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Bankruptcy discharge...

Brea, CA |

A mortgage lender sues a mortgage broker in superior civil court for breach of contract and breach of fiduciary duty. The lender alleges that the broker submitted a low quality loan transaction. The loan officer who was an independent contractor of the broker was also named as a defendant and has fraud alleged against them. The broker does not have fraud alleged against him. The plaintiff is alleging "vicarious liability" against the broker. Can the broker file ch. 7 bk and get it discharged?

Attorney Answers 3

Posted

If the broker files for Chapter 7 and there is no adversary proceeding filed, it will be discharged. If an adversay proceeding is filed, and all that is alleged is vicarious liability, then it will probably be discharged.

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As someone who represents only consumers, many of whom were greatly harmed during the housing bubble by thinly capitalized and underinsured mortgage brokers, and by their unscrupulous "independent" contractors, I have to say, "I hope not."

That said, there is too much money at stake here for the broker (that would be you, I think, because the lender is a large bank represented by a tall building firm and the borrower has no stake in litigation brought by the lender) to rely on Internet advice. You really need to ask a bankruptcy lawyer who has a fair amount of experience with mortgage origination issues. That lawyer will not be cheap. In general, however, a principal can be held liable even for criminal acts of an agent under some circumstances. Debts incurred by fraud OR in breach of fiduciary duty are not dischargeable.

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Filing for Chapter 7 bankruptcy is not necessarily a panacea in this instance.

I would have to agree with Mr. Oney. The broker can be held vicariously liable for the acts of the broker's agent.

Section 523(a) of the Bankruptcy Code specifically excepts various categories of debts from the discharge granted to individual debtors. Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies. The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

The types of debts described in sections 523(a)(2), (4), and (6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. However, a creditor such as the mortgage lender can file an adversary proceeding complaint and ask the bankruptcy court to determine that these debts are excepted from discharge.

In short, debts incurred by fraud or in breach of fiduciary duty might not be dischargeable. Therefore, it is imperative that you consult with an experienced bankruptcy attorney before you decide to file for Chapter 7.

Frank W. Chen is licensed to practice law in the State of California. The information presented here is general in nature and is not intended, nor should be construed, as legal advice. This posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, consult your own attorney.

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