Vincent Howard and our Riverside County personal bankruptcy attorneys were interested to see a non-dischargeability finding involving deception in taking out a commercial real estate loan. O'Donnell v. Toye that turned not on whether a loan application was deceptive, but whether David O'Donnell meant to deceive. O'Donnell took out the loan to buy some apartment buildings in Maine, but both he and his business partner ended up in bankruptcy. Thomas Toye III argued that their debts should not be discharged in bankruptcy because the financial statement they prepared was materially false. O'Donnell contended that he did not intend to deceive, but the First Circuit's Bankruptcy Appellate Panel upheld the bankruptcy court.
O'Donnell and business partner Rudy Ferrante asked loan broker Kevin Smith for help finding a $350,000 bridge loan to buy the buildings. Smith approached Toye for possible financing, using a financial statement purportedly signed by O'Donnell, though O'Donnell denies signing it. The statement overstates his property ownership and rental income, and does not include encumbrances on some of his properties. Toye made the loan, and both O'Donnell and Ferrante personally guaranteed the debt. Unfortunately, they never were able to repay it, and Toye successfully sued O'Donnell for the debt. In a separate bankruptcy proceeding, the bankruptcy court determined that Ferrante owed a non-dischargeable debt to Toye; when O'Donnell filed, Toye sought the same ruling. The bankruptcy court held a trial, at which O'Donnell insisted that he did not provide false information to Smith when Smith prepared the financial statement, or sign it. The bankruptcy court found for Toye, ruling that a debtor who turns a blind eye to whether a statement is true may be liable for non-dischargeability.
On appeal, O'Donnell argued that he did not cause the financial statement to be made, and that he did not do it with intent to deceive Toye--both elements of a non-dischargeability finding. The First U.S. Circuit Court of Appeals BAP disagreed. The bankruptcy court found that Smith was acting as O'Donnell's agent, and that engaging him for that purpose was sufficient to prove that O'Donnell caused it to be prepared. The BAP agreed, saying O'Donnell relied on Smith in previous business transactions as well as this one, which was adequate to establish agency. O'Donnell next challenged the bankruptcy court's finding that he acted with reckless disregard for the truth of the financial statement. The BAP noted that bankruptcy courts may find non-dischargeability via reckless disregard, despite a debtor's claim of ignorance. O'Donnell had a responsibility to follow up with Smith and review the documents, and the panel saw no reason to disturb the bankruptcy court's finding that O'Donnell's claim of innocence lacked credibility. Even if he was, the panel said, he would still be liable through his agent. Thus, it upheld the bankruptcy court.
Vincent Howard and our San Bernardino consumer bankruptcy lawyers hope the bankruptcy courts extend the same complex analysis to other cases where a borrower claims paperwork was filled out incorrectly by a seeming or actual agent. We wrote last week about a case in which the Ninth Circuit BAP found wrongdoing by a consumer mortgage lender that filled out paperwork for the borrower. In our experience at Howard Law, P.C., this is a common claim in the aftermath of the housing crisis; there were many predatory lenders seeking to inflate borrowers' assets in order to make larger loans, and thus more profit. This may be less true for commercial borrowers like O'Donnell, but mortgage borrowers come in all levels of sophistication. Our Santa Ana individual bankruptcy attorneys have helped many clients who simply didn't have the background to spot the deceit in complex loan documents.
If you believe you were deceived or misled when you took out a mortgage loan that's now causing problems, call Vincent Howard and the team at Howard Law to discuss a predatory lending case. You can reach us toll-free at 1-800-872-5925 or send us an email.