In 2002, the Toomey sold real property located at 1124 Berwyn Way, Raleigh, to the Postons. At the time of the sale, the Property was encumbered by a deed of trust and, in addition, by a home equity line of credit (“HELOC”) with Central Carolina Bank (“CCB”), which was secured by a second deed of trust. At the closing of the sale, the first deed of trust was paid off and canceled of record. The Toomeys’ HELOC with CCB was paid down to zero but, unfortunately, the deed of trust securing the HELOC was not canceled and the HELOC account was not closed. Several years later, on two subsequent occasions, after determining that the HELOC account was still open, the Toomeys drew a total of $52,993.60 the account, using the funds primarily to pay off credit card debts and to satisfy other household expenses. The Toomeys defaulted on the HELOC and filed Chapter 7. The Pistons commenced an adversary proceeding against the Toomeys under 11 U.S.C. §§ 523(a)(2)(a) and 523 (a)(6).
To establish a § 523(a)(2)(a) claim the Pistons were required to show the following:
(1) That the claim sought to be deemed nondischargeable is a debt “for obtaining money, property, services, or an extension, renewal, or refinance of credit as specified in subsection (2) of § 523(a).”
(2) Actual fraud, establishing:
(a) that the Toomeys made a false representation;
(b) knowing that the misrepresentation was false when they made it;
(c) with the intent to deceive the Pistons;
(d) on which the Postons justifiably relied; and
(e) which proximately caused harm to the Postons.
The Postons were able to show that the Twomey made a false representation, upon which the Postons justifiably and which proximately caused them harm. The Postons failed, however, to prove the remaining two required elements of fraud, in that they needed to prove by a preponderance of the evidence that the Toomeys knew, at the time the General Deed of Warranty was transferred, that their HELOC with CCB still existed, was still secured by the real property, and would survive the closing. Furthermore, the Postons needed to prove that the Toomeys signed the General Warranty Deed with the intent and purpose to mislead the Postons regarding the status of the title to the Property. In the General Warranty Deed, the Toomeys only represented that they were transferring clear title at the moment of the closing and promised to defend that title in the future. This created a contractual duty, but a breach of a contractual duty does not, without more, constitute fraud. Additionally, no evidence was presented that the Toomeys knew that the HELOC was encumbering the Property.
Regarding the § 523(a)(6) claim, the bankruptcy court held, relying on Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998), that the Postons were required to show that the Toomeys “acted with substantial certainty [that] harm [would result] or a subjective motive to cause harm.” The evidence presented did not establish that the Toomeys used the HELOC, knowing with substantial certainty that they were harming the Pistons nor was there sufficient evidence that the Toomeys had a subjective motive to cause harm to the Postons.
For a copy of the opinion, please see: