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Lavender v. Auto Sales

March 9, 2010


The opinion of the court was delivered by: Seybert, District Judge


On February 9, 2009, U.S. Bankruptcy Judge Alan S. Trust issued an Order concluding that, under 11 U.S.C. § 523(a)(2)(B), Debtor James M. Lavender could not discharge his $518,728.27 debt to Creditor Manheim's Pennsylvania Auction Services, Inc. d/b/a Manheim Auto Auction and Manheim Financial Services, Inc. ("Manheim"). Mr. Lavender appeals this decision.

For the foregoing reasons, the Bankruptcy Court's Order is AFFIRMED.


Mr. Lavender, together with his wife Diane Lavender (together, "Debtors"), did business as Lavender Auto Sales, a sole proprietorship located On Long Island. Through Lavender Auto Sales, Debtors operated a used car business. Among other things, Lavender purchased vehicles that Manheim then sold at Manheim's car auction business.

In 1994, Mr. Lavender entered into a floor plan financing agreement with Manheim. Under the agreement, Manheim advanced money to Mr. Lavender to enable him to purchase vehicles. Mr. Lavender then sold these vehicles through Manheim and repaid Manheim's loans with the sale proceeds. Initially, Manheim extended Mr. Lavender a $300,000 credit line. Within a few months, however, Manheim increased Mr. Lavender's credit line to $500,000.

Sometime in 1998, Mr. Lavender sought to increase his credit line to $900,000. To this end, Mr. Lavender drafted a financial statement on September 2, 1998 ("Financial Statement") and sent it to Manheim. This Financial Statement was materially false in many ways. Specifically, the Financial Statement: (1) set forth that Mr. and Mrs. Lavender owned three real properties they had no interest in; (2) understated Mr. Lavender's mortgage debt with respect to another real property; (3) listed a life insurance policy with a cash surrender value of $100,000 that Mr. Lavender did not own; and (4) listed $50,000 worth of phantom stocks and bonds. A few weeks after drafting this fraudulent statement, Mr. Lavender, on behalf of Lavender Auto Sales, executed and personally guaranteed a $900,000 promissory note in Manheim's favor. Manheim, in turn, increased the credit line to $900,000. Eight months later, however, Manheim decreased the credit line to $650,000.

Mr. Lavender's and Manheim's business relationship ended in late 1999, apparently after Mr. Lavender failed to make good on outstanding loans he owed Manheim. In 2000, Manheim sued Debtors in New York state court. In this action, Manheim won a $518,728.27 judgment against Mr. Lavender, reflecting $339,403.37 owed on outstanding loans, plus prejudgment interest, costs, and disbursements.

Manheim seeks to have this judgment survive Mr. Lavender's subsequent bankruptcy. Under 11 U.S.C. § 523(a)(2)(B), a debt survives bankruptcy if it resulted from a written statement: "(i) that is materially false; (ii) respecting the debtor's or an insider's financial condition; (iii) on which the creditor . . . reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive." Finding that § 523(a)(2)(B)'s requirements were met, the Bankruptcy Court concluded that Mr. Lavender could not discharge his debt to Manheim in bankruptcy.

Mr. Lavender appealed. On appeal, Mr. Lavender raises three issues: (1) the Bankruptcy Court should have awarded him summary judgment, because Manheim failed to raise a genuine issue of material fact at that stage of litigation; (2) the Bankruptcy Court should have sanctioned Manheim for alleged discovery abuses; and (3) after trial, the Bankruptcy Court improperly found that Manheim "reasonably relied" on the Financial Statement in extending Mr. Lavender's credit line.


I. Standard Of Review

"On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." FED. R. BANK. P. 8013. A bankruptcy court's "finding[s] of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous . . . ." Id.; see also In re Momentum Mfg. Co., 25 F.3d 1132, 1136 (2d Cir. 1994); In re PCH Assoc., 949 F.2d 585, 597 (2d Cir. 1992). "A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. . . . Factual findings must be upheld if plausible in light of the record viewed in its entirety. Robbins Int'l, Inc. v. Robbins MBW Corp. (In re ...

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