Bankruptcy: Dischargeability of Debts - Piercing the Corporate Veil

     In the case of Hodnett v. Loevner, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia held that a bankruptcy debtor is not insulated from the dischargeability issues raised under Bankruptcy Code §523 (a)(4) by virtue of the fact that the transactions were done in the name of a corporation. 

     The debtor had transferred the plaintiff/creditor's trust funds to a limited partnership of which the investment company, the debtor's alter ego, was a general partner, without any notice to the plaintiff. Further, the debtor failed to properly account for the location of the funds. The debtor was also an officer, director and 50 percent shareholder in the corporation, and most importantly, was the person who made the investment decisions concerning client funds. The debtor was the alter ego of the investment company, and the Court found that the company was used in conjunction with the limited partnership to obscure fraudulent conduct with respect to the plaintiff. Therefore, the Court invoked the doctrine of piercing the corporate veil to hold the debtor personally liable for acts of the corporation.

     The Court held that the judgment was also exempt from discharge under Bankruptcy Code §523(a)(2)(A) because of the debtor's actual fraud. The debtor's statements, reports and correspondence concerning the existence of certificates of deposits were misrepresentations of material facts which were made by the debtor in an effort to deceive the plaintiff, and upon which the plaintiff relied, permitting the debtor and the investment company to use the trust funds in violation of an express trust. As a result of those misrepresentations, the debtor lost $107,000 of the plaintiff's trust funds. The Court found that this conduct on the part of the debtor constituted fraud.

     The Court further found that even if it could be argued that the debtor intended to repay the funds, his lending the plaintiff's funds on an unsecured basis while lying to the plaintiff about the nature of the investment constituted reckless conduct tantamount to fraud.

Bankruptcy: Dischargeability of Debts - False Pretenses

      In the case of Slonim v. Marineau, the United States District Court confirmed a Bankruptcy Code ruling that a debt was non-dischargeable pursuant to Bankruptcy Code §523(a)(2)(A), as it was obtained by false pretenses. The Bankruptcy Court had made a factual finding that the debtor's loan agreement with the creditor, who was an individual investor, provided that the $90,000.00 loaned by the creditor would be used to construct pre-sold homes in Albermarle and Greene Counties, but instead the debtor had used the loan to pay personal expenses.
     The debtor had argued that his statements did not "qualify" as misrepresentations under Bankruptcy Code §523(a)(2)(A) because the statements concerned future performance. Most courts, however, have held that when such statements are accompanied by the present intention not to perform as promised. The statement of present intention at issue in this case involved the use to which the debtor would put the money. The Court ruled that where money is entrusted to a debtor for a specific purpose, the debtor impliedly represents that it will be used for that specific purpose constitutes a misrepresentation of the debtor's intention.
     The debtor's own testimony established that he never intended to use the funds for that purpose. He testified at trial that he always intended to use the loan to reimburse himself and his partner for expenses incurred in building the house for the partner. Thus, the debtor's representation that the money would be used for a specific purpose was knowingly false when he made it. Furthermore, his intent to deceive could be inferred from his immediate depletion of the funds and statements aimed at making the investor believe that there was less risk involved than which truly existed. Accordingly, the debt was ruled non-dischargeable pursuant to Bankruptcy Code §523(a)(2)(A).