Farm Credit Services of America, PCA v. Woodrum

SIGNED THIS: February 24, 2025

Mary P. Gorman

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

CENTRAL DISTRICT OF ILLINOIS

In Re )

) Case No. 23-70583

STEVEN ALLEN WOODRUM, )

) Chapter 7

Debtor. )

tl)

)

FARM CREDIT SERVICES OF )

AMERICA, PCA, )

)

Plaintiff, )

Vv. ) Adv. No. 23-07036

)

STEVEN ALLEN WOODRUM, )

)

Defendant. )

Before the Court after trial is an amended complaint to determine the

dischargeability of debts owed by the Debtor to Farm Credit Services of America,

-|-

PCA. For the reasons set forth herein, judgment will be entered in favor of Farm

Credit Services of America on a portion of its claims under one of its theories.

I. Factual and Procedural Background

Steven Allen Woodrum (“Debtor”), acting pro se, filed a voluntary Chapter

11 Subchapter V petition on July 20, 2023. On the petition, the Debtor reported

being engaged in business as a farmer under the name Flying S Farms. When

the Debtor failed to file various required documents, the United States Trustee

(“UST”) filed a motion to dismiss the case. The Debtor thereafter began filing the

required schedules and statements, and an attorney filed an application to be

employed as counsel for the Debtor. The application was conditioned on the

Court approving payment terms that included a $30,000 post-petition retainer.

Creditor Prairieland FS, Inc., (“Prairieland”) filed an objection to the application,

claiming to have a state court citation lien on the funds proposed to be used for

payment of the retainer. Proposed counsel countered that the citation had

expired under state law, thereby terminating Prairieland’s lien.

At a hearing on the motion to dismiss and employment application, the

Court noted that it did not have enough information to decide the issues and

gave the parties time to gather records from the state court proceedings. After

two continued hearing dates, the Court ultimately denied the application to

employ citing concerns about overruling a prior state court order. As the Court

saw it, an adversary proceeding and full evidentiary hearing would be required

to determine the status of Prairieland’s citation lien and case law was not

favorable to proposed counsel’s suggestion that this Court could reconsider and

reverse the order of the state court continuing the citation in full force and effect.

Proposed counsel then expressed doubt about seeking employment under

different terms and withdrew his appearance.

The UST’s motion to dismiss was continued several times while the Debtor

progressed with filing required documents before it was ultimately withdrawn.

Among the documents filed by the Debtor were schedules of secured and

unsecured creditors. Relevant here, the Debtor scheduled Farm Credit Services

as an unsecured creditor with a claim of nearly $600,000 that the Debtor marked

as contingent, unliquidated, and disputed. Prairieland, the only creditor

scheduled as secured, was listed as being owed a disputed $4.5 million partially

secured by real estate, farm equipment, and products. The Debtor also filed a

Chapter 11 plan of reorganization, which drew several objections. Confirmation

of that plan was denied, and the Debtor was given an opportunity to file a first

amended plan. Before an amended plan was filed, Prairieland sought and

obtained relief from the automatic stay as to the Debtor’s residence and his

interest in roughly 40 acres of farmland. The Debtor then filed a motion to

convert his case to Chapter 7, which was granted.

Prior to the case being converted, Farm Credit Services of America, PCA

(“Farm Credit”) timely filed a three-count complaint to determine dischargeability

of debt. At a pretrial status conference, the Court expressed concern about the

viability of one count brought under §523(a)(2)(A) to except from discharge debt

obtained by fraud in light of the Supreme Court’s decision in Lamar, Archer &

Cofrin, LLP v. Appling, 584 U.S. 709 (2018). Farm Credit thereafter was granted

leave to file an amended complaint to remove the §523(a)(2)(A) count and

generally tighten up the allegations of the remaining counts.

The Amended Complaint consisted of two counts. Count I sought a

determination that the debts owed to it be excepted from the Debtor’s discharge

under §523(a)(6) for willful and malicious injury by the Debtor. Count II sought

a determination that the debts be excepted from discharge under §523(a)(2)(B)

as obtained using false statements in writing respecting the Debtor’s financial

condition. Both counts were based on the same set of allegations involving two

loans made by Farm Credit to the Debtor pursuant to agreements dated January

11, 2018, and February 27, 2019. According to Farm Credit, the loans were

obtained using materially false written statements regarding the existence and

value of farm equipment that was to secure the debts. Farm Credit further

contended that, in creating and delivering the falsified documents upon which

Farm Credit relied in extending financing, the Debtor willfully and maliciously

injured Farm Credit and its property, namely the loaned funds.

After an unsuccessful motion to dismiss, the Debtor answered the

Amended Complaint. The Debtor admitted that he was indebted to Farm Credit

under the January 2018 and February 2019 loan agreements, but he disputed

the amount of the debts and denied responsibility for the information and

documents submitted to Farm Credit in connection with the loans. Instead, he

blamed the Prairieland employee that helped him apply for and obtain financing

through Farm Credit. The case was tried over two days.

Farm Credit called Michael Stroup as its first witness. Mr. Stroup

identified himself as a longtime finance manager with Prairieland at its

Jacksonville, Illinois, location. As finance manager he has served as a point of

contact with Prairieland’s customers, helping them apply for loans and collecting

on past due accounts. It was through his employment with Prairieland that Mr.

Stroup came to know the Debtor. Mr. Stroup said that the Debtor had been a

customer of Prairieland since around the time Mr. Stroup was promoted to

finance manager and assigned to the Morgan County territory more than 20

years prior. He described his relationship with the Debtor as friendly but said

that they were not close friends. Mr. Stroup testified that the Debtor was a

“sizeable” customer and opined that Prairieland had loaned the Debtor millions

over the years and helped him obtain financing from third-party lenders as well.

According to Mr. Stroup, by the end of 2017, the Debtor owed Prairieland

more than $3 million, and Prairieland was unwilling to extend further financing.

At the same time, the Debtor was in desperate need of money to pay cash rents

coming due in early 2018. Mr. Stroup explained that the Debtor did not own

most of the land he farmed but rather leased it from various landowners, and

his ability to pay cash rents was critical to his operation.

Mr. Stroup identified a selection of text messages sent between himself

and the Debtor in December 2017 and January 2018. He acknowledged sending

the Debtor a text message on December 13, 2017, expressing concern about

getting the Debtor’s 2016 debt obligations off Prairieland’s books. Although

additional financing was not available through Prairieland, Mr. Stroup worked

with the Debtor to find a solution. He acknowledged receiving a text message

from the Debtor on December 20, 2017, stating that he “may have a solution,”

to which Mr. Stroup responded, “Is it legal[?]” The next day, Mr. Stroup received

a message from the Debtor: “Knock knock”—a common practice by which the

Debtor and other established customers would announce their arrival and ask

to be let in through the locked backdoor of the Prairieland Jacksonville office.

Later that afternoon, the Debtor sent a text message stating, “Well I’ve stared

and punched the calculator all day and I’m stumped.” In response, Mr. Stroup

pondered whether the Debtor could “pick two pieces of equip to do AgDirect,” to

which the Debtor replied, “Doesn’t get me close enuff.” Mr. Stroup acknowledged

sending a text message to the Debtor the morning of December 22, 2017,

mentioning that he was submitting his first AgDirect loan application that day

and suggesting again that it might be a feasible option for the Debtor. The text

conversation from that day concluded with the Debtor telling Mr. Stroup he

would get together with him the following week to see if they “could make

something work.”

On January 4, 2018, Mr. Stroup sent the Debtor a text message asking,

“Do you have those papers for me[?]” When the Debtor answered affirmatively,

Mr. Stroup responded: “Great! I think we should submit the request.” Mr. Stroup

acknowledged meeting with the Debtor in his office the following day as indicated

by the Debtor texting “Knock knock” shortly after noon on January 5.

Mr. Stroup identified the loan application form he submitted to AgDirect—

an assumed name under which Farm Credit does business—on January 5,

2018, on behalf of the Debtor.1 Mr. Stroup acknowledged his own handwriting

on the document, explaining that he completed the form using information

provided by the Debtor. He also identified the Debtor’s signature on the form,

testifying that the Debtor signed the completed form in his presence at his office.

Mr. Stroup also said he provided the required applicant disclosure form attached

to the application.

The completed application identified four pieces of equipment: a 2018 CIH

2150 planter with serial number YHS074106 and listed value of $240,000, a

2016 CIH 370 Steiger tractor with serial number ZGF308065 and listed value of

$225,000, a 2018 CIH RB 565 baler with serial number YHN196682 and listed

value of $59,500, and a 2018 CIH DC 102 “disc bine” with serial number

YHN263879 and listed value of $39,500.2 Mr. Stroup acknowledged preparing

the loan application without copies of underlying purchase orders for the loan

equipment. He said that the Debtor brought in a slip of paper that listed the

equipment with serial numbers and other identifying information. He said he

copied the equipment information onto the application but did not keep or make

a copy of the slip of paper provided by the Debtor. Mr. Stroup testified that he

had no reason to believe the information provided was untrue when he prepared

the application.

