COOP A/C AGUAS BUENAS v. MEDINA RIVERA et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: 	:
:
LUCAS MEDINA RIVERA & 	:
ANTONIA DELGADO RAMOS 	: 	Case No. 05-09278(GAC)
:
:
Debtors 	: 	Chapter 7
___________________________________:
:
COOPERATIVA AHORRO & CREDITO 	:
AGUAS BUENAS, 	:
:
Plaintiff 	:
:
v. 	: 	Adv. No. 05-00283
:
LUCAS MEDINA RIVERA & 	:
ANTONIA DELGADO RAMOS 	:
:
Defendants 	:
___________________________________:
DECISION AND ORDER
I. Background
Pending 	before 	this 	Court 	is 	a 	motion 	for 	summary 	judgment
filed 	by 	the 	plaintiff, 	Cooperativa 	de 	Ahorro 	y 	Credito 	Aguas
Buenas 	(“Cooperativa”)(Docket #7) and an opposition filed by the
debtors, Lucas Medina Rivera (“Medina”) and Antonia Delgado Ramos
(“Delgado”) (collectively “debtors”)(Docket #18). On December 16,
2005, 	Cooperativa 	filed 	the 	instant 	adversary 	proceeding 	to
determine 	whether 	three 	debts 	owed 	by 	the 	debtors, 	in 	the 	total
amount of $49,039.04, are non-dischargeable pursuant to 11 U.S.C.
§ 523(a)(2)(B)(Docket #1).
On 	February 	2, 	2006, 	Cooperativa 	filed 	a 	motion 	for 	summary
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judgment 	asserting 	that 	it 	executed 	three 	consumer 	loans 	to 	the
debtors (Docket #7). The first consumer loan dated July 8, 2003, was
for 	the 	amount 	of 	$7,844.97, 	payable 	in 	fifty-three 	(53) 	monthly
installments of $101.56, with an interest rate of 12.25% per annum.
(Docket #21, Exhibit 5). The second consumer loan 	dated 	April 	19,
2005, was for the amount of $27,890.27, payable in ninety-five (95)
monthly installments of $439.27, with an interest rate of 12.25% per
annum. (Docket #21, Exhibits 4 and 6). The third loan was a Master
Card, 	with 	the 	latest 	transaction 	dated 	March 	8, 	2005, 	for 	the
amount 	of 	$13,303.95, 	based 	on 	a 	variable 	interest 	rate 	of 	13.5%
and/or 15.5% per annum, until fully paid. Cooperativa avers that the
debtors 	defaulted 	on 	each 	of 	these 	loans 	and 	remain 	indebted 	to
Cooperativa.
Cooperativa 	contends 	that 	the 	debtors 	fraudulently 	and
willfully misrepresented material facts regarding their financial
condition 	inducing 	it 	to 	lend 	the 	debtors 	substantial 	amounts 	of
money. Cooperativa avers that in its customary evaluation process
regarding the debtors’ loan applications, it reasonably relied on
three 	financial 	statements 	that 	the 	debtors 	submitted, 	which
allegedly represented their actual net income. Cooperativa asserts
that 	these 	three 	financial 	statements 	were 	prepared 	by 	Carlos 	A.
Velez de Jesus & Company, Accountants and Management Consultants.
It 	avers 	that 	the 	financial 	statements 	contained 	the 	following
relevant information: (a) the first statement dated September 20,
2001, 	regarding 	the 	fiscal 	year 	that 	ended 	on 	June 	30, 	2001,
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reported 	that 	the 	debtors’ 	net 	income 	was 	$81,938.00; 	(b) 	the
second statement dated 	August 17, 2002, regarding the fiscal year
that ended on June 30, 2002, reported that the debtors’ net income
was $94,715.00; and (c) the third statement dated October 30, 2004,
regarding 	the 	fiscal 	year 	that 	ended 	on 	June 	30, 	2003, 	reported
that 	the 	debtors’ 	net 	income 	was 	$119,030.00. 	(Docket 	#21,
Exhibits 1, 2 and 3).
