were in a romantic relationship or merely a friendship after the defendant’s relocation, but the plaintiff agreed to lend money to the defendant to help him pay off some debts. The plaintiff drafted an agreement to loan the defendant up to $55,000, and he agreed to its terms. The plaintiff believed she would receive his truck title as collateral as soon as the truck was paid off. The parties soon revised the loan agreement to include additional debt of approximately $6,750. The defendant made payments to the plaintiff until he was laid off from his job less than two months later.

After signing the revised loan agreement and before losing his job – and unbeknownst to the plaintiff – the defendant continued to borrow from commercial lenders. He made regular monthly payments on those loans even after the job loss, although he made no serious efforts to find another job. He also withdrew funds from the plaintiff’s bank account without asking her, but when she learned about it, he told her he would pay back those withdrawals in three weeks. He subsequently defaulted on his truck loan, and the plaintiff lent him the funds to prevent repossession, reasoning that he needed the truck in order to work and earn money with which to repay her. The plaintiff also drew up a second revised loan agreement to include the bank account withdrawals and the truck payment, bringing the loan amount to $71,381. The defendant did not sign the agreement but agreed to them via text message.

When the plaintiff finally shut off the funding stream and refused to loan the defendant any more money, he stopped communicating with her. The plaintiff filed a collection action in the County Court of Dodge County, Nebraska, on August 20, 2024. She obtained a judgment and began garnishing the defendant. The defendant filed bankruptcy shortly thereafter.

The plaintiff filed this adversary proceeding to except the judgment debt from discharge under § 523(a)(2)(A) for money obtained through fraud, false pretenses, or false representations. Much of the plaintiff’s evidence consisted of print-outs of the text messages she and the defendant exchanged. However, the court found that “[t]he defendant’s written statements about his credit score, about the extent, existence, or concealment of his other debts, about his income, and about his general ability to repay are not actionable as fraud in this case as pled because they concern his financial condition.” Written statements concerning a debtor’s financial condition fall under § 523(a)(2)(B), and §§ 523(a)(2)(A) and (a)(2)(B) are mutually exclusive. Here, the plaintiff did not plead a claim under § 523(a)(2)(B).

The court evaluated the allegations of fraud separately for each loan agreement. For the original loan agreement, the plaintiff alleged the defendant falsely represented that he (1) would provide his truck as collateral for the loan; (2) would repay the loan; and (3) wanted to use the loan to become debt-free. The court found that the representation about collateral was not false because the terms of the agreement stated the defendant would sign over the truck “as soon as it was paid off.” In fact, the truck was never paid off. It was totaled in an accident, so the obligation to sign over the title was never triggered. The court also found the defendant’s statements about intending to become debt-free were not actionable under § 523(a)(2)(A) because those texts concern the defendant’s financial condition. Even if the statements were actionable, they do not establish fraud because debt-free status was the defendant’s aspiration, not a factual representation that he would never again be in debt. As to the plaintiff’s claim that the defendant falsely stated he would repay her, the court examined the timing of the defendant’s representations. The defendant demonstrated an intent to repay the original loan when it was made by making several monthly payments on it.

Likewise, with the first revised agreement, the defendant was employed and making payments when he signed it, which indicates he intended to repay the loan. That revised agreement documented amounts that had already been lent to the defendant, so the causation element of § 523(a)(2)(A) was not met. In other words, the money was not “obtained by” fraud at that point.

The second revised loan agreement covered multiple advances, so the court analyzed each. The court ruled that the defendant’s withdrawals from the plaintiff’s bank account and the advance to pay the truck loan were obtained by false pretenses and the false representation that the defendant intended to repay her. The evidence that he was continuing to pay his commercial lenders even after he stopped paying the plaintiff, and his statement that he would restore the bank withdrawals “in 3 weeks” when he had no means to do so, demonstrated his fraudulent intent. As a result, the court excepted the principal amount of $9,629 from discharge.

The bankruptcy court reiterated that a judgment lien on the debtor’s 50% interest in his house is fully avoided, but the judgment creditor may go to state court for a determination of the extent of the debtor’s interest vis-à-vis his former wife’s interest in the property, which was their marital home.

The judgment creditor is unlikely to obtain the result he desires, however, because if the debtor’s interest is determined to be 50% or less, the judgment lien has been fully avoided and the creditor is bound by the discharge injunction in § 524. If the debtor’s interest exceeds 50%, any action by the creditor concerning the excess is stayed under § 362 and the portion over 50% is property of the bankruptcy estate to be administered by the trustee, which may also cause the debtor to amend his assets and exemptions and perhaps seek additional lien avoidance.