Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almb-3_04-ap-08006/USCOURTS-almb-3_04-ap-08006-0/pdf.json

Parties Involved:
Larry Duvall
Plaintiff
Scott Alan Mann
Defendant
Deanna Lee Mann
Defendant

Document Text:

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF ALABAMA

In re Case No. 04-80326-DHW

 Chapter 7

SCOTT ALAN MANN and

DEANNA LEE MANN,

 Debtors.

______________________________

LARRY DUVALL,

Plaintiff,

v. Adv. Proc. No. 04-8006-DHW

SCOTT ALAN MANN and 

DEANNA LEE MANN,

Defendants.

MEMORANDUM OPINION

On June 7, 2004 Larry Duvall (hereinafter “Duvall”) filed a complaint to

determine the dischargeability of his claim against the debtors/defendants, Scott

Alan Mann (hereinafter “Mann”) and Deanna Lee Mann. Duvall contends that

the debt was obtained by false pretenses, a false statement or actual fraud and

is excepted from discharge by 11 U.S.C. § 523(a)(2)(A). 

Trial was held in Opelika, Alabama on April 20, 2005. At trial the

plaintiff was represented by Douglas A. Dellaccio, Jr., and the defendants were

represented by Charles M. Ingrum, Sr. The defendants did not appear at the trial

except through counsel.

JURISDICTION

Jurisdiction in this adversary proceeding is derived from 28 U.S.C. § 1334

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 First Alabama Bank of Guntersville was subsequently acquired by or merged

with Regions Bank.

2

 The July 16, 1997 note was admitted into evidence and is identified as

Plaintiff’s Exhibit P-1.

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and from the United States District Court for this district’s general order

referring title 11 matters to this court. Further, because an action to determine

the dischargeability of a particular debt is a core proceeding pursuant to 28

U.S.C. § 157(b)(2)(I), the court’s jurisdiction is extended to the entry of a final

order or judgment. 

FACTUAL FINDINGS

Mann is Duvall’s nephew. In August 1995 Mann approached Duvall

about co-signing with him on a loan through First Alabama Bank of

Guntersville, Alabama.1 The loan proceeds were to be used in Mann’s carpet

and furniture dyeing business. Mann represented to Duvall that his business was

doing well and supplied Duvall with a prospectus of his business income.

Duvall consented and co-signed the note as surety for the Manns’ debt.

The note came due in July 1997. By that time the Manns had paid down

the balance of the note to $9,156.20. Mann again approached Duvall about cosigning another note and as before, presented Duvall with a financial prospectus

of his carpet and furniture dyeing business. The financial prospectus predicted

a “nice” positive income for the business. Mann indicated to Duvall that he was

doing well financially although he was considering limiting his business

operations to servicing only residential customers and dropping the more

competitive commercial accounts. Duvall testified that he should have

suspected that all was not well with Mann’s business upon learning this.

Nevertheless, Duvall consented and co-signed this second note as the Manns’

surety. 

The second note, dated July 16, 1997, is in the amount of $17,156.20.2

From those proceeds Mann received $8,000 cash, and $9,156.20 was used to pay

off the remaining balance of the August 1995 loan. Under the terms of the note,

the Manns were required to repay the loan in monthly installments of $446.15

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 The judgment is for twice the amount of the original loan due to the accrual

of unpaid interest on the indebtedness.

4 The debtors’ Schedule F-Creditors Holding Unsecured Nonpriority Claims was

admitted into evidence and designated Plaintiff’s Exhibit P-2.

5

 Exceptions to discharge must be strictly construed so as to give effect to the

fresh start policy of the Bankruptcy Code. Hope v. Walker (In re Walker), 48 F.3d

1161, 1164-65 (11th Cir. 1995). Further, a creditor in a § 523(a) dischargeability

complaint has the burden of proving the elements by a preponderance of the evidence.

Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991).

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beginning August 15, 1997.

