Turbo Aleae Investments, Inc. v. Borschow (In re Borschow)
467 B.R. 410
W.D. Tex.2012Background
- Debtors Allen C. Borschow and Patricia L. Borschow operated BI, which secured an SNB loan and a line of credit; the SNB loan was secured by BI's inventory, accounts receivable, and equipment.
- BI owned Almost Originals, which produced artwork prints; BI's business declined and cash needs rose.
- Loans from Omar and Ernest Koury were extended beginning in 2006, with multiple checks labeled as personal loans to Allen and a later consolidated debt to Turbo Aleae Investments, Inc. (Turbo) via a Letter Agreement in 2007.
- Turbo loaned $150,000 in January 2007 and later consolidated debt into a Final Turbo Note for about $167,500 with 10.25% interest; Allen and Patricia signed the Letter Agreement and the Final Turbo Note.
- Debtors filed for Chapter 7 in January 2009; Turbo filed an adversary proceeding seeking non-dischargeability under 11 U.S.C. § 523(a)(2)(A); the bankruptcy court held the Eureka Debt non-dischargeable and most other debt dischargeable, with Turbo appealing.
- The district court affirmed the bankruptcy court, holding that Turbo, as assignee of the Eureka Debt, could pursue § 523(a)(2)(A) recovery and that the Eureka Debt was non-dischargeable in the amount specified.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an assignee can assert § 523(a)(2)(A) non-dischargeability by stepping into the original creditor’s position | Turbo can pursue non-dischargeability as assignee of the Eureka Debt | Debtors contend assignee status does not change reliance requirements | Yes; assignee may stand in the original creditor’s shoes under § 523(a)(2)(A) |
| Whether the Eureka Debt was non-dischargeable under actual fraud (§ 523(a)(2)(A)) | Turbo proves misrepresentation, intent to deceive, reliance, and damages | Debtors argue lack of relied-upon misrepresentation and insufficient intent | Eureka Debt non-dischargeable for actual fraud |
| Credit attribution for payments toward the Eureka Debt | Debtors argue $17,200 should offset Eureka Debt | Turbo argues those payments relate to the Final Turbo Note, not Eureka | $4,000 payment credited to Eureka Debt; $17,200 payments not credited toward Eureka Debt |
| Whether Turbo can pursue false pretense/false representation theories for non-dischargeability | Turbo seeks alternative theories to non-dischargeability | Promises to use loan proceeds in the future are not false pretenses/representations | Turbo cannot prevail under false pretenses/representation theories; only actual fraud theory sustained |
Key Cases Cited
- Cohen v. de la Cruz, 523 U.S. 213 (U.S. 1998) (fraudulent conduct to deny discharge in bankruptcy)
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (statutory standard for dischargeability in bankruptcy)
- Field v. Mans, 516 U.S. 59 (U.S. 1995) (justifiable reliance standard in fraud cases)
- In re Acosta, 406 F.3d 367 (5th Cir. 2005) (two-step test for actual fraud under § 523(a)(2)(A))
- In re Mercer, 246 F.3d 391 (5th Cir. 2001) (elements of actual fraud under § 523(a)(2)(A))
- In re Boyajian, 564 F.3d 1088 (9th Cir. 2009) (assignee can rely on original creditor’s reliance under § 523(a)(2)(A))
- In re Meyer, 120 F.3d 66 (7th Cir. 1997) (assignee rights under § 523(a)(2)(A))
- In re Sheridan, 57 F.3d 627 (7th Cir. 1995) (promises to use funds for real estate deposits; relevance of future-promises in fraud analysis)
- In re Moody, 817 F.2d 365 (5th Cir. 1987) (bankruptcy appellate jurisdiction and discrete judicial unit)
- In re Bercier, 934 F.2d 689 (5th Cir. 1991) (distinction between false representations, pretenses, and actual fraud)