IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
DEAN and SUSAN NOWACKI, No. 93-10807
WILLIAM and DALE GATES,
v. A.P. No. 93-1172
DEAN and SUSAN NOWACKI,
Memorandum of Decision
In January, 1990, debtors and defendants Dean and Susan Nowacki prepared and gave to a
business broker a financial statement pursuant to their attempt to purchase a hardware store. No
agreement was reached with that seller, but two months later the Nowackis agreed through the
same broker to purchase a small manufacturing business from plaintiffs William and Dale Gates
for $178,000.00, of which $70,000.00 was paid in cash and the balance in the form of a note.
The Nowackis asked the broker if he needed an updated financial statement, and he told them no.
The Nowackis have since filed a Chapter 7 petition, and the Gates now allege that the debt owed
to them is nondischargeable pursuant to section 523(a)(2)(B) based on the financial statement,
which is alleged to be false. For the reasons set forth below, the court finds the Gates' case
utterly without merit.
The court begins by noting that there was not one shred of evidence that anything in the
financial statement was false. The debtors admit that (with the broker's counseling) they listed
the value of one piece of real property as they estimated it would be worth with pending repairs
completed. However, for all the court knows that estimated value was well below the actual
value even without the improvements; plaintiffs offered no proof as to actual values.
Moreover, William Gates himself testified that he considered the values placed on the real
property to be irrelevant, and that he looked only to the Nowacki's liquid assets in reviewing the
financial statement. Thus, there was no reliance on the real estate value figures.
The escrow closed about six months after the financial statement had been prepared. By that
time, most of the $120,000.00 in cash described in the statement was gone; $70,000.00 to the
Gates themselves, and the rest for property improvements and living expenses. At no time did
the Gates ask for an updated statement, or indicate to the Nowackis that their having a large
amount of cash after the close of the sale was in any way important.
Even though the financial statement was clearly dated, the Gates argue, based on First
National Bank v. Niles
, 35 B.R. 409 (D.C.1983) that the subsequent changes amount to fraud.
However, in that case there was an express representation that the information was continuing
to be true. Here, the Nowackis offered to update their financial statement and were told that it
was not necessary.
Even if the Nowackis had updated their fiancial statement, it would have revealed nothing
which would have caused the Gates to back out of the sale. The court does not believe Gates'
testimony that the amount of cash the Nowackis had was important beyond their ability to pay
the $70,000.00 down payment. There was no credible testimony that the Gates would not have
completed the sale if they had seen an updated financial report.
Moreover, the alleged false information in the financial statement amounts to only two or
three percent of the total assets. In addition, the Nowackis forgot
to list an asset worth
$32,000.00. Thus, the actual misrepresentation, even if the court were to find it (which it does
not), only amounts to a net of about one percent. This is nowhere near material.
To summarize, the Gates proved no false statement at all. The alleged false statements are
not material, and the Gates did not rely, reasonably or otherwise, on them. There was no
evidence at all of intent to deceive, and in fact all of the evidence (including full disclosure to the
broker and failure to list a valuable asset) negated any fraudulent intent. The Gates accordingly
did not prove a single element of an action under section 523(a)(2)(B). They shall accordingly
take nothing by their complaint, which shall be dismissed with prejudice. The Nowackis shall
recover their costs of suit.
This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a)
and FRBP 7052. Counsel for the Nowackis shall submit an appropriate form of judgment
Dated: February 23, 1994 _______________________