Published on:

California Bankruptcy Court Reviews Standards of Proof for Nondischargeability of Debts Due to Fraud, or Tortious or Illegal Acts

debtsA bankruptcy court may grant a discharge of remaining debts at the end of a case, allowing a fresh start for the debtor. Certain debts, however, are not eligible for discharge. A bankruptcy judge in California recently considered a creditor’s argument that an alleged debt was nondischargeable on one or more fault-based grounds, since it was incurred as a result of fraud or false pretenses, fraud by a fiduciary, or willful and malicious acts resulting in injury. 11 U.S.C. §§ 523(a)(2)(A), (a)(4), (a)(6). The judge reviewed the standard of proof for each alleged ground and ruled that the creditor failed to provide sufficient evidence to support her claims. In re Ogilvie, No. 13-bk-31179, Adv. Proc. No. 13-ap-03221, mem. dec. (N.D. Cal., Feb. 23, 2015).

A debt involving something of value obtained through “false pretenses, a false representation, or actual fraud” is not dischargeable. 11 U.S.C. § 523(a)(2)(A). The Ninth Circuit, which includes California, uses a five-part test in this sort of claim:  (1) the debtor made statements or representations to the creditor, (2) which they knew at the time were false, (3) with fraudulent intent, (4) and the creditor reasonably relied on these statements or representations in making the transaction and (5) suffered damages as a result. In re Eashai, 87 F.3d 1082, 1086 (9th Cir. 1996). A creditor must establish each element by a preponderance of the evidence.

Debts incurred through fraud while acting in a fiduciary capacity are not dischargeable. 11 U.S.C. § 523(a)(4). A creditor has to prove, by a preponderance of the evidence, the existence of an express trust, the actual act of fraud, and the fiduciary relationship. In re Stanifer, 236 B.R. 709 (B.A.P. 9th Cir. 1999). Proving a trust requires evidence of a trust agreement, including “sufficient words to create a trust.” Ogilvie, mem. dec. at 9.

A debt resulting from a “willful and malicious injury” caused by the debtor is also not dischargeable. 11 U.S.C. § 523(a)(6). This requires proof by a preponderance of the evidence that the injury itself was intentional, not just the action that resulted in the injury. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998).

The mother of the creditor in Ogilvie was the debtor’s half-sister, who inherited more than $150,000 from her father’s estate in 2004. She suffered from severe health problems, and she worried that “she might not live to see her daughter into adulthood.” Ogilvie at 2. She therefore gave some part of the inheritance to the debtor “for safekeeping.” Id. According to the debtor, the creditor’s mother intended to conceal most of the inheritance from the government, out of fear of losing the benefits payments she needed for her health care.

The creditor’s mother died in 2009. When the debtor filed for bankruptcy, the creditor commenced an adversary proceeding, seeking a finding that the full amount of the inheritance, plus additional costs and damages, was nondischargeable because of fraud. The court found that neither party could account for what became of about $100,000 of the inheritance, and the evidence was insufficient to support any of the three grounds of nondischargeability. It described the creditor’s claims as a demand that the court “infer or assume that [the debtor] frittered [the money] away.” Id. at 6.

Los Angeles debt relief attorney Devin Sawdayi has helped clients through the Chapter 7 and Chapter 13 bankruptcy processes since 1997. To schedule a free and confidential consultation with a member of our team, contact us today online, at (310) 475-9399, or at (800) 474-6050.

More Blog Posts:

Courts Begin to Reconsider Standard Used to Determine Dischargeability of Student Loans, Los Angeles Bankruptcy Lawyer Blawg, April 4, 2016

Court Rules that Fines Under California’s Private Attorney General Act Are Not Dischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 14, 2015

Tax Penalties Accrued More than Three Years Before Bankruptcy Filing Date Are Dischargeable, Court Rules, Los Angeles Bankruptcy Lawyer Blawg, July 24, 2015

Photo credit: Constant Wauters [Public domain], via Wikimedia Commons.