## Facts

- The Hills purchased a home for about $220,000 and, as the home’s value increased, refinanced the original deed of trust and obtained a junior deed of trust that they refinanced multiple times.
- About one year before filing for Chapter 7 bankruptcy, the Hills contacted mortgage broker Ellerback to refinance the junior deed of trust into a new home-equity line of credit with National City Bank.
- The loan application for the new line of credit sought $200,000 and listed the Hills’ combined gross annual income as approximately $145,000.
- Roughly six months later, the Hills requested an increase in the line of credit directly from the bank to $250,000 and listed combined gross annual income as approximately $190,000 on the later application.
- To support the stated income, the Hills provided a letter on an accountant’s letterhead attesting to Mrs. Hill’s business and verifying her self-employed income.
- The income-verification letter was not actually signed by the named accountant; it was signed by another person.
- Other than the letter, the bank required no meaningful proof of income (such as tax returns) and did not verify the Hills’ claimed income.
- The bank did not question or investigate the large increase in claimed income between the two applications.
- The Hills’ combined gross annual income never actually exceeded approximately $65,000.
- The Hills later filed for Chapter 7 bankruptcy relief.
- National City Bank, as the holder of the junior deed of trust, was foreclosed out and asserted a claim of about $250,000.
- The bank filed an adversary proceeding seeking to except its claim from discharge under 11 U.S.C. § 523(a)(2)(B).

## Issues

1. Whether National City Bank proved that its debt was nondischargeable under 11 U.S.C. § 523(a)(2)(B) because the Hills obtained credit using materially false written statements respecting their financial condition, made with intent to deceive, on which the bank reasonably relied.
2. Whether the bank’s approval and increase of the credit line without verifying income, despite obvious warning signs (including the dramatic income jump and a questionable verification letter), satisfied the “reasonable reliance” requirement of § 523(a)(2)(B).

## Decision

- The court entered judgment for the Hills on the bank’s § 523(a)(2)(B) claim; the debt was not excepted from discharge.
- The court found the Hills’ written income statements were materially false and were made with intent to deceive.
- The court concluded the bank failed to prove it reasonably relied on the Hills’ written statements because it did not verify readily verifiable income information and did not follow up on clear warning signs in the loan file.

## Legal Principles

- A creditor seeking nondischargeability under 11 U.S.C. § 523(a)(2)(B) must prove by a preponderance of the evidence that the debtor obtained money, property, services, or credit by use of a statement in writing:  
  - that was materially false,  
  - respecting the debtor’s financial condition,  
  - that the creditor reasonably relied on, and  
  - that the debtor made or published with intent to deceive.
- “Reasonable reliance” is an objective inquiry based on the totality of the circumstances; it is not satisfied when a lender ignores clear warning signs and skips basic verification steps that are easy to perform.
- A creditor may not establish reasonable reliance merely by showing that the debtor lied; the creditor must also show that, in the lending decision at issue, it acted as a reasonable lender would in light of the information available.
- When a written financial statement contains inconsistencies or suspicious features (such as an abrupt, unexplained income increase or a questionable verification document), reasonable reliance generally requires additional investigation before extending or increasing credit.
- Discharge exceptions are construed narrowly; the creditor must satisfy each statutory element, including reliance, to remove a debt from the discharge.

## Conclusion

In *In re Hill*, the court held that although the Hills intentionally submitted materially false written income statements to obtain and increase a home-equity line of credit, National City Bank did not carry its burden under § 523(a)(2)(B) because it failed to show reasonable reliance in light of obvious warning signs and its lack of basic income verification; accordingly, the bank’s claim was dischargeable in the Hills’ Chapter 7 case.


In re Hill, 2008 WL 2227359 (2008)