McClave State Bank v. Jay Stum

Case Type:
Case Status:
CO-20-055, CO-20-059 (10th Circuit, Dec 01,2021) Not Published
An exception from discharge under § 523(a)(2)(B) was warranted where the debtor provided written financial statements that omitted certain debts that—if disclosed—would likely have disqualified the debtor from obtaining a loan under the lender’s established lending guidelines.
Procedural context:
Creditor McClave objected under § 523(a)(2)(B) and § 523(a)(4) to the dischargeability of debts owed by Debtor Stum under four promissory notes, alleging under the former claim that Stum misrepresented the value of certain collateral and failed to disclose certain material debts on his financial statement. The Bankruptcy Court held that the plaintiff failed to prove its claim under § 523(a)(4) or the material falsity of the collateral, but sustained plaintiff’s claim under § 523(a)(2)(B) based on the failure to disclose certain material debts. The debtor appealed the court’s findings that McClave reasonably relied on the financial statements and that the debtor had the requisite intent to deceive.
This case provides a good example of just how exacting a plaintiff’s burden under § 523(a) can be. Affirming the lower court’s ruling, the BAP observed that the reported amount of Stum’s liabilities played a “key part” in several key financial metrics (eg, debt service coverage ratio, debt-to-worth ratio) upon which McClave relied in its approval process. In particular, the Court noted there was specific evidence both of McClave’s standard lending practices that relied on such metrics, as well as that Stum only barely qualified under those metrics—providing compelling evidence both that the omission was material and that McClave relied upon it. “In making this inquiry, courts must consider ‘the creditor’s standard lending practices, the standard in the industry, and the surrounding circumstances at the time the debtor applies for credit.”
Somers, Jacobvitz, and Loyd

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