THE question before the court is whether or not checks drawn against insufficient funds are dischargeable. The facts of the case in re Alexander are as follows. Chapter 7 debtor was a horticulturalist for the Home Depot. She also worked as marketing consultant for her daughter’s business. In the daughter’s business, debtor held a power of attorney authorizing her to run the business. In June 2000, Revere Federal Savings Bank, the predecessor to Danvers Savings Bank which filed a complaint to object to discharge of NSF checks written by debtor, opened an account for the business. Although the bank knew that the debtor’s daughter had a history of bouncing checks, it agreed to open the account because the debtor, not the daughter, would be the primary controller for the account.
Shortly after the account was opened, the debtor and her daughter went to the bank and deposited checks totaling $260,000, and withdrew $81,000. The $260,000 came from an account that the business had at a different bank. The bank officer at Revere was shown a bank statement stating that the business had $466,000 in the account. The time stamp on the statement indicated that the statement was only a few hours old. However, the business in reality only had $730 in the account. The bank officer testified that he did not remember whether the debtor or her daughter presented the bank statement which was either forged or tampered with to show $466,000 that was not really in the account. The checks that were dishonored were signed by debtor. After debtor filed for bankruptcy, the bank filed a complaint objecting to discharge of the bank’s claim against debtor based on Section 523(a)(2).
That section states that a claim is excepted from discharge "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by: a) False pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition; b) Use of a statement in writing, that is materially false respecting the debtor’s financial condition on which the creditor to whom the debtor is liable for such money…reasonably relied, and that debtor caused to be made or published with intent to deceive…"
Based on the facts of the case, it seemed like a slam dunk case for the bank. The bank statement was indisputably false because the account did not have $466,000. It only had $730. Further, the bank reasonably relied on the statement to extend credit to debtor. However, at trial, the bank failed to prove that the debtor had a hand in making the fake bank statement, and that the debtor knew that there was practically no money in the account because the bank officer testified that he did not remember whether the debtor or her daughter presented the bank with the fake statement. The court noted that the presentation of nonsufficient funds (NSF) checks, without more, was not enough to support a claim under Section 523(a)(2). The court ruled that because the bank did not prove that the debtor knew that there insufficient funds in the account to cover the checks, the bank could not establish its claim was excepted from discharge. The court ruled for the debtor, finding that the bank did not prove that debtor acted with an intent to defraud or harm the bank.
On the other hand, if it was the debtor’s daughter who filed for bankruptcy, the court will probably decide in favor of the bank. It would be difficult for the daughter to maintain the position that she believed that the account only had $730 in it when the statement showed that it had $466,000.
Creditor objecting to discharge of its claim has the burden of proof to support its allegations of fraud. It must be able to show by a preponderance of evidence that there was malice aforethought on the part of debtor to defraud creditor. Creditor must prove that debtor’s state of mind at the applicable time was malicious.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published June 16, 2010 in Asian Journal Los Angeles p. B5 )
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