IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE:

ARTHUR L. PEARSALL, JR. and : Case No. 14-10616-TPA

TAMMY L. PEARSALL, :

Debtors : Chapter 7

 :

MARY PEARSALL, : Adv. No. 14-1068-TPA

Plaintiff :

 :

v. : Related to Doc. No. 1

 :

ARTHUR L. PEARSALL, JR. and :

TAMMY L. PEARSALL, :

Defendants :

Appearances: Mark A. Lindsay, Esq. for Plaintiff

Earle D. Lees, Jr., Esq. for Defendant Arthur L. Pearsall

David J. Hopkins, Esq. for Defendant Tammy L. Pearsall

MEMORANDUM OPINION

The Debtors/Defendants here are Arthur L. Pearsall, Jr. (who was been referred to

as “Lee” by everyone, a practice the Court will likewise follow) and Tammy Pearsall (“Tammy”). 

 Tammy and Lee have been married since 1994. In this adversary proceeding, Plaintiff Mary

Pearsall (“Mary”) seeks a determination pursuant to 11 U.S.C. §§523(a)(2), 523(a)(4), and/or

523(a)(6) that the remaining principal loan obligation from an original loan of $58,000 from Mary

1

FILED

CLERK

U.S. BANKRUPTCY

COURT - :'3$

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to Tammy, is not dischargeable in this bankruptcy.

1 Mary also asserts claims for supplemental

relief in the form of the denial of an exemption and a subordination of the Debtors’ equity interest

in certain real estate to her claim for repayment of the loan. The Parties submitted their post-trial

briefs and waived final argument. For the reasons set forth below, the Court will find that the

remaining debt owed by Tammy to Mary on the $58,000 loan is excepted from discharge pursuant

to Section 523(a)(2)(A), but will deny the requested relief in all other respects.2 The Court is unable

to determine the actual amount of the remaining debt based on the current state of the record and

will therefore schedule a further evidentiary hearing for that purpose if the Parties are otherwise

unable to agree upon an amount. 

FINDINGS OF FACTS

Before setting forth its findings of fact the Court will comment on how they were

determined. The trial in this case was centered much more on witness testimony rather than

documents, which played a secondary role at best. Four witnesses testified at trial: Mary, Tammy,

Lee, and Mary’s son, Cole Wilson. Of these, Mary and Tammy were by far the most significant

1 As will be discussed further below, there were actually two separate loan

transactions: a loan of $58,000 made on November 14, 2011 and a loan of $1,600 made in or about

December, 2012. The main focus of this Opinion will be the $58,000 loan. The minimal evidence

presented by the Plaintiff as to the $1,600 loan was insufficient to meet her burden as to nondischargeability, though the smaller loan does have some relevance in demonstrating a pattern of

conduct by Tammy. Unless specified otherwise, references in this Opinion to “the loan” or “the loan

obligation” should be understood as referring to the $58,000 loan only. 

2 The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§157 and 1334.

This is a core matter pursuant to 28 U.S.C. §157(b)(2)(I). This Memorandum Opinion represents

the Court’s findings of fact and conclusions of law under Fed.R.Bankr.P. 7052.

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witnesses in the Court’s view in that they were the only actual witnesses to the loan transaction that

is central to the case, as well as in many instances the only actual witnesses to the conversations and

interactions leading up to the loan. When the testimony of these two witnesses diverged on relevant 

points, it fell to the Court as the trier of fact to determine which of them was more credible. 

The Court followed several well-recognized strategies to assist it in making

credibility determinations in this case. One was to observe, beyond their mere words, the

deportment, demeanor and attitude of the witnesses. A second was to consider the consistency of

their testimony under oath at different times, for example in prior depositions or verified pleadings. 

 Third, was to examine the inherent probability, or lack of probability, of the particular facts

propounded by the witness, considered in the light of all of the facts and circumstances in the record, 

applying ordinary common knowledge of human nature and common sense as the measure of

probability. See, generally, In re Kovler, 249 B.R. 238, 256–57 (Bankr. S.D.N.Y. 2000),

supplemented, 253 B.R. 592 (Bankr. S.D.N.Y. 2000), and corrected, 329 B.R. 17 (Bankr. S.D.N.Y.

2005).

The Court’s overall impression was that Mary was a very credible witness who

answered as truthfully as she could. There was no indication that she was being deliberately

deceptive or evasive as to any material points in her testimony. She did not appear to be giving a

rehearsed presentation, nor did she seem to be deliberately shading her testimony to fit a theme. 

That is not to say that the Court necessarily accepts all aspects of her testimony as true. While her

mental alertness was impressive given her age and physical limitations, it was also apparent that her

recollection as to some of the finer details of the relevant events, for instance times and places, may

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be less than ideal. Tammy’s testimony, by contrast, appeared to be of a more calculated nature. It

is difficult to point to any blatantly and deliberately false answer in her testimony, but the Court got

the real sense that she was tailoring her testimony toward a desired goal and, to that end, would

emphasize or downplay certain aspects as necessary. As opposed to the openness displayed by

Mary, Tammy was more guarded and wary in her testimony. Finally, the Court found Lee to be a

generally credible witness.