1 Most of the testimony and documentary evidence presented at trial related specifically to AgDirect rather than Farm

Credit. For purposes of this Opinion, the two are treated as one and the same and reference to either should be

construed as a reference to the other.

2 This CIH DC 102 “disc bine” is shown as a DC 102 “disc mower” on the security agreement and some of the other

documents presented at trial. The discrepancy was never discussed at the trial and is not critical to the decision here;

whether described as a “disc bine” or “disc mower,” the equipment was listed with the same make, model, and serial

numbers. All the evidence supports a finding that the equipment pledged as collateral for the January 2018 loan did

not exist. The Debtor never suggested that the equipment existed but was just misdescribed.

Submitted with the loan application was a balance sheet for the Debtor

dated December 19, 2017. As with the loan application, Mr. Stroup testified that

he prepared the balance sheet using information provided to him by the Debtor.

He agreed that, among the equipment listed on the balance sheet as being “100%

owned” by the Debtor, was the same equipment—with matching serial numbers

and values—described in the loan application. He was not certain but believed

that the balance sheet was prepared specifically in support of the loan

application. He also could not say exactly when it was prepared but that it must

have been at the same time or after the Debtor provided the collateral information

for the loan application. Mr. Stroup acknowledged that the Debtor did not sign

the balance sheet.

Shortly after the January 5 meeting and submission of the loan

application, Mr. Stroup sent a text message to the Debtor: “They are working on

it. They requested the purchase orders.” Mr. Stroup explained that the message

was in reference to Farm Credit reviewing the Debtor’s AgDirect loan application

and wanting from the Debtor the purchase orders for the equipment listed in the

application documents. Mr. Stroup sent a follow up message to the Debtor on

the morning of January 8, 2018. He identified the text message which simply

stated, “Bill of sale,” referring to the request for purchase orders covering the

collateral listed on the loan application. He acknowledged that, in response, the

Debtor texted that he was going to the equipment dealership and that the dealer

“was very funny about it.” The Debtor also followed up asking if Mr. Stroup had

heard anything more on the loan application. Mr. Stroup texted the Debtor that

he had not heard back on the loan application and that nothing would happen

until the requested information was provided. Mr. Stroup agreed that he met

with the Debtor in his Prairieland office later that day as indicated by the familiar

“Knock knock” text message. Mr. Stroup believed that the Debtor gave him the

requested purchase order at that meeting.

Mr. Stroup identified an equipment purchase order from Beard Implement

Company dated December 7, 2017, as the one provided by the Debtor in support

of the loan application. He testified that he first saw the purchase order when

the Debtor provided it to him in his office after the loan application was

submitted. The purchase order listed the Debtor as the purchaser of four pieces

of equipment with serial numbers and prices matching the information set forth

on the loan application and balance sheet for a total cash price of $564,000 with

no amount due. Although he assumed the Debtor had given him the original

purchase order, he had doubts about the document’s authenticity after reviewing

it. Specifically, Mr. Stroup explained that the purchase order appeared to have

been altered to show a higher purchase price.

Late in the evening of January 8, 2018, Mr. Stroup texted the Debtor to

inform him that he had just received an email letting him know the Debtor’s

application was close to being approved but that the purchase order and proof

of payment were still needed. The Debtor responded: “The purchase order shows

paid.” Mr. Stroup sent a text message to the Debtor a few minutes later asking,

“So am I sending the cut and paste one and risking it[?]” The Debtor responded

that “[h]is reply was he gave me what I asked for.” Mr. Stroup inquired further:

“So there was no other original paperwork that wouldn’t be suspicious . . . We

don’t get a second chance.” The conversation ended with a text from the Debtor

stating that he would follow up in the morning with whom Mr. Stroup understood

to be Kyle Schumacher of Beard Implement, adding that “[Kyle] got kinda pissy

when I asked him about it this afternoon.”

The next morning, Mr. Stroup received a message from the Debtor stating,

“I guess try.” Mr. Stroup sought confirmation from the Debtor: “You sure? After

looking at it, I’d ask a lot more questions.” The Debtor responded: “I’ll call you in

a few.” Despite his concerns about authenticity, Mr. Stroup forwarded the

purchase order to Farm Credit on the Debtor’s behalf.

Mr. Stroup admitted that he never explicitly told representatives of

AgDirect or Farm Credit that he believed the purchase order to include

misrepresentations or be “doctored.” But he stated that he did raise the issue

generally and identified the email, dated January 10, 2018, by which he

forwarded the purchase order on the Debtor’s behalf to Carla Mickey, a

representative of AgDirect and Mr. Stroup’s point of contact on the loan

application. In that email, Mr. Stroup noted that the Debtor dropped the

attached document off, adding that it “[l]ooks to me like they combined or

corrected some information on it—not sure why.” The email encouraged AgDirect

to contact the Debtor directly if it had any questions about the document.

Mr. Stroup acknowledged texting the Debtor the following day—January

10, 2018—asking whether he had received any calls. When the Debtor texted

that he had not, Mr. Stroup explained: “Told them to call you if questions on the

doc. They are prob still scratching head.” Mr. Stroup testified that he was

referring to Farm Credit in his text message to the Debtor and that, at the time,

he thought the lender might question the purchase order because it appeared to

be cut and pasted or doctored in some way. He said as much in a text to the

Debtor at the time, to which the Debtor responded: “I really hope I’m not part of

beards cooking books.” Mr. Stroup then texted the Debtor that he “would be at

risk at this point.”

Mr. Stroup conceded that he could have refused to submit the purchase

order, adding that he would not have submitted it had he known that the

information on it was false. He also acknowledged that he neither reached out to

nor spoke with anyone at Beard Implement about the authenticity of the

document but said that was not typically a practice that he would follow. He

testified that he did not willingly or knowingly participate in whatever was

happening with the production of the purchase order and merely submitted what

he was given on the Debtor’s behalf.

With the purchase order having been provided, the Debtor’s loan

application was approved. At the time, however, Prairieland held a blanket lien

on all the Debtor’s property and Farm Credit wanted assurances of its status as

priority lienholder. Mr. Stroup identified an AgDirect Chattel Subordination

Agreement dated January 10, 2018, and signed by him on behalf of Prairieland.

By its terms, Prairieland agreed to subordinate to Farm Credit its security

interest in the four pieces of equipment that were to serve as collateral for the

January 2018 loan. He agreed that the Debtor would not have been involved or

have even known about the subordination transaction.

Mr. Stroup identified the AgDirect Promissory Note and Loan Agreement

between Farm Credit and the Debtor dated January 11, 2018 (“January 2018

loan”). He identified the Debtor’s signature on the agreement, explaining that he

witnessed the Debtor sign the document in the Prairieland office in Jacksonville

on January 11, 2018. Mr. Stroup also identified the corresponding security

agreement dated January 11, 2018, as well as the Debtor’s signature that he

said the Debtor affixed to the document in his presence on that same date. Mr.

Stroup agreed that the security agreement identified as collateral for the January

2018 loan four pieces of equipment described by make, model, and serial

number, all of which matched the descriptions of the equipment listed on the

loan application, purchase order, and balance sheet. He agreed that, despite

requesting only $500,000 on the application, Farm Credit ultimately extended

$564,000 on the January 2018 loan, an amount equal to the value of the

collateral as listed on the application. Mr. Stroup identified the check from

AgDirect, dated January 11, 2018, and made payable to the Debtor in the

amount of $564,000. He understood the check to be the loan proceeds for the

January 2018 loan and surmised that the funds were deposited into the Debtor’s

bank account and spent on his farming operations.

Mr. Stroup acknowledged seeing a decline in the Debtor’s health in early

2019 and reaching out to the Debtor’s family out of concerns about who was

running his farming operations because rents and bills were coming due and

tasks needed to be done. Mr. Stroup sought another loan through AgDirect on

the Debtor’s behalf around that time. He said the process for obtaining the

second loan was a bit different because the Debtor and Prairieland then had an

existing relationship with AgDirect and could apply for loans through a

streamlined online portal. Mr. Stroup identified the AgDirect Promissory Note

and Loan Agreement between Farm Credit and the Debtor dated February 27,

2019 (“February 2019 loan”). He identified the Debtor’s signature on the

agreement, explaining that he witnessed the Debtor sign the document in the

Prairieland office in Jacksonville. Despite the Debtor’s health issues, Mr. Stroup

said he had no reason to believe that the Debtor was impaired when he signed

the loan documents.

Mr. Stroup said that the purpose of the second loan was to refinance some

equipment unrelated to the first loan, namely two shredders, three tractors, and

a fuel trailer. More specifically, the loan was what he described as a “cash out

refi”—meaning the loan proceeds were used to pay off an existing debt secured

by the property with the surplus going to the Debtor. He identified a chain of

emails between himself and Joni Stewart, an AgDirect representative, that

included a payoff letter from Mr. Stroup for a debt on Prairieland’s books owed

by the Debtor. According to Mr. Stroup, the February 2019 loan was used to pay

off some of the Debtor’s debts to Prairieland. He said Prairieland carved out a

portion of the Debtor’s existing operating loans to be paid off with a new AgDirect

loan in exchange for subordination of Prairieland’s security interest in several

pieces of equipment over which Farm Credit was to receive a first priority lien.

