NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with
Fed. R. App. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Submitted February 1, 2012*
Decided February 2, 2012
Before
FRANK H. EASTERBROOK, Chief Judge
WILLIAM J. BAUER, Circuit Judge
DIANE P. WOOD, Circuit Judge
No. 11‐3193
ANTHONY STELMOKAS, Appeal from the United States District
Plaintiff‐Appellant, Court for the Northern District of Illinois,
Eastern Division.
v.
No. 11 C 3600
VYTAUTAS KODZIUS,
Defendant‐Appellee. Amy J. St. Eve
Judge.
O R D E R
Anthony Stelmokas filed an adversary action seeking to prevent the discharge in
bankruptcy of a $14,000 debt owed to him by Vytautas Kodzius. After a bench trial, the
bankruptcy court found for Kodzius and also ordered Stelmokas to pay the $5,000 in
attorney’s fees incurred by Kodzius in defending the suit. The district court upheld both
rulings, and Stelmokas appeals. We agree with the bankruptcy court’s finding that
Stelmokas failed to establish that the debt was exempt from discharge, but we conclude that
the award of fees is not supported by the record.
*
Appellee Vytautas Kodzius, who is represented by counsel, elected not to file a brief.
After examining the appellant’s brief and record, we have concluded that oral argument is
unnecessary. Thus the appeal is submitted on the appellant’s brief and the record. See FED.
R. APP. P. 34(a)(2)(C).
No. 11‐3193 Page 2
Stelmokas owns Club Gintaras, a Chicago tavern that also serves as the headquarters
of his side business of making “payday loans” and cashing third‐party checks. Kodzius and
Vilma Madson, who lived with him, are the sole shareholders of V & V Construction. In
2006 Kodzius and Madson began taking checks payable to V & V Construction to Stelmokas
to be cashed. By the end of 2008, Stelmokas had cashed checks totaling nearly $578,000,
keeping 1% as a fee for his services. In March 2008 he loaned $11,650 to Kodzius at an
interest rate of 1% weekly. The loan, which was memorialized by a personal check made
payable to Stelmokas in that amount, was to be repaid within a matter of weeks. But
apparently the check was no good, and nine months passed without payment. In December
2008, Kodzius and Madson renegotiated the loan, executing a promissary note due in June
2009 for a principal amount of $14,000 plus interest at a 12% annual rate. But the
renegotiated loan was never repaid, even though Kodzius and Madson continued using
Stelmokas to cash over $50,000 in checks payable to V & V Construction. In July 2009
Kodzius and Madson separately filed for bankruptcy under Chapter 7. Kodzius listed the
debt to Stelmokas on his schedule of unsecured, nonpriority claims and listed his stock in
V & V Construction as an asset worth $600.
In Kodzius’s Chapter 7 case, Stelmokas filed, through counsel, an adversary
complaint seeking a ruling that the $14,000 debt was made nondischargeable by
11 U.S.C.
§ 523(a)(2)(A).1 Section 523(a)(2) provides an exception to discharge “from any debt . . . for
money . . . or refinancing of credit, to the extent obtained by . . . false pretenses, a false
representation, or actual fraud, other than a statement respecting the debtor’s . . . financial
condition.” Stelmokas alleged that he made the loan only because Kodzius had been
deceptive about his poor financial condition and intention to default. Later, after
discharging his lawyer, Stelmokas represented himself at a bench trial on the adversary
complaint. During that trial he testified that the large number of checks that he cashed for
Kodzius and Madson had induced him to make, and later extend, the loan by creating the
mistaken impression that V & V Construction was a healthy business. Stelmokas also said
that when he made the loan he believed that Kodzius owned two houses, but later
discovered that one of those homes had gone into foreclosure, and the mortgage on the
other was in arrears.
Stelmokas further testified that, before extending the loan, he had asked Kodzius if
he would repay him when the loan matured, and Kodzius had said, “Yes.” He then asked
Kodzius “Are you going to have any problems paying it?” to which Kodzius replied, “No.”
