I AM sure that most people have applied for a loan over the phone where the bank representative asks the applicant material questions and the verbal responses of applicant are fed into a computer data base. The information gathered from the telephone interview of the applicant is then used to approve or deny the loan application. Sometimes applicants overstate their household income to ensure that their loan application is approved. What happens when the applicant gets a loan based on income that he has overstated on the telephone and then is unable to repay the debt so he files a bankruptcy to discharge that debt? Is that debt obtained through a verbal overstatement of income a misrepresentation of material fact that supports a finding that the debt is not dischargeable in bankruptcy?
The foregoing is exactly what happened in Re MATERA. In this case, Swift Financial Corp. extended a $50,000 credit line to Rivercraft Corp. in April 2008 requiring a personal guaranty of the debtor who was Rivercraft’s owner and general manager. The loan application was taken over the telephone. Among the information solicited from the debtor was his household income, which the database entry reported as being $250,000. The loan went into default after about one year. After the debtor and his wife filed for bankruptcy, the lender challenged his ability to discharge his personal guaranty. The lender alleged that the debtor fraudulently overstated his household income relying on Section 523(a)(2)(B). That section states that “ A discharge under section 727… does not discharge an individual debtor from any debt”, that is “based on the use of a statement in writing (i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive…” So, is the information on the data base a written statement considering that the debtor gave the information over the phone in response to a question over the phone?
The debtor argued that a loan application taken over the telephone is not a “statement in writing for the purposes of Section 523(a)(2)(B). “Neither the Fourth Circuit nor lower courts within the Fourth Circuit have yet addressed whether a loan application submitted by telephone can be considered a statement in writing for the purpose of Section 523(a)(2)(B) when information orally supplied by the applicant is entered into a computer database by the lender (and, obviously, can be printed out at any time). The only reported opinion at the court of appeals level, however, has specifically ruled that it cannot, Bellco First Federal Credit Union v. Kaspar. In that case, the Tenth Circuit, on acts very similar to those here, squarely held “the oral statements made by the debtor which led to the computer generated form are not to be regarded as the functional equivalent of a “writing” within the meaning of Section 523(a)(2)(B),” the court said, and noted its agreement.
Moreover, the court said that a response over the phone is not “publication”. “In short, there can be no publication within the meaning of Section 523(a)(2)(B) before there is a writing to be published. In the present case, the only writing and the court will assume without deciding that a ‘screen shot’ of information contained in a computer database constitutes a writing for the purposes of Section 523(a)(2)(B) was created by the creditor itself after the debtor had orally communicated the information.”
Hence, the court ruled that the plaintiff’s claim was discharged. But what if the creditor relied on 523(a)(2)(A) instead? That section says that a debt is not discharged if the debt is “for money, property, services, or an extension… to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition…” The result probably would have been the same.
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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.
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