Cooperativa 	avers 	that 	after 	the 	debtors 	filed 	the 	petition
for bankruptcy, it requested an examination under Rule 2004 of the
Federal 	Rules 	of 	Bankruptcy 	Procedure. 	It 	asserts 	that 	once 	it
received 	debtors’ 	tax 	returns 	for 	years 	2002, 	2003 	and 	2004, 	it
noticed 	that 	the 	tax 	returns 	reflected 	a 	substantially 	lower 	net
income 	compared 	to 	the 	net 	income 	in 	the 	financial 	statement
submitted 	to 	Cooperativa 	prior 	to 	the 	granting 	of 	the 	three
consumer loans. (Docket #21, Exhibits C and D). Cooperativa avers
that 	the 	tax 	returns 	it 	examined 	were 	filed 	by 	Delgado 	because
according to the tax returns, Medina, at all relevant times, had no
reportable 	income 	because 	he 	was 	undergoing 	treatment 	under 	the
Worker’s 	Compensation 	Fund 	of 	Puerto 	Rico. 	Cooperativa 	maintains
that 	Delgado’s 	tax 	return 	for 	year 	2002 	reported 	an 	income 	of
$8,009.00. 	Her 	tax 	return 	for 	year 	2003 	reported 	an 	income 	of
$7,657.00 	and 	finally, 	her 	tax 	return 	for 	year 	2004 	reported 	an
income 	of 	$8,026.00. 	Cooperativa 	also 	asserts 	that 	although 	the
debtors amended their statement of financial affairs for year 2004,
the 	amount 	is 	substantially 	lower 	than 	the 	income 	represented 	in
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the financial statement for the year ending on June 30, 2004, and
different from the income tax return for the same period.
Cooperativa 	asserts 	that 	it 	relied 	on 	the 	debtors’
representations and written statements about their income and did
not became aware of the debtors’ fraud until after the bankruptcy
petition was filed. Cooperativa maintains that the debts owed are
for 	money 	obtained 	by 	false 	pretenses 	or 	actual 	fraud, 	and 	that
materially false statements were made by the debtors with an intent
to 	deceive 	Cooperativa, 	which 	statements 	actually 	deceived 	and
harmed 	Cooperativa, 	thus 	rendering 	the 	debts 	non-dischargeable
under 	§ 	523(a)(2)(B) 	of 	the 	Bankruptcy 	Code. 	Cooperativa 	asserts
that it is entitled to summary judgment because no genuine issues
of material fact are in dispute regarding the non-dischargeability
of the debts pursuant to § 523(a)(2)(B).
On 	April 	11, 	2006, 	the 	debtors 	filed 	an 	opposition 	to
Cooperativa’s motion for summary judgment (Docket #18). The debtors
assert 	that 	the 	Court 	cannot 	perceive 	the 	debtors’ 	mental 	state
through Cooperativa’s summary judgment motion or its attachments,
and 	that 	the 	Court 	cannot 	determine 	whether 	Cooperativa
justifiably relied on the financial statements based on a written
motion or affidavit. They further assert that the affidavit is not
correctly translated and does not prove all the elements required
under § 523(a)(2)(B), particularly the elements of justifiable or
reasonable 	reliance 	on 	the 	statements 	in 	determining 	whether 	to
extend the credit. They assert that it is impossible with only one
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affidavit to cross-examine Cooperativa to know if there were other
factors considered in extending credit to the debtors, for example
the 	bond 	to 	secure 	payment 	that 	was 	suggested 	by 	Cooperativa 	and
for which payment was deducted from the loans or renovation loans,
or 	debtors’ 	credit 	worthiness 	with 	the 	institution. 	The 	debtors
further 	contend 	that 	it 	cannot 	be 	ascertained, 	nor 	can 	debtors
cross-examine 	Cooperativa 	to 	know 	what 	other 	due 	diligence 	was
exercised by Cooperativa to investigate other sources of financial
capacity 	by 	way 	of 	debtors’ 	credit 	report, 	their 	tax 	returns
contemporaneous to the loans and renovations to the loans, or other
means reasonably required by any creditor who extends credit.
The 	debtors 	further 	contend 	that 	the 	prematureness 	of 	the
motion 	for 	summary 	judgment 	has 	not 	allowed 	for 	discovery 	and
assert 	that 	the 	evidence 	will 	show 	at 	trial 	and 	after 	the
opportunity to initiate discovery, that there were “red flags” that
should have warned a sophisticated creditor, like Cooperativa, that
the debtors were overextended in their credit. The debtors assert
that such “red flags” were precisely what motivated Cooperativa to
suggest or require the debtors to secure payment in case of default
through 	a 	bond. 	The 	debtors 	allege 	that 	this 	bond 	was 	what
Cooperativa 	relied 	on 	to 	extend 	the 	credit 	to 	the 	debtors. 	They
further aver that the evidence will also show that the debtors did
not 	seek 	the 	most 	recent 	loan 	in 	the 	form 	of 	a 	renewal 	or
renovation 	of 	a 	prior 	loan, 	but 	rather 	it 	was 	Cooperativa 	that
called the debtors to renew the loan, when the prior loan had been
substantially 	reduced 	to 	approximately 	$11,000.00. 	Moreover,
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Cooperativa called the debtors to increase their line of credit on
the Master Card.
