Here, the debtor, a physician, borrowed money from the bank and promised to secure that loan with a pledge of a $50,000 bond that the debtor could not locate at the time of the loan. The bank agreed to loan the money as long as Dr. Bercier brought in the bond at a later date to secure the loan.

When Dr. Bercier found the bond, he failed to take it to the bank and, in fact, he cashed it in and spent the proceeds to pay his living expenses.

Dr. Bercier defaulted on his note with the bank and the bank filed suit, obtaining a judgment against the doctor for $48,000. Dr. Bercier then filed a Chapter 7 Bankruptcy and sought to discharge the bank’s debt.

The bank filed a Complaint with the Bankruptcy Court alleging Dr. Bercier committed a fraud on the creditor by promising to pledge the bond and failing to do so. If the bank had won, the bank’s debt would not have been discharged by the Bankruptcy Court.

Here, however, the Court of Appeals found that a debtor’s promise to do something in the “future” would not be considered fraud under the Bankruptcy Code even if the debtor fails to follow through with his/her promise.

The Bankruptcy Code provides that:

. . . a debt for money, or an extension, renewal or refinancing of credit is nondischargeable to the extent it is obtained by false pretenses, a false representation or actual fraud.

The Bankruptcy Court held that the phrase “false representation” or “false pretenses” must encompass the debtor’s statements that depict current or past facts — not representations as to future activities.

The Court of Appeals found that Dr. Bercier had not misrepresented any facts when the debt was finalized. The Court further noted that:

A mere promise to be executed in the future is not sufficient to make a debt nondischargeable, even though there is no excuse for the subsequent breach.

Dr. Bercier’s debt was, therefore, discharged by the Bankruptcy Court. Bank of Louisiana vs. Maurice Bercier (U.S. Court of Appeals, 5th Circuit, Case No. 91-3046).

EDITOR’S COMMENT

This decision is significant since the Court is not recognizing an unfulfilled promise to do a future act as “fraud” under the Bankruptcy Code. As a practical matter though, it does appear to be fraud. To protect the Credit Union, no loan should be granted without a simultaneous pledge of the security.

This decision could easily be extended by the Courts to a situation where the Credit Union agrees to refinance the debtor’s obligations (including paying off other creditors) in exchange for the debtor’s promise not to incur additional debts in the future.

Often, however, a Credit Union may attempt to keep a debtor out of bankruptcy through a massive refinance, with the Credit Union paying off the other creditors. Beware of this case though, since even if the debtor agrees to close out those other accounts and not incur more debts, if the debtor fails to comply with that promise, the Credit Union debt could still be discharged under this case and the Credit Union may lose more money than if it had not acted to help the debtor.

Author: Charles R. Harroun, Attorney at Law