SW Financial Services of Las Cruces, Inc. v. Lopez

1See Order and Judgment (Docket # 51).
2That section provides:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title
does not discharge an individual debtor from any debt--
(2) for money, property, services, or an extension, renewal, or refinancing
of credit to the extent obtained by --
(A) false pretenses, a false representation, or actual fraud, other
1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	EDWARD PARRA LOPEZ and 	No. 7-05-14734 ML
EVA GONZALES LOPEZ,
Debtors.
_____________________________________________________________________________
SW FINANCIAL SERVICES OF LAS CRUCES, INC.,
Plaintiff,
v. 	Adversary No. 06-1078 M
EVA GONZALES LOPEZ,
Defendant.
MEMORANDUM OPINION
THIS MATTER is before the Court on the non-dischargeability action filed by SW
Financial Services of Las Cruces, Inc. (“SW Financial”) against Eva Gonzales Lopez, now
known as Eva Gonzales. The Court held a trial on the merits following the partial reversal and
remand by the Tenth Circuit Bankruptcy Appellate Panel (“BAP”) of this Court’s order granting
Plaintiff’s motion for summary judgment.1 SW Financial seeks a determination that certain debt
arising from two promissory notes executed by Defendant is non-dischargeable under 11 U.S.C.
§ 523(a)(2)(A) as a debt obtained by false pretenses.2 The sole issue on remand is whether
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than a statement respecting the debtor’s or an insider’s financial
condition.
11 U.S.C. § 523(a)(2)(A).
3At trial, Defendant argued that because she did not complete the loan application, she
made no representations to SW Financial; consequently, Defendant asserts that SW Financial
failed to establish that Defendant made any false representation. This Court determined in its
Memorandum Opinion (Docket # 37) that Defendant made false representations to SW Financial
that she was the borrower and recipient of the loan funds by executing the notes in favor of SW
Financial when she knew that she was obtaining the loans for the benefit of Joe Valdez. See
Memorandum Opinion, p. 13. The Judgment and Order entered by the BAP did not reverse this
Court’s decision on that issue. Nor were the facts concerning this element different at trial.
Thus, the determination that Defendant made a false representation under 11 U.S.C. §
523(a)(2)(A) is the law of the case. See In re Straight, 248 B.R. 403, 410 (10th Cir. BAP
2000)(“Issues decided on appeal become the law of the case and are to be followed in all
subsequent proceedings in the same case in the trial court . . . ‘unless the evidence on a
subsequent trial was substantially different . . . or the decision was clearly erroneous and would
work a manifest injustice.’”)(quoting Woods v. Kenan (In re Woods), 215 B.R. 623, 625 (10th
Cir. BAP 1998)(quoting White v. Murtha, 377 F.2d 428, 431-32 (5th Cir. 1967), reh’g denied,
381 F.2d 34 (5th Cir. 1967)), aff’d, 173 F.3d 770 (10th Cir. 1999); In re Integra Realty
Resources, Inc., 354 F.3d 1246, 1259 (10 th Cir. 2004)(law of the case doctrine "‘applies to issues
previously decided, either explicitly or by necessary implication.’”)(quoting Octagon Res., Inc.,
v. Bonnett Res. Corp. (In re Meridian Reserve, Inc.), 87 F.3d 406, 409 (10 th Cir. 1996)(further
quotation omitted)). Similarly, the SW Financial’s justifiable reliance on Defendant’s
representations has already been determined.
2
Defendant intended to defraud SW Financial when she executed two promissory notes in favor
of SW Financial knowing that she would immediately turn the funds over to Joe Valdez,
Defendant’s former spouse and then officer and shareholder of SW Financial.3
Based on the testimony and evidence before the Court, the Court finds that there is
sufficient circumstantial evidence from which to infer intent to defraud within the meaning of 11
U.S.C. § 523(a)(2)(A). 	Consequently, the debt at issue in this adversary proceeding is not
dischargeable in Defendant’s bankruptcy proceeding.
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3
FACTS AND DISCUSSION
Most of the facts relevant to this proceeding are not disputed. Defendant executed the
following promissory notes and security agreements in favor of SW Financial: Promissory Note
and Security Agreement dated July 5, 2001 in the amount of $4,630.16 (“Note 1"); Promissory
Note and Security Agreement dated August 2, 2001 in the amount of $4,007.00 (“Note 2"); and
Promissory Note and Security Agreement dated December 28, 2001 in the amount of $6,352.86
(“Note 3"). 	See Plaintiff’s Exhibits 5, 6, and 7. 	Note 3 refinanced the outstanding balance of
Note 2; Note 2 was paid in full from a portion of the proceeds of Note 3. 	Defendant entered into
these loans at the request of her former husband, Joe Valdez, who was also at that time an owner
and officer of SW Financial. 	Defendant agreed to enter into the loans with the understanding
that Joe Valdez would repay them. 	Defendant received the proceeds from the loans and turned
them over to Joe Valdez. 	Some payments were credited to the notes, but the source of the
payments is not reflected on the account ledgers for the loans. 	See Defendant’s Exhibits 8, 9
and 10. 	Defendant testified that Joe Valdez made the payments. The unpaid balances on Note 1
and Note 3 were ultimately charged off. See Defendant’s Exhibits 9 and 11.
