Legal Blog
A Perpetrator of Fraud Cannot Hide Behind the Skirts of Bankruptcy
By: James M. Hoffman
An honest person who seeks bankruptcy protection is relieved of most of his or her debts at the conclusion of the proceedings, which is known as a “discharge” of debts. The discharge is a cornerstone of the Bankruptcy Code and is intended to provide what the Supreme Court has referred to as the “honest but unfortunate” debtor with a fresh start. However, not all debts are discharged in bankruptcy. The Bankruptcy Code automatically excludes certain types of debts from discharge, and provides creditors with the opportunity to object to the discharge of their debts if they can prove to the bankruptcy court that their debt was incurred by the debtor under limited and specific circumstances, usually involving some form of misconduct or dishonesty on the part of the debtor.
William Erskine of Offit Kurman, P.A. successfully represented a husband and wife (the couple) in an objection to their debt owed by a debtor in a three-day trial before the bankruptcy court in Baltimore, Maryland. Specifically, the couple objected to the discharge of substantial sums of money advanced by them to the debtor prior to her bankruptcy filing in connection with the purchase of real property based on three exceptions to discharge under the Bankruptcy Code: fraud, larceny, and willful and malicious injury.
The couple alleged that the debtor induced them to advance the funds toward the purchase of the property by misrepresenting that the purchase price was $1.7 million (it was actually $1.2 million), that the wife would be an equal owner of the property, and that the funds advanced by them would be secured by a mortgage against the property. The couple also alleged that the debtor misrepresented that she had invested more than $400,000 of her own money toward the purchase of the property. The couple alleged that through her scheme, the debtor acquired sole ownership of the property, and the monies they advanced to her were not secured by a mortgage lien against the property. Simply put, the debtor induced them to provide her with the funds she needed to purchase the property without investing any of her own money.
After considering the evidence presented at trial, including conflicting testimony of numerous witnesses, the bankruptcy court determined that the debtor was not entitled to a discharge of a debt in the amount of $695,000 owed to the couple. The court found that Mr. Erskine met the burden of proof on all three grounds upon which the couple alleged that the debt was nondischargeable. First, the court noted that “perpetrators of fraud were not allowed to hide behind the skirts of the Bankruptcy Code” under Section §523(a)(2)(A) of the Bankruptcy Code. The court also concluded that the acts of the debtor constituted larceny as a knowing theft of money under Section §523(a)(4) of the Bankruptcy Code. Finally, the debt owed by the debtor to the couple constituted a willful and malicious injury to the couple’s property excepted from discharge under §523(a)(6) of the Bankruptcy Code.
Bankruptcy may not be the end to creditors’ claims against a person who has filed for bankruptcy protection. Too often creditors do not take steps to protect their interests because they mistakenly believe that their debt is uncollectible when the debtor files for bankruptcy protection. While it is true that bankruptcy offers protections for the “honest but unfortunate” debtor, the bankruptcy process also affords creditors with an opportunity to object to the discharge of a debt owed to them if they can show that the debtor incurred the debt through false pretenses, fraud, larceny, or other grounds. By seeking the advice of experienced bankruptcy counsel, creditors and debtors can best protect their interests in the bankruptcy process.
The Court’s Order and Memorandum is dated January 23, 2018, in Allison v. Lee (In re Lee), Case No. 16-24339-MMH; Adv. Proc. No. 17-00071-MMH.
Questions about discharging debts or other bankruptcy law issues?
Please contact James Hoffman at jhoffman@offitkurman.com
Read more of our blogs from the CRRAB Group (Creditors Rights, Reorganizations and Bankruptcy) at Offit Kurman.
ABOUT JAMES HOFFMAN
James Hoffman is a corporate, bankruptcy and litigation attorney. Mr. Hoffman focuses his practice in the areas of representing various business types, particularly closely held businesses and also has a broad base of experience representing creditors, trustees and debtors in bankruptcy cases and litigation. In his business practice, Mr. Hoffman represents businesses through their life cycles from creation, to formulating employment and shareholders agreements, creating contracts, collecting debts and closing the business through sale or liquidation. Mr. Hoffman has represented nine different Chapter 7 trustees, and several Chapter 11 trustees and receivers. Thus, he is “a lawyer’s lawyer.” He has been involved in handling a broad range of litigation before state courts, including disputes involving complex commercial litigation, breach of contract actions, and collection actions.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 140 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eleven offices serve individual and corporate clients in the Virginia, Washington, DC, Maryland, Delaware, Pennsylvania, New Jersey, and New York City regions. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.
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