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Dischargeability action

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  • Dischargeability action

    Tomorrow is my case’s objection to discharge deadline, and today a bank which lended me a business loan filed an AP claiming my substance abuse history, which was not voluntarily disclosed at the time I applied for the loan, constitutes fraud.

    A few weeks back, I filed a motion to avoid the lien this company placed securing the loan, a UCC-1 filing. It was a blanket lien covering all my business and personal assets. At the time of my filing however, there were no business assets, and my personal assets amounted to only 20% of the Texas allowed personal exemption amount. So, this lien impaired my exemptions, and attached to nothing. The company responded by filing an objection, claiming I misrepresnted my personal assets and that I have more than I put on my schedules/ and/or I undervalued my assets.

    So this gets gets more interesting at this 11th hour.

    FYI, there was of course no misrepresentation on my loan application. There was no health questionnaire either.

    Does losing your job to substance abuse three three months after obtaining a loan constitute fraud? I wonder if anyone in this forum has heard of such a precedent for argument.


  • #2
    Substance abuse alone is not evidence of fraud. In any event, I hope that you have an attorney to represent you in the AP. I'm confused as to you saying they filed an objection when you say they filed a complaint. Is it a complaint to determine dischargeability or an objection on your motion to avoid lien... or both?

    I don't think their strategy will go anywhere and may be designed just to get you to compromise/settle. But, I highly recommend an attorney.
    Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
    Status: (Auto) Discharged and Closed! 5/10
    Visit My BKForum Blog: justbroke's Blog


    I am not an attorney. Any advice provided is not legal advice.

    Comment


    • #3
      Here’s the quick breakdown.

      341 meeting
      Case Trustee files No Distribution report same day

      30 days pass, no creditors or trustee challenges my exemptions. So we...

      File a motion to avoid lien from “Bank A”, who holds a perfected UCC-1 lien that attaches to “all my business assets (none) and all my personal property” (exempt in Texas).

      “Bank A” files an objection to my motion to avoid the lien, claiming they believe I have under/ misrepresented my personal property in my schedules. I had listed in my schedules only about 20% of the value of my possible exempted personal property amount here in Texas ($100,000), so they are essentially claiming I am hiding/ undervaluing over $80,000 in assets. They noted in their objection an Etching/ Art piece I listed is not a home furnishing and therefore is not exempt for instance. They also stated they believe it is worth more than I listed it for on my schedules. This wasn’t challenged during the 30 day period after the 341 to file objections to my exemptions, but they state they have the right to do so now in response to my motion to avoid their lien which impairs these exemptions. Apparently that re-opened the door to challenge my exemptions at least in regard to this proceeding.

      The case trustee reads their objection, and withdraws the no-distribution report, and files a statement I am now a potential asset case. This may be over an etching that Heritage Auctions wouldn’t even take because it would only fetch $500-$1000 in their estimation. Bank A and the case trustee are not aware I already tried to liquidate the etching this summer to pay bills. To no avail.

      Finally, one day before the magic 60 mark, “Bank A” files an AP (dischargeability action), on the grounds my treatment for substance abuse just months after taking out the loan qualifies as fraud/ misrepresentation. They stated I did not voluntarily disclose using substances when I applied for the loan.

      So, at least 60 days are in the books, and no 707b / UST involvement at all in my case. Because of that however, I feel like this is being done to allow for SOME discovery to occur of where the money I borrowed was spent. My agreement with Bank A for this loan gave them a purchase-money security interest in any items purchased with the loan proceeds. I canvery much understand why they are both objecting to the lien avoidance and why they filed the dischargeability action. They want answers.

      I do have a lawyer. I’m sure I’ll be spending many a billable hour with him!

      Ultimately, I did not under-represent my assets on my schedules, not at all. And I did none of the stauatory things that dischargeability actions are typically filed by creditors for. So they will have to prove fraud. There was no fraud. I’m not going to spell the facts out here, but I’m hoping with strong representation and a good rebuttal to their AP, this can go away early in this process. It’s a lot of money though, so who knows. I ain’t settling.

