Bandi – Dischargeability under 523(a)(2)(A)

On June 12, the Fifth Circuit issued an opinion addressing the meaning of “a statement respecting the debtor’s or an insider’s financial condition” [and the distinction between non-dischargeability of debts under 523(a)(2)(A) and (B)]. In re Bandi, 2012 WL 2106348 (5th Cir.2012).

523(a)excepts from discharge any debt –

(2) 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;

                        (B) use of a statement in writing—

                                    (i) that is materially false;

                                    (ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; …” [Emphasis added.]

In Bandi the debtors (two brothers) guaranteed a loan their corporation obtained from a friend. Prior to obtaining the loan, one of the brothers represented that he had purchased a home and both of the brothers represented that they had purchased a condominium project and an office building. They even took the friend (and his lawyer wife) on a tour of “their” office building. The brothers did not actually own any of the properties and admitted as much at trial. They argued that their statements were made with respect to their financial condition, so they did not fall within the scope of 523(a)(2)(A) and they were not in writing, so they did not fall within the scope of 523(a)(2)(B), either. The focus of the opinion is on the meaning of “a statement respecting the debtor’s or an insider’s financial condition.”

 The court held: “The term ‘financial condition’ has a readily understood meaning. It means the general overall financial condition of an entity or an individual, that is, the overall value of property and income as compared to debt and liabilities. A representation that one owns a particular residence or a particular commercial property says nothing about the overall financial condition of the person making the representation or the ability to repay the debt. The property about which a representation is made could be entirely encumbered, or outstanding undisclosed liabilities of the person making the representation could be far more than the value of the property about which a representation is made.” The court found that the false statements were not statements respecting the debtors’ financial condition within the meaning of 523(a)(2)(A) and the debt was non-dischargeable.

 I’m not sure I agree with the court’s definition. The Code does not say “the general overall financial condition” of the debtor – it says a statement “respecting” the debtor’s financial condition. My American Heritage Dictionary defines “respecting” as “In relation to; concerning.” “I own this office building” would seem to “relate to” my financial condition. This may just be one of those “bad facts make bad law” cases. The debtors got their friend to loan them $150,000, at least in part by “puffing.” It doesn’t seem fair for them to get away with it. The court fashioned a remedy so they didn’t. 

Michael Baumer

 

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by Michael Baumer