When an individual obtains a loan with no intention of repaying the lender, it is well established that such a debt is not dischargeable in bankruptcy. If, however, a debtor does not misrepresent its intent to repay the lender, but instead materially misrepresents the purpose of the loan, is the debt dischargeable in the debtor’s subsequent bankruptcy?

In the recent case of Johnson v. Dowling, 2013 WL 684681, W.D. Va. (2013), Judge Norman Moon of the Western District of Virginia held that when a debtor intentionally fails to use the proceeds of a loan as indicated, the resulting debt may not be discharged in a subsequent bankruptcy – even if the debtor intended to repay the lender at the time the loan was executed. This case is potentially significant for creditors and their counsel because it potentially reframes the question as to what constitutes fraudulent intent under § 523(a)(2)(A).

Although the Dowling court relies on similar opinions from the First, Sixth, Seventh and Ninth Circuits, courts within the Eleventh Circuit have not addressed this specific issue. The opinion most similar is In re Hendricks. In Hendricks, a debtor obtained a loan, but ultimately used the proceeds for a different purpose than his stated intention when he obtained the loan. Had the creditor successfully demonstrated that the debtor intentionally misrepresented the use of  the funds at the time the loan was made, the result would likely have been similar to Dowling. However, Judge Briskman of the Middle District of Florida held that the creditor failed to overcome its burden to prove the debtor’s fraudulent intent.

Certainly the Virginia opinion does not eliminate the “intent” requirement present in Hendricks. Instead, Dowling makes clear that when a borrower makes a false statement to obtain a loan, even one unrelated to default, the creditor bears the burden of proving that the statement was made “with the intent to deceive,” as required by § 523(a)(2)(A). Thus, Dowling merely extends the manner in which a debtor may deceive a lender under § 523(a)(2)(A) beyond simply the intent to use the funds for purposes other than those indicated at the time of the execution of the loan.

Many lenders will view the Dowling case as a prudent extension of § 523(a)(2)(A)’s non-dischargeability provision. Creditor’s counsel, however, should recognize that Dowling does not lower the bar on proving fraudulent conduct. Indeed, creditors still bear the burden of proving the common law elements of fraud. Dowling merely opens the door to additional considerations of a debtor’s intentional deceit in obtaining a loan. Regardless, Dowling provides an interesting approach to objecting to dischargeability of a debt under § 523(a)(2)(A) when the circumstances and evidence so permit.