Judge Berger

07-06294 EZ Loans of Shawnee, Inc. v. Hodges (Doc. # 20) - Document Text

Case 07-06294 Doc# 20

The relief described hereinbelow is SO ORDERED.

Signed June 19, 2009.

United States Bankruptcy Judge


In re:

LORI L. HODGES, Case No. 07-22311
Debtor. Chapter 13

Filed 06/19/09 Page 1 of 7


v. Adv. No. 07-6294


Plaintiff EZ Loans of Shawnee, Inc. (“EZ Loans”), filed a complaint objecting to
discharge of a debt under 11 U.S.C. §523(a)(2) and (6). EZ Loans seeks to except from
discharge a debt stemming from a September 15, 2007, payday loan in the principal amount of
$100.00. EZ Loans alleges Debtor Lori Hodges fraudulently and with false pretenses induced

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Plaintiff to loan the money without intending to pay back the loan because Debtor filed for
bankruptcy less than a month after the date of the payday loan. Further, EZ Loans presents
evidence Debtor was contemplating bankruptcy prior to the date of the loan.

Debtor responded to Plaintiff’s motion for summary judgment with a combined objection
and motion to dismiss under LBR 7012.1. In the body of the response, Debtor further requests
attorney’s fees pursuant to 11 U.S.C. §523(d). Since Debtor’s response and cross motion to
dismiss post-date her answer, the Court shall consider the response as a cross motion for
summary judgment. The response/cross motion satisfies the requirements of a summary
judgment motion in both form and substance.

Findings of Fact

Debtor filed for bankruptcy on October 12, 2007. Debtor makes about $2,000.00 a
month as a church janitor. She supports herself and a five-year-old son. Debtor’s schedules
show her necessary monthly expenditures are also about $2,000.00. Almost half of Debtor’s
monthly income pays two mortgages on her home. Debtor’s schedules show several payday loan
companies as unsecured lenders. Debtor scheduled about $19,000.00 in unsecured debt.
Debtor’s confirmed plan commits $163.00 monthly for the plan payment. The plan does not pay
a dividend to unsecured creditors. EZ Loans did not object to Debtor’s plan.

Debtor originally signed a payday loan application with EZ Loans on May 29, 2007.
Debtor presented EZ Loans with a post-dated check for $115.00 in exchange for $100.00 cash.
The interest rate was 391% APR. Every two weeks thereafter, Debtor returned to EZ Loans,
paid $15 in interest, and entered a new contract for a $100.00 loan in exchange for a $115.00
post-dated check. Debtor continued this practice until September 15, 2007, when she wrote her


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last post-dated check to EZ Loans for $115.00. The check was dated September 29, 2007.
Debtor had paid EZ Loans $120.00 in interest as of September 15, 2007.

Coincidently, counsel who would eventually represented EZ Loans in this matter was
pursuing debt collection remedies against Debtor on behalf of Noble Finance in August 2007.
On August 21, 2007, counsel and Debtor met in state court on the unrelated collection matter.
At that time, Debtor told counsel she was contemplating bankruptcy.

Meanwhile, beginning in June 2007, five lenders sued Debtor. Debtor’s employer was
served with a garnishment order on September 26, 2007. Debtor then closed her bank account in
preparation for bankruptcy. Thus, when EZ Loans presented Debtor’s check for payment on or
after September 29, 2007, the check was dishonored. EZ Loans filed its dischargeability
complaint on December 19, 2007.

Debtor’s uncontroverted testimony states Debtor juggled several payday loans as she
became increasingly unable to pay all the interest and pay for monthly necessities for herself and
her son. The September 26 garnishment order brought Debtor to a crisis point and left her
unable to continue without bankruptcy relief.

Conclusions of Law

Proceedings to determine the dischargeability of a particular debt are core proceedings
which grants this Court jurisdiction to enter a final order.1

A. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates there is no genuine
issue as to any material fact, and he is entitled to judgment as a matter of law.2 Cross motions

1 11 U.S.C. §157(b)(2)(I).


Fed. R. Bankr. P. 7056.


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for summary judgment allow the Court to assume the only evidence to be considered has been
submitted with the pleadings. However, cross motions are to be considered independently, and
summary judgment is not appropriate if disputes remain as to any material fact.3 All inferences
drawn from undisputed evidentiary facts are to be construed in favor of the nonmoving party.4
Only when reasonable minds could not differ as to the import of the proffered evidence is
summary judgment proper.5

B. Nondischargeable Debts Based on Fraud
Section 523(a)(6) does not state a claim for relief for EZ Loans in this case. Debts
excepted from discharge under §523(a) may be discharged under Chapter 13 unless expressly
excluded from discharge in §1328(a)(2). Section 523(a)(6) is not incorporated into §1328(a)(2);
thus, EZ Loans fails to state a claim for relief by citing §523(a)(6).6

To prevail on a nondischargeability claim for fraud under 11 U.S.C. §523(a)(2), a
creditor must prove by a preponderance of the evidence: (1) the debtor made a false
representation; (2) the debtor intended to deceive the creditor; (3) the creditor relied on debtor’s
conduct; (4) the creditor’s reliance was justifiable; and (5) the creditor was damaged as a
proximate result.7 Exceptions to discharge are construed narrowly.8

3 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).



