#2537        signed 9-14-00

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

ORDER DENYING MOTION TO DISMISS

This proceeding is before the Court on the defendant-debtors' motion to dismiss. The debtors

appear by counsel William E. Metcalf. Plaintiff Southwestern Savings and Loan Association appears

by counsel John H. Stauffer, Jr., and Anne M. Kindling. The Court has reviewed the relevant pleadings

and is now ready to rule.

FACTS

The debtors filed for bankruptcy on November 24, 1995. In their schedules, they indicated

that they jointly owed a debt to Southwest Savings & Loan, 631 S. Main, Hugoton, Kansas, that was

secured by their home, and that Mr. Hittle alone owed the savings and loan another debt that was

secured by irrigation engines and government payments. The home mortgage debt does not appear to

be involved in this proceeding. Southwestern Savings and Loan Association (“Southwestern”) has

never filed a proof of claim in the debtors' bankruptcy case, but did file a complaint alleging that a

$47,987.29 debt to it was nondischargeable under 11 U.S.C.A. §523(a)(2)(A) and (B), and that the

debtors should be denied a discharge pursuant to §727(a)(5) for failing to explain a loss of or

deficiency in their assets. Attachments to the complaint indicate that Southwestern's address is 631

Main, Box B, Hugoton, Kansas. Despite the minor differences in the name and address, it seems clear

that the debts listed in the schedules were owed to Southwestern.

The debtors suggest in their motion to dismiss that Southwestern sold its note and that

Southwest National Bank is now the real party in interest in this action; however, they have not

presented or pointed to any evidence supporting this assertion. They also do not appear to seek any

relief based on this assertion, and Southwestern has not responded to it. The Court will not attempt to

resolve this matter in this order.

Southwestern attached to its complaint twelve documents that appear to include a promissory

note and a security agreement in each. Debtor Walter Hittle is identified as the borrower on and signed

these documents during 1993, 1994, and 1995. Debtor Cynthia Hittle's name appears as a borrower

on only one of the documents, and it does not appear that she signed it (an exhibit sticker partially

obscures the spot where she would have been expected to sign, so it is somewhat difficult to tell

whether she signed it). Her name does not appear at all on the other eleven documents and she did not

sign any of them. Nevertheless, the debtors admitted in their answer to Southwestern's complaint that

they were in the farming business and took out a series of loans for the purpose of operating their farm

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during the time between January 1, 1993, and December 31, 1995. Southwestern alleged that, to

secure these loans, the debtors assigned various feed grain and wheat deficiency payments and disaster

payments to it on ten occasions during 1993 through 1995. It attached to its complaint a list showing

the dates the assignments were signed, the amount of the payments assigned by each, and certain other

information, but did not include copies of the assignments themselves. It alleged the debtors

represented that the amounts being assigned were the amounts of the payments they were entitled to

receive. Southwestern also alleged, and the debtors admitted in their answer, that due to Mr. Hittle's

job, the debtors were well-versed in the workings and procedures of the government programs that

would be providing the payments to them. However, Southwestern continued, the amounts it actually

received through the assignments were substantially less than the amounts the debtors had assigned.

Based on these allegations and as Count I of its complaint, Southwestern alleged the debtors' debt to it

should be nondischargeable under 11 U.S.C.A. §523(a)(2)(A).

In Count II of its complaint, Southwestern alleged the debtors supplied it an agricultural

financial statement on April 29, 1994, a copy of which was attached. The financial statement lists Mr.

Hittle as the applicant and Mrs. Hittle as the co-applicant, but only Mr. Hittle signed it. The statement

allegedly substantially overstated the value of the debtors' assets and substantially understated their

liabilities, showing their net worth to be over $130,000 when in fact they had a negative net worth.

Southwestern alleged that Mr. Hittle caused this financial statement to be published with the intent to

deceive Southwestern, and that his debt to it should be nondischargeable under §523(a)(2)(B).

Southwestern again relied on the financial statement in Count III of its complaint, asserting that

the debtors had a net worth of $138,087 in April 1994, but showed a net worth of negative $387,889

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when they filed for bankruptcy on November 24, 1995. The debtors' tax returns allegedly show losses

of less than $150,000, and Southwestern asserts the debtors have failed satisfactorily to explain the

$525,976 loss in net worth over that time period. As a result, it asserts, the debtors should be denied a

discharge under §727(a)(5).

