BANKRUPTCY LAW: “Actual Fraud”​ that Denies Debtor a Discharge of the Debt Does Not Require False Statements to the Creditor

by Herbert Wiggins | Mar 20, 2020 | Uncategorized

The purpose of the Bankruptcy Code is to relieve borrowers who are in over their heads to terminate (discharge) unsecured debt [Chapter 7 Bankruptcy], or to restructure debt, including, in some cases, mortgages (Chapter 11 and Chapter 13 Bankruptcy).

Chapter 7, for example, offers the debtor with only unsecured debt, such as credit cards, “a fresh start.”

However, to get a discharge, the debtor must truthfully disclose all assets, and must not have debts that appear to have originated with fraud, or which show some type of “moral turpitude.” A debtor will not be able to terminate, or get relief, from debts connected to fraud.

For example, the US Supreme Court, in a 7-1 opinion authored by Associate Justice Sotomayor, held that under 11 USC 523(a)(2)(A), a debtor who transferred assets to a close associate was ineligible for discharge of the debt, because that transfer constituted “actual fraud.” The apparent purpose of the transfer was to make them unavailable to creditors.

In the opinion of the Court. this apparent intent was enough to deny the discharge of the debt. It did not matter that neither the debtor nor the recipient had claimed to the creditor that the transfer was legitimate. No “representation” to the creditor was required to show that moral turpitude was present, thus barring bankruptcy relief to the debtor.

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FROM THE COURT 

“The Bankruptcy Code prohibits debtors from discharging debts “obtained by . . . false pretenses, a false representation, or actual fraud.” 11 U. S. C. §523(a)(2)(A). The Fifth Circuit held that a debt is “obtained by . . . actual fraud” only if the debtor’s fraud involves a false represen-tation to a creditor. That ruling deepened an existing split among the Circuits over whether “actual fraud” requires a false representation or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation, such as a fraudulent convey-ance of property made to evade payment to creditors. We granted certiorari to resolve that split and now reverse.

. . .

“This Court has historically construed the terms in [11USC] §523(a)(2)(A) to contain the “elements that the common law has defined them to include.” Field v. Mans, 516 U. S. 59, 69 (1995). “Actual fraud” has two parts: actual and fraud. The word “actual” has a simple meaning in the context of common-law fraud: It denotes any fraud that “involv[es] moral turpitude or intentional wrong.” Neal v. Clark, 95 U. S. 704, 709 (1878). “Actual” fraud stands in contrast to “implied” fraud or fraud “in law,” which describe acts of deception that “may exist without the imputation of bad faith or immorality.” Ibid. Thus, anything that counts as “fraud” and is done with wrongful intent is “actual fraud.

. . . 

“Equally important, the common law also indicates that fraudulent conveyances, although a “fraud,” do not require a misrepresentation from a debtor to a creditor. As a basic point, fraudulent conveyances are not an inducement based fraud. Fraudulent conveyances typically involve “a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration.” BFP, 511 U. S., at 540–541 (citing Twyne’s Case, 3 Co. Rep. 80b, 76 Eng. Rep. 809 (K. B. 1601)); O.Bump, Fraudulent Conveyances: A Treatise Upon Conveyances Made by Debtors To Defraud Creditors 31–60 (3d ed. 1882)). In such cases, the fraudulent conduct is not in dishonestly inducing a creditor to extend a debt. It is in the acts of concealment and hindrance. In the fraudulent-conveyance context, therefore, the opportunities for a false representation from the debtor to the creditor are limited. The debtor may have the opportunity to put forward a false representation if the creditor inquires into the whereabouts of the debtor’s assets, but that could hardly be considered a defining feature of this kind of fraud. Relatedly, under the Statute of 13 Elizabeth and the laws that followed, both the debtor and the recipient of the conveyed assets were liable for fraud even though the recipient of a fraudulent conveyance of course made no representation, true or false, to the debtor’s creditor. The famous Twyne’s Case, which this Court relied upon in BFP, illustrates this point. See Twyne’s Case, 76 Eng.Rep., at 823 (convicting Twyne of fraud under the Statute of 13 Elizabeth, even though he was the recipient of a debtor’s conveyance). That principle underlies the now-common understanding that a “conveyance which hinders, delays or defrauds creditors shall be void as against [the recipient] unless . . . th[at] party . . . received it in good faith and for consideration.” Glenn, Law of Fraudulent Conveyances §233, at 312. That principle also underscores the point that a false representation has never been a required element of “actual fraud,” and we decline to adopt it as one today.“