The findings of fact which follow were arrived at based on the testimony presented,

and in light of the credibility determinations as broadly described above. The Court will not explain

in detail its thought process in arriving at a factual conclusion as to every disputed point, though if

a particular item is of key importance it will do so. 

The Debtors currently own and reside at property located at 244 Toby Road, Kersey,

Pa. (“Kersey Property”), which they purchased on December 16, 2011. Previous to that they had

owned and resided at property located at 779 Washington St., St. Marys, Pa. (“St. Marys Property”). 

The $58,000 loan whose dischargeability is primarily at issue in this case was related to the Debtors’

acquisition of the Kersey Property, the circumstances of which will be discussed in further detail

below.

The Debtors are related to Mary, though not blood relatives, in that Mary was married

to Lee’s grandfather (who interestingly was also named “Arthur H. Pearsall, Jr.” and will be referred

to as “Arthur” to avoid any possible confusion with Lee) from 1985 until his death on July 9, 2009. 

The marriage between Mary and Arthur was a second marriage for both. Each of them had children

from the prior marriages, but no children were born during their marriage.

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 Mary is at present in her mid-80s, has remained a widow since Arthur’s death, and

resides by herself in a house on Green Road in Kersey, Pennsylvania. She has serious vision

impairment, caused by macular degeneration and cataracts, as the result of which she can only see

things clearly if they are within a foot or two of her. Because of that condition she has not driven

on public roads since at least 2009. She is nevertheless mentally alert and reports that despite her

very poor vision she remains independent and able to perform considerable tasks around the house,

for instance, splitting wood, gardening and canning. She does, however, require the assistance of

others to take her to places outside of her home, and to help with such things as paying bills and

managing her bank account.

During their marriage, Mary and Arthur only had infrequent contact with the Debtors 

 until around 2008 when Arthur was hospitalized and the Debtors visited him there. Following

Arthur’s discharge from the hospital, the Debtors began to visit with him and Mary at their Green

Road home on a more regular basis, and at some point, began visiting almost on a weekly basis. 

 As indicated above, Arthur died on July 9, 2009. Tammy and Lee continued making 

regular visits with Mary at her house after Arthur’s death, often dropping by to eat dinner with her. 

 The Debtors would sometimes take her for car rides, for example, to look at houses that the Debtors

might be interested in buying. Sometimes Tammy would visit Mary by herself and help her out

with things around the house. Tammy would also routinely drive Mary to places she needed to go,

such as to shop or to doctor appointments. Tammy, who at the relevant time was operating a tax

preparation business out of her home, also began assisting Mary with financial matters, for example,

writing checks to pay Mary’s monthly bills and preparing her tax returns. Mary’s level of comfort

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with Tammy’s help in handling her monetary affairs even rose to the level of giving her the “user

name” and password for her checking account which allowed Tammy to access the bank account

on her home computer because Mary did not have a computer at her house. Mary clearly trusted

Tammy in that respect and there was no evidence presented at trial that would indicate that during

this time Tammy ever misappropriated funds from the checking account. Throughout her trial

testimony, Tammy referred to Mary as “Gram” and it was apparent that the two had over-time

developed a close relationship.

When the visits with Mary following the death of Arthur occurred, the Debtors were

residing at the St. Marys Property. However, apparently they were not entirely happy with living

there. Tammy enjoyed gardening and was hoping to move to a house with more land available for

that purpose. The Debtors had tried a number of times, but without success, to sell the St. Marys

Property – first in 2002 and again in 2006 – prior to the hospital visits with Arthur that then gave

rise to their regular visits with him and Mary. While residing at the St. Marys Property in 2006 or

2007 the Debtors became embroiled in a legal dispute with their adjacent neighbor, Virginia Allan

(hereinafter referred to as “the Allan Dispute”).

 The Allan Dispute involved a shared driveway that straddled the property line and

had existed for many years, going back to when the two adjoining properties had been owned by

related family members. When Ms. Allan attempted to secure a reverse mortgage on her house, she

was told she would either have to get a formally recognized and assignable easement to use the

shared driveway, or else construct a new driveway elsewhere but completely on her property. The

Debtors did not want to give an easement because they thought it would negatively impact the value

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of their property. Conversely, Ms. Allan did not want to construct a new driveway. As a result, the

parties came to an impasse and a lawsuit over the matter was filed against the Debtors by Ms. Allan

in the Elk County Court of Common Pleas sometime in 2008 or 2009.3

As Mary quite credibly testified to at trial, during her visits, Tammy would frequently

talk about the Allan Dispute and how much stress it was causing her, Lee and their four children. 

During her visits with Mary, Tammy would sometimes appear sick and complain about the effects

the dispute was having on her and her family. For example, her children were not allowed to go

through the yard with their ATVs and Lee always had to worry about whether the driveway was

plowed before they could go anywhere. At that time, Tammy also had clients arriving at the St.

Marys Property because of her tax business and if they parked in the wrong place it could result in

Ms. Allan coming over and demanding that they move. Tammy expressed to Mary that it was her

hope to sell the St. Marys Property and move elsewhere to relieve the stress the matter caused her. 