The email exchange with Ms. Stewart referenced amounts paid or payable

to complete the loan transaction. Mr. Stroup explained that the downpayment

for the February 2019 loan was made in the form of the Debtor’s equity in a

trailer valued at $22,225. Even with the equity downpayment, the value of the

collateral given for the second loan fell short of the required loan-to-value ratio,

and a payment of $2838 from the Debtor to AgDirect was needed to complete the

loan transaction and clear the debt from Prairieland’s books. Asked whether the

Debtor signed a loan agreement for the Prairieland debt that was paid off by the

February 2019 loan, Mr. Stroup said the debt would have fallen under the future

advance clause of the master agreement signed by the Debtor years prior.

Mr. Stroup also identified the corresponding security agreement dated

February 27, 2019, as well as the Debtor’s signature that he said the Debtor

affixed to the document in his presence at the Prairieland office on that date. Mr.

Stroup agreed that, unlike the January 2018 loan, the collateral for the February

2019 loan did exist, and he said that all but one piece of collateral had been

repossessed by Prairieland and was eventually recovered by Farm Credit. He also

acknowledged that the security agreement contained a cross-collateralization

clause and had no reason to doubt that Farm Credit would not have entered into

the second loan agreement had it known that the collateral for the first loan did

not exist.

Mr. Stroup described the process he would generally follow when having a

customer review and sign documents, which admittedly varied with the

circumstances. When third-party lenders like AgDirect were involved, the

process would typically be more involved than for in-house loans because those

third-party lenders would have their own review process that Mr. Stroup would

have to follow. He said he had a specific recollection of reviewing the documents

for the January 2018 loan with the Debtor because it was only the second loan

that Prairieland had done through AgDirect and he was careful to follow the

review checklist exactly as written. While he admittedly did not remember every

occasion that the Debtor signed a document in his presence over the years, he

said they all would have been signed in his presence or in the presence of a

notary. He also said that, although the Debtor did not sign or initial every page

of the loan and security agreements with Farm Credit—and particularly the

pages listing the collateral—he would not have collected the Debtor’s signature

on the final pages of the documents without providing all other pages. He denied

ever providing the Debtor with blank loan documents to sign.

On cross examination, Mr. Stroup was asked about Prairieland’s

relationship with Farm Credit. To the best of his knowledge, Farm Credit

typically provided purchase money financing through equipment dealerships. He

said that he reached out several times trying to establish a relationship with

Farm Credit via AgDirect and that the January 2018 loan was part of a trial run

in furtherance of the goal of becoming an authorized merchant or dealer able to

issue loans directly through AgDirect. Mr. Stroup said he did not receive

compensation for the January 2018 loan, but he acknowledged being

compensated for the February 2019 loan. He said that Prairieland worked with

Farm Credit on several more loans through AgDirect but that the relationship

had paused pending the litigation stemming from the loans issued to the Debtor.

The next witness called by Farm Credit was Kyle Schumacher. Mr.

Schumacher testified that he is part owner and president of Beard Implement

Company. He explained that he oversees operations of the business, which sells

farm machinery, and sometimes personally makes sales for the company. He

said the company operates out of multiple dealership locations and carries

various brands of equipment, including Case IH. The company offers financing

on the equipment it sells, through either the manufacturer or purchase money

lenders. Mr. Schumacher said that he had known the Debtor for several years

dating back to the time he began working at Beard Implement.

Mr. Schumacher identified a collection of documents that Beard

Implement produced in response to a subpoena relating to the company’s

dealings with the Debtor. Among them, was a purchase order dated September

14, 2017, for certain equipment sold to the Debtor, including a 2015 CIH 370

Steiger. He confirmed that Beard sold the listed equipment to the Debtor as

reflected on the purchase order. He also identified several lease agreements

entered into with the Debtor in December 2017 covering a CIH RB 565, a CIH

DC 102, a CIH 2150, and another CIH 370 Steiger. He confirmed that each item

listed in the agreements was in fact leased to the Debtor.

Next, Mr. Schumacher identified the December 7, 2017, purchase order

that was provided to Farm Credit in connection with the Debtor’s AgDirect loan

application. He recognized it as a Beard Implement form and acknowledged that

it appeared to bear his signature. But he denied signing a purchase order with

the information shown and said that Beard did not sell the equipment listed to

the Debtor. Mr. Schumacher said that he personally searched for the equipment

by serial number in Beard’s system and found that no equipment with those

serial numbers existed. He agreed that the Debtor had, at different times, leased

or purchased from Beard equipment of the same make and models as those listed

on the purchase order albeit with different serial numbers. Mr. Schumacher

further explained that he did not know where the December 2017 purchase order

had come from, only that it was not one prepared by him or his company.

Mr. Schumacher said that he understood the Debtor to have a copy of a

blank Beard purchase order form and identified a group of text messages

between himself and the Debtor showing that he sent a blank form to the Debtor

on September 14, 2017. Included in the text messages was an image of a blank

form sent by the Debtor with a message stating that “[i]t was blank” in response

to a message from Mr. Schumacher telling the Debtor to check his email. Mr.

Schumacher also said that the Debtor would have had copies of actual purchase

orders and agreements for equipment he previously purchased or leased from

Beard.

On cross examination, Mr. Schumacher agreed that he had a good working

relationship with the Debtor as one of Beard’s larger customers over many years.

As with many of Beard’s larger customers, Mr. Schumacher said that he

frequently personally dealt with the Debtor. Prior to the Debtor’s financial and

legal troubles, Mr. Schumacher said he never had any issues with the Debtor.

Mr. Schumacher agreed that the signature on the December 2017 purchase

order looked like his but also said that he often used his typed name or initials

in place of a physical signature on purchase orders. As to whether the blank

purchase order sent to the Debtor included his signature, Mr. Schumacher could

not say because the bottom of the document was cut off in the text image.

Asked whether he had ever met with Prairieland representatives regarding

the September 14, 2017, purchase order, Mr. Schumacher could not recall. He

said that he did meet with Michael Stroup at Prairieland’s Jacksonville office one

time but could not recall the specifics of that meeting or what other

communication he might have had with Mr. Stroup via text message. He

acknowledged ultimately recovering equipment leased to the Debtor and

repossessed by Prairieland but emphasized that those pieces of equipment had

serial numbers different from the nonexistent equipment.

Tracie Archer was also called as a witness in Farm Credit’s case in chief.

She testified that she is a corporate representative of Farm Credit, which does

business as AgDirect. Ms. Archer began her career with Farm Credit as a

resolution officer, acting as the initial contact with customers when accounts

became past due. After one year she was promoted to her current position of

litigation officer, which she has held for the last 13 years. As a litigation officer,

Ms. Archer manages past due accounts that the resolution officers are unable to

resolve and monitors accounts that have reached the litigation stage, including

bankruptcy and foreclosure proceedings.

Ms. Archer said she was familiar with the Debtor’s file, which came to her

after the default could not be resolved and it became necessary to retain counsel

to pursue the collateral and to represent Farm Credit in the Debtor’s bankruptcy.

Through her employment and in preparation as a witness in this proceeding, Ms.

Archer said she had reviewed the entire file and could testify to the account

history and the actions taken by Farm Credit with respect to the Debtor. To that

end, Ms. Archer said she was familiar with the Amended Complaint, which she

reviewed prior to filing, and testified that the allegations therein were true and

accurate to the best of her knowledge. She also identified a state court complaint

filed against the Debtor that included her signed verification as to the truth and

accuracy of the allegations made therein. Ms. Archer also reviewed and verified

the accuracy of Farm Credit’s proof of claim filed in the Debtor’s bankruptcy.

She acknowledged that the total claim amount as of the date of the Debtor’s

bankruptcy was $778,396.34, of which $674,155.70 was attributed to unpaid

principal, interest, late fees, and attorneys’ fees on the January 2018 loan, and

$104,240.64 was attributed to unpaid principal, interest, late fees, and

attorneys’ fees on the February 2019 loan.

Ms. Archer identified the loan application submitted on the Debtor’s behalf

for the January 2018 loan and testified that Farm Credit relied on the

truthfulness of the information therein when it approved the Debtor for a loan

and extended financing through AgDirect. Ms. Archer also identified the Beard

purchase order dated December 7, 2017, that was submitted to Farm Credit in

response to its request for purchase orders in support of the loan application.