The Manns made only one monthly payment on the note, and ultimately,

Regions called on Duvall to pay the debt. Duvall paid Regions and

subsequently sued the Manns in state court where he recovered a judgment in

the amount of $35,296.97.3

At no time did Deanna Lee Mann speak to Duvall about these loan

transactions. 

Duvall testified that he has subsequently learned that Mann’s business

was not doing well at the time the second note was signed and that the business

prospectus was false. 

The Manns filed a joint petition for relief under chapter 7 of the

Bankruptcy Code on March 5, 2004. Therein, they scheduled Duvall’s claim in

the amount of $35,296.97.4

CONCLUSIONS OF LAW

The Bankruptcy Code makes a debt obtained by fraud nondischargeable.5

The statute provides:

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(a) A discharge under section 727, 1141, 1228(a), or 1328(b) of

this title does not discharge an individual debtor from any debt—

 (2) for money, property, services, or an extension, renewal, or

refinancing of credit, to the extent obtained, by—

 (A) false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s or an insider’s

financial condition;

11 U.S.C. § 523(a)(2)(A). 

In order to prevail in an action under 11 U.S.C. § 523(a)(2)(A), the

creditor must prove the following elements: 1) that the debtor made a false

representation to deceive the creditor; 2) that the creditor relied on the

misrepresentation; 3) that the reliance was justified; and 4) that the creditor

sustained a loss as a result of the misrepresentation. SEC v. Bilzerian (In re

Bilzerian), 153 F.3d 1278, 1281 (11th Cir. 1998); Fuller v. Johannessen (In re

Johannessen), 76 F.3d 347, 350 (11th Cir. 1996). Further, the false statement

must concern a matter other than the debtor’s financial condition. Finally,

justifiable reliance, rather than the more stringent reasonable reliance or the

more lenient actual reliance, is the standard in § 523(a)(2)(A) litigation. Field

v. Mans, 516 U.S. 59, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995); City Bank &

Trust Co. v. Vann (In re Vann), 67 F.3d 277, 281 (11th Cir. 1995).

Duvall contends that the Manns’ promise to repay their second Regions

Bank note was a fraudulent misrepresentation because they never intended to

repay the obligation from the time of its making. Because the misrepresentation

concerns a future rather than a past or existing fact, Duvall bases this complaint

on a promissory fraud theory. 

To establish a cause of action for promissory fraud under Alabama law,

a plaintiff must establish: "(1) that the defendant made a false representation of

a material fact; (2) that the false representation was relied upon by the plaintiff;

(3) that the plaintiff was damaged as a proximate result of the reliance; (4) that

the representation was made with a present intent to deceive; and (5) that when

the representation was made the defendant intended not to perform in

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accordance with it." Howard v. Wolff Broadcasting Corp., 611 So. 2d 307, 311

(Ala. 1992). “The only basis upon which one may recover for fraud, where the

alleged fraud is predicated on a promise to perform or abstain from some act in

the future . . . is when the evidence shows that, at the time . . . the promises of

future action or abstention were made, the promisor had no intention of carrying

out the promises, but rather had a present intent to deceive.” Wade v. Chase

Manhattan Mortgage Corp., 994 F. Supp. 1369, 1378 (N.D. Ala. 1997) (citing

Robinson v. Allstate Ins. Co., 399 So. 2d 288 (Ala. 1981)). See E & S Facilities,

Inc. v. Precision Chipper Corp., 565 So. 2d 54, 58-59 (Ala. 1990); Capital

Chevrolet v. Bullock (In re Bullock), 317 B.R. 885, 889-90 (Bankr. M.D. Ala.

2004). Further, “[t]he failure to perform, alone, is not evidence of intent not to

perform at the time the promise was made . . .” Wade, 994 F. Supp. at 1378

(citing First Bank of Boaz v. Fielder, 590 So. 2d 893 (Ala. 1991), overruled on

other grounds, Life Ins. Co. v. Smith, 719 So. 2d 797 (Ala. 1998)). 

