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First Circuit Affirms Holding That Home Equity Loan Debt Non-Dischargeable Because It Was Created Through False Pretenses When Debtor Took Advantage Of Bank Mistake

The First Circuit Court of Appeals has affirmed a bankruptcy court decision that a debtor's home equity loan debt was non-dischargeable because it was created through false pretenses. The debtor knew the line of credit should have been closed when she sold her home and paid off the associated mortgage but she subsequently wrote $124,000 of checks on the credit line.

The debtor had obtained the line of credit secured by a second mortgage on her home. The credit limit was $124,000. She also obtained a checking account that allowed her to write checks on the line of credit. The debtor knew the line of credit was available only as long as she still had the mortgage. She subsequently sold the home and paid off the mortgages. However, the bank never closed the line of credit. The debtor's husband's business got into financial trouble and her family was not paying its bills on time. The debtor wrote $124,000 of checks on the line credit to herself which she failed to pay back. She then filed for bankruptcy.

For a debt to be non-dischargeable because it was obtained under false pretenses, the creditor must show that: (1) the debtor made a false representation with false intent, (2) the debtor intended the creditor to rely justifiably on her misrepresentation, (3) the creditor did rely on the misrepresentation, and (4) the reliance caused a financial loss. A misrepresentation can be created when the circumstances imply a particular set of facts and one party knows the facts to be to be otherwise and where the silent party may have duty to correct what would otherwise be a false impression. Intent is established when the debtor knows the matter is not as she represents it to be.

The circuit court found the debtor knew the equity account should not have been available once the mortgage was paid. When the debtor wrote checks on that account she acted under false pretense and with an intent to defraud. She intended the bank to rely on her representation that she was entitled to draw on the account and the bank did so. The bank's tellers did not know that the account should have been closed and they reasonably relied on her representation.

Section 523(a)(6) of the Bankruptcy Code exempts from discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity. " An injury is malicious "if it was wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will." The injury must have been committed in "conscious disregard of one's duties." Willfulness requires "a showing of intent to injury or at least of intent to do an act which the debtor is substantially certain will lead to the injury in question." The First Circuit said the record supported the bankruptcy court's determination that the debtor's actions were malicious and willful.

In re Levasseur, No. 13-1869, 2013 WL 6570917 (1st Cir. Dec. 16, 2013)

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