It has long been the law that if you incur debt by defrauding a creditor that that debt cannot be discharged through bankruptcy if the creditor cries foul. But a new federal appeals court case has broadened that standard ere in New Jersey to include debt where the debtor had a “reckless disregard for the truth."
In the case of In re: Bocchino, the Third Circuit Court of Appeals held on July 23, 2015, that a creditor does not have to prove that the debtor knew of a falsity, just that he had a reckless disregard for whether it was true. In doing so, the court created a duty on the part of the debtor to investigate facts being represented to creditors.
So What Did the Debtor Do?
In that case, the debtor was a stockbroker who recommended to clients that they invest in certain stocks. This recommendation was not based on any thorough investigation of the stock by Bocchino, but just on rumors he had heard about them. At the same time, he did know about facts that should have put him on alert that there was a problem. Still, he did nothing.
The investments later turned out to be fraudulent, the principals of those companies were arrested, and Bocchino’s clients lost their money! On top of that, the SEC sued Bocchino for violations of securities laws and got judgments for almost $179,000.
Chapter 13 Bankruptcy No Help
Bocchino then filed a chapter 13 bankruptcy in order to deal with his debt and discharge what he could not pay back. The SEC did not sit still for this and filed an action in bankruptcy court called an Adversary Proceeding asking the judge to declare the debt non-dischargeable.
Even though the court found that Bocchino thought what he represented to his clients was true, and thus no actual fraud, it still found the debt to be non-dischargeable due to his recklessness in failing to investigate the quality of the investment. A stockbroker of his experience should have been more diligent.
The court also found that it was reasonable to conclude that the fraud by those companies would have been discovered if an investigation had been conducted.
Each case is different, of course, but people here in New Jersey now need to be aware that fraud is not the only standard that can be used by a creditor to object to discharge. You need to think about whether the “truths” you relied upon would have held up to scrutiny if you had asked a few questions and looked into it more.
Thinking About Bankruptcy?
If you live in southern New Jersey and are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.
If you have more questions about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.
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