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California Bankruptcy Court Rules on Dischargeability of Debt Allegedly Incurred through “False Pretenses”

Maxiline [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayA debtor may not discharge a debt in bankruptcy that involved money, services, or something else of value obtained by “false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). A California bankruptcy court recently reopened a Chapter 7 case, at the request of a creditor, and ruled that the creditor’s loan was not dischargeable. It found that the debtor, who was involved in an extramarital relationship with the creditor at the time the loan was made, obtained the loan by a false representation. The district court affirmed the bankruptcy court’s ruling. In re Bachman, No. 5:13-cv-01130, civil minutes (C.D. Cal., Jul. 17, 2014).

The debtor and his wife filed a Chapter 7 bankruptcy petition in July 2008 and received a discharge that November. The court closed the case in January 2009. The creditor filed a motion to reopen the case in March 2012, claiming that she never received notice of the bankruptcy case. The court granted the motion, and the creditor filed an adversary proceeding asking the court to rule that two loans from her to the debtor were nondischargeable.

According to the district court’s recitation of facts, the debtor and the creditor first met at an investment seminar in April 2003. They began a romantic relationship, although the debtor was married to someone else. The debtor was involved in “house flipping,” buying and selling residential properties as an investment, when the relationship began. He asked the creditor to loan him $50,000 in March 2005 to assist in a house purchase, promising to repay that amount with interest in one year. In March 2006, the debtor did not repay the full amount of the loan, claiming that he did not have enough funds.

The debtor asked the creditor for a second $50,000 loan in December 2006, claiming that he needed to hold that amount in an investment account to qualify for a mortgage. The creditor loaned him the money, but instead of holding it, the debtor used it to trade options. He never repaid the loans, although he continued to make small payments through 2010. The Chapter 7 petition did not include the two loans in the list of debts.

The creditor learned about the bankruptcy in 2012 when she attempted collection on the two loans. Her adversary proceeding sought a ruling that neither loan was dischargeable. The bankruptcy court ruled in the creditor’s favor with regard to the second loan, and the debtor appealed to the district court.

The district court cited a five-part test for determining if debt is nondischargeable due to a false representation.  The debtor must have (1) made a representation (2) that he or she knew was false at that time (3) with intent to deceive the creditor, and the creditor must have (4) relied on the representation (5) to their detriment. Bachman, minutes at 4, citing In re Hashemi, 104 F.3d 1122, 1125 (9th Cir. 1996). The debtor’s representation to the creditor regarding the need for liquidity in his investment account, the court found, was false, and it fit all five prongs of the test.

Bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area since 1997, helping them repair their finances through Chapter 7 or Chapter 13 bankruptcies with dignity and respect. To schedule a free and confidential consultation to see how we can assist you, please contact us today online or at (310) 475-9399.

More Blog Posts:

Supreme Court Decision on Dischargeability of Debts Results in Remand of Several California Cases to Bankruptcy Court, Los Angeles Bankruptcy Lawyer Blawg, December 6, 2013

Supreme Court Rules on Meaning of “Defalcation” in Statutory Provision for Nondischargeable Debts in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2013

Payroll Debts Ruled Nondischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 23, 2013

Photo credit: Maxiline [Public domain, CC0 1.0], via Pixabay.