Fool Them Once, That's Enough - Inherited Dischargeability Claims

In re Boyajian, 2007 WL 1119910 (Bankr. App. 9th Cir. March 30, 2007) will prove useful to assignees of debts obtained by fraud. The Debtor was the President of the Blue Diamond Straw & Toothpick Company. She gave a personal guaranty and a false personal financial statement to Epic Funding Co. to obtain an equipment lease. After payments under the lease were delayed by Blue Diamond's cash flow problems, Epic sold the lease to Cupertino National Bank. After the lease defaulted the Bank obtained a judgment against Blue Diamond and Boyajian, then sold the judgment to Stornawaye Capital LLC, which conducted judgment debtor exams and then resold the judgment to New Falls Corporation. Boyajian then filed a chapter 7 petition.

The Debtor hung her hat on the "plain language" of 11 USC section 523(a)(2)(B), which excepts from discharge debts obtained by the use of a financial statement "on which the creditor to whom the debtor is liable . . . reasonably relied. . . ." The Debtor pointed out that New Falls purchased the debt after default, judgment and judgment debtor examination had all taken place, and obviously did not reasonably rely on her financial statement. She cited a number of cases requiring proof of reliance by the assignee, including In re Bui, 188 B.R. 274 (Bankr. N.D. Cal. 1995), followed by In re Whitenack, 235 B.R. 819 (Bankr. D. S.C. 1998); and In re Hurley, 285 B.R. 871 (Bankr. D. N. J. 2002).

In Boyajian the BAP disapproves these cases and holds that it is sufficient to prove reasonable reliance by the original creditor. In reversing Bankrutcy Judge Thompson of the Central District, the opinion nevertheless quotes her sceptical question to the Debtor's counsel:

"Really what you're saying to me it's okay to lie ... in order to get the credit because if you're really lucky somebody else will come along and purchase this debt...."

Whoever sells a debt after default, judgment and unsuccessful efforts to collect a judgment will be taking a pretty deep discount. But maybe not quite as deep as the result of this ruling. Although this one arose in a commercial context, you can see that it will also be used by purchasers of consumer debt.