She said that Farm Credit relied on the truthfulness of the information in the

purchase order in determining whether to approve and make the loan to the

Debtor. Likewise, Ms. Archer identified the balance sheet submitted in

connection with the Debtor’s loan application and said that Farm Credit relied

on the truthfulness of its contents in approving the Debtor for financing. Next,

Ms. Archer identified the January 2018 loan and security agreements under

which Farm Credit through AgDirect loaned the Debtor $564,000 in exchange

for his promise to repay and a security interest in four pieces of equipment

described in the security agreement with serial numbers matching those listed

on the loan application, balance sheet, and purchase order. She said that Farm

Credit relied on the existence of the collateral in entering into the January 2018

loan agreement.

Ms. Archer next identified the subordination agreement with Prairieland

dated January 10, 2018. She explained that the purpose of the agreement was

to ensure that Farm Credit held a first priority security interest in the four pieces

of collateral pledged for the January 2018 loan. She confirmed that the

equipment listed in the subordination agreement matched that listed in the

security agreement. Ms. Archer also identified a UCC financing statement

regarding the collateral pledged for the January 2018 loan. She confirmed that

the financing statement, which was marked as having been received by the

Illinois Secretary of State on January 11, 2018, listed four pieces of equipment

with serial numbers matching those listed on the Debtor’s loan application and

the January 2018 security agreement. Ms. Archer testified that Farm Credit

believed it had a perfected security interest in the collateral described when it

caused AgDirect to issue a check on January 11, 2018, made payable to the

Debtor in the amount of $564,000.

Ms. Archer said that the Debtor made only one payment under the

January 2018 loan agreement before defaulting on a second loan. She identified

that second loan as the February 2019 loan under which an additional $184,662

was extended. Ms. Arched testified that, for the February 2019 loan, the Debtor

pledged six additional pieces of equipment under a contemporaneously executed

security agreement. She said the Debtor failed to make any payments on the

February 2019 loan, triggering a default on that loan as well as the cross-

collateralized January 2018 loan. She said Farm Credit never would have made

the February 2019 loan had it known that the collateral pledged for the January

2018 loan did not exist.

After the notice of default was issued, Farm Credit began the process to

recover its collateral. Ms. Archer said that a recovery team for Farm Credit

reached out to Beard Implement for information it might have as the original

dealer. She said that Farm Credit was unable to locate the collateral for the

January 2018 loan; Beard Implement never sold the equipment to the Debtor.

On cross-examination, Ms. Archer agreed that Farm Credit typically does

not lend directly to consumers but goes through vendors who work with

borrowers. She explained that Farm Credit would generally build relationships

with vendors and enter into “merchant agreements” that would outline Farm

Credit’s requirements and expectations for the loan application process. She said

that vendors are often dealers of goods or equipment but that other lenders or

financial institutions are also among Farm Credit’s vendors. She acknowledged

that Prairieland’s status as a vendor had been suspended due to the litigation

surrounding the Debtor’s loan transactions.

Ms. Archer did not dispute that everything submitted on the Debtor’s

behalf came through Michael Stroup. She identified emails sent between Mr.

Stroup and AgDirect representative Joni Stewart regarding the February 2019

loan. She agreed that those emails called for the Debtor to pay $2838 to close on

the agreement, the purpose of which she believed was to make up a shortage

between the amount Farm Credit was willing to loan and the amount of

Prairieland debt that was to be paid off and replaced by the February 2019 loan.

She did not dispute that the Debtor had no apparent involvement in the email

discussion or that all proceeds for the February 2019 loan went to Prairieland.

Finally, after testifying as an adverse witness in Farm Credit’s case in chief,

the Debtor testified in his own defense.3 He said that he had farmed all his life

but began farming in earnest with his grandfather in 1999. Operating as a sole

proprietor under the name Flying S Farms, the Debtor testified that he farmed

approximately 6500 acres at the peak of his operation. He farmed everything

from cattle to hay but said that he focused mostly on soybeans and corn. The

Debtor acknowledged that less than 40 acres of the land he farmed was his own

and that the vast majority was farmed on a cash rent basis. He said that the

3 For clarity and organizational purposes, his testimony as an adverse witness is discussed with his defense

testimony here.

terms and payment schedules of the leases varied among as many as 30

landlords. To meet the obligations of operating at the scale he was, the Debtor

relied on the availability of credit. He said that, over the years, he worked almost

exclusively with Prairieland and Mr. Stroup for his borrowing needs and put a

great deal of trust in them.

By the end of 2017, pressure was mounting over repayment of outstanding

debts to Prairieland, and some of his cash rents were coming due in early 2018.

The Debtor acknowledged not having liquid funds at the time to satisfy those

obligations. He identified the selection of text messages between himself and Mr.

Stroup in December 2017 and January 2018 and said he was familiar with them.

The Debtor acknowledged his participation in the text conversations trying to

find a solution to his financing needs. The Debtor agreed that he and Mr. Stroup

eventually decided to apply for a loan through AgDirect after Mr. Stroup

successfully completed the process for the first time on behalf of another

customer. The Debtor did not dispute that he then met with Mr. Stroup in his

office on January 5, 2018, and said he understood that Mr. Stroup would be

submitting an AgDirect loan application on his behalf.

When presented with the completed loan application form that was

submitted to Farm Credit, however, the Debtor disclaimed any participation,

knowledge, or responsibility for the document. Noting that the loan application

was completed by Mr. Stroup, the Debtor claimed not to have supplied the

information included on the form; he surmised it was information Mr. Stroup

already had from the Debtor’s prior dealings with Prairieland. As to the four

pieces of equipment listed, the Debtor agreed that he never owned or leased any

of the items. And although he admitted he signed a loan application form, he

refused to admit that the signature on the completed form was his. He believed

the document he signed was blank, asserting that to be common practice for him

in his dealings with Mr. Stroup and Prairieland and adding that he was always

running late and was a bit scatter-brained.

The Debtor identified the December 2017 balance sheet that Mr. Stroup

testified to preparing on his behalf. The Debtor did not dispute that Mr. Stroup

prepared the document or that the collateral the Debtor testified he never owned

was listed on the balance sheet as equipment owned by him. He agreed that the

model numbers, serial numbers, and values of those four pieces of equipment

all matched the information on the loan application and that the information on

the balance sheet was likewise false. Still, the Debtor denied any knowledge that

this false information was being supplied to AgDirect or Farm Credit.

The Debtor was also questioned about the Beard Implement purchase

order dated December 7, 2017. Asked whether he signed the document, the

Debtor said he did not believe he signed a “fake purchase order.” Pressed further

on the document’s authenticity, the Debtor said he never disputed the document

was illegitimate and again conceded that he had not purchased the four pieces

of equipment with the serial numbers listed and therefore also did not pay Beard

Implement $564,000 in cash for such equipment on December 7, 2017, or any

other date. The Debtor denied having any knowledge of where the document had

come from other than that he did not prepare it and did not provide it to Mr.

Stroup or Farm Credit. He speculated that someone at Prairieland took his

signature from another document and affixed it to the fake purchase order.

Despite his claims of ignorance, the Debtor acknowledged participating in

the text exchange with Mr. Stroup about the status of the AgDirect loan

application in the days following their January 5 meeting in the Prairieland office.

He agreed that Mr. Stroup informed him that the lender was “working on it” and

had “requested the purchase orders.” The Debtor said he understood the

message to mean Farm Credit had reviewed his loan application and wanted

supporting purchase orders from Beard Implement. In response to Mr. Stroup’s

message, the Debtor texted, “Ok I’ll grab them.” When asked what purchase

orders he was going to get from Beard, however, the Debtor said he did not

entirely understand but thought he needed purchase orders showing equipment

trade-ins and lease buyouts that created surplus equity to borrow against.

The Debtor identified and acknowledged text messages exchanged with Mr.

Stroup over the next several days. He admitted that the focus of those

conversations was the requested purchase order, and that the messages

suggested that he would and did obtain a purchase order from Beard Implement

and deliver it to Mr. Stroup on or about January 8, 2018. He also admitted that

Mr. Stroup had raised concerns about the provided purchase order being “cut

and paste” or “doctored” and questioned whether it should be submitted to Farm

Credit. The Debtor acknowledged his text in response to Mr. Stroup’s inquiring

stating, “I guess try.” At first, the Debtor testified that he was telling Mr. Stroup

to send certain unidentified purchase orders other than the December 2017

purchase order for nonexistent equipment. When pressed about his message in

the context of the text exchange leading up to it, the Debtor admitted that he

was telling Mr. Stroup to send the purchase order that looked “cut and paste”

but continued to disclaim any understanding of what was happening. He

acknowledged sending a message later regarding to the “doctored” purchase

order that said, “I really hope I’m not part of beards cooking books.”