Sometime after Note 1 and Note 3 became delinquent, SW Financial discovered that Joe
Valdez was responsible for making a series of allegedly improper loans on behalf of SW
Financial. 	SW Financial, Joe Valdez, and Gene Lee entered into a Settlement Agreement that
identifies twenty-one suspect loans. 	Note 1 and Note 3 are among the loans listed in the
Settlement Agreement. The Settlement Agreement provides that Joe Valdez is liable for
$144,177.00, representing the outstanding balance of the twenty-one loans, plus legal expenses.
See Plaintiff’s Exhibit 10. In partial payment of the amount due under the Settlement
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4
Agreement, Joe Valdez sold his shares of common stock in several financial institutions,
including his shares of stock in SW Financial, for the sum of $71,402.00. 	Id. 	No accounting
of the application of the stock proceeds to the loans identified in the Settlement Agreement is in
evidence. 	Gene Lee, the current president of SW Financial, testified at trial that the value of the
stock redeemed as part of the Settlement Agreement was discounted and that none of the
proceeds from the stock redemption were applied to the loan balances for Note 1 or Note 3.
At trial, Gloria Romero testified that when she contacted Defendant after the loans
became delinquent, Defendant told her that she would contact Joe Valdez or that SW Financial
should contact Joe Valdez regarding payment. 	Ms. Romero also testified that it was against
SW Financial’s general policy to make loans to family members or employees. 	Loans to
immediate family members of employees of SW Financial required the approval of Gene Lee.
Mr. Romero also confirmed that Defendant contacted SW Financial by telephone to request a
payoff amount for one of the loans, and that by April of 2003 Defendant indicated that she knew
it was her responsibility to repay the loans.
Defendant testified that she borrowed the money represented by Note 1, Note 2, and Note
3 for Joe Valdez, that she had an agreement with him that he would repay the loans, but that she
knew if he did not repay the loans she would be responsible. 	Defendant also confirmed that
upon receipt of the checks from SW Financial representing the proceeds from the loans, she
cashed the checks and gave the proceeds to Joe Valdez. 	Defendant further testified that because
Joe Valdez was the president of the company and asked her to borrow the money on his behalf
she assumed it was ok. 	Although she testified at trial that she did not ask at the time of the loans
whether SW Financial had any objection to the loan, her prior deposition testimony indicated
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4See Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10 th Cir. 1996)(stating
that fraudulent intent may be inferred based on the “totality of circumstances”)(citations and
internal quotations omitted)); In re Abraham, 247 B.R. 479, 483 (Bankr.D.Kan.2000)(stating that
“[s]ince a promisor does not usually admit fraudulent intent, the plaintiff must prove
circumstances substantial enough to support an inference that there was intent to
defraud.”)(citation omitted); AT & T v. Herrig (In re Herrig), 217 B.R. 891, 896
(Bankr.N.D.Okla. 1998)(noting that courts apply the “totality of circumstances” approach to
determine intent because “rarely, if ever, will a debtor admit his or her intent to deceive while
under oath.”)(citation omitted)).
5Young, 91 F.3d at 1375 (“totality of circumstances” test). See also, Mercantile Bank v.
Canovas, 237 B.R. 423, 428 (Bankr.N.D. Ill. 1998)("[T]he court must look at the totality of the
circumstances in order to 'determine whether all the evidence leads to the conclusion that it is
more probable than not that the debtor had the requisite fraudulent intent.'")(quoting In re
Murphy, 190 B.R. 327, 334 (Bankr.N.D.Ill. 1995)).
6Hill v. Horst (In re Horst), 151 B.R. 563, 568 (Bankr.D.Kan. 1993)(stating that “a
representation made with gross recklessness as to its truth and with knowledge that it would
5
that she did question Joe Valdez about the propriety of the loans. 	Defendant did not initially
list SW Financial in the statements and schedules filed with her bankruptcy petition. 	But after
SW Financial filed a claim, she added SW Financial as a creditor and would have made a
distribution to them as an unsecured creditor through her Chapter 13 plan had she been able to
proceed under Chapter 13. 	Defendant did not file an objection to SW Financial’s claim.
Intent to Defraud under 11 U.S.C. § 523(a)(2)(A).
Because a Defendant rarely admits an intent to defraud, a Plaintiff can satisfy the scienter
element under 11 U.S.C. § 523(a)(2)(A) through circumstantial evidence from which the Court
may infer the requisite intent to defraud.4 The Court must consider the totality of the
circumstances as of the time the representation was made to determine whether a debtor had a
subjective intent to defraud the creditor.5 The Court may logically infer an intent to deceive if
the debtor knowingly or recklessly makes a false representation that the debtor knew or should
have known would induce another to act.6
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induce the creditor to make a loan fulfills the intent to deceive requirement for
nondischargeability for fraud of false pretenses under § 523(a)(2)(A) (citing In re Phillips, 804
F.2d 930, 934 (6th Cir. 1986)) and confirming that the Tenth Circuit adopted a similar standard in
In re Black, 787 F.2d 503, 506 (10 th Cir. 1986) when construing § 523(a)(2)(B)); Glucona Am.,
Inc. v. Ardisson (In re Ardisson), 272 B.R. 346, 357 (Bankr.N.D.Ill. 2001).