Despite what Tammy was telling Mary, according to Lee, the Allan Dispute was not

having any significant effect on Tammy, Lee, or their children. Lee testified that relations with Ms.

Allan remained “civil” throughout the dispute, and it did not cause identifiable strain or any

emotional grief on his family’s life. Furthermore, Tammy testified that although the dispute caused

her some stress in the sense that it created uncertainty as to what would happen to the value of the

St. Marys Property should Ms. Allan prevail, she was clear in her overall testimony that any

3 At least that was the testimony from Tammy at trial. See Transcript of March 10,

2016 Trial at 118:1-6, Doc. No. 73 (hereinafter “T.T.___”). The Court notes that there was a motion

filed by Ms. Allan in the main bankruptcy case that would seem to indicate that her complaint was

actually filed in March 2011. See Main Case Doc. Nos. 22, 24.

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underlying level of distress she might feel did not approach the level that Mary testified Tammy was

describing in their conversations.

The various conversations between Tammy and Mary took place over the course of

2009 through 2011. Based partly on what Tammy was telling her, and partly on her own

observations as to Tammy’s demeanor, Mary became concerned for the well-being of the Debtors

and their family. Mary became convinced that they needed to move away from the St. Marys

Property. At some point, probably in September 2011, Mary began indicating to Tammy that she

would like to help the Debtors be able to move to a new house by loaning them some money. 

Tammy must have at least considered the possibility of accepting such a loan at that time because

she discussed it with Lee, but he told her that he had no interest in obtaining such a loan because he

believed the family’s budget was already stretched to the limit. Thus, Tammy initially declined

Mary’s offers of a loan.

As to this particular item, the Court credits the testimony of Tammy over that of

Mary. Tammy testified that Mary had made several offers of a loan before the loan was actually

consummated, whereas Mary testified that the only time she ever made an offer of a loan was on the

date of the loan. See, T.T. 27:6 through 29:15. Lee testified credibly to a conversation he had with

Tammy prior to the closing on the Kersey Property in which Tammy informed him that Mary was

offering to make a loan and asked if he was interested. In the Court’s view it is more likely that this

conversation occurred prior to the actual loan, meaning Mary had made at least one prior offer.

Tammy’s visits with Mary continued, and she continued complaining to Mary about

the Allan Dispute and the effect it was having on her. The complaints increased in intensity and by

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November Tammy was leading Mary to believe that she might hurt herself or someone else if

something was not done. In a visit that took place on November 14, 2011, Tammy told Mary that

she was “going nuts,” and that appears to have been the final straw for Mary, who practically

insisted that Tammy accompany her to the bank to see about getting a loan. 

Tammy and Mary did go to Mary’s bank that day and Mary inquired about how much

money she could obtain on her home equity line of credit.4 Mary was told that she could get

$58,000. When Mary asked Tammy how much she needed, Tammy responded that she needed the

full amount. The transaction was then completed and Tammy was given a check for $58,000 which

she took to her bank, First Commonwealth Bank, and placed the monies in a newly-opened account

in the names of Tammy and Lee. Tammy had Lee’s name included on the account which she was

able to do without informing him and even though, at the time, he was apparently unaware of the

loan. The understanding between Tammy and Mary regarding the loan was that Tammy would

make the required monthly payments directly to Mary’s Bank. The loan was amortized over 10

years and the initial monthly payment was around $800. At the time of the loan the Debtors had

approximately $50,000 in liquid assets which could have been used toward the purchase of a house. 

Mary never asked about the Debtors’ financial condition before offering the loan and Tammy never

volunteered the information.

The evidence was unclear as to an exact date, but shortly after obtaining the loan

Tammy and Lee entered into a contract to purchase the Kersey Property for $45,000, with Tammy

4 This was a pre-existing line of credit that had been opened up at an earlier time. 

Mary had loaned her son some money acquired through the line of credit in 2009 and that loan had

been paid off by November 2011.

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using $1,000 from the new First Commonwealth Bank account as a deposit. The closing on the

Kersey Property occurred on December 16, 2011, with the Debtors taking title as tenants by the

entireties. The Debtors were required to provide $44,977.50 at the closing to complete the

transaction ($45,000 sale price, plus $977.50 in settlement charges, less $1,000 deposit). Tammy

got this money from the newly created First Commonwealth Bank account. In addition to the loan

proceeds, approximately $15,000 from Lee’s 401(k) account had been deposited by Tammy into

that account shortly before the closing. Lee did not know about the existence of the loan at the time

of the closing but thought that the cash for the purchase of the Kersey Property had come from the

401(k) funds and from “mattress money” that Tammy had been saving. In that regard, the evidence

showed that Tammy clearly was in charge of the family finances, with Lee having very little direct

involvement aside from being the primary income earner. Tammy told Lee about the loan around

January 2012. He was upset about it but did not speak to Mary or try to undo the loan. 