Finally, 	the 	debtors 	contend 	that 	the 	six 	elements 	for 	a
discharge 	under 	§ 	523(a)(2)(B) 	cannot 	be 	determined 	by 	the 	Court
through 	a 	summary 	judgment 	motion, 	nor 	through 	Cooperativa’s
uncontested 	facts, 	nor 	prior 	to 	the 	opportunity 	for 	discovery 	by
the debtors and not before a trial has been conducted. They contend
that 	their 	state 	of 	mind 	is 	material 	and 	that 	there 	are 	factual
questions and issues that are not susceptible to a summary judgment
decision 	and 	that 	as 	such, 	Cooperativa 	has 	not 	met 	the 	burden 	of
proof 	to 	warrant 	either 	summary 	judgment 	or 	a 	judgment 	of 	non-
dischargeability. Thus, the debtors maintain that the Court cannot
decide that there are no genuine issues as to whether the debtors
had 	the 	actual 	intent 	to 	cause 	injury 	to 	the 	creditor 	relying 	on
the 	summary 	judgment 	motion 	or 	without 	an 	evidentiary 	hearing 	on
the merits. In addition, the debtors deny the intent to deceive or
to cause injury. The debtors maintain that the factual disputes are
outcome 	determinative, 	in 	that 	intent 	and 	reliance 	are 	crucial
elements 	in 	a 	determination 	of 	non-dischargeability 	under 	§ 	523.
The 	debtors 	contend 	that 	Cooperativa 	has 	not 	met 	its 	burden
generally 	as 	to 	both 	debtors, 	and 	specifically 	as 	to 	debtor
Delgado, 	and 	that 	there 	is 	an 	absence 	of 	proof 	on 	each 	and 	every
element 	of 	its 	claim 	under 	§ 	523. 	The 	debtors 	request 	that 	the
Court deny Cooperativa’s motion for summary judgment.
On April 21, 2006, Cooperativa filed a sur-reply to debtors’
opposition (Docket #20). Cooperativa contends that when the debtors
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first applied for a loan in 2003, it asked the debtors about their
financial status so that Cooperativa would had a reliable factual
basis 	upon 	which 	to 	render 	a 	decision 	about 	lending 	the 	money.
Cooperativa asserts that for debtors to meet the requirements, they
had 	to 	submit 	either 	their 	tax 	returns 	or 	supply 	a 	financial
statement prepared by a qualified third party. It asserts that the
debtors chose to submit the financial statement prepared by Carlos
A. 	Velez 	de 	Jesus 	& 	Company, 	Accountants 	and 	Management
Consultants, rather than their income tax returns and that the net
incomes 	were 	reported 	as 	true 	and 	correct 	in 	the 	financial
statements.
Cooperativa 	contends 	that 	the 	debtors 	attempt 	to 	draw 	a
factual 	issue 	from 	a 	separate 	requirement 	under 	the 	loan
application, which required the applicants to seek a guaranty bond
for 	the 	loan. 	Cooperativa 	contends 	that 	in 	this 	case, 	both
Cooperativa and the debtors were informed and understood that the
actual approval of the bond by the company would not be determined
by 	the 	bonding 	company 	until 	after 	the 	debtors 	defaulted 	on 	the
loans. Cooperativa asserts that once the debtors defaulted on the
loans, the bonding company denied Cooperativa’s bond claim, leaving
the 	debtor 	without 	a 	guarantor 	and 	exposing 	themselves 	to
Cooperativa for total liability under the loans. Thus, Cooperativa
contends that the loans were not bonded. Furthermore, Cooperativa
asserts 	that 	it 	reasonably 	relied 	on 	the 	financial 	statements 	in
making the decision to enter into various loan agreements because
Cooperativa 	knew 	that 	the 	guaranty 	bond 	was 	conditional 	and 	that
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the bonding company could deny coverage upon default.