Stelmokas submitted documents to the court showing that, at the time Kodzius made those
1
A second claim included in Stelmokas’s adversary complaint later was abandoned.
No. 11‐3193 Page 3
statements, he had not paid his mortgage for at least two months and went into foreclosure
shortly after obtaining the loan. Stelmokas insisted that this omission was a
misrepresentation that caused him to make the loan.
At the close of the bench trial, the bankruptcy judge ruled in favor of Kodzius. The
court explained that, under § 523(a)(2)(A), even debts obtained through oral
misrepresentations are dischargeable if the debtor’s statements concerned his financial
condition. The judge noted that she had rejected a similar argument by Stelmokas in a
proceeding against a different debtor, see Stelmokas v. Kupciunas, No. 09‐00307 (Bankr. N.D.
Ill. Jan. 30, 2010), and that she was aware that he had presented this argument without
success to at least one other bankruptcy judge.
After the trial Kodzius moved for attorney’s fees under § 523(d), which provides that
the debtor should be awarded attorney’s fees if, without a basis that is “substantially
justified,” a creditor “requests a determination of dischargeability of a consumer debt under
subsection (a)(2).” Stelmokas filed a written response arguing that the fees request was
premature because the bankruptcy court had not ruled on his motion to reconsider the
decision in the adversary proceeding. When that contention was rejected by the bankruptcy
court at a hearing on the fees request, Stelmokas tried to present what he characterized as a
“defense” to the application of § 523(d). The bankruptcy judge stopped him, telling him that
all arguments omitted from his written response were waived. The court ordered Stelmokas
to pay Kodzius $5,000 in attorney’s fees.2 The court reasoned that his position in the case
against Kodzius was not substantially justified and expressed concern about the number of
comparable cases Stelmokas had filed.
Stelmokas appealed to the district court, which upheld the decisions on both his
adversary complaint and the award of attorney’s fees. In this court he maintains again that
because Kodzius’s oral assurances that he could repay the loan were “unconditional and
unequivocal” they should be regarded as misrepresentations under § 523(a)(2)(A). But that
contention misses the point. Section 523(a)(2)(A) provides that even a debtor who induces a
2
Stelmokas filed an identical adversary complaint in Madson’s Chapter 7 case.
See Stelmokas v. Madson, No. 11 C 3649,
2011 WL 4738263 (N.D. Ill. Oct. 5, 2011). Stelmokas
voluntarily dismissed that complaint, but that did not stop the bankruptcy judge (the same
judge who presided over Kodzius’s case) from ordering Stelmokas to pay Madson $3,000 to
cover attorney’s fees. Stelmokas’s appeal from that award of fees was assigned to a different
district judge, who also affirmed the bankruptcy court’s ruling.
Id. Stelmokas did not file a
notice of appeal from the district court’s decision, and the allotted time for appeal has now
expired. See FED. R. APP. P. 4(a)(1).
No. 11‐3193 Page 4
debt through misrepresentation has an escape hatch: The debt is still dischargeable if the
claim of false pretenses, false representation, or actual fraud rests on “a statement respecting
the debtor’s . . . financial condition.” In re Joelson,
427 F.3d 700, 705 (10th Cir. 2005);
In re Bogdanovich,
292 F.3d 104, 112–13 (2d Cir. 2002); In re Kosinski,
424 B.R. 599, 607–08
(B.A.P. 1st Cir. 2010). That is the situation here.
