In Re Hill

Facts

D bought their home 20 years ago for $ 220,000. They filed for chapter 7 bankruptcy in April 2007. As the value of the House increased, D refinanced the original first deed of trust to obtain additional cash. They obtained a junior deed of trust, which they refinanced several times. At the time they filed their bankruptcy petition, Ds scheduled the debt secured by the House as totaling approximately $683,000. D was a parts manager at Auto Wholesaling, earning an annual salary of up to $39,000, depending on overtime. The Mrs. was self-employed, using a dba of C Ann H Distributing, distributing free periodicals for various companies. Her income also fluctuated, depending on how many companies were employing her for this purpose. It appears doubtful that Ds' combined annual gross income was ever greater than $65,000. In April 2006, Mrs. contacted a mortgage broker, Ellerbeck, seeking to refinance the existing second deed of trust. Ellerback had acted as Ds' loan broker on five prior occasions. The second deed of trust had a balance of approximately $100,000. Ds sought and obtained from P an equity line of credit for $200,000, thereby obtaining approximately $60,000 in cash after paying the cost of the refinance and other consumer obligations. They used the cash to pay off their consumer debt and to 'fix-up' the House. D's monthly income was listed as $ 98,112 and Mrs'. was listed as $47,604 or a combined $145,716. Ellerback obtained this income information from Mrs. over the phone, inputted it into the application form, and sent the application to Ds for their signature. In October 2006, Ds were in need of more cash. P permitted them to increase their equity line of credit to $250,000. Mrs. dealt with P. On this loan application, D's income was listed as $67,200 and Mrs. was listed as $123,600 or $190,800. Mrs. denied having provided this income information to P. P noted that both this loan and the loan obtained by Ds in April 2006 were 'stated income' loans that did not require verification of income. P's Guidelines stated that, for a borrower who was employed, the only requirement was the verification of employment, not verification of income. No third party vendor ever evaluated whether it was reasonable for an automobile parts manager in the San Francisco Bay Area to earn $ 98,112 on an annual basis. Self-employed verification could be accomplished by: (1) a copy of the borrower's business license, (2) a copy of the most recent month's bank statement reflecting liquidity at least equal to one-tenth of the borrower's annual income, or (3) a CPA letter verifying the existence and ownership of the business. P chose the third option. A copy of a letter verifying the existence and ownership of Mrs.' business was introduced into evidence. The letter was written on the letterhead of a CPA, but was signed by someone other than the CPA whose name was on the letterhead. Evidence was also introduced that the Bank had verified the existence of the CPA on the letterhead. However, no evidence was presented that P had verified the identity or credentials of the person who signed the letter. In April 2006, the House had been appraised at $785,000. In October 2006, the House was appraised at $856,000. Shortly after Ds filed for bankruptcy in April 2007, the first deed of trust holder purchased the House at its foreclosure sale pursuant to a credit bid based on a secured debt of approximately $450,000, no one having submitted an overbid. P sought to exempt from discharge its approximately $250,000 claim pursuant to 11 U.S.C.S. § 523(a)(2)(B) asserting that Hill (Ds) submitted false financial statements in their loan application, upon which P relied to its detriment.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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