6
The BAP reversed and remanded the case on the issue of fraudulent intent, finding that
Defendant’s statements that she did not think she was doing anything wrong and that she
understood that she would be required to repay the notes if Joe Valdez failed to do so created a
genuine issue of material fact precluding summary judgment in favor of SW Financial. 	Upon
consideration of the evidence and testimony at trial, including the Defendant’s demeanor, the
Court finds that the surrounding facts and circumstances support an inference of fraudulent
intent within the meaning of 11 U.S.C. § 523(a)(2)(A).
At trial Defendant confirmed that she entered into the transaction knowing that she was
really obtaining the loans on behalf of Joe Valdez. 	Her trial testimony that she did not question
the loans was inconsistent with her deposition testimony that she had some concerns about the
propriety of the loans. Defendant knew or should have known that by representing to SW
Financial that she was the borrower when she intended to give the loan proceeds immediately to
Joe Valdez, she was deceiving SW Financial as to the true nature of the transaction. 	Her
statement that she understood at the outset that she would ultimately be responsible for
repayment of the loans is belied in part by her response to SW Financial’s collection efforts:
instead of attempting to make arrangements for payment on the notes, she told SW Financial that
it should contact Joe Valdez regarding payment. 	Because of her side agreement with Joe
Valdez, she acted solely as the nominal party to the transaction and, in fact, had no present
intention to repay the loans when she entered into them. 	The Court does not find credible
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7Cf. Summit Properties, Inc. v. Public Service Co. of New Mexico, 138 N.M. 208, 222,
118 P.3d 716, 730 (Ct.App. 2005)(discussing the collateral source doctrine and stating that “the
7
Defendant’s explanation that she did not think she was doing anything wrong in assisting Joe
Valdez in receiving a loan. 	Why would Joe Valdez ask her to obtain a loan and give him the
proceeds if he were able to take out the loan himself? 	Defendant either knew or should have
known that the reason Joe Valdez asked for her assistance was because he was precluded from
obtaining loans from SW Financial on his own behalf. 	She knowingly participated in this
scheme. 	The Court, therefore, concludes that Defendant had the requisite intent to defraud
within the meaning of 11 U.S.C. § 523(a)(2)(A).
Partial Payment of Indebtedness through Settlement between Joe Valdez and SW
Financial.
Defendant asserted at trial that the discounted stock redemption proceeds received under
the terms of the Settlement Agreement with Joe Valdez should be applied proportionately to the
outstanding balances of Note 1 and Note 3. 	SW Financial countered that the outstanding
balance due under the Settlement Agreement far exceeds the amounts due under Notes 1 and
Notes 3 and that it could elect to attempt collection from any source, provided it does not recover
more than the total amount due under the Settlement Agreement. 	No accounting was provided
to the Court documenting which loans SW Financial chose to apply the proceeds from the stock
redemption. 	But because Defendant executed the notes and remains responsible for the
outstanding balances thereunder, and because there is no evidence to suggest that SW Financial
has recovered more than its actual losses, SW Financial was not required to apply a
proportionate share of the proceeds it already received to the outstanding balances due under
Note 1 or Note 2. 7
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general rule is that a plaintiff may not recover more than his or her actual loss”)(citing McConal
Aviation, Inc. v. Commercial Aviation Insurance Co., 110 NM 697, 700, 799 P.2d 133, 136
(1990)).
8
The Court previously entered an Order Granting Motion to Alter or Amend Judgment
(“Order”) (Docket # 46) providing that the debt at issue in this adversary proceeding in the
amount of $7,702.68, plus interest at the rate of 19.99% per annum as provided in Note 1 and
Note 3 from December 31, 2003, plus reasonable attorneys’ fees not to exceed 15% of the
remaining balance of the Notes, plus actual court costs, was non-dischargeable under
523(a)(2)(A). The Order was based upon the Court’s Memorandum Opinion (Docket # 37) that
was reversed by the BAP. 	Having conducted a trial on the merits following remand and
determined that all elements of 11 U.S.C. § 523(a)(2)(A) have been satisfied, it is now
appropriate to enter a second judgment determining only the nature of the debt.
CONCLUSION
Based on the foregoing, the Court concludes that the debt at issue in this adversary
proceeding is non-dischargeable under 11 U.S.C. § 523(a)(2)(A). This Memorandum Opinion
constitutes the Court’s findings of fact and conclusions of law issued in accordance with Rule
7052, Fed.R.Bankr.P. The Court will enter a judgment consistent with this Memorandum
Opinion.
________________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: July 8, 2008
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COPY TO:
David P. Lutz 	R. Trey Arvizu III
Attorney for Plaintiff 	Attorney for Defendant
PO Drawer 1837 	PO Box 1479
Las Cruces, NM 88004-1837 	Las Cruces, NM 88004
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