The Debtors did not immediately move into the Kersey Property because it was in

poor condition and required extensive repairs. They viewed it as a project that could be treated like

a camp until it was fixed enough that they could live there full time. Lee did the repairs himself

with some help from family members. The work was described as a “gut” and included electrical

work, plumbing, flooring, walls, and clearing the property. Some of the funds from the loan were

used to buy materials and equipment for the Kersey Property, but it is clear that some of the loan

proceeds were also used for other, unrelated things. The evidence was not sufficient for the Court

to determine by exact breakdown the amount of the loan proceeds that were used for purposes

unrelated to the Kersey Property, though it was a minority share. The Debtors continued to live in

the St. Marys Property while work on the Kersey Property was ongoing. They would stay in the

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Kersey Property occasionally during the renovation process, beginning around October 2012, but

they did not completely move in until early 2013. 

Tammy initially began making the monthly payments to Mary’s bank as the parties

had agreed. That practice continued until August 2013. The visits between Mary and the Debtors

also continued after the loan was made. A couple of incidents that occurred during the time period

that Tammy was making the loan payments are noteworthy. Tammy borrowed an additional $1,600

from Mary, probably in December 2012, though the record is not entirely clear as to the time. This

loan took place in DuBois on a day when Tammy had driven Mary there for some reason. Mary

noticed that something seemed wrong with Tammy and asked her if she needed money, to which

Tammy indicated yes. Mary suggested they go to her bank when they returned home but Tammy

requested that they go to a bank branch in DuBois instead, to which Mary assented. At the bank

Mary asked how much she could get on a loan and was told $1,600. She asked Tammy how much

she needed and Tammy indicated the “full amount” so Mary withdrew the $1,600. Mary went to

hand the proceeds to Tammy inside the bank, but Tammy refused them and said to wait until they

got in the car.

The second incident concerns a written agreement that Mary prepared in a notebook

at some point after the loan (again, the record is not clear as to an exact time) that seems to have

been in the nature of a promissory note memorializing the $58,000 loan. Mary asked Tammy if she

would sign the agreement. Tammy said she would like to take the notebook home, apparently so

she could review it, and Mary agreed to that. Mary asked Tammy about the status of the agreement

several times over the next several months and Tammy finally returned the notebook one day, 

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informing Mary that she had signed the agreement. Mary did not look at the notebook that day but

at a later time when her daughter Ginger was visiting it was discovered that the agreement had, in

fact, not been signed.

Another of Mary’s children, Cole, discovered the existence of the loan to Tammy

around June or July 2013 when he happened to see papers from the bank on Mary’s kitchen table. 

He asked her about them and then later called and questioned Tammy and Lee about the loan. Cole

and Ginger subsequently took Mary to see an attorney and a lawsuit over the loan was filed in state

court sometime in July 2013. It was about that time that Tammy stopped making the monthly

payments on the loan. Tammy testified that she was no longer able to make the payments because

her business income had been reduced due to health issues and Lee’s employment income had been

reduced because his hours were cut. The Debtors filed their bankruptcy petition on May 23, 2014.

DISCUSSION

The evidence at trial clearly established that the loan obligation was between Mary

and Tammy, and that if there was any fraudulent or wrongful conduct involved in connection

therewith such that the debt should be excepted from discharge, it was due to the conduct of Tammy. 

Any liability of Lee would only be vicarious or derivative, and likewise would be an exception to

his discharge. For this reason, the Court finds it convenient to first focus on the case as against

Tammy before turning to Lee.

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Tammy’s Discharge

Mary seeks to have the loan obligation found to be excepted from discharge under

the following provision of the Bankruptcy Code:

(a) A discharge under section 727... of this title does not discharge an

individual debtor from any debt— 

...

(2) for money, property, services, or an extension, renewal,

or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual

fraud, other than a statement respecting the debtor's or

an insider's financial condition; 

...

11 U.S.C. §§523(a)(2)(A). Creditors bear the burden of proving nondischargeability under this

provision by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991). 

Section 523(a) is strictly construed against creditors and liberally construed in favor of debtors in

furtherance of the “fresh start’ policy under the Bankruptcy Code. In re Cohn, 54 F.3d 1108, 1113

(3d Cir. 1995).

Proof of five elements is necessary to succeed on an exception to discharge claim

under Section 523(a)(2)(A):

(1) The debtor made a false representation or engaged in false

pretense;

(2) The debtor knew it was false at the time of the representation or

pretense;

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(3) The false representation or pretense was made with the intent and

purpose of deceiving the creditor;

(4) The creditor justifiably relied on the representation or pretense;

and

(5) The creditor was damaged as a proximate result of the false

representation or pretense.

See, e.g., Corso v. Walker, 449 B.R. 838, 845 (W.D. Pa. 2011); In re Sosso, 516 B.R. 303, 312

(Bankr. W.D. Pa. 2014). 