Cooperativa maintains that the debtors do not deny that they
defaulted 	on 	the 	loans, 	do 	not 	contest 	that 	they 	provided
Cooperativa with written financial statements prepared by Carlos A.
Velez 	de 	Jesus 	& 	Company, 	Accountants 	and 	Management 	Consultants
describing their financial condition, do not contest or provide any
rebuttal 	evidence 	by 	way 	of 	affidavit 	or 	otherwise, 	and 	do 	not
contest the fact that the financial statements contained materially
false 	information 	and 	were 	published 	with 	the 	intent 	to 	deceive.
Cooperativa asserts that it relied on the financial statements and
not on the bond because it was conditional. It further states that
it is uncontroverted that the financial statements were prepared by
a 	large 	and 	reputable 	firm 	of 	accountants 	and 	that 	it 	had 	an
ongoing 	relationship 	with 	the 	debtors 	between 	2003 	and 	2005.
Cooperativa 	maintains 	that 	it 	has 	met 	all 	six 	elements 	of 	§
523(a)(2)(B) and that although the debtors mentioned “red flags,”
they 	fail 	to 	provide 	evidence, 	because 	non 	existed. 	It 	contends
that 	the 	information 	provided 	by 	the 	debtors 	in 	the 	statements
assured Cooperativa that their condition was sound.
Finally, 	as 	to 	the 	prematureness 	of 	the 	motion 	for 	summary
judgment 	alleged 	by 	the 	debtors, 	Cooperativa 	contends 	that 	the
debtors have not engaged in any discovery, that they failed to file
an answer to the complaint within the time required and that when
they 	filed 	for 	an 	extension 	of 	time, 	it 	was 	well 	after 	the
deadline. Furthermore, Cooperativa asserts that the debtors do not
present 	in 	their 	opposition 	or 	in 	the 	affidavit 	submitted, 	how
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discovery will impact the outcome of the Court’s determination of
Cooperativa’s motion for summary judgment. It asserts, that parties
opposing 	summary 	judgment 	may 	not 	rest 	on 	vague 	assertions 	that
additional 	discovery 	will 	produce 	unspecified 	facts 	to 	defeat 	a
summary 	judgment, 	instead 	they 	are 	required 	to 	state 	with 	some
specificity that material is sought and how the material will help
in opposing summary judgment. Cooperativa asserts that the debtors
fail 	to 	present 	any 	procedural 	reasons 	for 	not 	granting
Cooperativa’s motion and thus, it requests that the Court grant the
summary 	judgment 	motion 	and 	enter 	a 	judgment 	of 	non-
dischargeability.
II. Discussion
A. Summary Judgment Standard
Under Federal Rule of Civil Procedure 56(c), made applicable
in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary
judgment 	is 	available 	"if 	the 	pleadings, 	depositions, 	answers 	to
interrogatories, 	and 	admissions 	on 	file, 	together 	with 	the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as
a 	matter 	of 	law." 	Fed. 	R. 	Civ. 	P. 	56(b); 	Celotex 	Corporation 	v.
Catrett, 	477 	U.S. 	317 	(1986) 	(citing 	Anderson 	v. 	Liberty 	Lobby,
Inc., 477 U.S. 242, 250 (1986)). 	As to issues on which the movant,
at trial, would be compelled to carry the burden of proof, it must
identify 	those 	portions 	of 	the 	pleadings 	which 	it 	believes
demonstrate that there is no genuine issue of material fact. 	In re
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Edgardo 	Ryan 	Rijos 	v. 	Banco 	Bilbao 	Vizcaya 	& 	Citibank 	(In 	re
Rijos), 263 B.R. 382, 388 (B.A.P. 1st Cir. 2001). 	Once the movant
makes 	a 	prima 	facie 	showing 	that 	there 	are 	no 	genuine 	issues 	of
material fact, the burden of proof shifts to the party opposing the
motion for summary judgment to establish that there are questions
of fact. 10 Collier on Bankruptcy, ¶ 7056.04, p. 7056-8 (15th ed.
2006). The Court must view the evidence in the light most favorable
to 	the 	nonmoving 	party. 	In 	re 	Rijos, 	263 	B.R. 	382, 	at 	388.
Therefore, 	summary 	judgment 	is 	"inappropriate 	if 	inferences 	are
necessary for the judgment and those inferences are not mandated by
the record." Id.
