FIRST CITIZENS NATIONAL BANK PLAINTIFF
AMANDA TRIMBLE DEFENDANT
CASE NO. 10-14408-DWH
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF MISSISSIPPI
Dated: August 24, 2012
In addition, pursuant to a trial stipulation (Exhibit P-2), the parties stipulated as to the accuracy of the following amounts as of May 21, 2012:
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The debtor signed a Uniform Residential Loan Application, (Exhibit P-3), in order to obtain the loan. The application included a column in which to list the borrower’s monthly income, as well as, a separate column to include the income of a co-borrower. In the column provided for the borrower, the debtor set forth a gross monthly employment income of $13,879.00. There was no co-borrower on the loan application, so the column applicable to the co-borrower was left blank. However, the debtor testified that the $13,879.00 figure she provided to Kidd was derived by adding her monthly income to the monthly income of her spouse who was obviously not a co-borrower.
On their 2007 joint tax return Schedule C, Profit or Loss From Business, (Exhibit P-4), the debtor reported gross income of $58,483.00, and her spouse reported gross income of $100,720.00. Using the amounts on Schedule C, the monthly gross income for both the debtor and her spouse would total approximately $13,267.00 per month.
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The loan application reflects a net monthly rental income of $9.00 per month. At the time she executed the loan application, the debtor lived in a home located in Hernando, Mississippi. The debtor testified that she informed Kidd of her intention to rent the Hernando property for $3,000.00 per month after she purchased the home located in Memphis. She indicated that she obtained a rental agreement for the Hernando property prior to the loan closing, but the potential tenant never occupied the property, nor paid any rent. The $9.00 net monthly rental income amount set forth on the loan application was calculated by deducting the mortgage payment, insurance premiums, maintenance costs, and taxes applicable to the Hernando property from the anticipated $3,000.00 rental income which was never realized.
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After the debtor’s loan application was approved, she executed the note and deed of trust on November 8, 2007. Not long thereafter, she defaulted, and First Citizens foreclosed on the property on August 22, 2008. First Citizens then filed suit against the debtor for the deficiency in the Circuit Court of Shelby County, Tennessee, and obtained a judgment in the amount of $51,453.04. The debtor filed for relief under Chapter 7 of the Bankruptcy Code on September 13, 2010.
Therefore, this court, relying on the instructive language of the Fifth Circuit, finds no merit in the debtor’s argument that First Citizens failed to meet its burden of proof due to a failure to show proximate causation. This finding, however, does not relieve First Citizens of its burden to prove each of the elements of nondischargeability underpinning a § 523(a)(2) claim by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291 (1991).
be reasonable when considering the borrower’s employment. See id. Under this program, borrowers routinely inflated their income levels. See id.
Kidd’s deposition testimony, (Exhibit P-l), confirmed that she communicated with the debtor solely by telephone during the loan application process. Although Kidd did not specifically remember the debtor, she provided an overview of the loan application and approval process for First Citizens at the time of the debtor’s loan. It is summarized as follows:
First Citizens provided additional insight in its responses to interrogatories propounded by the debtor (Exhibit D-1). The Countrywide guidelines did not require income verification because the debtor’s credit scores were sufficient to qualify her for the “stated asset/stated income” loan. After receiving approval to close the loan from Countrywide’s underwriting system, First Citizen submitted the loan to Countrywide for purchase. However, due to an appraisal issue, Countrywide declined to purchase the loan.
provided that certain types of liabilities are excepted from the general rule of discharge.” Id. “Congress evidently concluded that the creditors’ interest in recovering full payment of debts in these categories outweighed the debtors’ interest in a complete fresh start.” Norris v. First Nat’I Bank in Luling, 70 F.3d 27 at 30.
First Citizens asserts that the debt owed by Trimble is excepted from discharge pursuant to §523(a)(2)(B), or alternatively § 523(a)(2)(A). The Fifth Circuit recently noted the difference between these two provisions in Bandi v. Becnel (In re Bandi), 683 F.3d 671, 673-675 (5th Cir. 2012):
In order to prevail on its primary claim that the debt is nondischargeable under § 523(a)(2)(B), First Citizens must prove the underlying four elements by a preponderance of the evidence. In re Norris, 7,0 F.3d at 29. The debt will be nondischargeable to the extent it is obtained by the use of a written statement:
Id.; see also Gen. Elec. Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 374 (5th Cir. 2005).
A statement is materially false 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.” Jordan v. Se. Nat’l Bank (In re Jordan), 927 F.2d 221, 224 (5th Cir. 1991); see also In re Norris, 7,0 F.3d at 30 n.10.
The term “financial condition” as used in § 523(a)(2)(B)(ii), means “the general overall financial condition of an entity or individual[.]” In re Bandi, 683 at 676.
Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 482 (5th Cir. 2009).
as discussed in In re Morrison, there is no need to do so because Trimble’s intent to deceive is blatantly obvious by her own admissions. She testified that, as a real estate agent, she was familiar with the level of income required to qualify for loan approval, and then admitted that she overstated her income information in order to meet the income requirement. Consequently, First Citizens has unquestionably met elements (i), (ii), and (iv) required by § 523(a)(2)(B).
