Thursday, January 21, 2010

Debtor's Occupation Relevant in Objection to Discharge

Mr. & Mrs. Contos walked into a bank. They submitted a credit application showing that Mr. Contos earned $280,000 per year and that they owned a substantial amount of other assets. The bank extended them a line of credit of approximately $500,000.

They promptly spent (stole) the cash and filed bankruptcy. It turns out that Mr. Contos made only about $20,000 per year, not $280,000.

The bank, of course, filed an objection to discharge under Section 523(a)(2)(B). Under this section, a discharge can be prevented when the debt was obtained by making a materially false statement in writing to the creditor with the intent to deceive.

In trying to prove the elements, the bank wished to introduce evidence of Mr. Contos' occupation. He was a mortgage broker. The bank wanted to show that he had he intent to deceive because, based on his occupation, he knew or should have known the importance of the accuracy of the information that he put on his loan application.

Mr. Contos argued that his occupation was irrelevant. Wrong.

The court allowed evidence relating to his occupation and subsequently found that the debt was non-dischargeable.

In re Contos, 2009 WL 3470695 (Bkrtcy.N.D.Ill.).


Unknown said...

Let's see. The Debtor (a mortgage broker) lied on his own mortgage loan application and the Bank foolishly (not reasonably) relied on those lies.

Through minimal due diligence and underwriting, the Bank should have been able to figure out from the Debtor's bank statements, past tax returns, etc. that Debtor's income was nowhere near what was stated on the application. The Bank's witness notwithstanding, its seems obvious that the Bank's underwriting practices at the time this loan was originated (during the real estate boom) were horrible.

The Bank's foolish reliance on the Debtor's false loan application combined with its own horrible underwriting practices, however, do not amount to a defense worthy of a result that would let the Debtor get away with stealing half a million dollars by filing bankruptcy.

Michael W. Huseman said...

Well said, Pete. It was not reasonable for the bank to rely on that application, but the debtor is still a crook, so he should not get the benefit of discharge.

Anonymous said...

nice post. thanks.