The Debtor admitted that he had a blank, unsigned purchase order for

Beard Implement in his possession. He also had copies of executed purchase

orders and lease agreements for equipment he had previously bought or leased

from Beard. He acknowledged having previously bought a CIH STG 370 with

serial number ZFF304814 for $207,000 from Beard, evidenced by the purchase

order dated September 14, 2017. He also acknowledged leasing two other CIH

STG 370 models from Beard, one with serial number ZEF301585 and evidenced

by a lease agreement dated March 13, 2017, and another with serial number

ZGF309075 and evidenced by a lease agreement dated December 16, 2017. The

Debtor agreed that none of the serial numbers matched those listed for the CIH

Steiger 370 on the fake December 2017 purchase order. The Debtor likewise

acknowledged having leased a CIH RB 565 with serial number YHN195682 and

a CIH DC 102 with serial number YHN263279 from Beard, as evidenced by the

lease agreement dated December 28, 2017. The Debtor also agreed that neither

of the serial numbers matched those listed for the same models on the fake

purchase order and did not dispute that the serial numbers for the DC 102

differed only by one digit. Finally, the Debtor acknowledged entering into a lease

agreement with Beard dated December 16, 2017, for a CIH 2150 with serial

number YHS073116, which differed from the serial number listed for the same

model on the fake purchase order. He denied changing the serial numbers for

the leased equipment to create the fake purchase order given to Farm Credit.

Presented with the January 2018 loan agreement bearing his purported

signature, the Debtor said he did not know whether he signed it but agreed that

he knew he had a loan and made the first installment payment called for in the

agreement. He acknowledged that the loan agreement also contained a cross-

collateralization clause and provided for payment of legal fees. He also

acknowledged the bolded provision above the signature line telling the endorser

to read the agreement carefully before signing. But when asked whether the

signature following the bolded provision looked like his, the Debtor said that a

letter from his middle name appeared to be missing and that he had reason to

believe his signature was forged by someone at Prairieland.

Turning to the security agreement for the January 2018 loan, the Debtor

said it was hard to say whether he signed the document. He said he could have

signed some piece of paper but did not recall signing a document in the form

shown to him at trial. The Debtor did agree that the equipment listed as collateral

in the security agreement did not exist and that he never purchased those items.

He acknowledged provisions within the security agreement regarding the

possession and condition of the collateral, as well as one in all capital letters

directly above the signature line stating that the endorser had read and received

a copy of the agreement before signing. He agreed that his name was correctly

spelled and that the signature appeared to be genuine; he ultimately conceded

that it was more likely than not his signature.

As to what the Debtor thought he was pledging as collateral for the

January 2018 loan of $564,000, the Debtor’s testimony was unclear. He

mentioned discussions of stripping equity out of existing equipment he had

pledged as collateral for other loans but did not give specifics. When pressed for

details, the Debtor first said he was never sure what was happening but then

said he thought that he was pledging a large combine as collateral. He claimed

he was ignorant of financial matters and relied on Mr. Stroup to handle his

finances and figure everything out for him.

The Debtor identified the AgDirect check dated January 11, 2018, and

made payable to him in the amount of $564,000. He acknowledged signing the

check, depositing the funds into his account with Farmers State Bank and Trust,

and ultimately spending the funds on cash rents and other expenditures related

to his farming operation. He agreed that, without the funds from Farm Credit,

he would not have been able to make his January 2018 cash rent payments.

The Debtor identified the February 2019 loan agreement he entered into

with Farm Credit. He did not dispute that the signature on the last page of the

agreement was his, but he denied that the complete agreement was presented to

him at the time he executed the signature page. Asked why he would sign a paper

that said it was “Page 5 of 5” without the first four pages, the Debtor said that

was his standard practice with Mr. Stroup and Prairieland and that he did not

generally read what he was signing. The Debtor also identified the corresponding

security agreement dated February 27, 2019. He testified that he could not be

certain that the signature on the last page of the document was his but that he

assumed he signed it. Again, he claimed that Mr. Stroup presented the signature

page to him for execution without the preceding pages. The Debtor agreed that,

unlike the security agreement for the January 2018 loan, the February 2019

security agreement listed collateral that in fact existed and was ultimately

recovered by lienholders. He also acknowledged receiving $187,500 from

Prairieland on March 4, 2019.

Under questioning from Farm Credit’s attorney, the Debtor agreed that

false statements were made in obtaining the January 2018 loan. But he

continued to disclaim any knowledge of the representations made on his behalf

in connection with either loan. He denied reading or even receiving complete

copies of documents that he signed and disclaimed any personal responsibility

for the representations made therein. The Debtor testified that he was always

busy, disorganized, and probably stretched too thin, and that he was distracted

by several health and medical issues that often left him in a state of confusion.

His attempt to offer previously undisclosed medical records as evidence was

denied by the Court.4

As to who was responsible for the false statements made on his behalf, the

Debtor pointed to Mr. Stroup and Prairieland, accusing them of engaging in

4 The Court’s standard trial order, which was entered in this case, plainly requires parties to identify and docket all

exhibits in advance of trial. The requirements of the trial order are strictly enforced. The Debtor failed to include the

medical evidence among the exhibits he identified and docketed as required by the Trial Order, and he was therefore

barred from offering the new evidence at trial. The Court also noted that evidence of the Debtor’s medical problems

or health history would generally require an expert witness.

questionable lending practices, schemes to defraud their own customers and

third-party lenders for profit, and other alleged misconduct.5 The Debtor

reiterated that he was not involved in the preparation and submission of the loan

application and claimed that Mr. Stroup had ulterior motives in making the

January 2018 loan happen. He questioned why he would create a fake purchase

order for one loan only to turn around and provide a legitimate purchase order

for the second loan.

His accusations against others notwithstanding, the Debtor admitted that

he signed an affidavit in connection with the state court litigation on December

11, 2020, which included the following statement:

4. To the best of my knowledge, the following equipment is in

possession of Beard Implement in Ashland, Illinois:

a. 2018 Case IH 2150 Planter, Serial No. YHS074106;

b. 2016 Case IH 370 Steiger Tractor, Serial No. ZGF308065;

c. 2018 Case IH RB565 Round Baler, Serial No. YHN196682;

and

d. 2018 Case IH DC102 Disc Mower, Serial No. YHN263879.

Despite attesting to the statement under penalty of perjury by signing the

affidavit, the Debtor denied representing that the collateral in fact existed.

Rather, the Debtor claimed that he was representing that equipment of the stated

make and models were in Beard’s possession and that, after signing the affidavit,

5 The Debtor attempted to offer, through his own testimony, the contents of a report by Steve McKasson, a purported

handwriting expert who examined and compared handwriting samples of the Debtor to certain documents the Debtor

said were forged by Prairieland. The Court sustained Farm Credit’s objection to the evidence, explaining to the Debtor

that he should have called Mr. McKasson as a witness so that he could have testified as to his report and findings and

been subject to cross-examination by Farm Credit.

he clarified that the serial numbers were incorrect. He ascribed the issue to his

practice of not reading documents before signing them.

At the close of evidence, the parties argued their respective positions. The

matter is ready for decision.

II. Jurisdiction

This Court has jurisdiction over the issues before it pursuant to 28 U.S.C.

§1334. All bankruptcy cases and proceedings filed in the Central District of

Illinois have been referred to the bankruptcy judges. CDIL-Bankr. LR 4.1; see 28

U.S.C. §157(a). The determination of the dischargeability of a particular debt is

a core proceeding. 28 U.S.C. §157(b)(2)(I). This matter arises from the Debtor’s

bankruptcy itself and from the provisions of the Bankruptcy Code and may

therefore be constitutionally decided by a bankruptcy judge. See Stern v.

Marshall, 564 U.S. 462, 499 (2011).

III. Legal Analysis

Farm Credit asserts that the debts owed to it by the Debtor on two separate

loans should be excepted from the Debtor’s discharge for two reasons: (1)

because the debts were for loans obtained by use of statements in writing that

were materially false, respecting the Debtor’s financial condition, and reasonably

relied on by Farm Credit; and (2) because the debts were incurred due to willful

and malicious injury caused by the Debtor to Farm Credit’s property.

A. Section 523(a)(2)(B)

Taking the causes of action of the Amended Complaint in reverse order,

Count II seeks a determination that the debts owed to Farm Credit based on loan

agreements dated January 11, 2018, and February 27, 2019, be excepted from

discharge under §523(a)(2)(B) as ones obtained by the use of false statements in

writing respecting the Debtor’s financial condition, namely misrepresentations

in the Debtor’s loan application and supporting balance sheet and purchase

order regarding his ownership of certain equipment that was being offered as

collateral.

Section 523(a)(2)(B) provides that an individual debtor is not discharged

from any debt 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

(iv) that the debtor caused to be made or published with intent

to deceive[.]

11 U.S.C. §523(a)(2)(B). Because exceptions to discharge are construed strictly

against the creditor and liberally in favor of the debtor, Farm Credit, as the

plaintiff, bears the burden of establishing each element of the exception by a

preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 290 (1991); In

re Cohen, 507 F.3d 610, 613 (7th Cir. 2007). Because Farm Credit challenges

the dischargeability of debts arising from two loan transactions, each must be

separately analyzed.

i. The January 2018 Loan

1. Statements in Writing Respecting Debtor’s Financial Condition

Threshold issues under §523(a)(2)(B) are that the statements at issue be

in writing and respecting the debtor’s financial condition. Here, Farm Credit’s

claim is based on the Debtor’s false statements that equipment had been

purchased and was owned by him on the loan application, balance sheet, and

purchase order submitted in connection with the January 2018 loan.

