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A False Seller’s Disclosure Statement Is Proof Of Fraudulent Intent In Chapter 7 Case

A False Seller’s Disclosure Statement Is Proof of Fraudulent Intent in Chapter 7 Case

 

Parties rarely, if ever, admit to having fraudulent intent.  What type of circumstantial evidence can a party produce for a Bankruptcy Court to find that the Debtor intended to commit fraud?

 

The Case

In re Melendez (Martin v. Melendez), 17-00068 (Bankr.E.D. Pa. 2018)(per Chan, J.)
(Decided August 27, 2018) 

In October, 2016 the Plaintiffs obtained a pre-petition judgment in the amount of $63,964.00 for breach of contract in the Chester County Court of Common Pleas  (the “Judgment”).  The CCP determined that the Debtor had breached a contract by knowingly supplying the Plaintiffs with a false Seller’s Disclosure Statement to induce them to purchase the Debtor’s prior home.  After the Debtor filed a Chapter 7 Bankruptcy the Plaintiffs filed an Adversary Action seeking to have the Judgment deemed nondischargeable pursuant to 11 U.S.C. §523(a)(2)(A). The Bankruptcy Court granted Plaintiffs’ Motion for Summary Judgment in part, finding that collateral estoppel bound the Debtor from challenging the CCP’s findings that the Debtor knowingly made false representations in the Disclosure Statement and that the Plaintiffs suffered damages as a result of the representations.  The Debtor later conceded that the Plaintiffs justifiably relied on the Disclosure Statement.

 

Intent to Deceive

Section 523(a)(2)(A) Claims based on false representation require the party objecting to prove by a preponderance of the evidence that: (1) the debtor made representations knowing they were false; (2) the debtor made presentations with the intent and purpose of deceiving the objecting party; (3) the objecting party justifiably relied on the debtor’s false representations; and (4) the objecting party suffered a loss or damages as a proximate consequence of the representations.  See In re Adalian, 474 B.R. 150, 160 (Bankr.M.D. Pa. 2012).

Under Pennsylvania law, collateral estoppel precludes relitigation of an issue of fact or law determined in a prior action if (1) the issue decided in the prior case is identical to the one presented in the later action; (2) there was a final adjudication on the merits; (3) the party against whom the pleas is asserted was a party or in privity to a party in the prior case; (4) the party or person in privity to the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the prior proceedings; and (5) the determination in the prior proceeding was essential to the judgment.  In re Kamps, 575 B.R. 62, 76 (Bankr.E.D. Pa. 2017).

The Bankruptcy Court found that collateral estoppel applied to every element, except one for the 523(a)(2)(A) Claim, because it would need to make identical findings to support a nondischargeable determination.  The only issue at trial was the first element, whether the debtor intended to deceive the creditor.

Because a debtor will rarely admit that deception was his purpose, courts can infer it based upon totality of the factual circumstances. In re Robbins, 562 B.R. 83, 109 (Bankr.E.D. Pa. 2016).  A court can also infer intent from a debtor’s reckless disregard for the truth.  In re Bocchino, 794 F.3d 376, 380-82 (3rd Cir. 2015).  Once a creditor introduces circumstantial evidence sufficient to infer the debtor’s intent to deceive, the debtor cannot overcome that inference with merely unsupported assertions of honest intent. In re Reynolds, 193 B.R. 195 (D.N.J. 1996).

 

Reckless Disregard for the Seller’s Disclosure Statement

At trial, the Plaintiffs provided sufficient circumstantial evidence to infer that the Debtor intended to deceive he Plaintiffs.  Those items included:

  1. The Disclosure Statement concealed a large number serious and dangerous defects that would have jeopardized the Debtor’s ability to sell the property if concealed;
  2. The Debtor’s financial situation was poor which could provide motivation to sell the property quickly;

The Debtor alleged that he may not have read or understood the Disclosure Statement before signing it.  Even if that was true, the Court found that the Debtor’s failure to do so constituted a reckless disregard for the Disclosure Statement’s accuracy and established as a matter of law that the Debtor acted with intent to deceive.  The Court ruled that the Judgment was nondischargeable.

 

 

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