It’s critical in any bankruptcy filing to be forthright and honest about all outstanding debts, assets and obligations. This is especially true for business owners, who in some cases can be held personally liable for company debts.
There have been instances in which debtors have attempted to game the system, and it usually doesn’t end well. A Maryland bankruptcy attorney can help you determine whether certain assets – such as your house, your vehicle, heirlooms, etc. – can be retained while still receiving a discharge of debt. These are things that should be discussed before you even file.
The recent case of Community Finance Group, Inc. v. Field reveals what can occur when debtors aren’t careful with disclosures, or attempt to gain discharge of debts accrued under false pretenses.
Here, the debtor filed for a personal Chapter 7 bankruptcy in early 2010. At the time, a commercial real estate project of which he was the chief executive officer and chief manager was in default on its loan obligations to a certain creditor, Community Finance Group.
The bankruptcy court found that throughout the course of several years working in the commercial real estate industry, the debtor worked with lenders to obtain loans, so he was familiar with the requirements. He recognized what material considerations were important to lenders, and he understood that lenders relied upon borrower’s representations of their assets as being both complete and accurate. At one time, the debtor had even been an investor and bank board member, reviewing applications for credit. This was a process with which he was familiar.
In 2005, prior to the real estate bust, his company was granted a $7.5 million line of credit for initial financing of a waterfront property project by a company called GCI. However, three years later, having drawn $5.8 million, the company struggled to keep up with the payments, as it was having trouble finding tenants to fill the vacancies.
He sought other forms of financing. This is where CFG came into the picture. Primarily a residential mortgage loan provider, the company had on a few occasions extended commercial loans. The lender’s general manager met with the debtor, who later submitted documents in lieu of a loan application. The lender later alleged figures in those documents were fraudulent, but the loan was granted, and a portion of that was used to pay back interest and arrearage to the first lender.
Soon, however, the company defaulted on its obligations to both lenders. GCI foreclosed the property and took interest. CFG did not participate, as the “junior lender.”
At the debtor’s bankruptcy filing, the second lender initiated an adversary proceeding. The bankruptcy court reserved for trial the issue of whether the debtor should be held personally liable for his actions regarding his company.
Ultimately, the bankruptcy court found the debtor was liable for some of the debts of his company, and excepted this debt from discharge in the bankruptcy, pursuant to Bankruptcy Code 523(a)(2)(A). This statute spells out exceptions to discharge, and holds that financing or credit obtained under false pretenses, false representation or actual fraud won’t be discharged in a bankruptcy.
Because the court found that the loan was obtained under false pretenses, the debtor was required to repay it. That decision was later upheld by the U.S. Bankruptcy Appellate Panel for the Eighth Circuit.
Contact Harris S. Ammerman, bankruptcy attorney serving Washington D.C., Maryland and Virginia, by calling (202) 638-0606.