Law Review: Tavera, Daniel, The Benefits of Hindsight: Determining Whether a Receipt of Benefits Is a Necessary Element of the Fraud Exception to Discharge

Available at:   https://ssrn.com/abstract=5295095

Abstract:
There is a circuit split on the meaning of the phrase “obtained by” under the Bankruptcy Code. Courts disagree on the proper interpretation of the portion of the statute relevant to this issue: whether a debtor needs to receive a benefit from the fraud to find the debt nondischargeable. Some courts have forgone a receipt of benefits test. Creditors now often argue that a debtor need not benefit from the asset obtained by fraud to except an underlying debt from discharge. But the fraud exception could include the requirement that a debtor receive a benefit from the assets “obtained” for certain frauds. This Article examines the history of the fraud exception and the split in the courts. This Article then analyzes the word “obtained” under the Code, and judicial interpretations of what it means to obtain assets. This Article summarizes the strengths and weaknesses on the different approaches of statutory construction applied to the word “obtained.” Based on the Supreme Court’s recent suggestion that a receipt of benefits is a necessary element of the fraud exception, this Article then concludes the exception for a willful and malicious injury appropriately addresses facts where nothing was “obtained.”

Commentary:

Tavera’s article will be of practical value to consumer bankruptcy attorneys litigating § 523(a)(2)(A) claims—especially in small business, guarantor, or insider-debtor scenarios where the money trail doesn’t end with the debtor.

We’ve all seen cases where a debtor signs a loan for a struggling business, uses rosy projections, or co-signs a note to help a relative. When the creditor sues for nondischargeability, the debtor’s defense is often: “I didn’t benefit.” Under the logic that some courts have adopted, that could be enough to avoid a judgment under § 523(a)(2)(A).

Tavera’s piece warns against that defense and provides an academic yet accessible explanation of why it should not be determinative. Fraud, not benefit, is the statutory touchstone.

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