FOR THE NORTHERN DISTRICT OF CALIFORNIA
DOLORES E. HUNDLEY, No. 92-11029
DONALD and SONYA VADNAIS,
v. A.P. No. 92-1200
DOLORES E. HUNDLEY,
Memorandum of Decision
In October, 1990, plaintiffs Donald and Sonya Vadnais entered into a written contract to sell
their small restaurant to debtor and defendant Dolores Hundley. The terms of the sale were
$55,000.00 cash and a note for $80,000.00. As part of the agreement, Hundley supplied the
plaintiffs with a written financial statement. Hundley's business failed, and she filed a Chapter
7 bankruptcy petition. By this adversary proceeding, plaintiffs seek a judgment that the balance
owing on the note is nondischargeable pursuant to section 523(a)(2)(B) because the financial
statement was false.
There are two items on the financial statement which were not true when the statement was
presented to the plaintiffs. First, Hundley did not yet have the $86,000.00 in cash as she
represented (she would need about $60,000.00 in cash to close the purchase). Second, she
listed one parcel of real property which she did not own. At first impression, these false items
seemed to mandate a judgment for plaintiffs. However, upon careful review of the entire
financial statement it is clear that there is no basis for a judgment against Hundley.
Plaintiffs allege that they were mislead into thinking that Hundley had enough cash to close
the transaction without borrowing, when in fact Hundley had to borrow on her property to
close. Thus, they argue, there was less equity in her real property to protect them. However,
a reading of the financial statment shows that Hundley did not understand it, and made a
mistake which eliminates plaintiff's argument.
On the second page of the financial statement, under "Schedule 3 Real Estate Holdings,"
Hundley listed three properties. She did not own one of them, which belonged to her former
husband whom she was contemplating remarrying. She indicated that her total equity
three properties was $316,500.00, and erroneously carried that forward to the primary part of
the financial statement on the first page where the total value, and not just the equity, was
supposed to go. She correctly listed a total of $285,500.00 in mortgage liens as a liability on
the first page. Deducting her liabilities from her assets gave a net worth of $207,200.00, which
was substantially lower than her true net worth. In other words, Hundley made a mistake on
the primary portion of the financial statement which cancelled out the inclusion of the unowned
parcel listed in schedule 3.
The way the first page of the financial statement reads, Hundley had real property worth
$316,500.00 and it was encumbered for $285,500.00, so that equity of only $31,000.00 would
be available for creditors. Even after borrowing to raise the $60,000.00 needed to pay plaintiffs
to close the sale, Hundley had far more equity than that in reality, without taking into account
her former husband's property.
The effect of Hundley's mistake is to completely undo plaintiffs' case. In order to be found
materially false, a financial statement must paint a substantially untruthful picture of the
debtor's financial condition. In re Harms
, 53 B.R. 134, 140 (Bkrtcy.D.Minn.1985). It is not
sufficient to show incorrect facts which do not render the statement materially false. In re
, 96 B.R. 369 (Bkrtcy.M.D.Fla.1989).
If plaintiffs read the financial statement carefully, then they would have found the mistake
and would have had to demand a correction before they could reasonably rely on it; reasonable
reliance cannot be shown if the financial statement is facially erroneous. In re Weiner
, 86 B.R.
912, 915 (Bkrtcy.N.D.Ohio 1988); In re Jackson
, 32 B.R. 549 (Bkrtcy.D.Del.1983). If they
did not read it carefully, then they would have thought that Hundley had a net worth of
$207,000.00, about enough cash to close the escrow, and not very much equity in real property
for them to look to in case of default; all of that was correct. Either way, plaintiffs cannot show
reasonable reliance on the statement.
Most importantly, the mistake does not permit a finding that Hundley intended to deceive
plaintiffs. It shows that she was trying to fill out the form as best she could, but did not really
understand it. She consulted the broker handling the transaction regarding the third property
owned by her former and prospective husband, and relied on at least what she perceived to be
his advice in listing it. The court cannot infer intent to defraud where the debtor has made a
mistake which substantially understates her net worth.
For the foregoing reasons, judgment will be entered in favor of Hundley. This
memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and
Dated: December 5, 1992 _______________________