Colo. E. Bank & Trust v. McCarthy (In re McCarthy), 421 B.R. 550, 560-61 (Bankr. D. Colo. 2009) (internal footnotes omitted).
In utilizing this two-step analysis, the court turns again to Kidd’s deposition testimony. Kidd testified that, as the loan originator, she would ensure the information provided by the borrower fell within certain guidelines and parameters promulgated by Countrywide under its “stated income/stated asset” loan program. One such parameter, which was known by the debtor according to her own admission, was a certain level of income. First Citizens relied on the debtor’s inflated income level, among other things, to determine the debtor’s eligibility before submitting the
loan application to Countrywide for approval. The debtor acknowledged that without such an overstatement of her income she would not have qualified for the loan. As such, the court finds that the income level provided by the debtor was a significant cause in her obtaining the loan approval, and that she would not have obtained the loan had she provided accurate information. Therefore, the court is of the opinion that that First Citizens actually relied on the debtor’s materially false financial statement.
In addition to actual reliance, First Citizens must also show that its reliance was reasonable. “The issue of reasonableness is not whether it was reasonable for the [b]ank to have made the [loan] to the [d]ebtor, but whether it was reasonable for the [b]ank to have relied upon the [d]ebtor’s financial statements in making the [loan].” In re McCarthy, 42,1 B.R. at 562. Ultimately, the reasonableness of a creditor’s reliance rests on the particular facts of each case. In re Coston, 99,1 F.2d at 261.
In agreeing with the factors articulated by the Fifth Circuit in In re Coston, the Court of Appeals for the Third Circuit added two factors relating to the standard practices and customs of the creditor and the creditor’s industry. See Cohn v. Cohn (In re Cohn), 54 F.3d 1108, 1117 (3d Cir. 1995).
Id. (citations omitted).
When considering relevant factors, a court may find a creditor’s reliance was reasonable where nothing in the financial statement presents a “red flag” that would invoke a duty to investigate. See Young v. Nat’l Union Fire Ins. Co., 995 F.2d 547, 549 (5th Cir. 1993); see also In re McCarthy, 42,1 B.R. at 562.
It is significant that First Citizens did not exclusively rely on the information provided by the debtor in the loan application process. Kidd stated that she would first ensure that the information provided by a prospective borrower fell within the program guidelines established by Countrywide. Because Trimble’s income was not verified, the bank depended on other sources to determine her eligibility. First Citizens obtained a credit report and verified Trimble’s employment prior to submitting the application to Countrywide. In its responses to interrogatories, First Citizens asserted that Trimble’s credit scores were sufficient to qualify her for the “stated income/stated asset” loan program. Additionally, she had “purportedly” unborrowed funds available to make the down payment for the home purchase in the amount $37,500.00.
Furthermore, Kidd testified that she had no reason to doubt that a real estate agent’s monthly income in 2007 was $13,879.00. She also testified that there were no “red flags” to put the bank on notice that the information provided by Trimble in the loan application was incorrect. Kidd stated that she would not have made a loan if she were aware that Trimble had lied to her.
In hindsight, it is now known that inherent problems existed with the “stated income/stated asset” loan program. By its very definition, a “stated income/stated asset” loan required the lender
to partially rely on the income and assets “stated” by the borrower in the loan application. However, these loans were commonly utilized in the lending industry and available to borrowers when Trimble obtained her loan. First Citizens sold these loans not only to Countrywide, but to FHA, Fannie Mae, and Freddie Mac as well. Although in retrospect the practices utilized in the “stated income/stated asset” loan program were perhaps not the most prudent, the court finds that these practices were consistent with the standards or customs of the lending industry at that time. As a seasoned real estate agent, Trimble knew how to manipulate the borrowing procedures of this loan program and did so. Accordingly, the court finds that the totality of the circumstances indicates that the reliance by First Citizens on the debtor’s materially false financial information was reasonable.
A judgment in the sum of $57,103.69, ($38,091.09 plus $19,012.20), which represents the principal balance plus interest and late fees accrued as of May 21, 2012, shall be awarded in favor of First Citizens against Trimble consistent with this opinion. Said judgment shall be a nondischargeable debt in Trimble’s bankruptcy case pursuant to § 523(a)(2)(B). Interest shall accrue thereon from the date of entry of said judgment at the highest rate permitted by state law.
Although the parties stipulated that attorney fees and court costs had accrued as of April 30, 2012, in the sum of $9,312.21, the court is unaware as to whether this amount was considered reasonable or necessary. Therefore, the attorney representing First Citizens shall submit an itemization of his fees and expenses to the court, with a copy to the debtor’s attorney, within 20
days of the date of this opinion. The debtor’s attorney shall have 10 days thereafter to object to the reasonableness and necessity of said fees and expenses. The court will then enter a separate judgment finalizing the award.
An order, consistent with this opinion, shall be entered contemporaneously herewith.
1. Hereinafter, all Code sections cited in this opinion will be considered as sections of the United States Bankruptcy Code unless specifically designated otherwise.
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