The statements made in the loan application, balance sheet, and purchase

order were in writing. At trial, the Debtor denied preparing the documents and

equivocated about whether he signed the documents or, if he did sign them,

whether he signed them as prepared. But there is no requirement that a debtor

have prepared or signed the writing to be charged with the statements therein

so long as he uses, adopts, or affirms the writing in some way. Colchester State

Bank v. Phillips (In re Phillips), 367 B.R. 637, 643 (Bankr. C.D. Ill. 2007) (Perkins,

J.) (citations omitted); see also Webster Bank v. Contos (In re Contos), 417 B.R

557, 563 (Bankr. N.D. Ill. 2009). Here, the Debtor adopted the written statements

when he caused them to be submitted to Farm Credit and again when he entered

into the January 2018 loan agreement. To be sure, he denied any knowledge of

the statements made in the documents. The Debtor’s knowledge about the

statements is fully addressed below in the context of the intent element, but it is

clear that the Debtor knew he needed asset equity to offer as collateral and that

documentation of such equity was required before his loan application would be

approved. The Debtor admitted that he authorized Mr. Stroup to submit the

documents on his behalf. He affirmatively texted Mr. Stroup telling him to

proceed with submitting the Beard purchase order to Farm Credit even after Mr.

Stroup raised questions about its authenticity.

Further, the statements were ones respecting the Debtor’s financial

condition. The Supreme Court has held that, consistent with its ordinary

meaning, the word “respecting” should be read expansively and that “a statement

is ‘respecting’ a debtor’s financial condition if it has a direct relation to or impact

on the debtor’s overall financial status.” Appling, 584 U.S. at 716-20. Because “a

single asset has a direct relation to and impact on aggregate financial condition,”

a statement about the existence or value of an individual asset “bears on a

debtor’s overall financial condition” and therefore can be a “statement

respecting” said condition. Id. at 720. Based on Appling, the statements in the

loan application, balance sheet, and purchase order about the existence,

ownership, and value of equipment that was to serve as collateral for the January

2018 loan were statements respecting the Debtor’s financial condition.

2. Material Falsity of the Statements

It is not disputed that the equipment listed as the Debtor’s in the loan

application, balance sheet, and purchase order did not exist and was therefore

never owned by the Debtor. The Debtor acknowledged in his testimony that the

Beard Implement purchase order dated December 7, 2017, was “fake” and that

he never owned a CIH DC 102 with serial number YHN263879, an RB565 with

serial number YHN196682, a CIH STEIGER 370 with serial number ZGF308065,

or a CIH 2150 with serial number YHS074106. The Debtor agreed that the same

items of equipment with corresponding serial numbers and values were listed as

being “100% owned” by him on the December 2017 balance sheet prepared on

his behalf and that the information on the balance sheet was therefore false. The

Debtor also identified the loan application listing the same equipment which he

agreed he never leased or purchased. Without question, the representations

about the existence and the Debtor’s ownership of the equipment in the purchase

order, balance sheet, and loan application were false statements.

The false statements were also material. There are two tests for

determining whether a false statement is material; the Seventh Circuit has

recognized both but has not decided whether one must be applied over the other.

Contos, 417 B.R. at 564 (citing Selfreliance Fed. Credit Union v. Harasymiw (In re

Harasymiw), 895 F.2d 1170, 1172 (7th Cir. 1990), and In re Bogstad, 779 F.2d

370, 375 (7th Cir. 1985)). Under the “substantial untruth” test, a false statement

is material if it “paints a substantially untruthful picture of a financial condition

by misrepresenting information of the type which would normally affect the

decision to grant credit.” Id. (citation omitted). The alternative “but for” test

requires proof “that ‘but for’ the material misrepresentations, [the creditor] would

not have extended money, property, services, or credit.” Id. (citations omitted).

Here, the loan application sought to refinance four pieces of equipment

purportedly owned and purchased by the Debtor for $564,000. Approval of the

application was subject to proof of purchase being provided to the lender and

was withheld until such proof was provided. The December 2017 purchase order

that was ultimately submitted showed a total cash purchase price of $564,000

for four pieces of equipment with serial numbers and prices for each that

matched the listings on the loan application and the December 2017 balance

sheet submitted with the loan application. Although the loan application only

sought $500,000, the Debtor was approved for and accepted loan proceeds of

$564,000 under the January 2018 loan agreement. Tracie Archer testified that

Farm Credit would not have made the loan to the Debtor without obtaining a

security interest in the equipment. Her testimony was bolstered by the fact that,

one day before entering into the January 2018 loan agreement with the Debtor,

Prairieland executed a subordination agreement under which it subordinated

any interest it had in the equipment in favor of Farm Credit as part of the latter’s

effort to ensure its loan to the Debtor was fully secured.

The unrebutted evidence established that Farm Credit would not have

extended $564,000 under the first loan agreement but for the representations

that the Debtor owned property with sufficient equity to fully secure the debt.

And those false statements are clearly of the type and magnitude that would

affect any lender’s decision to grant credit. Under either test, the Debtor’s false

statements were material.

3. Farm Credit’s Reliance on the Statements

Ms. Archer’s unrebutted testimony was that Farm Credit relied on the

truthfulness of the Debtor’s loan application, balance sheet, and purchase order

in approving and making the January 2018 loan to the Debtor. She said that

Farm Credit would not have approved the Debtor’s loan application and would

not have entered into the January 2018 loan agreement with the Debtor had it

known that the listed equipment—which was specifically identified as collateral

for the loan in the contemporaneously executed security agreement—did not

exist. Her testimony was bolstered by other evidence showing Farm Credit’s

insistence on the purchase order for the equipment being provided before it

would process the Debtor’s loan application. The Debtor conceded he had no

reason to dispute that Farm Credit relied on information provided in the loan

application, balance sheet, and purchase order. Together this evidence

established that Farm Credit in fact relied on the statements made in the loan

application, balance sheet, and purchase order. But actual reliance is not

enough; Farm Credit must also establish that its reliance was reasonable. Busey

Bank v. Cosman (In re Cosman), 616 B.R. 358, 369 (Bankr. N.D. Ill. 2020)

(citation omitted).

The reasonableness of a creditor’s reliance is determined on a case-by-

case basis, but “courts should not use the reasonable reliance requirement to

second-guess a creditor’s decision to lend money.” Contos, 417 B.R. at 566 (citing

In re Morris, 223 F.3d 548, 553 (7th Cir. 2000), and In re Bonnett, 895 F.2d 1155,

1157 (7th Cir. 1989)). Here, Farm Credit’s insistence on proof of purchase of the

equipment before determining whether to make the January 2018 loan supports

a finding that its reliance was reasonable.

Michael Stroup’s testimony suggested that Farm Credit had notice of

potential issues with the purchase order that was submitted. He identified the

email he sent to an AgDirect representative on January 10, 2018, by which he

submitted the requested purchase order along with a note that it “[l]ooks to me

like they combined or corrected some information on it—not sure why.” But

insofar as Mr. Stroup’s email called attention to irregularities in the purchase

order, by the same token, it offered a justification for those irregularities to allay

potential concerns. Mr. Stroup’s text messages with the Debtor at the time and

his trial testimony describing the purchase order as “doctored” showed that he

had real concerns about the authenticity of the Beard purchase order. But he

did not share those concerns with representatives of AgDirect or Farm Credit in

any meaningful way; the comments he made in the email were not enough to

alert Farm Credit that the purchase order may have been falsified or that the

equipment did not exist. Cosman, 616 B.R. at 370-71 (creditors not required to

review and verify each representation with incredulity and are generally entitled

to rely on representations made unless it would be so unreasonable as not to be

actual reliance at all) (citing Morris, 223 F.3d at 553, and In re Garman, 643 F.2d

1252, 1259-60 (7th Cir. 1980)) (other citations omitted).

Farm Credit relied on the loan application, balance sheet, and purchase

order in loaning the Debtor $564,000 under the January 2018 loan agreement,

and that reliance was reasonable.

4. The Debtor’s Intent

A debt obtained through use of false statements in writing, respecting the

debtor’s financial condition, and upon which the creditor relied will only be

excepted from discharge if the debtor “caused [them] to be made or published

with intent to deceive[.]” 11 U.S.C. §523(a)(2)(B)(iv). Proof of intent to deceive can

be established in different ways. It may be proven through direct evidence. In re

Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). It may “logically be inferred from a

false representation which the debtor knows or should know will induce another

to make a loan.” Id. (citations omitted). “A debtor’s intent to deceive may also be

demonstrated by showing reckless indifference to, or reckless disregard for, the

accuracy of the information” presented in supporting documents submitted as

part of a loan request or in the loan documents themselves. Contos, 417 B.R. at

565 (citation omitted). “Whether to infer the requisite intent is left to the

bankruptcy court that presides over the case.” Sheridan, 57 F.3d at 634.

