Here are the creditor’s and debtor’s closing arguments in our hypothetical trial about the discharge of a debt.
Here’s the fifth blog post in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last four posts about the different steps in the “adversary proceeding” so far, including the trial itself. Now it’s time for the two sides to give their closing arguments to the bankruptcy judge.
The Creditor’s Closing Argument
The lawyer for the creditor says the following to the judge:
As the U.S. Supreme Court said way back in 1934, bankruptcy law “gives to the honest but unfortunate debtor… a new opportunity in life… unhampered by the pressure and discouragement of preexisting debt.”
As the debtor here fully admits, he was NOT honest with his creditor, Heather, his aunt. Marshall admitted that he purposely did not include his debt to another aunt on his loan application to Heather. He admitted that he did this because he was afraid that otherwise Heather would not give him the loan. He desperately wanted that loan. It was the only way he could start his business. So he stooped to lying, and put his lie in writing. He then signed the loan application, dishonestly asserting that what he wrote was truthful.
Marshall’s omission was not insignificant or immaterial.
The outstanding loan balance was $7,500. This amount was enough that, had Heather known about it, that outstanding loan likely would have given Heather pause about providing her own loan.
The existence of the prior loan was a material fact and his omission of it was a material omission. That prior loan was another family loan. Had Heather known about it, she could well have figured that if money got tight for Marshall down the line and he had to choose, he’d pay the earlier loan ahead of hers. So Heather definitely deserved to know about that loan balance before she made her decision about giving Marshall a new loan.
The Creditor Lawyer’s Conclusion
Marshall says now that he believed at the time that Heather would not base her decision on the loan application. He tells us his impression at the time was that this documents wasn’t all that important. And yet Heather told him directly that she had her lawyer prepare the application and other loan documents because she wanted the loan to be legally enforceable. He had every reason to know that the loan application was a meaningful document. He knew he needed to take it seriously, that he had every obligation to complete it truthfully. It’s disingenuous for him to now use the excuse that he didn’t have to be honest because Heather wouldn’t treat the application seriously in making her decision.
Marshall materially lied on the one and only document that he presented to Heather to have her decide whether or not to give him a loan. He cannot now claim to be an “honest but unfortunate debtor” deserving to write off his debt to Heather. This court must therefore exclude this one debt from the discharge Marshall is getting of his other debts.
The Debtor’s Closing Argument
Then the Louisville bankruptcy lawyer for Marshall, the debtor, says the following to the judge:
The creditor here, Heather, has failed to establish three different elements of her case. If she fails to establish even JUST ONE of these elements, the debt must be discharged.
Not “Materially False”
First, while Marshall’s omission was admittedly false, it was not materially false. What’s crucial to the omission being material is not the amount of the prior loan. Nor is it that this prior loan was a family loan like Heather’s. What is crucial under the law is whether Heather would have made the loan to Marshall if he would have included the other aunt’s prior loan in Heather’s loan application. An omission is material if it would have made a difference in the creditor’s decision to make the loan.
The evidence is quite clear that not including the prior loan was not a material omission. Heather admitted she didn’t even look at the completed loan application, nor discuss its contents with her lawyer. Heather testified here that she based her lending decision on family considerations, not on Marshall’s finances. Whether one particular debt was or was not included in the loan application had no bearing on Heather’s decision. The omission was immaterial.
No “Intent to Deceive”
Second, Marshall did not omit the prior debt “with intent to deceive” Heather. He completed the application with the understanding that what he wrote on it was not important to Heather. He was reasonable in this understanding because that was what he had heard, albeit indirectly, from Heather. She signaled strongly to him that her decision was being made primarily or even exclusively because of their relationship. This included both their family and personal relationship.
Marshall admitted that he intentionally did not include the prior debt, but for a very specific reason. He knew that at the time Heather was having a quarrel with his other aunt who’d made that prior loan. Marshall knew Heather could be impulsive, erratic, and even irrational. So Marshall was justifiably concerned that Heather would somehow let some irrelevant irritation cause her to deny him the loan. He imagined her telling him to instead just go back to that other aunt for more money. He already knew the other aunt was unable to lend him what he needed. His only intent in not listing the prior loan on the application was to avoid having Heather hit an emotional tripwire that would distract her from her decision to make the loan.
No “Reasonable Reliance”
Third and most clearly, Heather did not rely on, much less reasonably rely on, on the loan application in her decision. She particularly didn’t rely on Marshall’s omission of the other loan. She never read the application, didn’t discuss the contents with her lawyer, and nothing about the application entered into her loan-making decision.
The Debtor Lawyer’s Conclusion
This creditor bases her entire argument on Section 523(a)(2)(B) of the Bankruptcy Code. That requires the use of a materially false “statement in writing” on which the creditor “reasonably relied.” It’s perfectly clear from the evidence presented at this trial that the creditor here does not meet this element of reasonable reliance. So just as perfectly clearly the debt at issue here should be discharged in this bankruptcy case.
The Judge’s Decision
Our next blog post in a couple days will give, and then explain, the judge’s decision about whether or not this debt will be discharged in bankruptcy.