With respect to the first element, the distinction between a false representation and

a false pretense is that the former is an express statement while the latter is an implied

misrepresentation or a product of conduct by the debtor that fostered a false impression. See,

Sosso,516 B.R. at 312; In re Witmer, 541 B.R. 769, 778 (Bankr. M.D. Pa. 2015) (claim of false

pretense is a variation on a claim of false representation and requires proof of an implied

misrepresentation promoted knowingly and willingly that creates a misleading understanding of the

transaction by the creditor); In re Feldman, 506 B.R. 222, 228 (Bankr. E.D. Pa. 2014) (false pretense

is “a set of circumstances which lead the plaintiff to a mistaken belief”); In re Oakley, 503 B.R. 407,

432 (Bankr. E.D. Pa. 2013) (a false pretense is an omission or implied misrepresentation that created

a contrived and misleading understanding of the transaction on the part of the plaintiff); In re

Adalian, 481 B.R. 290, 296 (Bankr. M.D. Pa. 2012) (false pretense is any series of events that create

a contrived and misleading understanding of a transaction in which a creditor is wrongly induced

to extend money to the debtor).

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 Mary does not point to any explicit false representations of specific, objective facts

made by Tammy in connection with the loan obligation, nor does the Court find any. Instead, Mary

argues that Tammy’s overall conduct was such as to create a false impression that caused her to

make the loan. 

In her post-trial brief, Mary identifies four distinct categories of false pretenses that

she contends Tammy’s conduct comprised as part of a fraudulent scheme to obtain the loan:

! Feigning severe mental distress and an inclination to harm

herself or someone else as a result of the Allan dispute.

! Implying that the Debtors lacked the financial wherewithal to

buy another house and move from the St. Marys Property

when they actually had over $50,000 in liquid assets

available.

! Implying that the loan would be repaid from proceeds of the

sale of the St. Mary’s property.

! Misleading Mary as to how the loan proceeds would be used.

Plaintiff’s Post-trial brief at 9-13.

Of these, the second category can be quickly ruled out as a possible basis for finding

the loan obligation to be excepted from discharge under Section 523(a)(2)(A). Even if the Court

assumes that Tammy gave such an implication as to the Debtor’s financial condition, Section

523(a)(2)(A) specifically excludes statements respecting a debtor’s financial condition from the

universe of false pretenses or false representations that can serve to make a debt non-dischargeable.5

5 False statements as to a debtor’s financial condition that are in writing are separately

addressed in 11 U.S.C. §523(a)(2)(B), but there has been no allegation or evidence of any such

writing in the present case.

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 There is some variation in how broadly bankruptcy courts interpret what it means for a statement

to rise to the level of “respecting the debtor’s ... financial condition,” but the second category as

proposed in this case by Mary clearly falls within the statutory exclusion under even the most

restrictive interpretation. See, e.g., In re Husman, 2013 WL 5134539 *3–4 (Bankr. W.D. Pa. 2013)

(under strict interpretation a statement respecting the debtor’s financial condition is any

communication that presents an overall picture of the debtor’s financial position).

The third category identified by Mary can also be eliminated because, simply put,

there was insufficient evidence presented that Tammy “said” or “did anything” in the nature of a

false pretense to lead Mary to believe the loan obligation would be repaid from proceeds of the sale

of the Saint Marys Property. The testimony by Mary under direct examination by her attorney as

to this was as follows:

Q. Mary, when you made the $58,000 loan, was there an

agreement as to how it was going to be repaid?

A. No, but they kept talking about selling their house, and I 

figured that’s probably when they’re going to pay it back. 

...

Q. Mary, did they -- did either Lee or Tammy ever promise to 

pay you when they sold the St. Marys house?

A. No, they didn’t, but I was under the understanding that that’s

– because they kept talking about selling it, and I was under

the understanding that that’s what they were doing, to pay it

off, or, you know, probably pay it off when they sold it.

T.T. at 33:15-18; 37: 5-11. Elsewhere Mary testified that her home equity line of credit from the

bank was set up for a ten year payoff, though she was “hoping” it would be paid off sooner, which

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“might” happen if the St. Marys Property was sold. TT at 78: 22- 79: 4.

Mary may well have assumed that the loan would be repaid when the St. Marys

Property was sold, but to attribute that assumption to any false pretense on the part of Tammy is a

far too tenuous of a connection. It must further be noted that, in any event, the record indicates that

the Debtors never sold the St. Marys Property. The Debtors still owned the St. Marys Property at

the time they filed their bankruptcy case. During the bankruptcy the mortgagee obtained relief from

stay and presumably then foreclosed on it. See, Order of September 19, 2014, Main Case Doc. No.

30. Thus, the Court fails to see how the proposed third category could possibly be characterized as

a false pretense or representation since even if Tammy had made such a representation, the

triggering event never occurred.

The fourth category can also be ruled out as a potential false pretense. By this

category, Mary contends that Tammy misled her into believing that the proceeds of the loan would

be used solely in connection with a new house to replace the St. Marys Property, whereas in

actuality the proceeds were used for other things as well. The allegation here, then, is that there was

a misrepresentation as to a future intent. 

Before discussing this further, the Court should first note that it is satisfied that not

all of the loan proceeds were used for purposes that might reasonably be considered as related to the

acquisition or improvement of the Kersey Property. The $58,000 in loan proceeds were placed into

a new bank account and were then commingled with funds from another source, i.e., Lee’s 401(k). 

