Lauren M. Shoemaker
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Under title 11 of the United States Code (the “Bankruptcy Code”), a debtor may be discharged of his or her debts.[1] However, certain debts are not dischargeable.[2] In particular, a debt obtained by false representation or false written statements cannot be discharged.[3] In In re Swing House Rehearsal and Recording, Inc., a California bankruptcy court held that debts owed to a creditor under a loan will not be discharged if the debtor made fraudulent misrepresentations of material fact to induce the creditor into providing the loan.[4] Philip Joseph Jaurigui (“Jaurigui”) was the president, secretary, Chief Executive Officer (“CEO”), and majority shareholder of Swing House Rehearsal and Recording, Inc. (“Swing House”).[5] On July 23, 2014, Jonathan Mover (“Mover”) initially loaned $150,000 to Jaurigui and Swing House.[6] On November 8, 2016, Jaurigui filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court in the Central District of California.[7] Thereafter, the Court converted Jaurigui’s chapter 11 case to chapter 7.[8] Additionally, on November 8, 2016, Swing House filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code.[9]
Mover filed a complaint against Jaurigui seeking a judgement declaring that his loans to Jaurigui were nondischargeable debts under 11 U.S.C. § 523(a)(2)(A), which provides that an individual debtor cannot be discharged from debts for money obtained by false representations, and 11 U.S.C. § 523(a)(2)(B), which provides that an individual debtor cannot be discharged from debts for money obtained by false written statements.[10] According to the bankruptcy court, to establish a nondischargeability claim under 11 U.S.C. § 523(a)(2)(A), a creditor must show:
(1) the debtor made representations; (2) that at the time the debtor knew they were false; (3) the debtor made those representations with the intention and purpose of deceiving the creditor; (4) the creditor justifiably relied on these representations; and (5) the creditor sustained losses as a proximate result of the debtor’s representations.[11]
Additionally, under 11 U.S.C. § 523(a)(2)(B), a creditor must show:
(1) it provided the debtor with money . . .; (2) the representation was materially false; (3) the debtor made the representation with the intention of deceiving the creditor; (4) the creditor relied on the representation; (5) the creditor’s reliance was reasonable; and (6) damage proximately resulted from the representation.[12]
The California bankruptcy court concluded that Jaurigui made materially false misrepresentations in the Swing House Offering Memorandum, which described Swing House’s services and detailed the income and expenses of Swing House’s operations for investors.[13] According to the court, such misrepresentations presented to Mover by Jaurigui contained false representations of fact, inducing Mover to provide Jaurigui and Swing House with considerable loans.[14]Additionally, the court found that Mover’s reliance on Jaurigui’s misrepresentations were reasonable given Jaurigui’s long-term ownership and management of Swing House and his familiarity with Los Angeles.[15] The evidence also demonstrated that Jaurigui knew the representations in the Offering Memorandum were false before Mover provided him with loans because of Jaurigui’s extensive knowledge about his own business.[16] Therefore, the court held that a debtor cannot discharge debts that were obtained through false representations or false written statements to induce a creditor into providing the debtor with a loan.[17]
Ultimately, this case shows that under § 523(a)(2)(A–B) of the Bankruptcy Code, a debtor cannot discharge debts that were obtained through knowingly false representations made with the intent to defraud the creditor, and when the creditor can show the losses were sustained from their reasonable reliance on the misrepresentations.[18]
[1] See 11 U.S.C.A. § 523(a)(2)(A–B).
[2] See Id.
[3] See Id.
[4] See In re Swing House Rehearsal and Recording, Inc., No. 2:16-bk-24760-RK, 2022 WL 4102825, at *49 (Bankr. C.D. Cal. Sept. 8, 2022).
[5] See id. at *4.
[6] See id. at *12.
[7] See id. at *4.
[8] See id.
[9] See id.
[10] See id. at *41; 11 U.S.C. § 523(a)(2)(A); 11 U.S.C. § 523(a)(2)(B).
[11] In re Swing House Rehearsal and Recording, Inc., 2022 WL 4102825 at *41 (citing Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010); In re Slyman, 234 F.3d 1081, 1085 (9th Cir. 2000)).
[12] In re Swing House Rehearsal and Recording, Inc., 2022 WL 4102825 at *41 (citing Siriani v. Northwestern Nat’l Ins. Co. (In re Siriani), 967 F.2d 302, 304 (9th Cir. 1992); Candland v. Ins. Co. of North America (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996) (finding that the claim under 11 U.S.C. § 523(a)(2)(B) were more compelling than the claim under 11 U.S.C.§ 523 (a)(2)(A))).
[13] See In re Swing House Rehearsal and Recording, Inc., 2022 WL 4102825 at *6.
[14] See id.
[15] See id. at *44.
[16] See id. at *43.
[17] See id. at *42, 46.
[18] See 11 U.S.C.A. § 523(a)(2)(A–B).