5 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-51 (1986).

6 See 11 U.S.C. §1328(a)(2) which excepts from a non-hardship Chapter 13 discharge the following:
“debts of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of
section 523(a).” Subsection 523(a)(6) is noticeably absent.

7 In re Davis, 246 B.R. 646, 652 (B.A.P. 10th Cir. 2000), aff’d in part, vacated in part on other grounds,
35 Fed. Appx. 826 (10th Cir. 2002). See also In re Sibley, 71 B.R. 147 (Bankr. D. Mass. 1987).

8 Grogan v. Garner, 498 U.S. 279 (1991).


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A dishonored check, standing alone, is not a false statement.9 The creditor must also
prove the debtor made a misrepresentation with the intent to defraud in direct connection with
issuing the check.10 In other words, the debtor must have fraudulently obtained money, property,
services or credit in a contemporaneous exchange for a check which the debtor knew would not
later be honored.11

EZ Loans’ evidence does not sustain its burden of proof. Payday loan companies are in
the business of providing loans to the insolvent. Payday lenders charge interest at a rate
hovering around 400% because of the high-risk nature of their loans. Payday loan companies
make these loans on the basis of post-dated checks, not on the strength of a credit report or a
financial statement. The precarious nature of their customer’s finances is known to such lenders.
These lenders are almost never justified in relying on the borrower’s assurances of repayment
and a post-dated check. The only fact in EZ Loans’ favor is the conversation about bankruptcy
between Debtor and counsel just weeks prior to Debtor’s final renewal of the loan. However,
Debtor paid $120 in interest over four months. Debtor’s conduct in making bi-weekly interest
payments does not evidence a fraudulent intent. She paid the principal in full and almost 50%
APR interest. The $20 interest paid in additional to the $100 principal is not the contractual
interest rate, but it is an impressive return nonetheless. Debtor did not steal anything from EZ
Loans. She was simply unable to afford the loan at 391% interest.

9 In re Davis, 246 B.R. at 653, citing Jarboe Sales Co. v. Degraffenreid (In re Degraffenreid), 131 B.R.
178, 180 (Bankr. N.D. Okla. 1991); Jack Master, Inc., v. Collins (In re Collins), 28 B.R. 244, 247 (Bankr. W.D.
Okla. 1983).


11 Snap-on Tools Corp. v. Couch (In re Couch), 154 B.R. 511, 513 (Bankr. S.D. Ind. 1992).


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C. Debtor’s Cross Motion for Costs and Attorney’s Fees
Debtor requests damages for the cost of defending the complaint pursuant to 11 U.S.C.
§523(d). Damages under 11 U.S.C. §523(d) are available for discharged consumer debts if the
court finds the creditor’s position was not substantially justified. “Substantially justified” means
based on facts which could satisfy a reasonable person.12

 While EZ Loans fails to satisfy its ultimate burden of persuasion, EZ Loans’ complaint
was justified by the slimmest of margins. There is a unique fact in this case. Debtor actually
told EZ Loans’ counsel Debtor was contemplating bankruptcy just weeks prior to the date of the
defaulted loan application. Although EZ Loans’ counsel was representing another client at the
time of this conversation, counsel was engaged by EZ Loans a short time later to pursue the
same Debtor. Counsel could reasonably infer Debtor sought yet another loan after deciding on
bankruptcy, thus presumptively demonstrating a fraudulent intent to obtain credit without any
intention of repaying it. The conversation occurred just two weeks prior to the defaulted loan
application and just over a month before Debtor’s bankruptcy filing. A reasonable person could
be offended by this sequence of events and infer fraud. Still, in view of all relevant
circumstances, EZ Loans does not sustain its burden of proof. The motion for §523(d) damages
is denied.


For the foregoing reasons, Plaintiff’s Motion for Summary Judgment is DENIED.
Debtor’s Motion to Dismiss Pursuant to LBR 7012.1 is deemed a motion for summary judgment
and is GRANTED. Debtor’s request for costs and attorney’s fees is DENIED. Each party shall

12 FIA Card Services, N.A., v. Flowers (In re Flowers), 391 B.R. 178, 183 (M.D. Ala. 2008).

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bear its own costs.


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