This commingling made it impossible to trace the use of particular funds for particular purposes with

exact precision. Despite that, it can be said that a substantial portion of the loan proceeds (at least

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1⁄2) was used for the initial acquisition of the Kersey Property, and then a further substantial portion,

though not so clearly defined, was used for purchases of materials and equipment for the repair or

refurbishing of such property. Beyond that, there was still a remainder of the loan proceeds that was

used for things such as groceries, vehicle payments and general household supplies that can in no

way be characterized as being related to the Kersey Property. Both sides presented evidence

purporting to show how the loan proceeds were spent, but the evidence was confusing and the broad 

breakdown noted above is as far as the Court is willing to go. In any event, an exact accounting of

the use of the loan proceeds is not critical to the Court’s decision. By contrast, there was no

testimony whatsoever as to the ultimate use of the second loan in the mount of $1,600, or even

testimony relating to its purpose. 

As indicated above, the fourth category relates to a future intention that Mary

contends was part of the agreement by which she made the loan. Put somewhat differently, she

argues that she made the loan based on an understanding that it would be used only for a new house,

and Tammy’s subsequent failure to restrict the use of the loan for that purpose therefore constituted

a false statement or false pretense under Section 523(a)(2)(A). The obvious danger in this line of

argument is that it could transform every breach of contract into a potential basis for an exception

to discharge. For that reason, the courts that have considered this sort of argument have been very

clear that, while it is possible for a contracting party to engage in a fraudulent misrepresentation by

falsely stating or implying an intention to comply with the terms of the contract, when in fact the

person does not intend to comply, a subsequent nonperformance under the contract does not of itself

prove there was such a misrepresentation.

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For example, the Restatement (Second) of Torts states:

d. Proof of intention not to perform an agreement. The

intention that is necessary to make the rule stated in this Section

applicable is the intention of the promisor when the agreement was

entered into. The intention of the promisor not to perform an

enforceable or unenforceable agreement cannot be established solely

by proof of its nonperformance, nor does his failure to perform the

agreement throw upon him the burden of showing that his

nonperformance was due to reasons which operated after the

agreement was entered into. The intention may be shown by any

other evidence that sufficiently indicates its existence, as, for

example, the certainty that he would not be in funds to carry out his

promise.

Restatement (Second) of Torts § 530 cmt. d (1977). Courts applying Section 523(a)(2)(A) follow

this same approach. See, e.g., In re Witmer, 541 B.R. 769, 779 (Bankr. M.D. Pa. 2015) (plaintiff

must establish that the debtor entered into the contract never intending to comply with the

contractual terms); In re Oakley, 503 B.R. 407, 433 (Bankr. E.D. Pa. 2013) (a creditor’s

demonstration that a debtor committed a breach of contract, by itself, does not render the contract

claim nondischargeable); In re Crawford, 476 B.R. 890, 896 (Bankr. W.D. Pa. 2012) (in order to

establish actual fraud on the basis of failure to perform as promised, a plaintiff must prove that the

debtor entered into an agreement with no intention of complying with the terms).

In the present case, even assuming the truth of Mary’s contention that a term of the

loan agreement was that the proceeds were to be used only for a new house, the fact that they were

not so used, standing alone, is insufficient to establish that Tammy acted with actual fraud. Mary

was required to prove by a preponderance of the evidence that, right from the outset, Tammy never

intended to comply with such restriction on the use of the proceeds. She has, however, pointed to

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no evidence, either circumstantial or direct, that would tend to show Tammy never intended to

comply.6 In the complete absence of such evidence, the Court must find that the fourth proposed

category cannot be a false pretense or false representation under the statute.

That leaves the first proffered category as the sole remaining candidate for a false

pretense to support Plaintiff’s claim. This one presents a closer call than the other three. By this

category, Mary is essentially claiming that Tammy “fooled” her into offering to make the loan by

deliberately falsifying or exaggerating the level of stress that she (Tammy) and her family were

feeling because of the Allan Dispute, and by giving the false impression that she was so distraught

that she might hurt herself or her neighbor unless something was done about it. Stated differently,

this is an argument that Tammy was misrepresenting the present state of her own mind to Mary. 

This is somewhat similar to the fourth proposed category discussed immediately above, although

it differs in that the contention there was that Tammy was misrepresenting her intention to comply

in the future with a promise made in the present, while the contention here is that she was

misrepresenting the present effect an ongoing situation was having on her mind or well-being. 

Although it is perhaps a bit unusual to have the present state of a person’s mind be

the subject of a false pretense or false representation under Section 523(a)(2)(A), and there are 

6 For instance, if at the time of incurring the loan Tammy already knew how much

money would be needed for the purchase of and any renovations to a new house, and if such amount

was less than the $58,000 loan, then perhaps it could be inferred that she must never have intended

to comply with the purported term of the loan agreement limiting the use of the proceeds. The

record indicates, however, that the Debtors did not put an offer in on the Kersey Property until

sometime after the loan was given, and did not close on it until December 16, 2011, so Tammy could

not have known how much was needed for a new house at the time of the loan. 

