A mortgage lender did not establish that a debtor’s mortgage debt was nondischargeable in a Chapter 7 bankruptcy, according to a California federal court. In re Duarte, No. 5:13-cv-905-ODW, order (C.D. Cal., Aug. 14, 2013). The lender had sought an order from the bankruptcy court declaring the debt nondischargeable under a statute prohibiting discharge of debts involving the acquisition of property by fraud. After the bankruptcy court denied the lender’s motion, the district court reviewed the Ninth Circuit’s legal requirements for establishing nondischargeability for fraud, held that the lender had not met its burden, and affirmed the bankruptcy court’s judgment.
The debtor obtained a mortgage loan from the lender in the amount of $558,750 in November 2007, applying it to the purchase of a new home. The court noted that the debtor does not read English, and that the lender’s loan agent assisted him in completing the loan paperwork. The agent did not require the debtor to provide some of the financial metrics requested in the paperwork. Id. at 4. Once the purchase of the home closed, the debtor made mortgage payments regularly for thirty months. He defaulted in early 2010, and filed a Chapter 7 bankruptcy petition that March. After the lender applied the proceeds from the foreclosure sale and the mortgage insurance payout, the remaining balance was just under $74,000.
The lender filed an adversary proceeding to have the mortgage deemed nondischargeable. It cited a statute prohibiting discharge of a debt “for…property…obtained by false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). The district court reviewed the five elements that a creditor must prove, by a preponderance of evidence, to establish nondischargeability under this section: 1) the debtor’s fraudulent statement, omission, or conduct; 2) the debtor’s knowledge of its falsity; 3) the debtor’s intent to defraud; 4) the creditor’s “justifiable reliance” on the deceit; and 5) damage proximately caused by the creditor’s reliance. Duarte, order at 3; In re Weinberg, 410 B.R. 19, 35 (B.A.P. 9th Cir. 2009); Grogan v. Garner, 498 U.S. 279, 291 (1991). The district court found no evidence of any misrepresentations or deceptive actions by the debtor that would support a finding of nondischargeability.
The debt was also nondischargeable, the lender claimed, because it was incurred to obtain property with the use of a “materially false” written statement “respecting the debtor’s…financial condition,” which the debtor used “with intent to deceive,” and on which the creditor “reasonably relied.” 11 U.S.C. § 523(a)(2)(B). The district court noted that “reasonable reliance” is a high bar for a creditor, and that the creditor relying on such a written statement has “some duty to investigate [its] accuracy.” Duarte, order at 3; In re Gertsch, 237 B.R. 160, 170 (B.A.P. 9th Cir. 1999). Many of the deficiencies, which the lender claimed was evidence of the debtor’s fraud, the court stated, were actually the result of the loan agent’s assistance to the debtor with the loan paperwork. The court affirmed the bankruptcy court’s holding that the debtor did not intend to deceive the lender, and did not commit any acts of fraud.
Since 1997, bankruptcy attorney Devin Sawdayi has guided people in the Los Angeles area through the process of Chapter 7 and Chapter 13 bankruptcies. Our office is dedicated to helping people in financial distress rebuild their lives with respect and dignity. Please contact us today online or at (310) 475-9399 to schedule a free and confidential consultation to see how we can help you.
More Blog Posts:
Supreme Court Rules on Meaning of “Defalcation” in Statutory Provision for Nondischargeable Debts in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2013
Court Addresses Grounds for Granting Relief from Automatic Stay in Chapter 7, Los Angeles Bankruptcy Lawyer Blawg, July 2, 2013
Illness or Other Misfortune Often Leads to Bankruptcy, as Shown by a Los Angeles Chapter 13 Case, Los Angeles Bankruptcy Lawyer Blawg, June 25, 2013