Oftentimes bankruptcy proceedings involve a debtor (the individual who owes money) who has fraudulently borrowed money prior to filing bankruptcy but is attempting to scrub that debt off. If a borrower can prove that the debtor fraudulently borrowed the money, a court may not allow the debtor to discharge that debt through bankruptcy. The particular bankruptcy code that addresses exceptions to discharge of a debt is 11 U.S.C. 523. As mentioned above, one of the exceptions to a debtor being able to discharge a debt is fraud. According to long established bankruptcy law, fraud has 5 elements:
(1) that the debtor made a representation;
(2) the defendant knew at the time the representation was false;
(3) the debtor made the representation with the intention and purpose of deceiving the creditor;
(4) the creditor relied on the representation; and
(5) the creditor sustained damage as the proximate result of the representation.*
If a creditor believes that a debtor fraudulently borrowed money or incurred a debt by fraud, they must prove all five elements in an adversary proceeding against the debtor. When a debtor files for bankruptcy, creditors get an opportunity to file objections to having their debt discharged. When filing an objection under 11 U.S.C. 523, a creditor has the opportunity to argue that the elements of fraud existed at the time the debt was incurred.
This element is straightforward. A representation is a statement, explicit or inferred, regarding the debtors circumstances or facts surrounding the debt.
How do I prove that they intended to defraud me?
Courts have found that a debtor has to intend to deceive a creditor through a misrepresentation. However, a court can look at the totality of the circumstances to determine intent. In re Dakota, 284 B.R. at 721. This allows courts to look at the events surrounding the purported fraud to make a determination of whether or not fraud existed. Courts can use their discretion in this area.
A creditor has to prove that they were damaged by the debtor’s representation. If the creditor was not damaged, then the standard for non-dischargeability is not met. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1223, 2010 BL 81460, 3 (9th Cir. 2010). If a creditor can prove that they were damaged, the amount they were damaged is the amount excluded from dischargeability.
Misrepresentations made after a debt is incurred
If a debtor incurs a debt and then later makes a misrepresentation about the debt, the debt is arguably still dischargeable. Smith v. Leverton (In re Leverton), 2014 BL 206333 (Bankr. D. Ariz. July 25, 2014). For example, if a debt is incurred and a couple of years later the debtor makes a misrepresentation about the debt, the misrepresentation was not made for the purpose of incurring the debt. However, if a misrepresentation causes the creditor to move their position after incurring the debt, the debt might not be dischargeable. Why? If a creditor relies on a fraudulent statement by a debtor and is damaged because of that fraudulent representation, there is arguably a claim for fraud.
Proving Fraud is Hard!
Proving fraud is much harder than many people assume. The nuances of factual scenarios, along with the complexity of the bankruptcy code mean that if you’re a creditor and believe that you’ve been defrauded, your best off contacting an attorney. If you have questions about whether your situation qualifies for a claim of fraud, give Catalyst Legal Group a call. One of our experienced attorneys may be able to help you.