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obvious issues associated with the proof thereof, the Court sees no reason why such a thing must be

categorically ruled out as a possibility. In an early English case involving this scenario, the court

stated:

The state of a man's mind is as much a fact as the state of his

digestion. It is true that it is very difficult to prove what the state of

a man's mind at a particular time is, but if it can be ascertained it is

as much a fact as anything else. A misrepresentation as to the state of

a man's mind is, therefore, a misstatement of facts.

Edgington v. Fitzmaurice, L.R. 29 Ch. D. 459 (1885) (quoted in W. Page Keeton, Fraud-Statements

of Intention, 15 TEX. L. REV. 185 (1937)).

Mary credibly testified that Tammy made statements on numerous occasions over

the course of several years that led Mary to believe that Tammy and her family were under stress

because of the Allan Dispute, and that they desperately wanted to sell the St. Marys Property so they

could get away from it. Mary described conversations where Tammy complained about how her

children were not permitted to go through the yard, how Mrs. Allan would complain if any cars

visiting the Pearsalls parked even a few inches on her side of the driveway, and how Lee always had

to make sure the driveway was plowed before Tammy and Lee could visit her. Mary also credibly

testified that Tammy frequently complained of feeling “sick” because of what was going on. These

various conversations are said to have culminated in an instance that happened just before the loan

was given when Tammy said she was going “nuts,” causing Mary to fear that someone might get

hurt.

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The Court has little trouble concluding that these conversations did occur,7 but a

more difficult issue is whether they can properly be characterized as constituting false pretenses or

false representations by Tammy. 

There is no question that the Allan Dispute was real and that it resulted in a lawsuit

being filed against the Debtors. Tammy testified that she was concerned that if Ms. Allan was able

to secure a permanent right of way over the driveway it could have a negative impact on the value

of the St. Marys Property, and that this uncertainty caused her “stress” that she talked about with

various people, including Mary. While, unless actually and truthfully told, no one knows for sure

at any given time what is going on in a person’s mind but the person herself, it would certainly be

understandable, and perhaps even expected, that a legal dispute of this nature between neighbors

could be stressful.

Cutting against this natural expectation are a couple of contrary pieces of evidence. 

Lee testified as follows regarding the Allan Dispute:

Q. Were you, in particular -- you say that you were stressed

out by the whole situation? 

A. No.

7 Indeed, it would be inherently unbelievable for Mary to have made an offer of the

loan in the absence of some sort of motivating reason, such as being led to believe the Debtors were

desperate to move from the St. Marys Property. Tammy suggested at certain points in her testimony

that Mary had come up with the idea of making a loan so the Debtors could buy a new house

completely on her own, based on no prompting or input whatsoever from Tammy, and without even

knowing whether the Debtors needed money to buy a house. See, T.T. 126:6 through 128:4. The

Court rejects any such contention as counterintuitive and wholly improbable and further finds that

the concept’s very suggestion negatively impacts Tammy’s credibility. 

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Q. Did it cause a lot of strain on your family life?

A. No, I mean sometimes we’d -- she was very adamant about

her lawn and I think she tried to claim property that wasn’t

hers. And we would ride our -- the kids and I would ride our

4-wheelers out back onto the back lot and she asked that we

not do it or whatever, but it wasn’t her property so -- it was

ours. I mean, it was just –

Q. As far as you knew, it was a legal dispute but didn’t cause

you any emotional grief?

A. No. No.

Q. As far as you knew, it wasn’t causing any emotional grief for

your family?

A. Correct.

T.T. 185:10-25. This does not necessarily lead to the conclusion that Tammy was fabricating her

level of stress to Mary. People react differently to the same circumstances and it is possible that

Tammy felt stressed while Lee did not. Still, it is noteworthy that Lee did not notice any particular

strain or stress on family members as a result of the Allan Dispute. A second bit of evidence is that 

both Tammy and Lee testified that their relationship with Ms. Allan remained “civil” throughout the

course of the dispute. Again, this alone does not prove that Tammy was misrepresenting the state

of her mind to Mary because it is quite possible to remain on civil terms with a legal adversary, even

in a stressful dispute, in effect hiding one’s inner feelings when dealing with the person. This is

probably more the exception than the rule, however, and the Court believes that in most instances

where a person was experiencing distress at a level such as Tammy was reporting to Mary, it would

have a more marked effect on the person’s relationship with the legal adversary.

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Based solely on the direct and circumstantial evidence as to Tammy’s true state of

mind as discussed above, it would be a close call as to whether Mary has met her burden of proof

to show that Tammy was engaged in a false pretense regarding the Allan Dispute. The Court is not

limited to a consideration of that evidence only, however. 

Because of the obvious proof difficulties involved in trying to establish a defendant’s

state of mind in Section 523(a)(2)(A) litigation, it is well-recognized that a court may consider the

“totality of circumstances” when determining whether a “picture of deceptive conduct on the

debtor’s part” has been presented. See, e.g., In re Barnette, 281 B.R. 869, 874 (Bankr. W.D. Pa.

2006). This can even include subsequent conduct by the debtor, to the extent that it provides an

indication of debtor's state of mind at the time of the actionable representations. See, e.g., In re

Copeland, 291 B.R. 740, 766 (Bankr. E.D. Tenn. 2003); In re Giquinto, 388 B.R. 152, 167 (Bankr.