The few appellate decisions on point have taken different approaches in defining
what constitutes a statement respecting the debtor’s financial condition. The narrow view is
that the statement must paint a picture about the debtor’s overall financial health, while the
broad view encompasses statements of that nature along with any other that conveys
significant information about the debtor’s finances. See In re Jorelson,
427 F.3d at 705 (narrow
view); In re Bogdanovich,
292 F.3d at 112 (noting inconsistent views but declining to choose);
Engler v. Van Steinburg (In re Van Steinburg),
744 F.2d 1060, 1061 (4th Cir. 1984) (broad view).
We have not yet addressed the question, although we note that a majority of bankruptcy
courts in this circuit have opted for the narrow construction. Compare In re Cassel,
322 B.R.
363, 374–75 (Bankr. C.D. Ill. 2005) (narrow); In re Olinger,
160 B.R. 1004, 1009 (Bankr. S.D.
Ind. 1993) (narrow); In re Price,
123 B.R. 42, 54 (Bankr. N.D. Ill. 1991) (narrow),
with In re Rhodes,
93 B.R. 622, 624 (Bankr. S.D. Ill. 1988) (broad). But we need not resolve the
question here, because neither construction helps Stelmokas, who bore the burden of proof
on this issue. See In re Cohen,
507 F.3d 610, 613 (7th Cir. 2007). The only evidence of
misrepresentation he introduced was Kodzius’s statement that he would not have any
trouble repaying the promissory note. Even assuming that Kodzius believed otherwise—he
was, after all, weeks away from a foreclosure action—his representation still was one
concerning his “overall financial health.”
Stelmokas also observes that Kodzius’s continued use of his check‐cashing services
for V & V Construction after executing the promissory note shows that Kodzius had access
to money that could have been used to repay the loan. The fact that no payments were made
during the period when those checks were cashed, Stelmokas insists, demonstrates that
Kodzius intended from the start to defraud him. See 4 COLLIER ON BANKRUPTCY
¶ 523.08.[1][d], at 46 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (explaining that
debtor’s failure “to take any steps to perform” contractual duties may create inference
assurances of intent to perform were misrepresentations). But the promissory note did not
obligate Kodzius to pay in installments, and, in any event, Stelmokas cannot use
circumstantial evidence to demonstrate Kodzius’s intent to defraud if he cannot prove any
fraudulent act by Kodzius. And Stelmokas has not identified any false statement or
misrepresentation made by Kodzius that is not exempted by the escape clause of § 523(a).
Stelmokas also argues that the bankruptcy judge erred by awarding attorney’s fees to
Kodzius. Not only was his adversary action substantially justified, says Stelmokas, but
No. 11‐3193 Page 5
§ 523(d) is limited to attempts under § 523(a)(2) to avert discharge of consumer debt.
See In re Sheridan,
105 F.3d 1164, 1166 (7th Cir. 1997). The latter contention is dispositive.
The bankruptcy code defines “consumer debt” as “debt incurred by an individual
primarily for a personal, family, or household purpose.”
11 U.S.C. § 101(8). The bankruptcy
court never made an express finding about the nature of the debt, which Stelmokas insists
was for Kodzius’s business. Thus, explains Stelmokas, the debt was not a consumer debt
and the award of fees under § 523(d) was improper.
Before addressing this contention, we must decide if it was waived or forfeited.
Stelmokas did not include this objection in his written response to Kodzius’s demand for
fees, and when he sought to articulate his “defense” to that demand, the bankruptcy judge
cut him off and asserted that any objection omitted from the written response was waived.3
The judge did not cite authority for this position, and we know of no precedent from this
court supporting it. Generally “[a] formal response to a motion is not obligatory except
when the federal rules or local rules specifically require affidavits or other papers to be filed
in opposition or when directed by the district judge.” 5 CHARLES A. WRIGHT & ARTHUR R.
MILLER, FEDERAL PRACTICE AND PROCEDURE § 1190 (3d ed. 2004). No bankruptcy rule
required a written response to the § 523(d) motion, and neither did the bankruptcy judge
order a response or give Stelmokas advance warning that any argument omitted from his
response would be deemed waived. Cf. Timms v. Frank,
953 F.3d 281, 285 (7th Cir. 1992)
(holding that pro se litigants are entitled to notice of the consequences of failing to respond
to a motion for summary judgment). We also note that, although the bankruptcy court is not
generally required to follow the local rules of the district court, see BANKR. N.D. ILL.
