Court Denies Motion to Dismiss In the Chapter 7 bankruptcy case of McCarthy, Kevin F.; In re (Colorado East Bank & Trust v. McCarthy), the bankruptcy court ruled that the plaintiff’s claim was not dischargeable in bankruptcy, but that the plaintiff violated the automatic stay by attempting to collect the debt during the bankruptcy process.

The details of the bankruptcy case:

The Chapter 7 debtor was a 63-year-old businessman who established and operated restaurants after managing his family’s funeral home business for 17 years. The restaurants took out various loans, some of which were personally guaranteed by the debtor who also took out personal loans to support the business. In June 2007, the plaintiff loaned $175,000 to one of the restau­rants. The loan was unsecured and guaranteed by the debtor. In February 2008, the plaintiff loaned $105,811 to the debtor. This loan was also unsecured. Prior to the making of the loans, the debtor did not have a direct busi­ness relationship with the plaintiff. However, the debtor said he knew the bank’s president and vice president for some time. The vice president was the plaintiff’s loan offi­cer. As part of the loan process, the debtor was required to provide a personal financial statement. It was undisputed that the financial statement given to the plaintiff prior to the issuance of the restaurant loan failed to disclose the debtor’s guaranty of two loans totaling almost $2.9 mil­lion. If these liabilities had been included, the financial statement would have shown a negative net worth for the debtor. The plaintiff did not investigate any of the informa­tion provided on the debtor’s financial report, other than to pull a credit report. The vice president testified that the loan application process complied with the plaintiff’s usual procedures for unsecured loans. After the debtor filed for bankruptcy, the vice president called the debtor about the restaurant loan, asked him to reaffirm the debt, and threatened to close the restaurant. This contact was followed up with an e-mail threatening a suit against the debtor if the restaurant loan was not paid. The bankruptcy court ruled that the plaintiff’s claim against the debtor was nondischargeable pursuant to Section 523(a)(2)(B) and that the plaintiff had willfully violated the automatic stay.

While the bankruptcy court said that the debtor behaved with reckless disregard for the truth by omitting the disclosure of his outstanding debt of $2.9 million when applying for the new loans, they granted the debtor $1,000 in punitive damages plus costs.  It’s important to note that even if the debtor receives a bankruptcy discharge on his other debts, the plaintiff in this case will have the right to pursue payment for the loans after the bankruptcy.