In Bandi, the debtors made false statements regarding
their ownership of particular real estate. The Fifth
Circuit upheld a finding that debts incurred in reliance on those
false statements were non-dischargeable in bankruptcy.
The statements were characterized as false statements, but not as
statements "respecting the debtor's or an
insider's financial condition" which are only
non-dischargeable if they meet more stringent standard.
Although a general goal of bankruptcy is to provide a
"fresh start" for the debtor, there are limits.
Section 523 of the Bankruptcy Code contains a number of exceptions
from the discharge of an individual debtor including:
(2) for money, property, services, or an extension,
renewal, or refinancing of credit, to the extent obtained by
(A) false pretenses, a false representation, or actual
fraud, other than a statement respecting the
debtor's or an insider's financial
(B) use of a statement in
(i) that is materially false;
(ii) respecting the
debtor's or an insider's financial
(iii) and which the creditor to whom the debtor is
liable for such money, property, services, or credit reasonably
(iv) that the debtor caused to be made or
published with intent to deceive.
Charles and Stephen Bandi (both Chapter 7 debtors) were
guarantors of a commercial loan made to an affiliated
company. The brothers had falsely represented to the
lender (Becnel) that they owned a commercial building, a
condominium that they were developing, and a residence.
The bankruptcy court found (at least implicitly) that the intent
was to "convey the impression that the two brothers owned
valuable real property and that their personal guaranties of a loan
to RSB [the affiliate company] would be backed by some measure of
The key issue in this case was whether these misrepresentations
were "a statement respecting the debtor's or an
insider's financial condition" so that the more
stringent test of subsection 503(2)(B) applied. Although
it may seem strange to have a more stringent test for some lies
than for others, as explained by the US Supreme Court in a case
quoted in the Fifth Circuit opinion:
The House report on the [Bankruptcy Code] suggests that Congress
wanted to moderate the burden on individuals who submitted false
financial statements, not because lies about financial condition
are less blameworthy than others, but because the relative equities
might be affected by practices of consumer finance companies, which
sometimes have encouraged such falsity by their borrowers for the
very purpose of insulating their own claims from discharge.
After the lender obtained judgments on their personal
guarantees, both brothers filed for bankruptcy protection under
Chapter 7. The lender contended that their guarantee
obligations should be non-dischargeable under both Sections
503(2)(A) and 503(2)(B). The bankruptcy court found that
the loan was acquired through "false pretenses, false
representations, or actual fraud regarding property ownership"
under Section 503(2)(A). It also concluded that these
were not statements regarding "financial condition" as
contemplated by Section 503(2) since they were not statements about
the "overall financial condition" of the debtor or an
The district court affirmed, and upon appeal the Fifth Circuit
agreed that "financial condition" means the "general
overall condition of an entity or individual, that is, the overall
value of property and income as compared to debt and
liabilities." It then held that a representation
about ownership of particular properties does not say anything
about overall financial condition since, among other things, the
properties could be encumbered or undisclosed liabilities of the
person could be far more than the value of the property.
The court acknowledged that there is a split among courts on the
interpretation of a statement about financial condition.
It noted that the Tenth Circuit and Eighth Circuit cases
are generally consistent with the Bandi decision, while
the Fourth Circuit has held that a representation about certain
property being unencumbered is a
statement regarding financial condition, and thus a loan made in
reliance on the statement is dischargeable (unless the more
stringent conditions of Section 503(2)(B) are met). So,
the outcome in a particular case will depend in part on which
jurisdiction is involved.
This case illustrates that if an individual debtor has made any
misrepresentations in connection with obtaining credit (including
for an affiliate), bankruptcy may not provide the magic bullet that
allows the individual to escape liability.
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