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Creditors in California Bankruptcy Case Allege False Pretenses Against Debtor

Constant Wauters [Public domain], via Wikimedia CommonsBankruptcy offers relief to people and businesses in financial distress, allowing them to pay down debts over a period of time, or pay them down quickly by liquidating assets. A court may then grant a discharge of some unpaid debts. The bankruptcy process is not, however, supposed to give people a way out of debts incurred because of dishonest or unlawful acts. Congress has placed provisions in the Bankruptcy Code that except certain types of debt from discharge. A California district court recently considered the appeal of creditors who alleged that their claim against a debtor was excepted from discharge because it involved false pretenses. In re De Long, No. 2:14-cv-02947, order (E.D. Cal., Jan. 7, 2016).

The Bankruptcy Code bars a wide range of debts from discharge. 11 U.S.C. § 523(a). In some cases, such as child support obligations and student loans, an entire class of debt is excepted from discharge. Other exceptions are based on the manner in which the debtor incurred the debt, including debts for something of value “to the extent obtained by…false pretenses, a false representation, or actual fraud…” Id. at § 523(a)(2)(A). Creditors may ask a bankruptcy court to find that a debt is not subject to discharge under this section, after providing notice to all parties and conducting a hearing. Id. at § 523(c)(1).

The debtor in the De Long case owned and operated a construction company in Sacramento, California. The creditors, a married couple, hired the company to work on their home. The original contract between the parties, signed in June 2010, included a total project cost of $246,000 and a payment schedule. The creditors eventually paid the construction company a total of $189,400, but they hired another contractor in late 2011 to complete the job.

The debtor filed for Chapter 7 bankruptcy in March 2012, followed by the construction company that May. Only the construction company identified the creditors in its petition. The creditors filed an adversary proceeding against the debtor in his individual capacity, claiming that the construction company “was a financially insolvent shell corporation used by [the debtor] to avoid individual liability.” De Long, order at 2. They alleged that the debtor accepted payments from them without intending to complete the job “and used the money for other purposes.” Id.

At trial in the bankruptcy court, the debtor moved to strike testimony by the contractor hired to replace him and several other people, arguing that “no witness could “testify as to what work [he] could have done,” since no one but he knew his precise situation at that point in time. Id. at 8. The court agreed and ultimately ruled that the creditors had failed to prove their case under § 523(a)(2)(A). The district court, however, found that the bankruptcy court erred by excluding testimony from the creditors’ witnesses. It reversed the judgment in favor of the debtor and remanded the case for a new trial.

Since 1997, bankruptcy attorney Devin Sawdayi has guided clients in the Los Angeles area through Chapter 7 and Chapter 13 bankruptcies. To schedule a free and confidential consultation to see how we may be of assistance to you, contact us today online, at (800) 474-6050, or at (310) 475-9399.

More Blog Posts:

Chapter 7 Bankruptcy Case Reopened for Creditors Left Out of Debtor’s Schedules, Los Angeles Bankruptcy Lawyer Blawg, August 7, 2015

Bankruptcy Court Grants Trustee’s Motion to Deny Discharge in Chapter 7 Case, Los Angeles Bankruptcy Lawyer Blawg, April 8, 2015

California Bankruptcy Court Rules on Dischargeability of Debt Allegedly Incurred through “False Pretenses”, Los Angeles Bankruptcy Lawyer Blawg, July 27, 2014

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