Memorandum of Decision Re: Fraud

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re CARL F. METTEN,                                                                   No. 95-11726        Debtor. ___________________________/ BATES LAND DEVELOPMENT CORP.,        Plaintiff,      v.                                                                                           A.P. No. 95-1275 CARL F. METTEN,        Defendant. ______________________________/
Memorandum of Decision
    *nbsp;Defendant Carl F. Metten is a medical doctor who ventured into the surety business. During a two or three year period in the early 1990's, Metten acted as a surety for numerous construction bonds, including a performance bond and a payment bond issued to plaintiff Bates Land Development, Inc. Metten filed a Chapter 11 petition when he was unable to pay claims made by Bates and others. In this adversary proceeding, Bates seeks to have its claim declared nondischargeable pursuant to section 523(a)(2)(B) on the grounds that Metten's financial statement was false.      Metten's financial statement consisted of a summary with a simple balance sheet on the reverse. Nothing in the financial statement was the whole truth, and there were several outright falsehoods. He stated that he owned $590,000.00 in real estate free and clear, when in fact the real estate was heavily encumbered. He stated that he had $977,000.00 in cash and marketable securities, without disclosing that most of this was in his pension plan. He grossly overvalued his other assets. Most importantly, he omitted from "all other liabilities" more than $1.5 million in bonds he had guaranteed. The result was a completely false and inaccurate financial statement. If it had been accurate, Metten would not have been an acceptable surety to anyone.      Bates reasonably relied on the financial statement, and especially on Metten's representations that he had $977,000.00 in liquid assets and that he had no other liabilities. Bates accepted Metten as a surety for a performance bond and a payment bond, both in the amount of $268,459.39. When the bonded contractor walked off the job, Bates sustained performance losses exceeding the amount of the performance bond and paid out $149,252.00 to subcontractors. The total losses applicable to the payment bond, with interest, are $158,963.00.      Metten argues that he did not intend to deceive anyone. Despite his denials, however, the court can and does infer intent to defraud from the reckless disregard Metten had for the truth. In re Cohen, 54 F.3d 1108 (3rd Cir.1995). Fraudulent intent may be established by showing reckless indifference to the accuracy of a financial statement, or reckless disregard of its accuracy. In re Coughlin, 27 B.R. 632 (1st Cir.BAP 1983).      The Bankruptcy Code does not allow any debt incurred by the use of a false financial statement to be discharged. However, issuance of a false financial statement by a surety is especially egregious. Financial solvency is the essence of a surety. Metten used a grossly and materially false financial statementto earn income as as surety, fooling Bates and others into thinking that they had insured themselves against foreseeable risks. Metten's debt to Bates is accordingly nondischargeable.      For the reasons stated above, a nondischargeable judgment will be entered in favor of Bates in the amount of $427,422.39, together with interest at the legal rate and costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Bates shall submit an appropriate form of judgment forthwith.
Dated: June 17, 1996                                                           _______________________                                                                                               Alan Jaroslovsky                                                                                               U.S. Bankruptcy