SUPREME COURT OF THE UNITED STATES No. 15–145

HUSKY INTERNATIONAL ELECTRONICS, INC., PETITIONER v. DANIEL LEE RITZ, JR.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

FEDERAL COURT: Plaintiff Defeats Mortgage Lender’s Motion to Dismiss ECOA Claim

by Herbert Wiggins | Aug 11, 2019 | Uncategorized

Judge William Alsup of the US District Court in San Francisco applied the law of pleading, and upheld the Plaintiff’s ability to amend her federal civil rights claims against Wells Fargo Bank.

Judge Alsup based his opinion on rulings of the US Supreme Court, as well as the 9th Circuit Court of Appeals.

HARRISON v. WELLS FARGO BANK, N.A., No. C 18-07824 WHA.

PATRINA HARRISON, Plaintiff, v. WELLS FARGO BANK, N.A. and NICHOLAS PACUMIO, Defendants.

US District Court, N.D. California, June 18, 2019.

Editors Note (from Leagle.com)

Applicable Law: 42 U.S.C. § 1983; Cause: 42 U.S.C. § 1983 Civil Rights Act; Nature of Suit: 440 Civil Rights (Other)

From the opinion:

The ECOA makes it illegal “for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction … on the basis of race, color, religion, national origin, sex or marital status, or age.” 15 U.S.C. § 1691(a)(1); Schlegel v. Wells Fargo Bank, NA, 720 F.3d 1204, 1210 (9th Cir. 2013). While our court of appeals has not had an opportunity to articulate a standard for ECOA discrimination claims in this context, other circuits apply a multi-element test to determine whether a plaintiff has properly pleaded a claim of disparate treatment under the ECOA. To satisfy this test, plaintiff must allege that: (1) she is a member of a protected class; (2) she applied for credit with defendants; (3) she qualified for credit; and (4) she was denied credit despite being qualified. Hafiz v. Greenpoint Mortg. Funding, Inc., 652 F.Supp.2d 1039, 1045 (N.D. Cal. 2009).

The FHA makes it illegal “for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” 42 U.S.C. § 3605(a). A prima facie case of disparate treatment requires a showing that: “(1) plaintiff’s rights are protected under the FHA; and (2) as a result of the defendant’s discriminatory conduct, plaintiff has suffered a distinct and palpable injury.” Harris v. Itzhaki, 183 F.3d 1043, 1051 (9th Cir. 1999). Defendants argue leave to amend should not be granted as to the ECOA and FHA claims because plaintiff failed to allege facts establishing that (1) she applied for credit with Wells Fargo for which she qualified and that she was denied despite being qualified, and (2) Wells Fargo approved loan applications of non-African-American applicants with the same qualifications (Dkt. No. 50 at 7).

Plaintiff, however, “need not make out a prima facie case of discrimination” to plead her disparate treatment claims. Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997).* Regardless, as explained above, this order finds (in liberally construing the complaint) that plaintiff has sufficiently alleged that she would have been qualified for the loan had she been given the opportunity to perfect her application. And, she was prevented from completing her application due to her race, as demonstrated by her allegation that a non-African-American customer was granted full access to Wells Fargo’s service. Accordingly, plaintiff’s motion for leave to amend the ECOA and FHA claims is GRANTED.

WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND DOES NOT CREATE AN ATTY-CLIENT RELATIONSHIP