Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
A jazz singer can wipe out $33,680 in back rent owed to her landlord in her bankruptcy case, the U.S. Bankruptcy Court for the Northern District of Illinois held ( In re McDougal , 2017 BL 270038, Bankr. N.D. Ill., 16 B 08776, 8/2/17 ).
Tim and Katherine Grover failed to prove that the rent Erin McDougal owed them for her apartment in Chicago wasn’t dischargeable in bankruptcy due to her fraudulent behavior, Judge Jacqueline P. Cox wrote Aug. 2.
Bankruptcy Code Section 523(a)(2)(A) prevents a debtor from wiping out any debt for money, property, or services or an extension, renewal, or refinancing of credit, if it is obtained by false pretenses, a false representation, or actual fraud.
The Grovers argued that McDougal made false representations after the lease began with the intent to deceive them into thinking she would pay the rent and stop them from evicting her.
To prevail, the Grovers needed to prove that McDougal made a representation she knew was false or with reckless disregard for whether it was true, with an intent to deceive or defraud, and they relied on it, the court said.
The Grovers failed to show that McDougal made false statements to obtain property, the court said.
McDougal made several promises to the Grovers by text message that she was trying to catch up with her past due rent obligations, and each promise was to pay in the future. Her failures to satisfy her obligations were contract breaches, not fraud, the court said. Failure to honor a promise is just breach of contract but making a promise that one intends not to keep is fraud, the court said, citing Seventh Circuit precedent.
The court didn’t find that McDougal made her promises with any intent to deceive. As a struggling jazz singer, McDougal didn’t make enough to afford the apartment and needed to sublet it on Airbnb even though the lease prohibited it.
The Grovers didn’t rely on false representations, but on McDougal’s promises, the court said. She was a tenant who paid her rent for the first lease so they gave her a second lease. The Grovers never asked McDougal to submit information about how or when she earned her income to pay the rent, the court noted.
Law Office of Joel F. Handler, Chicago, represented Tim and Katherine Grover; Law Office of Daniel Brown, Chicago, Richard D. Grossman Law Offices, Chicago, Chicago Volunteer Legal Services, Chicago, and Lattas & Lattas Law, LLC, Chicago, represented Erin McDougal; Chapter 7 Trustee Michael K. Desmond, Figliulo & Silverman P C, Chicago, represented himself.
To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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