'Unreasonable Mistake' does not prevent Discharge of Debt

Monday, April 11, 2005
The U.S. Court of Appeals for the Fifth Circuit ruled that an unreasonable, but honest mistake by a debtor in obtaining a loan does not prevent the debt from being discharged in a subsequent bankruptcy. In the instant case, the debtor was corporate secretary and director of a shipowning company. The company executed a preferred ship mortgage on one of its ships in favor of a business with which it had a number of transactions. The debtor signed the authorizing resolution for the transaction. The company and the other business had various disputes that were eventually settled. Debtor apparently was under the impression (albeit mistaken) that the settlement extinguished the preferred ship mortgage. The company then negotiated a working capital loan with a credit corporation. The company president and debtor signed the loan agreement on behalf of the company and both agreed to personally guarantee the loan. When the company defaulted on the loan, the credit corporation sought payment from debtor, who then filed for bankruptcy. The credit company contended that the debt was not dischargeable because debtor had made false representations in obtaining the loan for the company. The appellate court held that it would not overrule the decision of the bankruptcy court on an issue of creditability where that was evidence in the record indicating that the misrepresentation, even if unreasonable, was honest. An interesting side-note concerns the preferred ship mortgage. Prior to the grant of the loan, documentation records of the Coast Guard were examined. Those records indicated that the preferred ship mortgage had been terminated. After the loan had closed, the Coast Guard notified counsel for the credit corporation that the earlier abstract of title was erroneous and that the prior preferred ship mortgage was valid. In the Matter of Acosta, No. 04-30087 (5th Cir., April 8, 2005)(HK Law)

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