Document Type

Research Memorandum

Publication Date

2014

Abstract

(Excerpt)

The Bankruptcy Code affords an “honest but unfortunate debtor” a “fresh start” by discharging certain prior financial obligations of the debtor. The bankruptcy process allows debtors to “reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.’” However, there are limitations on a debtor’s ability to obtain a discharge. For example, a creditor that lent money to a debtor based on a fraudulent writing can seek a determination that the debt is non-dischargeabile under section 523(a)(2)(B).

Issues arise where the original lender assigns the debt to a third party that in turn asserts that the debt is non-dischargeable. Specifically, the debtor may argue that the assignee can assert a non-dischargeability claim because a fraud claim is unassignable and/or the assignee cannot assert reliance since it was the original lender that actually relied on the misrepresentations. Recently, in Pazdzierz v. First American Title Insurance Co., the Sixth Circuit recently held that an assignee of a loan that the debtor allegedly obtained through a fraudulent writing could assert that the debt was non-dischargeable. There, the court rejected the debtor’s argument that the assignee “could not pursue an action under [section] 523(a)(2)(B) because it was an assignee of an interest in the [promissory] notes and, under Michigan law, claims for fraud cannot be assigned.” The court determined the assignee was not asserting a naked claim for fraud, but rather, the assignee was seeking to enforce its rights under the promissory notes, which may be transferred under Michigan law. Moreover, the court held that the assignee could assert the same reliance as the original lender.

The Pazdzierz ruling reinforces the idea that a debt purchaser has the same non-dischargeability rights as the original lender, which will allow an assignee to assert that its debt is non-dischargeabile under section 523(a)(2)(B). This Article examines the issue presented in Pazdzierz and is separated into four parts. Part I discusses the standard for asserting that a debt is not dischargeable pursuant to section 523(a)(2)(B). Part II discusses that when fraud is not at issue, an assignee can assert section 523(a)(2)(B) non-dischargeability. Part III discusses how an assignee can assert the same reliance as the assignor under section 523(a)(2)(B). Part IV discusses the implications of Pazdzierz.

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