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Debtor Who Obtained Loan Through Fraud Has Debt Exempted From Discharge - In re Belice

February 16, 2012

Vincent Howard and our Corona consumer bankruptcy lawyers warn every bankruptcy client about the penalties for lies in bankruptcy -- including lies that become relevant in a later bankruptcy as well as lies during the bankruptcy itself. So we were interested to read about such a case in our own home Ninth U.S. Circuit Court of Appeal's Bankruptcy Appellate Panel. In In re Belice, the panel overturned a bankruptcy court decision from San Diego in which Jason Belice's debt to Michael Barnes was not exempted from discharge. The panel found that Belice's alleged lies were outside of the "statements... respecting the debtor's financial condition" contemplated by the Bankruptcy Code. Because that was not how the lower court ruled, it reversed and remanded for more consideration.

Belice and his wife filed for Chapter 7 bankruptcy in 2009 and were classified as a "no asset" bankruptcy case because most of their assets were exempt. Barnes filed a nondischargeability complaint two months later, saying Belice had borrowed a total of $25,000 over two loans, secured by an interest in a business. That interest later turned out to be worthless, and Barnes alleged Belice knew it. He alleged Belice never repaid any amount and claimed interest as well as the principal. The court dismissed this claim, finding it was not pleaded specifically enough and also that any lie about the value of the security was an allowable "statement regarding a debtor's financial condition." His first and second amended complaints cited false statements Belice allegedly made about his income and business, as well as his failure to disclose that he was being sued. The bankruptcy court ultimately dismissed these as well, repeating that these were allowable statements and adding there was no duty to disclose the lawsuit.

Debts are exempted from discharge when they were incurred by fraud, false pretenses or other forms of deceit, the panel said -- unless they were oral lies about the debtor's financial condition. Courts have differed over what "the debtor's financial condition" means. After a lengthy review of the caselaw, the BAP decided that the phrase should be interpreted narrowly, to mean statements that "purport to present a picture of the debtor's overall financial health." The bankruptcy court appears to have chosen a broader interpretation, the panel said, particularly in light of its rejection of certain caselaw -- but this was an error. Under a narrow interpretation, some of Belice's allegedly false comments cannot be considered statements of income or expenses; others may relate to his assets but don't reveal anything meaningful on their own. Thus, the bankruptcy court was wrong to find Barnes had no claim, the panel said. However, the BAP agreed that there was no duty to disclose the lawsuit.

At Howard Law, P.C., our Laguna Beach personal bankruptcy attorneys prefer to have as much information as possible about our clients' financial situations, even if that information is less than flattering. That's because it's vital for us to make sure we understand the client's finances. This doesn't just help us get the best possible situation for our clients after discharge, although it's an important job. It also helps us avoid situations in which the client is accused of withholding assets or lying. Clients sometimes misunderstand this as a situation for "surprises" or are confused or embarrassed, but these innocent mistakes can lead to serious penalties in court, including cancellation of the bankruptcy or cancellation of discharge. Vincent Howard and our Paramount individual bankruptcy lawyers can do our best job when we're given the full picture, even if it's not so pretty.

Vincent Howard and the entire team at Howard Law represent clients across California who are considering bankruptcy as a way to handle debt they believe they cannot realistically pay off. To tell us about your situation and learn more about your legal rights, send us a message online or call toll-free at 1-800-872-5925.

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