The Debtor admitted that false statements were made in the loan

application, balance sheet, and purchase order regarding the existence and his

ownership of equipment that was to serve as collateral for the January 2018

loan. However, he denied preparing those documents and denied supplying the

information or having any knowledge of the misrepresentations made in the

documents. He further denied reading or even having the opportunity to review

documents prior to signing them or their being submitted to Farm Credit. The

Debtor’s denials were simply not credible.

True, Michael Stroup prepared the loan application and balance sheet on

the Debtor’s behalf. But text messages between the two showed that the Debtor

was very much involved in the decision to apply for a loan through AgDirect and

in the application process, as well as discussions about what was needed to

qualify for financing. Early in the discussions, the Debtor was dismissive of Mr.

Stroup’s suggestion that he “pick two pieces of equipment to do AgDirect,” texting

in response that it “[d]oesn’t get me close enuff.” When he later decided to pursue

financing through AgDirect, the Debtor was clearly aware that approval of his

loan application was contingent on him providing proof of purchase for the

equipment that was to be pledged as collateral; he was tasked with obtaining

relevant purchase orders from Beard Implement and forwarding them to Mr.

Stroup. The Debtor ultimately produced a single purchase order that he directed

Mr. Stroup to submit to the lender notwithstanding Mr. Stroup’s stated concerns

about the document appearing to have been “doctored.”

The Debtor suggested that he may have been a pawn in some unexplained

scheme by Kyle Schumacher and Michael Stroup, but that suggestion was not

supported by the evidence. Mr. Schumacher credibly testified that he did not

prepare the purchase order, never sold the specific equipment listed to the

Debtor, and that Beard had no record of the equipment existing in its inventory

to even have been available for sale. It strains credulity to believe that someone

with no apparent motive would risk exposure for himself and his company by

preparing a fake purchase order for made-up equipment that against all odds

happened to match equipment listed in the loan application and balance sheet

separately prepared and previously submitted for a loan in which he had no

interest. Likewise, the text messages between the Debtor and Mr. Stroup strongly

suggested that Mr. Stroup did not prepare the fake purchase order; the messages

showed that the Debtor produced a questionable purchase order that Mr.

Stroup, in turn, gave to Farm Credit. If there was a scheme involving Mr.

Stroup—and there may well have been—the Debtor was certainly an active

participant. Add to that the Debtor’s knowledge of how similar equipment was

listed on purchase orders through past transactions with Beard and his

admission that he had a blank Beard purchase order form in his possession at

the time, the obvious conclusion to draw is that the Debtor created a fake

purchase order showing the purchase of equipment he never owned.

But even if the Court were to believe the Debtor’s claims that he did not

prepare the fake purchase order, had no knowledge of its contents, and was

otherwise unaware of what equipment was listed in the loan application and

other loan documents, it would not be enough to preclude a finding of intent to

deceive. At a minimum, the Debtor showed reckless indifference to, or reckless

disregard for, the accuracy of the information presented in his loan application,

supporting balance sheet and purchase order, as well as the loan documents.

His claimed ignorance of financial matters notwithstanding, the Debtor owned

and operated a sizeable farming operation for many years and had significant

experience working with lenders and obtaining financing to sustain his business.

The text messages between Mr. Stroup and the Debtor showed a general

awareness of the information needed to qualify for loans. The evidence also

established that the Debtor was desperate for financing when he applied for the

January 2018 loan. Even if the Debtor never reviewed the loan application,

balance sheet, purchase order, or loan and security agreements—whether

because he chose not to read them or because they were never presented to him

in completed form—he knew that the representations made in those documents

were being used to secure financing. Financial Pacific Leasing, LLC v. Kilaru (In

re Kilaru), 552 B.R. 806, 815-16 (Bankr. N.D. Ill. 2016). And for the purchase

order specifically, the Debtor was aware of Mr. Stroup’s concerns that it appeared

to have been “cut and paste” or “doctored” but instructed him to submit it

anyway. The Debtor’s failure to review or inquire as to what was being submitted

on his behalf showed his utter disregard and indifference for the accuracy of

information he knew would play a pivotal role in his being approved for the loan.

Although executed after the fact, the Debtor’s state court affidavit

regarding the existence and location of the fake equipment embodied the same

hallmarks of fraudulent intent. When the Debtor signed the affidavit stating that

the nonexistent collateral was in the possession of Beard Implement, he was

aware that his loans were in default and that Farm Credit was pursuing its rights

against him and the collateral. By signing the affidavit under penalty of perjury,

the Debtor either knew the truth and lied or should have known the truth but,

in reckless disregard for the truth, did not bother to verify the accuracy of

information to which he was attesting. As stated above, the Court does not

believe that the Debtor was clueless about the representations being made to

Farm Credit in seeking and obtaining the January 2018 loan. That neither Kyle

Schumacher nor Michael Stroup was involved in preparing the affidavit casts

further doubt on the Debtor’s efforts to portray himself as a hapless victim. But

again, even if the Debtor was truly ignorant of the representations being made,

his ignorance was willful and showed a reckless disregard for the accuracy of

information that he clearly understood to be key to his loan approval.

Because the January 2018 loan was obtained using written statements

regarding the Debtor’s financial condition that the Debtor caused to be made

and Farm Credit reasonably relied upon in making the loan, the debt from the

January 2018 loan will be excepted from the Debtor’s discharge. The Debtor

scheduled the debt to Farm Credit as disputed, but Farm Credit filed a proof of

claim to which the Debtor did not object. The claim included a summary

breaking down the portions of the claim attributable to the January 2018 loan,

including interest, late fees, and attorney fees and costs. The Debtor agreed that

the loan agreement provided for payment of Farm Credit’s legal fees. Exceptions

to discharge under §523(a)(2) include any liability arising from the debt obtained

by the means prescribed under the statute. Kilaru, 552 B.R. at 816-17 (extending

the holding of Cohen v. de la Cruz, 523 U.S. 213, 223 (1998), which dealt with

§523(a)(2)(A), to exceptions to discharge under §523(a)(2)(B)); Dancor Const., Inc.

v. Haskell (In re Haskell), 475 B.R. 911, 923 (Bankr. C.D. Ill. 2012) (Perkins, J.)

(noting that attorney fees contemplated by contract could also be excepted from

discharge). The entirety of the debt arising from the January 2018 loan will

therefore be excepted from the Debtor’s discharge.6

6 Farm Credit did not seek a money judgment as part of the relief sought, so no money judgment will be entered.

ii. The February 2019 Loan

Although Farm Credit met its burden of establishing the elements of

§523(a)(2)(B) as to the January 2018 loan such that the debt will be excepted

from the Debtor’s discharge, the same does not necessarily result in a

determination that the February 2019 loan debt should be excepted from the

Debtor’s discharge. Each debt arose from a distinct transaction and must

independently meet the requirements under §523(a)(2)(B).

The only false statements that Farm Credit asserted in support of its

dischargeability claims against the Debtor were those made in the Debtor’s loan

application, balance sheet, and purchase order relating to the existence and

ownership of equipment that was to serve as collateral for the January 2018

loan. The burden was on Farm Credit to establish those false statements were

also used by the Debtor to obtain and reasonably relied on by Farm Credit in

making the February 2019 loan. See Ford Motor Credit Company, LLC v.

Fleckenstein (In re Fleckenstein), 2017 WL 835160, at *4-6 (Bankr. C.D. Ill. Mar.

2, 2017) (absent evidence of debtors’ adoption and creditor’s actual and

reasonable reliance, inaccuracies in credit applications generated by creditor

using obviously outdated information from prior applications and transactions

with same debtors did not meet requirements of §523(a)(2)(B)); Westbank v.

Grossman (In re Grossman), 174 B.R. 972, 978, 983-86 (Bankr. N.D. Ill. 1994)

(financial statement given in connection with earlier loan not applicable to

second loan absent evidence that the debtor used it to obtain second loan and

plaintiff reasonably relied on it in making second loan). Farm Credit failed to

meet its burden.

According to Farm Credit, it would not have made the February 2019 loan

had it known that the information relied upon in making the January 2018 loan

was inaccurate. Farm Credit’s assertion is not surprising, of course, as it was

made with the benefit of hindsight. But no evidence was presented of Farm

Credit’s review or decision-making process or that it specifically considered the

Debtor’s past written statements in making the February 2019 loan. The Debtor

was not asked to renew or affirm the accuracy of the assertions made in the

documents previously provided in support of his prior loan request, and the

February 2019 loan and security agreements did not specifically refer to the

collateral for the earlier loan. Ms. Archer did note the inclusion of a cross-

collateralization provision as part of the February 2019 loan transaction but did

not say that the provision was specifically relied on in making the second loan.

To the contrary, all the evidence suggested that the second loan was made based

on the value of the collateral offered for that loan. As part of the transaction, the

Debtor was required to make a small cash payment to bring the loan-to-value

calculation into balance and that calculation was based solely on the collateral

pledged for the February 2019 loan. If Farm Credit was relying on any perceived

equity in the January 2018 loan collateral in making the February 2019 loan,

that equity should have received at least a passing reference in the loan-to-value

calculation, but neither Mr. Stroup nor Ms. Archer testified that it did.

