In re Skinner – Inference of Fraud in Nondischargeability Action

     On December 13, 2012, Judge Marlar issued a memorandum decision in In re Skinner, 2012 Bankr. LEXIS 5782 (Bankr. D. Ariz. 2012) in which he found that the debtors’ actions in failing to even attempt to make good on a promise to pay, coupled with the debtors’ clear inability to live up to the promise, warranted an inference of intent to deceive in an action to determine the non-dischargeability of a particular debt. 

     The debtors sold a classic car to the plaintiffs for $12,000 plus two lots of real property.  The debtors agreed to pay off the existing liens of $33,000 on the vehicle in order to convey clear title to the plaintiffs.  The debtors received the $12,000 from the plaintiffs and sold the two lots for $20,000, but did not use any of the money to pay down the liens.  In fact, the debtors increased the liens against the vehicle to $60,000.  The debtors eventually defaulted and the vehicle was repossessed.  The plaintiffs were awarded a default judgment in state court prior to the debtors’ bankruptcy filing and sought in the bankruptcy to have the debt declared non-dischargeable.

     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.”  A claim of non-dischargeability under section 523(a)(2)(A) requires the creditor to demonstrate five elements:  “(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of the statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on  the debtor's statement or conduct.”   In re Slyman, 234 F.3d 1081, 1085 (9th Cir. 2000).

     The court noted that proving knowledge and intent to deceive is inherently difficult, but that those elements “may be inferred by circumstantial evidence and from debtor’s conduct.”  The court found that the debtor “made a representation that was so far beyond his financial reality as to be deceptive, and that, when made, he knew that he either could not or would not perform his promise to quickly pay off the underlying . . . lien on the vehicle.”  That clear inability to pay, coupled with the fact that the debtor did not use even a single dollar to pay off the liens evidenced to the court the intent to deceive necessary for a finding of non-dischargeability under section 523(a)(2)(A).