Simply put, “the law places a heavier burden in those fraud actions where

one attempts to prove fraud based on a misrepresentation relating to an event to

occur in the future.” National Sec. Ins. Co. v. Donaldson, 664 So. 2d 871, 876

(Ala. 1995). In such cases a plaintiff must prove that the debtor did not intend

to perform or abstain and intended to deceive the plaintiff at the time the false

representation was made. Crowne Invs., Inc. v. Bryant, 638 So. 2d 873, 877

(Ala. 1994). If such were not the case, every promise to perform in the future,

such as a promise to repay a loan at a later date, would constitute

nondischargeable fraud if the promise went unfulfilled.

This court, then, must decide whether the evidence will support a finding

that the Manns never intended to repay the debt guaranteed by Duvall. The

court must find indicia of fraud beyond the debtors’ mere failure to repay the

loan. The following circumstances are considered:

Immediacy of the default:

The Manns signed the note in question on July 16, 1997. The note

required monthly installments of $446.15 commencing August 15, 1997. The

Manns made only one monthly payment. While the failure to repay the note

alone cannot form the basis of a finding of promissory fraud, the fact that a

default occurred almost immediately lends credence to the plaintiff’s contention

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 Duvall testified that Mann furnished him with the business prospectus, but that

Deanna Lee Mann never spoke with him about these loans or the business. Apart from

signing the note promising to repay, Deanna Lee Mann made no other representations

to Duvall regarding this obligation.

7

 As with the case of the alleged false financial prospectus, this statement is not

actionable under § 523(a)(2)(A) because it relates to the debtor’s financial condition.

However, the statement may bear on the debtor’s intent to defraud under a promissory

fraud theory. 

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that the Manns did not intend to repay the debt from the beginning. 

False financial prospectus:

Duvall testified that Mann presented him with a false business prospectus

that portrayed the business’ future in a rosy light.6

 A false statement concerning

the debtor’s or an insider’s financial condition is not actionable under

§ 523(a)(2)(A). Such statements are actionable only under § 523(a)(2)(B). No

§ 523(a)(2)(B) count was asserted in the complaint sub judice. Nevertheless, if

the debtor furnished the creditor with a false financial statement, that fact may

bolster the creditor’s contention that the debtor did not intend to repay the debt

from its inception. That is, the giving of a false financial statement may be an

indicium of promissory fraud. 

Duvall’s subsequent knowledge of the condition of Mann’s business:

Duvall testified that at the time of the loan in question Mann told him that

his business was doing well.7 Duvall subsequently learned through discovery

in this adversary proceeding that the business was actually floundering at the

time of the second Regions Bank loan. Though Mann’s oral representation

respecting his financial condition is not actionable under 11 U.S.C.

§ 523(a)(2)(A), it may nevertheless bear on the debtor’s intent to defraud under

the theory of promissory fraud. 

CONCLUSION

The evidence here points to three sets of circumstances from which the

plaintiff contends the court could infer promissory fraud by Mann. No such

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evidence exists respecting Deanna Lee Mann. 

The most compelling of the three is the immediacy of the default. While

the other two are not actionable under 11 U.S.C. § 523(a)(2)(A), they form a part

of the totality of the circumstances from which the court may make inferences

regarding fraud. The testimony regarding the false prospectus and the condition

of the business, though conclusory, was uncontested. The court concludes that

the plaintiff presented sufficient testimony to conclude, by a preponderance of

the evidence, that the Mann did not intend to repay the loan at the time it was

made.

A separate judgment will enter declaring the debt of Scott Mann to Larry

Duvall nondischargeable. The judgment will declare the debt of Deanna Mann

to Larry Duvall dischargeable.

Done this 11

th day of August, 2005. 

/s/ Dwight H. Williams, Jr. 

United States Bankruptcy Judge

c: Douglas A. Dellaccio, Attorney for Plaintiff

 Charles M. Ingrum, Sr., Attorney for Defendants

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