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In re McFarland

May 23, 1996

IN THE MATTER OF: DOROTHY MCFARLAND, DEBTOR-APPELLEE. APPEAL OF: SOUTH DIVISION CREDIT UNION.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 94 C 4613 Paul E. Plunkett, Judge.

Before COFFEY, MANION, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

ARGUED JANUARY 3, 1996

DECIDED MAY 23, 1996

South Division Credit Union filed an adversary complaint in a chapter 7 bankruptcy proceeding alleging the nondischargeability of the balance on a promissory note executed by the debtor, Dorothy McFarland. The bankruptcy court determined that only a fraction of the total balance was non-dischargeable under the relevant statute, and the district court affirmed. South Division Credit Union v. McFarland, 179 B.R. 87 (N.D. Ill. 1995). The district court found that the statutory language requires only that the amount of additional credit extended to the debtor in such a transaction is nondischargeable. This appeal followed, and it presents us with the question whether the discharge exception prescribed by 11 U.S.C. sec. 523(a)(2)(B) encompasses the entire amount of a loan whose proceeds are used in part to extinguish the debtor's obligation on a previous loan from the same creditor.

I.

The material facts are undisputed. McFarland had been a longtime Credit Union customer when she executed a promissory note on May 29, 1991, in the amount of $7,669.97 with a maturity date of February 28, 1995. She consistently made timely payments on this note. On May 11, 1993, McFarland applied for a loan from the Credit Union in the amount of $9,257.17 and subsequently executed a promissory note for this amount. The loan secured by the May 1993 note comprised a disbursement of $3,500 to McFarland and the satisfaction of her obligation on the May 1991 note, which then had a balance of $5,757.17.

The record suggests that this was the typical method by which the Credit Union extended additional credit while simultaneously refinancing existing debt. McFarland executed five separate promissory notes between December 10, 1990, and May 11, 1993. We itemize the notes below using the terms that appear on the face of the notes:

Origination date

12/10/90

02/13/91

05/29/91

05/05/92

05/11/93

Loan amount

$6,948.54

$7,549.96

$7,669.97

$7,233. ...


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