SC Lawyer, Nov. 2005, #1. Debts based on bad checks in S.C. Bankruptcy Court.

AuthorBy George L. Clauer III

South Carolina Lawyer


SC Lawyer, Nov. 2005, #1.

Debts based on bad checks in S.C. Bankruptcy Court

South Carolina Lawyer November 2005 Debts based on bad checks in S.C. Bankruptcy Court By George L. Clauer III When the maker of an NSF check files bankruptcy

When an irate creditor comes to your office holding an NSF check issued by person who has filed a bankruptcy case, she often expects a quick and easy finding that the debt is not dischargeable in bankruptcy for fraud. Unfortunately, the debt based on a bad check is not automatically and not even usually held to be non-dischargeable. To prevent discharge of the debt based on the bad check, the creditor must file an adversary complaint within 60 days of the first date set for the meeting of creditors and usually bears a heavy burden of proof of fraud. F.R.Bank.P. 4007(c).

Until the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which is October 17, 2005, objections to dischargeability of debts for fraud are only available in cases filed under Chapter 7, Chapter 11 cases filed by individuals, and Chapter 12 (family farmer cases). Currently no objection to discharge of debts for fraud is available in a Chapter 13 case unless a rarely granted "hardship discharge" is requested. Objections to discharge of debt for fraud will become available in all Chapter 13 cases filed after the effective date of BAPCPA.

Fraud in the transaction is distinguishable from a fraudulent check

Where the underlying debt for which a check was issued is based on fraud, the court may hold the debt to be non-dischargeable based on the underlying fraud without reference to any fraud directly related to the issuance of the check. In addition, a claim of fraud in connection with a check intentionally written on a closed account is an easier proposition to deal with. There the debtor can have little or no basis to assert that the dishonor of the check was inadvertent or beyond his control. In re Feldman, 111 B.R. 481 (Bankr.E.D.Pa. 1990).

Debts for money, property or services obtained by fraudulent checks

An NSF check will only be non-dischargeable to the extent that the resulting debt was "for money, property or services . .

.obtained by . . . false pretenses, a false representation, or actual fraud . . ." 11 U.S.C. § 523(a)(2)(A) (emphasis added), Printy v. Dean Witter Reynolds Inc., 110 F.3d 853, 857 (1st Cir. 1997). This means that a check issued in payment or part payment of a pre-existing debt does not result in any new loss, merely failure to pay an old debt. This creditor has not given up any new money, property or services as a result of the issuance of the check in payment of a pre-existing debt.

The only time the mere issuance of a check, unrelated to other fraud, can result in the denial of the dischargeability of the debt is when the check is tendered at the same time the debt is incurred for money, property or services. DANIEL R. COWANS, BANKRUPTCY LAW AND PRACTICE, § 6.21 at 2 (6th ed. 1994); Forbes v. Four Queen Enterprises, Inc., 210 B.R. 905, 912 (D.R.I. 1997).

The question of whether the debt based on the NSF check is non-dischargeable is governed by federal bankruptcy law. "The validity of a creditor's claim is determined by rules of state law. Since 1970, however, the issue of non-dischargeability has been a matter of federal law governed by the terms of the Bankruptcy Code." In re Allison, 960 F.2d 481, 483 (5th Cir. 1992).

The creditor's burden of proof to obtain a denial of dischargeability of a debt for money, property, services or an extension, renewal or refinancing of credit, to the extent obtained by a misrepresentation, is that:

(1) the debtor made a fraudulent misrepresentation;

(2) the debtor's conduct was with the intention and purpose of deceiving or defrauding the creditor;

(3) the creditor relied on the debtor's representations or other fraud; and

(4) the creditor sustained loss and damage as a proximate result of the representations of fraud.

Boyuka v. White (In re White), 128 Fed. Appx. 994, 998 (4th Cir. 2005); In re Biondo, 180 F.3d 126, 134 (4th Cir. 1999).

State statutes creating presumption of fraud are not enforceable in bankruptcy

The bankruptcy court cannot apply the South Carolina statute that provides that the failure of the drawer of check to pay the amount of a returned check within 10 days of demand constitutes "prima facie evidence of fraudulent intent" because this kind of imputed or implied fraud is insufficient for the purposes of denial of dischargability of the debt in bankruptcy. S.C. Code Ann. § 34-11-70 (1976); In re Allison, 960 F.2d at 483.

The representations made or implied by issuing a check

The next question is whether the issuance of a check for goods or...

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