B. Exceptions to Discharge § 523(a)(2)(B)
In the case before us, Cooperativa seeks a determination that
the debts owed to it are non-dischargeable pursuant to 11 U.S.C. §
523(a)(2)(B). Section 523(a)(2)(B) provides that:
(a) 	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-
(B) use of a statement in writing-
(i) that is materially false;
(ii) respecting the debtor's or
an 	insider's 	financial
condition;
(iii) on which the creditor to
whom 	the 	debtor 	is 	liable 	for
such money, property, services,
or 	credit 	reasonably 	relied;
and
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(iv) that the debtor caused to
be 	made 	or 	published 	with
intent to deceive;
11 	U.S.C. 	§ 	523(a)(2)(B). 	Thus, 	pursuant 	to 	§ 	523(a)(2)(B), 	if 	a
debtor uses a written statement regarding his financial condition,
that 	is 	materially 	false 	and 	made 	or 	published 	with 	an 	intent 	to
deceive 	and 	the 	creditor 	reasonably 	relied 	upon 	the 	statement 	in
extending credit, the resulting debt is non-dischargeable. Another
requirement added by the Fist Circuit Court of Appeals is that the
financial 	institution 	or 	bank 	demonstrate 	that 	it 	was 	damaged 	by
the 	debtor’s 	submittal 	of 	the 	false 	financial 	statement. 	In 	re
Goodrich, 999 F.2d 22 (1st Cir. 1993). “At the trial on a complaint
objecting to discharge, the plaintiff has the burden of proving the
objection.” 	Fed. 	R. 	Bankr. 	P. 	4005. 	Each 	of 	the 	elements 	must 	be
proved by a preponderance of evidence. See Field v. Mans, 516 U.S.
59 (1995) and Grohan v. Garner, 498 U.S. 279 (1991).
1. Writing
The first element that Cooperativa has the burden of proving
is that it received a financial statement that is in “writing.” The
statement 	must 	have 	been 	written 	by 	the 	debtor, 	signed 	by 	the
debtor or written by someone, but adopted by the debtor. 4 Collier
on Bankruptcy, ¶ 523.08[2], p. 523-46 & 523-47 (15th ed. 2006). In
the 	present 	case, 	Cooperativa 	asserts 	that 	the 	debtors 	submitted
three financial statements prepared by Carlos A. Velez de Jesus &
Company, 	Accountants 	and 	Management 	Consultants. 	It 	asserts 	that
the 	debtors’ 	financial 	statements 	were 	received 	with 	their 	loan
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applications 	and 	were 	dated: 	September 	20, 	2001, 	regarding 	the
fiscal year that ended on June 30, 2001; August 17, 2002, regarding
the fiscal year that ended on June 30, 2002; and October 30, 2004,
regarding the fiscal year that ended on June 30, 2003. Cooperativa
offered into evidence the three financial statements together with
debtors’ loan applications. (Docket #21, Exhibits 1, 2, 3, 4, 5 and
6).
The debtors do not rebut any of the aforementioned and do not
present 	evidence 	that 	rebuts 	Cooperativa’s 	contentions 	that 	it
received 	three 	financial 	statements 	from 	the 	debtors 	with 	their
loan 	applications. 	After 	examining 	the 	statements, 	the 	Court
concludes 	that 	Cooperativa 	received 	three 	written 	statements
prepared 	by 	Carlos 	A. 	Velez 	de 	Jesus 	& 	Company, 	Accountants 	and
Management Consultants, signed by Medina and thus, adopted by him.
2. Materially False Information
The second requirement is that the financial statement has to
contain materially false information.
A statement is materially false if it paints a
substantially untruthful picture of financial
conditions 	by 	misrepresenting 	information 	of
the 	type 	that 	would 	normally 	affect 	the
decision to grant the credit.
4 Collier on Bankruptcy, ¶ 523.08[2][b], p. 523-47 (15th ed. 2006).
After an examination of the exhibits submitted by Cooperativa, this
Court 	concludes 	that 	the 	financial 	statements 	reflect 	vastly
different incomes than those stated in the debtors’ tax returns.
