Fraudulent Inducement To Forbear Collection Of Loan Results in Non-Dischargeable Debt Under Section 523(a)(2)(A)
OJEDA v. GOLDBERG (March 25, 2010)
Gail and Ronald Goldberg were in the business of making high risk loans. They made such a loan in the amount of $600,000 to Ernest and Beverly Ojeda. The Ojedas provided stock valued at $800,000 as collateral. The original loan agreement was executed in August of 1998, with an original maturity date of October of 1998. The maturity date was extended many times, and the Ojedas continued to pay monthly interest until January of 2006. In late 1999, the company whose stock secured the original loan executed a reverse stock split, significantly reducing the number of shares and value of the collateral. At the time of one of the loan extensions in late 2001, two entities owned by the Ojedas, both of which owned McDonald's restaurants, guaranteed the note. Another maturity date came and went – and the Ojedas continued to make the monthly interest payments. In 2004, the Ojedas sold their interest in the McDonald's restaurants and used the proceeds to pay off creditors and to buy a pizza franchise. The Ojedas ultimately defaulted on the note in January of 2006, the pizza franchise failed a month later, and the Ojedas entered bankruptcy. In the bankruptcy proceeding, the Goldbergs asserted that the Ojedas’ liability on the $600,000 loan should be non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The bankruptcy court concluded that the Goldberg's were not justified in relying either on the value of the stock or the ownership in the restaurants and further concluded that, if there was reliance, the only amount excluded from discharge would be attorney's fees and unpaid interest. The district court reversed, concluding that reliance on the restaurant ownership was justified and that the entire amount was excepted from discharge. The Ojedas appeal.
In their opinion, Judges Kanne, Rovner, and Williams affirmed. The Court first set forth the elements of a discharge exception under § 523(a)(2)(A): a debtor’s false representation, the debtor's knowledge of the falsity or reckless disregard for the truth, an intent to deceive, and justifiable reliance. The first three elements were not seriously contested. With respect to justifiable reliance, the Court noted that it is a lower standard than reasonable reliance, and only requires that one not rely "blindly" on a false representation if the falsity would have been obvious upon cursory investigation. Applying that test, the Court found no clear error in the bankruptcy court's determination that the Goldberg's reliance on the stock shares was not justified. Ronald Goldberg was an experienced businessman and he was aware of the company's troubles. He therefore should have made inquiry before continuing to extend the note. The Court found error, however, in the bankruptcy court's conclusion that the Goldberg's reliance on the Ojeda’s restaurant ownership was not justifiable. The Court concluded that the Goldbergs had no information that would have alerted them to the sale of the restaurants. Even though the restaurants did not secure the debt, the companies that owned the restaurants did guarantee the note. The sale of the restaurants materially affected each company's ability to perform as guarantors. Next, the Court concluded that the fraudulently induced forbearance fit within the definition of an "extension" or "renewal" of credit under § 523. Finally, the Court addressed the issue of the extent to which the forbearance was obtained by false pretenses. The test is whether the creditor: a) had collection remedies at the time of the false representation, b) did not take advantage of the remedies because of the false representation, and c) the remedies lost value during the extension period. The Court concluded that the Goldbergs met the test since the Ojedas had significant assets in 2004 that no longer existed at the time of default. Since the Goldberg's forbearance applied to the entire debt, the Court concluded that the entire debt was excepted from discharge, notwithstanding that the original loan involved no deception.
