IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
STEPHEN and DEBRA GINN, No. 1-88-00019
CALIFORNIA STATE & FEDERAL
CREDIT UNION #20,
v. A.P. No. 1-88-0039
STEPHEN and DEBRA GINN,
Memorandum of Decision
On July 13, 1987, the debtors, who were both state employees, borrowed $7,000.00 each
from plaintiff California State and Federal Employees Credit Union #20. In their applications,
the debtors represented that their household goods were worth $15,000.00 and they had stock
worth $5,000.00. These representations were false, in that the household good were worth only
about $4,000.00 and the stock was valueless. The week before the loans were made debtor
Stephen Ginn had gone out on sick leave due to stress he was experiencing at his workplace.
By this adversary proceeding, the Credit Union seeks to have its claim declared
nondischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code on the theory that
the debtors borrowed the money with no intent to pay it back, and pursuant to section
523(a)(2)(B) because of the false financial statements. For the reasons stated below, the Court
finds no merit in the Credit Union's position.
In order to prevail on a false financial statement theory,the law requires the creditor to prove
by clear and convincing evidence that the statements were materially false, that the creditor
reasonably relied on them, and that the debtors had the intent to deceive. The Credit Union
proved only that the statements were false, but not that it relied on them. When the question
was put to the only representative of the Credit Union to testify, she stated that she could not
say whether the loan would have been made if the truth had been known about the values of the
household goods and the stock. The fact that the debtors had made several previous loans from
the Credit Union and repaid them all, and had an excellent credit history with the Credit Union,
leads the Court to the inescapable conclusion that the representations were neither material nor
relied upon by the Credit Union.
The Credit Union argues that at the time the debtors made the loans they had no intention to
repay them, Stephen had no intention of returning to work, and the debtors intended to file a
bankruptcy to discharge their obligations. However, the testimony presented to the Court clearly
showed that the debtors made repeated efforts for the next six months to retain Stephen's job,
they continued to make payments on the loan to the Credit Union, and that their bankruptcy was
only filed when efforts to retain the job on acceptable terms proved fruitless. There is no
requirement in the law that a debtor continue to work at a stressful job in order to repay
The Court is fully convinced that at the time they made the loans the debtors intended to
repay them and believed they had the ability to do so. While the debtors did, subsequent to their
loans from the Credit Union, incur a great deal of additional consumer credit debt to other
creditors, this evidence falls far short of convincing the Court that the debtors perpetrated a fraud
on the Credit Union merely by borrowing from it.
Section 523(d) of the Bankruptcy Code requires the Court to award the debtors costs and
attorney's fees incurred in defending a dischargeability action of this type unless the position of
the creditor was substantially justified or special circumstances would make the award unjust.
During the testimony it became clear that the debtors had perjured themselves in their schedules,
concealed assets and transfers from the trustee, and cannot account for a great deal of cash.
These acts may place the debtors' discharge in jeopardy, and indeed may be the basis for criminal
prosecution, but are not germane to the narrow issues of this adversary proceeding.
Nonetheless, the Court considers them to be sufficient special circumstances to make an award
of costs and fees unjust. Accordingly, while judgment shall be entered in favor of the debtors
each side shall bear its own fees and costs.
This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and
Bankruptcy Rule 7052. Pursuant to Bankruptcy Rule 9021, a separate judgment shall be
Dated: October 7, 1988 _______________________