Monday, May 17, 2010

Section 523(a)(2)(A): Fraud

Section 523(a)(2)(A) excepts for discharge any debt for money to the extent obtained by "actual fraud." The term “actual fraud” means common law fraud. A creditor must show that the debtor’s actions were purposefully deceptive or misleading. Courts infer requirements establishing intent, reliance and materiality.

To provide that a debtor committed "actual fraud," the objecting creditor must show the following: (1) a representation made by debtor to the objecting creditor; (2) debtor’s knowledge of the falsity when the representation was made; (3) debtor’s intent to deceive in making such representation; (4) creditor’s justifiable reliance; and (5) creditor’s damage as a result. A creditor must plead and prove each element of fraud in order to sustain a finding that a debt is nondischargeable, including intent on the part of the debtor to deceive at the time the debt was created.

For a breach of contract to result in a nondischargeable debt, the objecting party must prove that debtor misrepresented debtor’s intention to perform contractual duties, which may be inferred if the debtor failed to begin performance.

In cases involving contractor-debtors, there are generally two ways to prove fraud or misrepresentation. First, the creditor could show that the debtor entered into the contract with the intent of never complying with the terms; or second, the creditor could show that debtor intentionally misrepresented a material fact or qualification when soliciting or obtaining the work.

when determining whether a contractor committed fraud in connection with a construction project, the question pivots on whether during the negotiations the contractor induced the property owner into signing the contract by making material false representations, like promising to obtain the necessary permits or overstating the contractor’s qualifications. Substandard performance or a mere breach of the construction contract does not rise to the level of fraud necessary to except the debt from discharge.
Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor

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