Even if Farm Credit in fact relied on the Debtor’s past statements in

making the February 2019 loan, it failed to present any evidence of the

reasonableness of its reliance or the materiality of the Debtor’s statements in the

context of the second loan transaction. The statements submitted in connection

with the Debtor’s January 2018 loan approval clearly related to the Debtor’s

financial condition at that time and, more specifically, purported assets the

Debtor was offering as collateral for that loan. Ms. Archer testified that Farm

Credit would not extend a loan without collateral, which it had for the February

2019 loan. The evidence, including the testimony of Ms. Archer, did not suggest

that the January 2018 loan transaction—along with the collateral that was to

secure it—was a condition precedent to Farm Credit extending the February

2019 loan. See Bogstad, 779 F.2d at 375.

That begs further questions about the Debtor’s intent and whether he used

his prior false statements to obtain the February 2019 loan. There appears to be

little dispute that the February 2019 loan was negotiated by Mr. Stroup for the

purpose of paying down debt to Prairieland. As part of the transaction,

Prairieland executed a subordination agreement that gave Farm Credit a first

priority lien in certain equipment of the Debtor that Prairieland held as collateral.

Ms. Archer agreed that the Debtor did not appear to be involved in the loan

negotiations or discussions and that the proceeds for the February 2019 loan

were paid directly to Prairieland rather than the Debtor. The note and security

agreement bore the Debtor’s signature. But none of the evidence supports Farm

Credit’s contention that the Debtor obtained the February 2019 loan by deceit

using the loan application, balance sheet, or purchase order from the January

2018 loan. See Fleckenstein, 2017 WL 835160, at *6.

Farm Credit failed to meet its burden of establishing that the February

2019 loan debt should be excepted from the Debtor’s discharge under

§523(a)(2)(B). Although it was established that the Debtor made false statements

on his loan application, balance sheet, and purchase order submitted for the

January 2018 loan, Farm Credit’s evidence fell short of connecting those

statements to the February 2019 loan. The February 2019 loan debt will

therefore not be excepted from the Debtor’s discharge under §523(a)(2)(B).

B. Section 523(a)(6)

Debts for willful and malicious injury by a debtor to an entity or the

property of an entity may be excepted from discharge. 11 U.S.C. §523(a)(6). A

creditor claiming that a debt is nondischargeable under §523(a)(6) must prove

three elements: (1) injury caused by the debtor, (2) willfulness, and (3) malice.

First Weber Group, Inc. v. Horsfall, 738 F.3d 767, 774 (7th Cir. 2013) (citations

omitted). In construing the statute, “willful” modifies “injury” and requires “a

deliberate or intentional injury, not merely a deliberate or intentional act that

leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Actions are willful

when both the act and the resulting injury are intended. Id. at 61-62. Willfulness

can be established by demonstrating either a debtor’s motive to inflict injury or

that the debtor knew his act was substantially certain to cause injury. First

Weber Group, 738 F.3d at 774 (citing Bukowski v. Patel, 266 B.R. 838, 843-44

(E.D. Wis. 2001)); Chuipek v. Gilmore (In re Gilmore), 590 B.R. 819, 835 (Bankr.

N.D. Ill. 2018). Actions are malicious if they are taken without just cause or

excuse or in conscious disregard of one’s duties. First Weber Group, 738 F.3d at

774 (citation omitted).

According to Farm Credit, the Debtor inflicted a willful and malicious

injury on it and its money by obtaining loans through false representations about

his financial condition. For the reasons set forth below, Farm Credit failed to

establish its entitlement to relief under §523(a)(6).

Fraud is an intentional tort and therefore could support a claim under

§523(a)(6). Groom v. Krook (In re Krook), 615 B.R. 479, 487 (Bankr. N.D. Ill. 2020).

But not all intentional torts meet the willful and malicious standard of §523(a)(6).

United Providers, Inc. v. Pagan (In re Pagan), 564 B.R. 324, 326-28 (Bankr. N.D.

Ill. 2017) (discussing Geiger and collecting cases from the Seventh Circuit

concluding that, while an intentional tort may meet the standard, not all

intentional torts will). For many years, the various discharge exceptions of §523

were interpreted in the Seventh Circuit as being mutually exclusive. Krook, 615

B.R. at 487-88 (citing cases); see also Attorneys’ Title Guaranty Fund, Inc. v. Wolf

(In re Wolf), 519 B.R. 228, 249 (Bankr. N.D. Ill. 2014). The Supreme Court’s

decision in Husky Int’l Elecs., Inc. v. Ritz, 578 U.S. 355, 363-64 (2016), however,

opened the door to debts being excepted from discharge under more than one

provision of §523. Acknowledging both the inevitable overlap and meaningful

distinctions between exceptions to discharge, the Court explained that it is

possible that conduct falling within §523(a)(2) could also meet the requirements

of §523(a)(6). Id. Of course, the creditor seeking to except its debt from a debtor’s

discharge has the burden of establishing the elements of each of its claims by a

preponderance of the evidence. Grogan, 498 U.S. at 287-88.

Here, Farm Credit established that the Debtor obtained the January 2018

loan using false written statements about the existence of equipment that was

to serve as collateral for the loan such that the related debt will be excepted from

his discharge under §523(a)(2)(B). And the Debtor undoubtedly acted

intentionally when he made the false statements. But, again, an intentional act

is “willful” for purposes of §523(a)(6) only if the resulting injury is also intended.

Geiger, 523 U.S. at 61-62.

Farm Credit presented no evidence of the Debtor’s subjective intent to

injure Farm Credit or its property. To the contrary, the testimony painted a

picture of the Debtor intent on keeping his farming operation afloat and in

desperate need of financing to pay cash rents and other expenses to meet that

end. With years of experience in the farm industry, the Debtor surely understood

that the survival of his business depended not only on his being able to obtain

loans but also on his repaying them. Farm Credit gave the Court no reason to

believe that the Debtor intended anything other than to keep the wheels of his

farming operation turning so that he might generate a profit from which he could

repay his debts to Farm Credit. Indeed, the Debtor made the first installment

payment on the January 2018 loan before a default was declared due to

nonpayment of the February 2019 loan. No evidence was presented that the

Debtor harbored any ill will toward Farm Credit or that he intended to inflict

harm on it. To the contrary, the Debtor apparently had never even dealt with

Farm Credit before Mr. Stroup suggested that he apply for the January 2018

loan.

Nor did Farm Credit present evidence to support a finding that the Debtor

knew his actions—in making false statements or otherwise—were substantially

certain to cause injury. No doubt, the false statements about the existence of

equipment left Farm Credit vulnerable in the event of nonpayment of the January

2018 loan. The same cannot be said, of course, about the February 2019 loan,

which was secured by other equipment that in fact existed. Certainly, the injury

suffered in relation to the February 2019 loan was caused by the Debtor’s

nonpayment, which, even if intentional, is not sufficient to except a debt from

discharge under §523(a)(6) in the Seventh Circuit. Taylor v. Snyder (In re Snyder),

542 B.R. 429, 438-442 (Bankr. N.D. Ill. 2015) (analyzing the Supreme Court and

Seventh Circuit’s comments about breach of contract as willful and malicious

injury in Geiger, 523 U.S. at 62, and First Weber Group, 738 F.3d at 773). Farm

Credit failed to show that the Debtor’s false statements made in connection with

the January 2018 loan evidenced the Debtor’s intent to harm Farm Credit. If the

evidence here were sufficient not only to except the debt for the January 2018

loan from the Debtor’s discharge but also to except both Farm Credit loans from

discharge based on willful and malicious injury, then every finding under

§523(a)(2)(B) would also result in a finding under §523(a)(6). That is not the state

of the law; more is needed to establish an exception to discharge under

§523(a)(6), but the needed evidence was not presented here.

Because Farm Credit failed to present evidence that the Debtor intended

injury or knew injury was substantially certain to occur from his actions, it

cannot establish that the debts owed to it were incurred due to willful and

malicious injury. The Debtor is entitled to judgment in his favor on the cause of

action brought under §523(a)(6).

IV. Conclusion

The Debtor made false statements relating to his financial condition in

several documents that he used to obtain a loan from Farm Credit in January

2018. He made those statements or caused them to be made with intent to

deceive Farm Credit, and Farm Credit reasonably relied on the Debtor’s

statements in making the January 2018 loan. The resulting debt therefore will

be excepted from the Debtor’s discharge. Farm Credit, however, failed to

establish a connection between the Debtor’s false statements and the February

2019 loan, and it failed to establish that either loan debt was incurred due to

willful and malicious injury caused by the Debtor. Judgment will therefore be

entered in favor of Farm Credit on Count II only to the extent of the January

2018 loan debt and in favor of the Debtor in all other respects.

This Opinion is to serve as Findings of Fact and Conclusions of Law

pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.

See written Order.

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