By: J. Ellsworth Summers, Jr. & Scott St. Amand
When an individual obtains a loan with no intention of repaying the lender, it is well established that such a debt is not dischargeable in bankruptcy. If, however, a debtor does not misrepresent its intent to repay the lender, but instead materially misrepresents the purpose of the loan, is the debt dischargeable in the debtor’s subsequent bankruptcy?
In the recent case of Johnson v. Dowling , 2013 WL 684681, W.D. Va. (2013), Judge Norman Moon of the Western District of Virginia held that when a debtor intentionally fails to use the proceeds of a loan as indicated, the resulting debt may not be discharged in a subsequent bankruptcy – even if the debtor intended to repay the lender at the time the loan was executed. This case is potentially significant for creditors and their counsel because it potentially reframes the question as to what constitutes fraudulent intent under § 523(a)(2)(A).
Although the Dowling court relies on similar opinions from the First, Sixth, Seventh and Ninth Circuits, courts within the Eleventh Circuit have not addressed this specific issue. The opinion most similar is In re Hendricks . In Hendricks , a debtor obtained a loan, but ultimately used the proceeds for a different purpose than his stated intention when he obtained the loan. Had the creditor successfully demonstrated that the debtor intentionally misrepresented the use of the funds at the time the loan was made , the result would likely have been similar to Dowling . However, Judge Briskman of the Middle District of Florida held that the creditor failed to overcome its burden to prove the debtor’s fraudulent intent.