January 17, 2006: Bank did not reasonably rely on debtor's false financial statement.
A bank's reliance on the false representations and materially false financial statement used by a Chapter 7 debtor in obtaining a loan for his landscaping business was not reasonable and, thus, the debt did not fall within 11 U.S.C.A. 523(a)(2)(B), the discharge exception for false financial statements. The bank was not reasonably prudent with respect to establishing the ownership and value of the collateral offered as security. The bank's reliance on the debtor's mere statements and representations contained in the loan and security agreement, without some independent verification, was not commercially reasonable, especially since there had been no previous business dealings between the parties. Moreover, the disparate valuations of collateral should have raised a "red flag" at least to its value, given the nature of the equipment and vehicles at issue. Even minimal investigation would have revealed the inaccuracies in the debtor's representations, the court noted.
A bank's reliance on the false representations and materially false financial statement used by a Chapter 7 debtor in obtaining a loan for his landscaping business was not reasonable and, thus, the debt did not fall within 11 U.S.C.A. 523(a)(2)(B), the discharge exception for false financial statements. The bank was not reasonably prudent with respect to establishing the ownership and value of the collateral offered as security. The bank's reliance on the debtor's mere statements and representations contained in the loan and security agreement, without some independent verification, was not commercially reasonable, especially since there had been no previous business dealings between the parties. Moreover, the disparate valuations of collateral should have raised a "red flag" at least to its value, given the nature of the equipment and vehicles at issue. Even minimal investigation would have revealed the inaccuracies in the debtor's representations, the court noted.
Comment