R.1000–2(C), the local rules for the Northern District of Illinois state that failure to respond
to a motion does not waive an argument, N.D. ILL. R. 78.3. We conclude that Stelmokas did
not waive or forfeit his argument by waiting until the hearing to raise it.
The district court declined to adopt the bankruptcy judge’s reasoning on the waiver
issue. Instead, the district judge concluded on its own that Stelmokas’s argument about the
3
The bankruptcy judge interrupted Stelmokas before he could describe his intended
“defense.” Consequently, we cannot be certain that the argument he wanted to make is the
one he presents here. But during this litigation Stelmokas has never offered a different
merits defense to the § 523(d) motion (aside from a general assertion that his claim under
§ 523(a)(2) was “substantially justified”). And given that he was prevented from putting his
defense on the record, we will give Stelmokas the benefit of the doubt and assume that his
consumer‐debt argument is what he tried to raise in the bankruptcy court.
No. 11‐3193 Page 6
nature of the debt had been waived on appeal because it had not been developed adequately
in his brief. See Judge v. Quinn,
612 F.3d 537, 557 (7th Cir. 2010). We disagree with that
analysis as well. As presented in his brief to the district court, Stelmokas’s argument is short
and straightforward, but that does not make it “perfunctory.” See
id. He provided a citation
to the allegedly misapplied statute and the portions of the record supporting his contention
that his loan to Kodzius and Madson was outside the scope of § 523(d). Counsel for Kodzius
acknowledged and addressed this argument in his appellee’s brief. This is enough to stave
off waiver or forfeiture.
As the proponent of fees under § 523(d), Kodzius bore the burden of demonstrating
the factual basis for them. See Am. Express Travel Related Servs. Co., v. Baker,
213 B.R. 834, 837
(N.D. Ill. 1997). The bankruptcy judge apparently found that the loan was a consumer
debt—otherwise it would not have granted the motion—and we review that finding for
clear error. See Ojeda v. Goldberg,
599 F.3d 712, 716 (7th Cir. 2010).
We conclude that the bankruptcy judge erred in finding that Kodzius met his burden
to show that the debt to Stelmokas was a consumer debt. Because the judge improperly
refused Stelmokas the opportunity to advance this argument, the record discloses little
about why Kodzius obtained the loan. Kodzius checked a box on his form bankruptcy
petition stating that his debts were “primarily” consumer debts, see
11 U.S.C. § 707(b), but
this proves nothing about the nature of the Stelmokas loan, which accounted for only
$14,000 of Kodzius’s nearly $60,000 in unsecured debts. Courts generally have held that
debts are “primarily” consumer when at least half of them are consumer debts.
See In re Stewart,
175 F.3d 796, 808 (10th Cir. 1999); In re Kelly,
841 F.2d 908, 913 (9th Cir.
1988); see also In re Pedigo,
296 B.R. 485, 490 (Bankr. S.D. Ind. 2003), rev’d on other grounds,
329 B.R. 47 (S.D. Ind 2005).
The only direct evidence in the record about the nature of the loan is Stelmokas’s
trial testimony (given before the § 523(d) motion was filed) that the loan was a business loan
sought for the purpose of funding the continuing operations of V & V Construction.
Kodzius’s attorney did not object to that testimony, cross‐examine Stelmokas on the issue,
call Kodzius or Madson to rebut the testimony, or introduce any other contradicting
evidence. Nor did the bankruptcy judge find that Stelmokas’s testimony on the subject was
not credible. Thus the business character of the loan was undisputed, and the bankruptcy
judge erred by concluding that Kodzius met his burden to demonstrate the factual basis for
attorney’s fees under § 523(d). Given this conclusion, we need not decide whether the
bankruptcy judge was correct in concluding that Stelmokas’s adversary action was not
substantially justified.
No. 11‐3193 Page 7
Accordingly, we REVERSE the district court’s decision upholding the award of
attorney’s fees to Kodzius. In all other respects, the judgment is AFFIRMED.
