Kane v. Torres (In re: Torres), No. 09-02979, Adv. Pro. No. 10-90005 (Bankr. D. Hawaii, February 2, 2011).
In a recent 9th Circuit decision out of the bankruptcy district of Hawaii, a bankruptcy court considered the issue of debts resulting from misrepresentation to another prior to bankruptcy proceedings.
The debtor in this case, Carl Torres, owned two Harley Davidson motorcycles, the payments for which he could not afford to make. As a result, Torres decided to sell one of the motorcycles to a co-worker, Shane Kane. Kane could not afford to make an outright payment in cash for the motorcycle, and his credit was not sufficient to obtain a loan, so Kane made a deal with Torres to pay monthly installment payments until Torres's loan on the motorcycle was paid and then he would pay a lump sum payment for the rest of the purchase price.
When Kane attempted to insure the motorcycle, he discovered that he could not obtain insurance on a vehicle he did not have title to. Because of this, Torres agreed to continue to make insurance payments on his own insurance for the motorcycle, and receive an additional monthly payment from Kane to cover the costs of the payment.
Eventually, it became difficult for Torres to make the insurance payments, and he did not renew the insurance, not notifying Kane of the fact. When, in 2009, Kane was involved in a motorcycle accident in which both he and the bike were damaged, Torres was forced to come clean about the lapse in coverage, and Kane received a ticket for failing to insure his vehicle. Kane, failing to recover from the insurance company, sued Torres in state court. Torres subsequently filed a petition for bankruptcy, and Kane sought a determination from the bankruptcy court that his claims could not be discharged under sections 1328(a)(4), 532(a)(6), and 523(a)(20(A) of the Bankruptcy Code.
The court found that, while sections 532(a)(6) and 1328(a)(4) do not apply in Chapter 13 cases, such as this one, section 523(a)(2)(A) does apply in chapter 13 cases, and applied in this case to prevent discharge. In order to prevail under the 523(a)(2)(A) claim, the court reasoned, Kane must show: (1) misrepresentation, fraudulent omission, or deceptive conduct by the debtor, (2) knowledge of the falsity or deceptiveness, (3) an intent to deceive, (4) justifiable reliance by the creditor on the falsity, and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct.
Here, Torres knowingly let the insurance on his motorcycle expire, he intended to deceive Kane by giving him an insurance card that was not effective, and did not correct Kane's false impression that the motorcycle was continuously insured. As a result, the court determined that Torres owned $10,532.15 in debt to Kane, and that it was not a debt that could be discharged in bankruptcy.