      Comment


      • #4
        Surrender the painting and stay firm on the other stuff. It must have "some" value and that's probably why the Trustee thinks this is an asset case. As for the creditor, you'll just have to fight this and your attorney should be able to maneuver quickly if there's no grounds for them to impair your exemptions.
        Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
        Status: (Auto) Discharged and Closed! 5/10
        Visit My BKForum Blog: justbroke's Blog


        I am not an attorney. Any advice provided is not legal advice.

        Comment


        • #5
          Two questions:

          1. When did you take out the loan?

          2. How much do you owe on the loan?

          One comment/recommendation:

          You state that you are not willing to settle. I recommend you not be so unflappable in your position. Running up $50k or more in legal fees with a potential to lose both matters is not out of the realm of possibility. Being closed minded to settlement is not smart.

          Des.

          Comment


          • #6
            Des,

            I took the loan in Dec 2016.

            Made 4 installment payments.

            The loan principal is worth more than three times your stated potential legal fees. With interest, 6x.

            Also, without a statutory reason to file the dischargeability action, I was hoping to ask for legal fees if they lose the AP in my response.

            Comment


            • #7
              Originally posted by ChaptainHook View Post
              Also, without a statutory reason to file the dischargeability action, I was hoping to ask for legal fees if they lose the AP in my response.
              Not likely under the American Rule unless you can prove that they filed a case that was not justifiable. There is a statutory reason, they think you obtained the money/services/goods under false pretenses or other general fraud and that's in 11 USC 523(a)(2). The burden would be on you to prove otherwise if you won the AP and if you sought fees under the exception to the rule. I mean, you yourself say that you can understand why they filed each of the motion and the complaint (AP); reads as though they are making a reasonable inquiry into a questionable area.

              If they wanted "discovery" in your case, a Rule 2004 Examination would have been the way to go. With an AP, they are putting you, and the Court/Trustee, on notice that they simply don't want this debt discharged (they want an exception to discharge). They only had 60 days from the 341 Meeting to make that decision and, not too unlike most APs, they filed within a day of the deadline -- very typical.

              Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
              Status: (Auto) Discharged and Closed! 5/10
              Visit My BKForum Blog: justbroke's Blog


              I am not an attorney. Any advice provided is not legal advice.

              Comment


              • #8
                Pardon my naivety but how much is "6x"?

                As to legal fees please see the USSC decision of Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co.

                https://www.supremecourt.gov/opinions/06pdf/05-1429.pdf

                Also, it appears you filed bankruptcy in August or September, 2017 only 8 or 9 months after taking the lender's money and only after having made 4 payments. Of course the lender is pissed off and is going to do whatever it can to stop you from successfully discharging the loan.

                Des.

                Comment


                • #9
                  Originally posted by ChaptainHook View Post
                  Finally, one day before the magic 60 mark, “Bank A” files an AP (dischargeability action), on the grounds my treatment for substance abuse just months after taking out the loan qualifies as fraud/ misrepresentation. They stated I did not voluntarily disclose using substances when I applied for the loan.
                  Am I the only one who sees a problem with this legal theory? I am not aware of any loan application which explicitly asks "Do you use illegal drugs or alcohol?" or anything to the effect. I am also not aware of any duty on the part of a borrower to volunteer such information, if not explicitly requested. Furthermore, it is very common for people who do have a drug or alcohol problem to not realize the extent of their problem, and some may not think they have a problem at all. Since fraud generally requires intent, I just don't see how being addicted to drugs/alcohol and losing one's job due to said addiction constitutes an intent to defraud one's creditors.

                  Comment


                  • #10
                    bcohen, no you're not the only one. I think the underlying theory is that it's fraudulent to obtain a six-figure personally-guaranteed business loan knowing that you won't pay. As to proving that, part of Bank A's theory is the substance abuse. This could be new caselaw that they are trying to make, who knows. For example, a business loan is to be used only for business purposes, but if you used the proceeds to fund a drug habit... that could be a reason for non-dischargeability in a bankruptcy. Remember, I'm only posting hypothetically because this case is based on the hypothesis that substance abuse issues could be cause.

                    Bottom line, many of these APs are settled which is probably what Bank A is relying upon.
                    Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                    Status: (Auto) Discharged and Closed! 5/10
                    Visit My BKForum Blog: justbroke's Blog


                    I am not an attorney. Any advice provided is not legal advice.

                    Comment

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