DISCUSSION AND CONCLUSIONS

The debtors first argue that, even taking all of Southwestern's allegations as true, the only claim

it has against them is one for fraud. This is clearly wrong. Southwestern alleges that the debtors were

in the farming business and obtained a series of loans from it to operate their farm. This much the

debtors even admitted in their answer to the complaint. Southwestern also alleges that the debtors have

not repaid those loans. These facts, if true, establish that the debtors still owe Southwestern on the

loans. The remaining question is whether the debtors' alleged fraud should make their loan obligations

nondischargeable. Except as to Mrs. Hittle alone, discussed below, the debtors do not question the

sufficiency of Southwestern's fraud allegations to support a conclusion that the obligations are

nondischargeable. The facts that Southwestern has not sued the debtors in state court for fraud, has

obtained no judgment against them, and has filed no proof of claim in their bankruptcy case do not

establish that Southwestern has no claim against the debtors. Southwestern's failure to file a proof of

claim merely means that it can receive no distribution from the debtors' bankruptcy estate.

The debtors next argue the Court has no jurisdiction of this adversary proceeding because

Southwestern did not file a proof of claim, so the Court does not have “related to” jurisdiction of this

proceeding because its resolution cannot conceivably have any effect on the bankruptcy estate. This

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argument relies in part on the previous assertion that Southwestern's only claim against the debtors is a

state law one for fraud. The debtors also suggest that Northern Pipeline Construction Co. v.

Marathon Pipe Line Co., 458 U.S. 50 (1982), means this Court has no jurisdiction to resolve

Southwestern's state law fraud claim. As indicated above, the assertion that Southwestern has only a

fraud claim against the debtors is incorrect. Northern Pipeline v. Marathon is not applicable here

because it involved a debtor's attempt to sue a non-debtor in bankruptcy court on a state law cause of

action when the non-debtor did not consent to the bankruptcy court's exercise of jurisdiction over the

suit. The plurality in Marathon distinguished the situation before it from one involving “the restructuring

of debtor-creditor relations, which is at the core of the federal bankruptcy power.” 458 U.S. at 71.

The case before this Court concerns the bankruptcy discharge, one of the most basic facets of “the

restructuring of debtor-creditor relations.” The two concurring justices in Marathon relied in part on

the fact the non-debtor party had not consented to the bankruptcy court's exercise of jurisdiction over

the suit. Id. at 91. By filing a voluntary bankruptcy petition, the debtors necessarily consented to this

Court's jurisdiction to adjudicate questions concerning their right to a discharge. The Court is

convinced this proceeding does not involve “related to” jurisdiction but instead this Court's original but

not exclusive jurisdiction “of all civil proceedings arising under title 11.” 28 U.S.C.A. §1334(b).

Southwestern contests here, under 11 U.S.C.A. §523(a)(2)(A) and (B), the debtors' right to discharge

their obligations to it and, under §727(a)(5), their right to discharge any of their debts. No matter what

court might ultimately decide them, such questions “arise under” title 11, so this Court has original

jurisdiction over them.

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Building on their first two arguments, the debtors contend Southwestern has no standing to

pursue this proceeding because it filed no proof of claim and this Court has no jurisdiction to determine

its state law fraud claim. Since the first two arguments failed, this one does, too.

The debtors final argument is that Southwestern cannot pursue its complaint against Mrs. Hittle

because nothing attached to the complaint shows that she signed a note, security agreement, or financial

statement. This argument also fails. First, the Court notes that Southwestern's cause of action based

on an alleged false financial statement covered by §523(a)(2)(B) is asserted against only Mr. Hittle,

whose signature does appear to be on the financial statement attached to the complaint. Second, for its

claim under §523(a)(2)(A), Southwestern alleges, and the debtors conceded in their answer, that both

debtors borrowed money from it. It further alleges that both debtors assigned various deficiency and

disaster payments to it to secure those loans, knowingly misrepresenting the anticipated size of the

payments. Thus, this claim does not depend on Mrs. Hittle having signed any document, but instead on

her having participated in making misrepresentations. Finally, for its claim under §727(a)(5),

Southwestern alleges that a financial statement it received showed the debtors had a net worth of

$138,087 in April of 1994, while their bankruptcy schedules showed they had a net worth of negative

$387,889 in November of 1995. Apparently anticipating a possible explanation for the reduced net

worth, Southwestern contends the debtors' tax returns (for one or more unspecified years) show they

suffered losses in their farming operation of less than $150,000. In effect, this claim is based on the

assumption that both the financial statement and the bankruptcy schedules correctly state the debtors'

net worth at the time the documents were executed. Southwestern contends the debtors have failed to

satisfactorily explain the loss of over $500,000 in net worth in the eighteen months between the

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execution of the two documents that left them unable to pay their debts. Like the claim under

§523(a)(2)(A), this claim does not depend on Mrs. Hittle having signed any document. In short, the

debtors' argument here could succeed only against a claim that Mrs. Hittle violated §523(a)(2)(B), a

claim that Southwestern has not made.

For these reasons, the debtors' motion to dismiss must be denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of September, 2000.

__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

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