Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Oct. 23 — A bad check tendered for the down payment of a vehicle is the reason that a debtor can't discharge in bankruptcy a debt she owed to a car dealership, a bankruptcy court in Wisconsin held Oct. 20.
Judge Margaret Dee McGarity of the U.S. Bankruptcy Court for the Eastern District of Wisconsin concluded that debtor Antoinette S. Benton's behavior clearly satisfies the elements of a false representation, false pretense, or actual fraud.
“Her communication, or lack thereof, created a false and misleading understanding of the transaction, which Kaufmann [Motorcars, Inc.] justifiably relied upon to its detriment,” the court said.
The debtor and her ex-boyfriend, Edward Youngblood, purchased a 2007 BMW from Harry Kaufmann Motorcars, Inc. The debtor's original financing arrangement called for a $5,000 down payment, which was later rejected in favor of a $10,000 payment, for a total purchase price of $30,000.
Upon delivery of the vehicle, the debtor signed all of the paperwork, and Youngblood submitted a check to Kaufmann, which was later found to be written against a nonexistent corporate account. The debtor and Youngblood agreed to repay the obligation to Kaufmann, and made a number of payments towards the balance. The remaining balance is $6,800.
Subsequently, the debtor filed for Chapter 7 bankruptcy in which the debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.
Kaufmann filed an adversary proceeding to determine the dischargeability of debt based on the fraudulent check tendered for the down payment of the vehicle.
The debtor can't use the “classic ostrich defense,” the court said. According to the court, the debtor knew that her boyfriend hadn't been employed for some time and was submitting a fraudulent check on her behalf as the down payment for the car. “She benefitted from and participated in the fraud that allowed her to obtain the BWM,” the court said.
The debtor's concealment of information was a “willful misrepresentation” under Bankruptcy Code Section 523(a)(2)(A), the court said.
Under Section 523(a)(2)(A), “a debtor is precluded from discharging any debt ‘for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud,'” the court said.
To succeed on a Section 523(a)(2)(A) claim, the court said, the creditor must establish: “(1) that the debtor made a false representation that the debtor either knew was false or was made with such reckless disregard for the truth as to constitute willful misrepresentation; (2) the debtor possessed an actual intent to defraud; and (3) the creditor justifiably relied on the representation and was damaged thereby.”
The court found that “silence or concealment” may constitute false pretenses. The debtor through her statements and actions gave the dealership the impression that she and Youngblood were engaged, living together, and planning to get married, the court said. She knowingly participated in creating the “impression of a couple with a rosy, prosperous future,” when in fact the debtor was “transitioning out of the residence,” the court said.
The debtor also helped to perpetuate a false impression about the couple's financial viability, the court said. She knew at the time of the purchase that Youngblood hadn't worked for a long time due to a medical condition, and was awaiting his disability check. According to the court, the debtor should have revealed the impossibility of Youngblood's ability to submit the down payment to Kaufmann, and her failure to disclose it was not inadvertent. It was a willful misrepresentation, the court concluded.
The court also found that Kaufmann's reliance on the debtor's misrepresentation was justifiable under the circumstances. “The appearance that both parties were working and about to be married helped induce Kaufmann to rely on the tender of that check,” the court said.
Defendant/debtor Antoinette Benton, Milwaukee Wis., represented herself in the adversary proceeding; Daniel J. Winter, Law Offices of Daniel J. Winter, Chicago, and Michael S. Winter, Milwaukee, Wis., represented plaintiff Harry Kaufmann Motorcars Inc.; Michael J. Watton, Milwaukee, Wis., represented debtor Antoinette Benton in her bankruptcy case; Chapter 7 Trustee was John M. Scaffidi, Milwaukee, Wis.
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