Three individuals, including the debtor, operated a business as principals. The creditor loaned money to the principals for their business. The loan was memorialized by a note, and all three principals were jointly and severally liable for the debt. Eventually, the principals stopped making full payments and defaulted on the loan. The creditor sued two of the principals, including the debtor, and received a default judgment for $10,429.02. Seven years after the default judgment, the debtor filed for Chapter 7 bankruptcy. The creditor brought this adversary proceeding, seeking a determination that the default judgment debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A). The creditor alleged that he loaned the debtor money “based upon oral and written representations made by [the debtor] and the [business] which were not true and materially false.” The debtor’s version of the facts differed, and he claimed that he made “no oral representations regarding the business other than [that] they needed cash to fund business operations.”
In Vasquez v. Mascareno (In re Mascareno), No. 24-50036, Adv. No. 24-5001, 2025 WL 892553, 2025 Bankr. LEXIS 683 (Bankr. S.D. Tex. Mar. 21, 2025) (unpublished opinion), the bankruptcy court held that the creditor failed to meet the burden of proof for a debt to be deemed nondischargeable under § 523(a)(2)(A) of the Bankruptcy Code. The court first concluded that the creditor’s claims regarding written representations were false and that the only valid claim concerned oral representations made by the principals. Other than that factual determination, the court explained that any factual differences between the parties were irrelevant because the creditor’s nondischargeability claim failed on other grounds. “Section 523(a)(2)(A) excepts from discharge any debt owed by an individual debtor to the extent obtained by ‘false pretenses, a false representation, or actual fraud, other than a statement representing the debtor’s or an insider’s financial condition.’” A creditor must prove nondischargeability by a preponderance of the evidence. The court noted that to succeed, the creditor must prove that (1) the debtor made the representations; (2) the debtor knew at the time they were false; (3) the debtor made the representations with the intention of deceiving the creditor; (4) the creditor relied on the representations; and (5) the reliance caused the creditor to sustain the alleged loss and damage. The court found that the creditor failed to prove elements (2) and (3). The court held the evidence insufficient to prove that the debtor knew any representations made were false or were made with an intent to deceive the creditor. The court noted the conflicting testimony and lack of corroborating testimony. An intent to deceive may be inferred by a debtor’s use of false financial statements, but the record lacked any documentary evidence other than the promissory note itself. Therefore, the court found no evidence supporting the creditor’s burden on elements (2) and (3) and thus discussion of the remaining elements was unnecessary. The court also denied the debtor’s request for attorney’s fees in defense of this adversary proceeding. Section 523(d) provides that if a creditor brings a nondischargeability claim for consumer debt under § 523(a)(2) and the court discharges the debt, then the debtor shall receive a judgment for the costs of the proceeding and reasonable attorney’s fees if “the court finds that the position of the creditor was not substantially justified.” Here, the court found that the debt was a business loan, not a consumer debt, so the debtor was not entitled to attorney’s fees.
By Kristin Meurer, [email protected]
Edited By Taylor O’Brien, [email protected]
Edited By Callighan Ard, [email protected]
Edited By Hayden Mariott, [email protected]