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a. Net Income for year 2001
Medina’s 	financial 	report, 	while 	doing 	business 	as 	Lucas’
Fashion, 	dated 	September 	20, 	2001, 	reflects 	a 	net 	income 	of
$81,938.00 	for 	year 	2001. 	(Docket 	#21, 	Exhibit 	1). 	Delgado’s 	W-2
Form reflects that she earned $8,009.83 in year 2001. (Docket #10,
Exhibit B page 3). The tax return for this year was not submitted
as 	evidence. 	Thus, 	this 	Court 	cannot 	conclude 	what 	the 	combined
income of the debtors was for year 2001.
b. Net Income for year 2002
Medina’s financial statement, dated August 17, 2002, reflects
a net income of $94,715.00 for year 2002. (Docket #21, Exhibit 2).
Delgado’s W-2 Form reflects that she earned $7,657.48 in year 2002.
(Docket #10, Exhibit C page 6). Medina’s tax return for year 2002
reflects 	that 	he 	was 	on 	leave 	with 	the 	State 	Insurance 	Fund 	and
that his income for that year was $7,657.00. (Docket #21, Exhibit
C). 	This 	amount 	reflects 	the 	same 	amount 	as 	that 	included 	in
Delgado’s 	W-2 	Form. 	Because 	both 	amounts 	are 	the 	same, 	the 	Court
concludes 	that 	Medina 	did 	not 	earn 	money 	in 	year 	2002. 	Thus, 	the
combined 	income 	for 	both 	debtors 	was 	$7,657.00 	compared 	to 	the
$94,715.00 reported in Medina’s financial statement.
c. Net Income for year 2003
Medina’s financial statement, dated October 30, 2004, reflects
a net income of $119,030.00 for year 2003. (Docket #21, Exhibit 3).
Delgado’s W-2 Form reflects that she earned $8,026.51 in year 2003.
(Docket #10, Exhibit D page 5). Medina’s tax return for this year
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reflected 	that 	he 	was 	on 	leave 	with 	the 	State 	Insurance 	Fund 	and
that his income for year 2003 was $8,026.00. (Docket #21, Exhibit
D). Again, this amount is the same amount as in Delgado’s W-2 Form
and the Court concludes that debtor Medina did not have income in
year 2003. Thus, the combined income for both debtors was $8,026.00
compared 	to 	the 	$119,030.00 	reported 	in 	Medina’s 	financial
statement.
The 	debtors 	do 	not 	rebut 	any 	of 	the 	evidence 	submitted 	by
Cooperativa. 	This 	Court 	concludes 	that 	in 	years 	2002 	and 	2003,
Medina 	submitted 	financial 	statements 	that 	did 	not 	represent 	an
accurate picture of debtors’ financial situation. It is materially
false 	information 	to 	represent 	that 	Medina 	was 	earning, 	in 	years
2002 and 2003, more than $90,000.00, compared to having no income.
3. Statement Regarding Debtor’s Financial Condition
The 	bankruptcy 	court 	in 	In 	re 	Flaherty, 	stated 	that 	§
523(a)(2)(B) refers to a special kind of financial statement “‘one
that specifically states a debtor’s or insider’s net worth.’” 335
B.R. 	481 	at 	490 	(Bankr. 	D.Mass. 	2005)(citing 	In 	re 	Seaborne, 	106
B.R. 711, 713 (Bankr. M.D.Fla. 1989)). Cooperativa asserts that the
three 	financial 	statements 	received 	were 	regarding 	debtor’s
financial condition. (Docket #21, Exhibits 1, 2 and 3). The debtors
do not rebut Cooperativa’s evidence and thus, there is no dispute.
After 	a 	simple 	examination 	of 	the 	exhibits, 	the 	Court 	concludes
that the three financial statements contain information regarding
Medina’s net income, his assets, his debts, capital and net worth,
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doing business as Lucas’ Fashion.
4. Cooperativa’s reasonable reliance
Cooperativa has to show that it reasonably relied on debtors’
financial statements to extend the credit. The bankruptcy court in
In re Flaherty, describes the factors to consider when making this
type of determination, the court should consider:
(1) whether the creditor had a close personal
relationship 	or 	friendship 	with 	the 	debtor;
(2) 	whether 	there 	had 	been 	previous 	business
dealings 	with 	the 	debtor 	that 	gave 	rise 	to 	a
relationship 	of 	trust; 	(3) 	whether 	the 	debt
was 	incurred 	for 	personal 	or 	commercial
reasons; 	(4) 	whether 	there 	were 	any 	"red
flags" 	that 	would 	have 	alerted 	an 	ordinarily
prudent 	lender 	to 	the 	possibility 	that 	the
representations relied upon were not accurate;
and 	(5) 	whether 	even 	minimal 	investigation
would 	have 	revealed 	the 	inaccuracy 	of 	the
debtor's representations.
