Failure To Prove Fraud Ends In Dismissal Of Bankruptcy Complaint

In a recent Chapter 7 bankruptcy case, a creditor/plaintiff accused the debtor of obtaining financing under false pretenses, misrepresentation and fraud and asked the bankruptcy court to make the debt nondischargeable. The situation is one that serves as a warning against doing business with no written contract. The creditor/plaintiff in this bankruptcy case alleges that the debtor borrowed money from them and promised to repay the money plus interest. The debtor, Mr. Galvan and the plaintiff, Mr. Dickinson co-borrowed $40,000 from Benchmark Bank in 2002.  The plaintiff also alleges that he invested other money into the debtor’s business ventures but received no repayments.

In the complaint to the bankruptcy court, the plaintiff alleges that the debtor borrowed the money under false pretenses and purposely misled them about their ability to repay the loan and how they would use the money. But because there was no written contract between the debtor and the plaintiff, and there was a lack of other evidence pointing to fraud, it was impossible for the plaintiff to really prove any of their accusations.

What the bankruptcy code says about providing proof:

In order for a creditor to receive an exception from discharge under 11 U.S.C. § 523(a)(2)(A) based on false misrepresentation,” a creditor must show that (1) the debtor made a false representation or omission, (2) that the debtor (a) knew was false or made with reckless disregard for the truth and (b) was made with the intent to deceive, (3) upon which the creditor justifiably relied.” Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010). In order to receive an exception from discharge under 11 U.S.C. § 523(a)(2)(A) based on actual fraud, “the creditor must establish the following: (1) a fraud occurred; (2) the debtor intended to defraud the creditor; and (3) the fraud created the debt that is the subject of the discharge dispute.”

The bankruptcy court ruled against the plaintiff in this case.