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What are False Pretenses and Willful and Malicious Injury in Bankruptcy?

Does it make sense to draw monies from a closed home equity account and then file bankruptcy to try to discharge the debt? Of course not. Readers of our blog and clients who have filed bankruptcy in Boston know that anything and everything on the bankruptcy petition and schedules must be honest and that any debt you attempt to discharge must have been a legitimate debt at the time you made it.

This week’s case involves an amazing fact pattern, with the Bankruptcy Court finding that the debtor used false pretenses to obtain funds and did so knowingly.

False Pretenses Before Bankruptcy

The debtor was Andrea Levasseur. Her former name was Andrea Sullivan. She lived in Rowley and had a mortgage. She applied for a home equity line of credit and obtained one from Fleet Bank in 2003 in the amount of $124,200. She used her name, at the time, which was Sullivan.

Six months later she sold the house in Rowley and paid off the mortgage and the home equity line of credit. She moved to another town where she bought a new home. The story begins when Fleet neglected to record a discharge of the line of credit. It remained open. Furthermore, they continued to send her statements of the account. Nevertheless, Ms. Sullivan, now Levasseur, did not attempt to draw on this line of credit for a period of two years.

Then, for some reason, likely because her husband had a failing business, using her old name of Sullivan, attempted to deposit a $50,000 check from the equity line of credit into a savings bank. Then she secured a $100,000 bank check from Bank of America (which had acquired Fleet) and deposited that into her personal savings account.

Ironically, because the $150,000 overdrew the $124,200 equity line, the first check, for $50,000 was returned for insufficient funds. In a brazen amount of gall, Ms. Levasseur went back to the bank and got a bank check for $24,200. She deposited that check into her personal account. Of course, she then defaulted.

Bankruptcy Court Proceedings For False Pretenses and Willful and Malicious Injury

Once Ms. Levasseur filed bankruptcy, things began to fit together. She attempted to discharge her debt. If she had obtained the debt on a home she was living in, and defaulted, the bank would be entitled to foreclose, and she would be entitled to discharge the debt.

The Bankruptcy Court, however, found that her defense, that she thought the $124,200 equity line of credit was a new line of credit! This is notwithstanding the fact that she switched back to her own name, used the old account on the check, and withdrew exactly the same amount as the original line of credit. Her defense was “wholly implausible,” the Court said.

Was Bank of America Responsible Due to Negligent Recordkeeping?

The Court found that even though Bank of America failed to record the discharge and then gave monies for a line of credit that should have been discharged, they relied on the “implied representation” of Levasseur that she had a line of credit.

False Pretenses and Willful and Malicious Injury

The Court found that the Bankruptcy Code for obtaining monies under false pretenses, Section 523(a)(6) and obtaining monies causing willful and malicious injury under Section 523(a)(2)(A) creates a “potential anomaly” they are not “mutually exclusive” and that Ms. Levasseur’s debt was not dischargeable.

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