335 B.R. 481 at 491 (Bankr. D.Mass. 2005)(citing In re Harloff, 272
B.R. 496, 500 (Bankr. M.D.Fla. 2001)).
Cooperativa 	asserts 	that 	it 	relied 	on 	the 	debtors’
representations 	and 	written 	statements 	about 	their 	income.
Cooperativa 	asserts 	that 	it 	had 	an 	ongoing 	relationship 	with 	the
debtors between 2003 and 2005. Cooperativa contends that when the
debtors first applied for a loan, it asked the debtors about their
financial status so that Cooperativa would have a reliable factual
basis 	upon 	which 	to 	render 	a 	decision 	about 	lending 	the 	money.
Cooperativa asserts that for debtors to meet the requirements, they
had 	to 	submit 	either 	their 	tax 	returns 	or 	a 	financial 	statement
prepared 	by 	a 	qualified 	third 	party. 	It 	asserts 	that 	the 	debtors
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chose to submit the financial statement prepared by Carlos A. Velez
de Jesus & Company, Accountants and Management Consultants, which
is a large and reputable firm, rather than their income tax returns
and that the net incomes were reported as true and correct in the
financial statements. It contends that the information provided by
the 	debtors 	in 	the 	statements 	assured 	Cooperativa 	that 	their
condition 	was 	sound 	and 	that 	although 	the 	debtors 	mentioned 	“red
flags,” non existed.
Cooperativa 	contends 	that 	the 	debtors 	attempt 	to 	create 	a
factual 	issue 	from 	a 	separate 	requirement 	under 	the 	loan
application, which required the applicants to seek a guaranty bond
for 	the 	loan. 	Cooperativa 	contends 	that 	in 	this 	case, 	both
Cooperativa and the debtors were informed and understood that the
actual approval of the bond by the company would not be determined
by 	the 	bonding 	company 	until 	after 	a 	default 	on 	the 	loans. 	Thus,
Cooperativa contends that the loans were not bonded. Furthermore,
Cooperativa 	asserts 	that 	it 	reasonably 	relied 	on 	the 	financial
statements 	in 	making 	the 	decision 	to 	enter 	into 	various 	loan
agreements 	because 	Cooperativa 	knew 	that 	the 	guaranty 	bond 	was
conditional and that the bonding company could deny coverage upon
default.
Debtors assert that Cooperativa has not proven that there was
justifiable 	or 	reasonable, 	or 	actual 	reliance 	on 	the 	financial
statement. They assert that it is impossible to know if there were
other considerations used by Cooperativa, for example the bond to
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secure 	payment 	that 	was 	suggested 	by 	Cooperativa 	and 	for 	which
payment was deducted from the loans or renovation loans, or debtors
credit worthiness with the institution. The debtors further contend
that 	it 	cannot 	be 	ascertained 	what 	other 	due 	diligence 	was
exercised by Cooperativa to investigate other sources of financial
capacity 	by 	way 	of 	debtors’ 	credit 	report, 	their 	tax 	returns,
contemporaneous to the loans and renovations to the loans, or other
means reasonably required by any creditor who extends credit. They
further 	assert 	that 	the 	evidence 	will 	show 	that 	there 	were 	“red
flags” 	that 	should 	have 	warned 	a 	sophisticated 	creditor, 	like
Cooperativa, that this debtor was overextended in his credit. The
debtors assert that such “red flags” were precisely what motivated
Cooperativa to suggest or require the debtors to secure payment in
case of default through a bond. The debtors allege that this bond
was what Cooperativa relied on to extend the credit to the debtors.
In 	the 	present 	case, 	the 	parties 	have 	not 	submitted 	enough
evidence 	to 	support 	a 	finding 	on 	Cooperativa’s 	reasonableness 	in
relying 	on 	debtors’ 	representations. 	The 	Court 	has 	no 	way 	of
determining Cooperativa’s procedure for extending credit compared
to 	other 	financial 	institutions; 	the 	type 	of 	relationship
Cooperativa had with the debtors; whether the relationship was one
of 	trust; 	how 	“red 	flags” 	are 	defined; 	nor 	how 	Cooperativa 	is
certain 	that 	there 	were 	no 	“red 	flags” 	in 	the 	applications 	or 	in
the 	financial 	statements 	that 	would 	alert 	Cooperativa 	that 	the
debtors were submitting materially false information.
