The United States Bankruptcy Code (Title 11 of the U.S. Code) generally allows a debtor to receive a discharge of his or her debts, thereby providing an individual a financial fresh start. However, in certain cases, a debtor will be refused a discharge of a debt.
One way a discharge will be denied is if the debt was obtained by “false pretenses, a false representation, or actual fraud.”
The United States Bankruptcy Appellate Panel of the Tenth Circuit recently addressed this issue in In Re Harold Kuwazaki and Michelle M. Kuwazaki, BAP No. CO 09 057. The Kuwazakis went into business with their aunt, Norma Brown. Brown’s role in the business was essentially reduced to providing a stream of funds to the business, despite having the title of CEO. Did I mention that before she went into business with the Kuwazakis, Brown was a nun?
When they created the business, Brown contributed $50,000 in start up funds. It wasn’t long, though, before the business started struggling financially under the heavy burden of credit card debt. However, the Kuwazakis hadn’t used the credit cards for the business, instead it was used for non business expenses, including cash advances taken at casinos, groceries, personal services, and recreational travel.
Brown wasn’t completely hands off, though. She asked about the debt. But instead of coming clean, Harold Kuwazaki told Brown that the debt was business related and asked Brown for a $130,000 loan to pay off the debt he and his wife had racked up living the good life.
Brown took out a mortgage on her previously mortgage free home. In exchange the Kuwazakis agreed to provide Brown regular financial reports and to make payments on Brown’s mortgage. Unfortunately, it wasn’t long before the Kuwazakis were back to spending Brown’s money gambling and taking vacations.
Brown finally got wise to the Kuwazakis’ funny business when credit card companies started calling her directly. But when Brown confronted the Kuwazakis, they stopped paying Brown’s mortgage and created another company, stealing clients from the original company.
Brown, who had no more cheeks to turn, sued in state court. Once again believing they could outsmart Brown, the Kuwazakis filed a Chapter 7 bankruptcy and Brown followed them, arguing that her claims were non dischargeable.
The bankruptcy court sided with Brown, and the Appellate Panel affirmed, citing Bankruptcy Code Section 523 as support for their decision.
Section 523 of the Bankruptcy Code provides that Chapter 7 of the Bankruptcy Code does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit which is obtained by false pretenses, a false representation, or actual fraud. Section 523 also does not discharge any debt for fraud while acting in a fiduciary capacity, embezzlement, or larceny.
In the end, the Kuwazakis will have to pay Brown her money and are denied the protection of bankruptcy due to their bad behavior. Bankruptcy is intended to protect individuals who act in good faith. If you try to eliminate a debt you got fraudulently, you risk having your bankruptcy case dismissed, or worse, face criminal charges by the US Trustee.
Author Resource:-
Peter Mullison is a Denver, Colorado bankruptcy attorney at Colorado Bankruptcy Law Group, LLC. You can read more about Colorado bankruptcy law at http://coloradobankruptcyguide.com
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