Estate Can’t Show Fraud by Debtor

Although debtor encumbered her el­derly mother-in-law’s home for debtor’s loans and defaulted on a Confessed Judgment Note she signed after the mother-in-law obtained a reverse mort­gage in order to stay in the home, and despite debtor’s “disturbing pattern of fiscally irresponsible,” “if not selfish” behavior, the Norfolk U.S. Bankruptcy Court says the mother-in-law’s grand­daughter/executor has failed to prove the debt on the Note is nondischarge­able under 11 U.S.C. §§ 523(a)(2) or 523(a)(6).

Fraud allegations

The complaint alleges debtor engaged in a series of fraudulent acts that ulti­mately resulted in decedent, represent­ed by plaintiff estate, obtaining a re­verse mortgage to satisfy certain debts incurred by debtor, who is decedent’s daughter-in-law. Plaintiff alleges debt­or committed fraud by misrepresenting her intent to pay the “Confessed Judg­ment Note” that she entered into with decedent, the purpose of which was to repay decedent for satisfying the daugh­ter-in-law’s debts. Debtor admitted signing the Note but denies the allega­tions of fraudulent behavior. The com­plaint seeks to deny debtor’s discharge with regard to this debt pursuant to 11 U.S.C. §§ 523(a)(2) and 523(a)(6).

Around 2002, decedent deeded the house she resided in to her son and daughter-in-law, who then encumbered the property with a substantial amount of debt. Decedent’s granddaughter tes­tified that after she became a lawyer in 2006, decedent forwarded her mail and financial information for the grand­daughter to review. She qualified as the executor.

The son died in 2005, predeceasing his mother. As sole beneficiary of his life insurance policy, debtor received $204,000 after his death. However, she did not use the life insurance proceeds to satisfy the outstanding financial debt against decedent’s property. Instead, debtor voluntarily ceased her em­ployment and the insurance proceeds served as her sole source of income for three years and she bought a new car and traveled during this period. She de­faulted on another debt and the creditor placed a lien against decedent’s proper­ty.

Debtor conveyed the property, encum­bered by two liens, back to decedent by deed of gift on May 8, 2007, and told decedent she would no longer pay the mortgage, taxes and insurance on the property, according to plaintiff. Debtor says she continued to pay the mortgage in order to allow decedent to obtain a reverse mortgage and continue living in the property, her home for 50 years.

Despite the parties’ divergence on the manner in which the financial as­sistance came about, the parties do concur that decedent, with the grand­daughter’s counsel, agreed to obtain a reverse mortgage and use the proceeds to satisfy the liens on the property in order to avoid foreclosure. As a condi­tion of decedent obtaining a reverse mortgage, debtor promised to repay her and signed the Confessed Judgment Note. The parties agree that by 2013, when the end of the note’s repayment term was reached, debtor had failed to submit a single payment to decedent and she subsequently defaulted on the Confessed Judgment Note. Decedent died on Jan. 11, 2015; debtor filed for bankruptcy on Feb. 9, 2015, and listed decedent as an unsecured creditor.

Debt is dischargeable

The alleged § 523(a)(2)(A) misrepre­sentation here is that debtor signed the Confessed Judgment Note without the intention of repaying this debt. During the trial, plaintiff alleged debtor made several implicit and express misrepre­sentations to decedent: assurances to decedent that she would not need to worry about making future mortgage payments; debtor’s lack of voluntary payment to satisfy the Note and fail­ure to inform decedent about the liens encumbering the property before she transferred it back to decedent in 2007; and debtor’s attempt to discharge the subject obligation by filing for bank­ruptcy despite prior representation that she would not do so.

The actions that occurred after debt­or signed the Note are superfluous to debtor’s state of mind and intentions during the contract formation. Debtor’s representation that decedent would be forced to move if the liens on the prop­erty were not satisfied, and the prop­erty would be lost to foreclosure, was a true, if very unfortunate, statement. The court does not find such statement prior to the Note being signed to be a misrepresentation.

Plaintiff did not sufficiently prove that debtor knew about the lien creat­ed by the Dominion judgment before the 2007 transfer or that decedent did not know about the SunTrust loan en­cumbering the property. While debtor’s use of a portion of the life insurance proceeds was financially ill-advised in light of her outstanding debts, such misguided behavior does not equate to fraud and does not evince an intent not to repay the Note she entered into three years after receiving the proceeds.

Admittedly, debtor’s decision to transfer the property back to decedent in 2007 after the property had been encumbered with a great deal of debt appears to be suspicious and opportu­nistic behavior. However, plaintiff has supplied no evidence, circumstantial or otherwise, to show that the proper­ty transfer was procured fraudulently or was the genesis of a multi-year-long scheme in an effort to defraud decedent.

The court further finds that dece­dent’s reliance on the promise to sat­isfy the Note was not justified, given debtor’s proximate financial troubles, prolonged period of unemployment and past work history – all known to dece­dent and her counsel.

Finally, debtor cannot be found to have waived dischargeability of this debt. The Bankruptcy Code’s statutory framework, overarching purpose and legislative history forbid the enforce­ment of both ipso facto and prepetition wavier of discharge clauses that penal­ize debtors for filing bankruptcy and intrude on the Code’s policy of a fresh start for debtors.

The court is not without empathy for plaintiff. Decedent appeared to be a remarkable woman who embodied the virtues of generosity and familial loyalty but perhaps some of her family were less than she deserved. However, there is no basis on this record to find the debt to be nondischargeable under §§ 523(a)(2) or 523(a)(6).

Estate of Erma C. McCoy v. McCoy (St. John) APN 15-07042, Aug.11, 2016; USBC at Norfolk, Va. VLW 016-4-015, 46 pp.