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5. Debtor’s intent to deceive
Cooperativa has the burden of proving that the debtors’ false
statement “was either knowingly false or made so recklessly as to
warrant a finding that the debtor acted fraudulently.” 4 Collier on
Bankruptcy, 	¶ 	523.08[2][e], 	p. 	523-50 	(15th 	ed. 	2006). 	Summary
judgment 	motions 	on 	discharge 	are 	ordinarily 	not 	granted 	because
they usually involve questions of motive and intent. 10 Collier on
Bankruptcy, ¶ 7056.04, p. 7056-7 (15th ed. 2006). But, if evidence
of 	fraud 	is 	conclusive 	enough 	and 	the 	debtor’s 	action 	yields 	no
other plausible conclusion but that his intent was fraudulent, then
the evidence presented may be enough to grant a motion for summary
judgment. 	See 	In 	re 	Marrama, 	445 	F.3d 	518 	at 	522 	(1st 	Cir.
2006)(citing In re Varrasso, 37 F.3d at 764 (1st Cir. 1994)). In In
re Marrama, the First Circuit Court of Appeals explains that “[i]n
certain cases, circumstantial evidence may be sufficiently potent
to establish fraudulent intent beyond hope of contradiction.” Id.
As 	discussed 	above, 	Medina’s 	financial 	statement 	were
materially 	false 	and 	demonstrate 	an 	intent 	to 	deceive 	by
representing that he was earning in excess of $90,000.00 per year
compared 	to 	having 	no 	income. 	The 	financial 	statements 	were
submitted 	to 	Cooperativa 	to 	induce 	it 	to 	extend 	a 	loan. 	Medina
denies the allegation that he had an intent to defraud Cooperativa,
but offers no explanation for submitting financial statements that
were materially false. Although, the debtors assert that the Court
cannot 	perceive 	their 	mental 	state 	through 	Cooperativa’s 	summary
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judgment 	motion 	or 	the 	attachments, 	the 	Court 	concludes 	that 	the
only evidence adduced establishes fraudulent intent beyond hope of
contradiction. There is no other plausible rationalization.
C. Conclusion
Federal 	Rule 	of 	Bankruptcy 	Procedure 	7056(e), 	expressly
provides 	that 	“[w]hen 	a 	motion 	for 	summary 	judgment 	is 	made, 	an
adverse party may not rest upon the mere allegations or denials of
the adverse party’s pleading.” In the present case, the debtors did
not 	present 	rebuttal 	evidence 	that 	they 	did 	not 	default 	on 	the
loans, that they did not provide Cooperativa with written financial
statements 	prepared 	by 	Carlos 	A. 	Velez 	de 	Jesus 	& 	Company,
Accountants and Management Consultants describing their financial
condition, 	and 	that 	they 	contained 	materially 	false 	information.
Debtors only deny the allegations without submitting an explanation
or evidence.
Cooperativa 	avers 	that 	there 	are 	no 	issues 	of 	material 	fact
but, 	the 	Court 	can 	not 	determine 	wether 	Cooperativa 	reasonably
relied on Medina’s financial statements when it extended credit to
the debtors. Related to this, the Court does not have evidence as
to 	the 	procedure 	established 	by 	Cooperativa 	to 	ensure 	debtors’
credit 	worthiness. 	The 	Court 	is 	not 	in 	a 	position 	to 	grant
Cooperativa’s summary judgment motion because Cooperativa has not
met its burden of establishing all of the elements necessary for a
determination as to the dischargeability of its debts.
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ORDER
IT 	IS 	ORDERED 	that 	the 	Motion 	for 	Summary 	Judgment 	filed 	by
Cooperativa de Ahorro y Credito Aguas Buenas (Docket #7) is DENIED.
An evidentiary hearing is scheduled for August 1, 2007 at 9:00
a.m. 	in 	the 	United 	States 	Bankruptcy 	Court 	to 	consider 	wether
Cooperativa de Ahorro y Credito Aguas Buenas reasonably relied upon
Medina’s financial statements in extending credit to the debtors.
SO ORDERED.
San Juan, Puerto Rico, this 10th day of May 2007.
/s Gerardo A. Carlo-Altieri
_____________________________
GERARDO A. CARLO-ALTIERI
Chief, U.S. Bankruptcy Judge
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