Section 4.38 Generally

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

1. (§4.38) Generally

Under 11 U.S.C. § 523(a)(2)(A), the discharge does not include any debt:

for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.

To prevail in an action under the discharge exception for debts obtained by false pretenses, a false representation, or actual fraud, a creditor must prove by a preponderance of evidence that:

· the debtor made a false representation;

· at the time, the debtor knew the representation was false;

· the debtor made the representation deliberately and intentionally with the intention and purpose of deceiving the creditor;

· the creditor justifiably relied on the representation; and

· the creditor sustained loss and damage as a proximate result of the representation having been made.

In re Newell, 164 B.R. 992, 995 (Bankr. E.D. Mo. 1994) (Barta, B.J.).

Section 523(a)(2)(B), rather than § 523(a)(2)(A), applies to materially false written statements regarding the financial condition of the debtor (or an insider). In re Dallam, 850 F.2d 446 (8^th Cir. 1988), involved a contractor/debtor who submitted an affidavit to a title insurance company containing false statements. Subsequently, the title insurer had to settle the subcontractors’ claims. When the contractor filed for bankruptcy, the title insurer sought to recover the amount that was paid to settle the claims as a nondischargeable debt. The Eighth Circuit held that § 523(a)(2)(A) incorporates the elements of common-law fraud, i.e., that the debtor knowingly made a false statement with the intent and effect of inducing reliance on it and thereby caused loss to the creditor. Dallam, 850 F.2d at 449. Counsel should also be aware of the heightened pleading standards for fraud claims.

Actual fraud “consists of any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another—something said, done or omitted with the design of perpetrating what is known to be a cheat or deception.” In re Moen, 238 B.R. 785, 790 (B.A.P. 8^th Cir. 1999) (quoting RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5^th Cir. 1995)). A settlement of an underlying fraud claim in a state court action, including an agreement by the debtor to pay a plaintiff, can amount to a debt for money obtained by fraud and excepted from a discharge under § 523(a)(2)(A). Archer v. Warner, 538 U.S. 314, 322 (2003).

A false pretense, on the other hand, “involves implied misrepresentation or conduct intended to create and foster a false impression.” Moen, 238 B.R. at 791 (quoting In re Guy, 101 B.R. 961, 978 (Bankr. N.D. Ind. 1988)). If circumstances imply a particular set of facts and the debtor knows the facts to be otherwise, the debtor “may have a duty to correct what would otherwise be a false impression,” which is the basis of the false pretenses exception provided in § 523(a)(2)(A). Moen, 238 B.R. at 791 (quoting In re Malcolm, 145 B.R. 259, 263 (Bankr. N.D. Ill. 1992)). The concept of false pretenses has also been described as “a series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, or false and misleading understanding of a transaction, in which a creditor is wrongfully induced by the debtor to transfer property or extend credit to the debtor.” In re Beza, 310 B.R. 432, 437 (Bankr. W.D. Mo. 2004) (Dow, B.J.) (false pretense that funds were available for payment created by delivery of check for cash advance to neighboring business owner); In re Overall, 248 B.R. 146, 151 (Bankr. W.D. Mo. 2000) (Federman, C.J.) (cashing of child...