The ultimate goal of any debtor is to receive a discharge. There are grounds for which the debtor will not receive a discharge of any debts and there are grounds for which the debtor may not receive a discharge of particular debts. Fraud is one of those grounds. Burmeister v. Wilcox (In re Wilcox), 194 B.R. 631 (Bankr.W.D.Mo. 1996); In re Reimer, 182 B.R. 816 (Bankr.E.D.Mo. 1995).
The Bankruptcy Code excepts from discharge a debt for money, property or services to the extent obtained by false pretenses, a false representation or actual fraud. A recent Supreme Court decision, Field v. Mans, ____ U.S. _____, 116 S.Ct. 437 (1995) held a creditor must prove that he justifiably relied on a fraudulent misrepresentation in order for the debt to be nondischargeable. Justifiable reliance is a lesser standard than the previous standard of reasonable reliance. The standard does not require a creditor to independently investigate a representation unless the circumstances would be apparent to one of his knowledge and experience.
In Wilcox, the court held that the former wife and father-in-law justifiably relied on the debtor's intentional misrepresentations as to the reason the debtor requested the quitclaim deed to himself before the sale, the amount of profit he received, his distribution, and that he attended the closing to intercept the check. The court held further that the former wife and father-in-law were under no duty to independently investigate the debtor's statements because the circumstances did not put them on notice that the debtor was deceiving them. The court then found that the debtor converted the funds knowingly and deliberately deceiving the former spouse and father-in-law about the amount of net profit to be received and the amount actually received. Therefore, the court held that the debts to the spouse and father-in-law were nondischargeable. Additionally, the court held that the attorneys' fee award to the former spouse's lawyer for contempt was a nondischargeable debt. Citing In re Reimer, the court held that the attorneys' fees incurred in attempting to stop the conduct and compel compliance with the decree were ancillary to the primary debt. The court maintained its holding, notwithstanding that the attorneys' fees were ordered payable directly to counsel rather than to the former spouse. This is because even though direct payment was permitted, the client still owes the attorney for services if the opposing party does not pay his order.
When a debtor files bankruptcy, a question that immediately should come to mind is whether the creditor has an interest in filing a proof of claim. A proof of claim is a form document that the bankruptcy court uses in determining the amount claims against the estate and the pro rata amount each creditor will receive. A creditor who fails to file a claim risks not sharing in the distribution, particularly if not listed on the bankruptcy schedules. Even if the creditor has filed a claim, the claim must be "allowed" in order for the creditor to receive a distribution. A filed claim is allowed unless a party in interest files an objection. In a recent case, Faris v. Jefferson Bank (In re Faris), 194 B.R. 931 (Bankr. E.D.Pa. 1996), the debtor filed an objection to the claim of a bank, arguing the bank's claim should be disallowed since the method in which the debtor became obligated to the bank violated the Equal Credit Opportunity Act (ECOA).
In Faris, the debtor/wife was a homemaker with no income and almost no assets. The husband was a businessman with significant assets, although most of them were heavily liened. The husband approached the bank for a $250,000 business loan to be secured by the marital home, which the husband and the debtor owned as tenants in the entirety. The debtor did not participate in the loan negotiations, nor did she sign the application. Nevertheless, the bank required she sign the note and mortgage.
Thereafter, the husband made all payments on the obligation until he went into default and filed a Chapter 11 petition. Over a year later, the wife filed a Chapter 13 petition. In the wife's bankruptcy, the bank filed a proof of claim based on the loan transaction, and the debtor objected. The court held the ECOA was enacted to protect consumers and to prevent discrimination based on marital status. If an applicant qualifies on his own, the ECOA makes it unlawful to require the signature of the applicant's spouse. The court found that the bank required the signature of the wife on the note and mortgage.
The question then became whether the requirement of the bank for the wife's signature to be included on the note and mortgage violated the ECOA. The court decided the requirement to have the wife sign the mortgage did not violate the ECOA since the house was owned by both spouses as tenants in the entirety such that neither could encumber the home without the consent of the other. However, to require the debtor's signature on the note would violate the ECOA unless the bank "reasonably believed" the signature on the note was necessary to secure the home in conjunction with the mortgage. The court held that upon conducting some minor research, the bank would have found that state law does not require the spouse's signature on the note in order to collateralize the residence. Therefore, the bank did violate the ECOA in requiring the debtor's signature on the note.
Obviously, the debtor has an interest in the amount of allowed claims. The other creditors also have an interest since many claims in a small pot dilute the distribution to each creditor. Therefore, sometimes it is worth examining the claims register maintained by the court to determine whether any claims should be disallowed. Of course, the party considering filing an objection will want to consider the cost of pursuing the objection in comparison to the benefit that can be derived from having the claim disallowed.
In Williams v. Califf (In re Califf), 195 B.R. 499 (Bankr. N.D.Ala. 1996), the debtor filed a Chapter 13 petition and listed the plaintiff as a general unsecured creditor in the amount of $3,000 for child support. The debtor then converted his Chapter 13 case to a Chapter 7 case. The debtor also amended his schedules to add the creditor to his Chapter 7 case, listing the plaintiff without indicating the amount owed or nature of the plaintiff's claim. In response, the plaintiff filed an adversary action seeking determination of the effect of the debtor's Chapter 7 discharge on the debtor's child support and retirement obligations to the plaintiff. The debtor conceded the nondischargeability of the child support obligation, and so the only issue became the effect of the debtor's Chapter 7 discharge upon the plaintiff's interest in the debtor's military retirement benefits.
The divorce decree provided the plaintiff would receive 45% of the retirement pay the debtor would receive upon retirement. The plaintiff argued the 45% was not dischargeable because it was her property, not a debt subject to discharge. The debtor argued it was part of a property settlement agreement subject to dischargeability pursuant to 11 U.S.C. 523(a)(15). The court agreed that disposable military retirement benefits are not debts defined under 11 U.S.C. 101(12) but are the separate property of the debtor's former spouse, citing the Uniformed Services Former Spouses Act.
Accordingly, if the issue of dischargeability arises under 523(a)(15), think about to whom the property rightfully belongs. If the property belongs to the nonfiling spouse, that person may be able to prevail in a nondischargeability contest by showing the property is not even subject to discharge.