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Ninth Circuit BAP Upholds Judgment in Favor of Discharging Alleged Fraud Debt - In re Mbunda

January 2, 2013

Vincent Howard and our Moreno Valley consumer bankruptcy attorneys were interested to see a non-dischargeability case in which the debtor was ultimately victorious. In In re Mbunda, the Bankruptcy Appellate Panel for the Ninth U.S. circuit Court of Appeals upheld a bankruptcy court ruling finding that debtor Wileharda Kilian Mbunda's debt to the estate of Evaline Jeanne Malis is dischargeable. Mbunda borrowed money from Malis to invest in Mbunda's art and jewelry store, but filed for bankruptcy in 2010. The executor of the estate, Thomas Van Zandt, alleged the debt was non-dischargeable for fraud, willful and malicious injury, and fraud while acting as a fiduciary. The bankruptcy court dismissed most of it, then heard evidence on the fraud allegation before finding for Mbunda. The BAP upheld that finding.

Mbunda runs an art and jewelry store called the Twiga Gallery. In 2005, she took out two $100,000 loans from Malis as either a loan or investment in the business. The estate argues that Mbunda falsely promised that she would buy art and precious stones for the gallery; that Malis would have a security interest in those materials and the gallery; that there would be paperwork to this effect; and that she would make monthly payments to cover the increase in Malis's mortgage that the loan would create (because she refinanced her home to get the money). The bankruptcy court dismissed the willful and malicious injury allegation and gave the estate leave to amend the fiduciary complaint to allege larceny. After an amended complaint, it dismissed the fiduciary count and set the fraud count for trial. After the estate's part of the trial, Mbunda was granted a dismissal on partial findings. The estate appealed.

The panel first took up the fraud claim, the only one that got a hearing. After the estate presented all its evidence, the bankruptcy court found that it couldn't prove the first two elements of fraud: that Mbunda had knowingly made any false representations. Indeed, it found that Mbunda had told the truth and actually repaid $40,000 to $50,000. The estate argued that the bankruptcy court should have admitted evidence of what Malis told Van Zandt before she passed away, but the statements were excluded as hearsay and the panel affirmed this. Nor could excluded evidence the estate challenged have made a difference. The panel next ruled that there was no abuse of discretion when the bankruptcy court dismissed the fiduciary fraud claim. The estate wished to allege there was a partnership, the panel said, but no evidence shows an intended partnership. Finally, the BAP upheld the dismissal of the willful and malicious injury allegations, saying the estate could not have proven it even if allowed to allege financial abuse of an elder.

Vincent Howard and our Anaheim personal bankruptcy lawyers are not surprised to see that the panel upheld all of these decisions. While it appears that Mbunda did not actually pay back all of the debt, it also looks from the decision like there was no fraudulent intent. While it's unfortunate that the debt was not repaid, bankruptcy law permits most debts to be dischargeable unless they meet the high standards that the estate was apparently unable to meet. That's important, because the goal of bankruptcy is to give debtors a chance to start over--and a non-dischargeability finding takes away that fresh start. At Howard Law, P.C., our Upland individual bankruptcy lawyers help clients through the difficult but rewarding process of repaying or discharging all the debts they can and starting over.

If you feel overwhelmed by your debts and you're ready to look for another solution, you should call Vincent Howard and the team at Howard Law, P.C., to discuss the possibility of a bankruptcy. To learn more , send us an email or call 1-800-872-5925.

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