This California Appellate Panel rendered an opinion favoring creditors who refinance a debt in reliance upon a fraudulent financing statement, even though no new money is advanced.

In this case, debtors had an existing loan with the bank and were unable to make the agreed payments. Debtors requested an extension of time to repay the Note.

In support of their request for an extension, debtors represented, in writing, that they were in the process of selling real estate, which the bank previously financed, and that they expected to close on the real estate sale within two months.

In fact, however, debtors had already sold their real estate to relatives and, instead of paying off the bank loan, used the proceeds from the sale to purchase a liquor/grocery store.

The bank approved debtors’ extension request and a new Note was signed for debtors to repay the loan balance in 92 days. No new money was advanced to debtors upon the refinance.

Debtors’ new store was not profitable and debtors were unable to repay the bank when the Note was due. The bank sued debtors and they consequently filed a Chapter 7 bankruptcy.

The Bankruptcy Code provides that a debtor cannot discharge a debt:

“(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 . . . ;
(B) use of a statement in writing–
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made with intent to deceive . . . .

This court noted that some courts have misinterpreted the Code section above to require new money to be advanced with an extension or refinance of credit. This court, however, held that there is no new money requirement to hold a debt nondischargeable.

In addition, reliance upon the misrepresentation was established by the bank demonstrating it had valuable collection remedies at the time of the extension, which it did not exercise in reliance upon debtors’ misrepresentation; thus the bank incurred damage proximately resulting from the misrepresentation. This opinion, which favors creditors, has not been adopted in all jurisdictions. Cho Hung Bank v. Jong Gil Kim, 163 B.R. 157.

Author: Charles R. Harroun, Attorney at Law