Arizona Bankruptcy Lawyers

Wednesday, December 19, 2012

In re Cunningham – stating a non-dischargeability claim

     In a decision designated “for electronic publication only,” Judge Curley held on December 5, 2012 that a non-dischargeability complaint would survive a motion to dismiss where the plaintiff’s allegations related to the debtors’ alleged concealment of material facts, rather than actual representations.  In re Cunningham, 2012 Bankr. LEXIS 5655 (Bankr. D. Ariz. 2012).    
     In In re Cunningham, the debtors purchased a home and executed a promissory note and deed of trust, but later sold the home to a third party using carry-back financing in which the buyer made payments to the debtors and the debtors used the payments to pay the original lender.  Two years later, the third party refinanced the property and the debtors were paid in full, but the debtors did not use the funds to pay off the original lender.  Rather, they retained the funds and continued to make payments on their note.  Eventually, both the debtors and the third-party defaulted on their obligations and a title company was required to pay off the original lender in order to release the lien.  The title company filed a complaint against the debtors to have the debt declared non-dischargeable in the debtors’ bankruptcy.  The debtors filed a motion to dismiss the complaint for failure to state a claim upon which relief could be granted.
     Section 523(a)(2)(A) provides that a monetary debt is not dischargeable “to the extent obtained by false pretenses, a false representation, or actual fraud.”  The plaintiff alleged that the debtors committed fraud by concealing two material facts:  (1) that the debtors concealed the transfer of the property from the original lender and (2) that the debtors failed to disclose and concealed the refinancing and the debtors' subsequent receipt of funds. The plaintiff argued that a concealment of material facts is no different than a misrepresentation. The court held that the plaintiff had met its burden and denied the motion to dismiss.
     The court examined two cases.  The first was Field v. Mans, 157 F.3d 35 (1st Cir. 1998), in which the court reasoned on very similar facts that, while the original granting of credit was not fraudulently induced, the debtor had obtained an “extension of credit” because an acceleration clause gave the creditor the right to call the note due or demand payment from the debtor after the unauthorized sale. The second opinion examined by the court was In re Demarest, 176 B.R. 917 (Bankr. W.D. Wash. 1995) aff’d 124 F.3d 211 (9th Cir. 1997).  In that case, the title company mistakenly failed to pay off a lender at closing and the debtors received $65,000 in excess of what they should have received.  The debtors deposited the check and continued making monthly payments.  The court in Demarest reasoned that  silence may create a false impression, providing the basis for a misrepresentation that is actionable under section 523(a)(2)(A).

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