by The debtors were entitled to summary judgment on the issue of dischargeability of their payday loans despite the fact that they took out the loans three days prior to filing for bankruptcy. Ameri Best, LLC, v. Holmes, No. 18-20578, Adv. Proc. No. 18-6044 (Bankr. D. Kans. April 27, 2022).
As they had done many times before, in March, 2018, the debtors, James and Stacy Holmes, each borrowed $500 from payday lender, Ameribest. The loans were due two weeks later with $75 interest. Three days later, they filed for bankruptcy owing Ameribest $1,150. Ameribest filed an adversary proceeding seeking an order that the debt was nondischargeable under sections 523(a)(2)(A) and (a)(6). It moved for summary judgment. The court denied the motion and ordered Ameribest to show cause why it should not enter summary judgment in favor of the debtors. The debtors then filed their own motion for summary judgment seeking an order of dischargeability and an award of attorney fees and costs under section 523(d).
The court began its analysis with section 523(a)(2)(A). That provision makes a debt nondischargeable when the debtor makes a false representation, intended to deceive the lender, which does deceive the lender and for which the lender suffered a loss.
The gist of Ameribest’s argument that the debtors acted with intent to deceive was premised on their filing for bankruptcy three days after taking out the loan. The court noted that taking out a loan which the borrower has no intention of repaying constitutes the intent to deceive required under section 523(a)(2)(A). In the absence of evidence that the debtors in fact took out the loan in good faith, the court found the debtors did not sustain their burden of showing no material issue of fact on that issue.
Likewise, the debtors failed to sustain their burden of demonstrating that there was no material issue of fact with respect to Ameribest’s reasonable reliance in light of the affidavit submitted by the owner of Ameribest stating that it relied on the debtors to repay the loan.
The court turned to the issue of whether Ameribest demonstrated that it suffered a loss by reason of the loan. Without clarifying how repayment of previous loans with interest related to the new loan at issue here, the court noted that from the time the debtors began routinely taking out payday loans they had paid Ameribest $1,125 in interest. In the case of the current loan, the court found that Ameribest “was $150 better off as a result of the March 24, 2018 transactions.” Again, the court did not make clear how Ameribest suffered no loss because of the debtors’ obligation, which they sought to discharge, to repay a loan with interest. [Though the court’s opinion is not clear on this issue, the debtors’ brief states that they did not receive any of the loan proceeds as the loans were used to repay previous loans].
The court concluded that Ameribest suffered no loss and the debtor was entitled to summary judgment on the issue of whether the loan was dischargeable under section 523(a)(2)(A).
The court turned to whether the debtors were entitled to costs and attorney fees under section 523(d). That section provides that when a lender challenges the dischargeability of a debt and loses, the prevailing debtor will be entitled to costs and attorney fees if the lender’s conduct was not substantially justified and there were no other circumstances to render the award unjust.
To demonstrate reasonable justification the lender must show “(1) a reasonable basis for the facts asserted; (2) a reasonable basis in the law for the legal theory proposed; and (3) support for the legal theory by the facts alleged.”
Ameribest argued essentially that based on its experience with other borrowers, it was reasonable for it to assume that because the debtors filed for bankruptcy so soon after taking out the loan, they never intended to repay it. The court was unpersuaded, finding that “Debtors did pay off their previous loans three days before filing for bankruptcy—and a creditor’s failure to investigate its own records does not constitute substantial justification for a § 523(a)(2) action.” It ordered Ameribest to pay fees and costs.
The court turned to Ameribest’s claim that the loan was nondischargeable under section 523(a)(6) due to debtors’ willful and malicious conduct. The court found that “section 523(a)(6) does not except debts from a non-hardship Chapter 13 discharge.” The court explained that that section does not except a debt from discharge unless and until the debtor applies for hardship discharge under section 1328(b). As that had not happened in this case, the court found Ameribest’s claim to be frivolous.
Finally, the court entered summary judgment in favor of the debtors on Ameribest’s remaining claims for fraud and breach of contract on the basis that Ameribest presented no evidence or argument in support of those claims.