Non-dischargeability and Intent to Defraud

The 6th Circuit Bankruptcy Appellate Panel has addressed what constitutes the intent to defraud for purposes of establishing non-dischargeability under Section 523(a)(4) of the Bankruptcy Code.  The president of a car dealership appealed the determination that a $2.4 million debt owed to his lender was non-dischargeable as embezzlement.  The car dealer asserted that he lacked the necessary fraudulent intent because he was acting to save his business rather than to harm the lender.  The bankruptcy court found otherwise.

On appeal from the Northern District of Ohio, in In re Cline, 2010 WL 22334, the BAP made the point that whether a debtor is motivated by a desire to save his business is not dispositive of the issue of fraudulent intent.  Instead, the BAP focused on the totality of the circumstances.  The Panel noted that there was no evidence to substantiate the car dealer’s claims that he was trying to refinance the debt, or that refinancing was even possible.  Similarly, there was no evidence to substantiate the claim that the loan proceeds were used to make improvements to the dealership.  There was also evidence of a rapid liquidation of inventory immediately before the bankruptcy case was filed, with none of the proceeds going to the lender.  Based on this evidence, the BAP held that there was sufficient evidence to permit the bankruptcy court to find an intent to defraud.  The bankruptcy court’s decision was upheld.


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