E.D. Pa. 2008).

When the Court expands its view to the totality of circumstances in this case it finds

a number of things that point to the conclusion that Tammy was engaged in deceptive conduct in her

dealings with Mary concerning the loan. First, despite asking Lee about the possibility of a loan

from Mary, and being told “no” by him because of his belief that they were already “tapped out” and

could not pay it back, Tammy nevertheless proceeded with the loan. Second, Tammy then kept the

existence of the loan hidden from Lee for a couple of months, and even after finally telling him

about it, she did not disclose to him that proceeds from the loan had been used in the purchase of

the Kersey Property – he claims not to have learned that fact until he was deposed in the instant

adversary proceeding in May, 2015. The Court finds that this deceptive conduct by Tammy

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provides a clear glimpse into the state of her mind concerning at least the $58,000 loan. See, e.g.,

United States v. Simonelli, 237 F.3d 19, 30 (1st Cir. 2001) (fact that defendant took steps to hide his

use of corporate funds could lead to an inference of intent to commit fraud); In re Wyly, 2016 WL

3098200, at *73 (Bankr. N.D. Tex. May 10, 2016) (quoting Spies v. United States, 317 U.S. 492,

499 (1943))(fraud may be inferred from “any conduct, the likely effect of which would be to mislead

or to conceal.”).

A third point is that rather than leave quickly from the St. Marys Property by buying

another house that was move-in ready, Tammy agreed to purchase the Kersey Property knowing that

it would need work and would not be ready for occupancy for an extended period of time. This was

not what one would expect from someone who was supposedly experiencing a severe level of

distress and who wanted to move away from the situation as soon as possible.

A fourth factor in a totality of circumstances consideration is that after the loan was

made Mary asked Tammy to sign a homemade promissory note to memorialize it, and after

successfully evading the matter for several months Tammy falsely told her that she had signed the

note. TT 34-35:24-8. Fifth, the additional $1,600 loan that occurred following the initial loan not

only smacks of manipulation by Tammy, but also coupled with the fact that she did not want to be

seen in public taking the money from Mary is telling in that it shows consciousness that what she

was doing was questionable.8

8 The Complaint seeks to have the $1,600 loan also found to be non-dischargeable. 

However, the Plaintiff did not make that argument at trial or in her post-trial brief, so she appears

to have abandoned it. Even if the Plaintiff has not abandoned it, the Court would find that she

clearly failed to meet her burden of showing why this separate loan transaction, occurring more than

a year after the $58,000 loan, should be found non-dischargeable. In particular, there was no

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In the Court’s view, each of these instances is indicative of someone with something

to hide, or a guilty conscience, or who was not acting consistently with the representation that had

been made to Mary. The Court therefore concludes that Tammy engaged in a pattern of false

pretense in her interactions with Mary respecting the effect that the Allan Dispute was having on her

– such falsity likely consisting of a conscious exaggeration of the level of stress she and the family

were feeling. Based on the evidence presented, the Court finds by a preponderance of the evidence

that Mary was induced to make the $58,000 loan by the false pretense created by Tammy. Mary has

thus proven the first element under Section 523(a)(2)(A) in that limited respect.

The second required element for Mary to prevail under Section 523(a)(2)(A) is proof

that Tammy knew the representations or pretense were false at the time she was engaged in them. 

This element would be met because, barring some sort of mental condition that impaired her

cognitive abilities – which has not been alleged here – a person falsely representing her state of mind 

to another would have to know such representation was false.

The third required element is proof that Tammy made the false representations or

pretense with the intent and purpose of deceiving Mary. This is the so-called “scienter”

requirement. Because a debtor will rarely admit that a deception was done on purpose, intent to

deceive can also be inferred from the totality of circumstances, including the debtor’s reckless

disregard for the truth. In re Ortiz, 514 B.R. 762, 768 (Bankr. D.N.J. 2014) (quoting In re Cohn, 54

evidence presented as to any misrepresentation or false pretenses by Tammy in connection with the

$1,600 loan. Although Plaintiff failed to prove non-dischargeability, the Court does view the

circumstances surrounding the $1,600 loan evidencing a pattern of Tammy taking advantage of

Mary.

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F.3d 1106 (3d Cir. 1995)). In the recent case of In re Bocchino, 794 F.3d 376 (3d Cir. 2015) the

court explicitly held that the scienter requirement under Section 523(a)(2)(A) can be met not only

by showing that the debtor had an intent to deceive, but also by a showing that the debtor acted with

gross recklessness.

 The issue then is whether Mary has proven that Tammy intended to deceive her, or acted in a

grossly reckless manner. 

Tammy denies any intent to deceive. Establishing that a debtor acted with intent is

a “difficult burden.” Sosso, 516 B.R. at 312. In order for the Court to conclude that Tammy

intended from the very beginning to deceive Mary into loaning her the money, it would have to

believe that she was patient and devious enough to have engaged in a methodical deception that

extended over the course of several years. Moreover, it would have to believe that she did so

without ever once even asking Mary for a loan, instead basing such plan on the mere hope or

expectation that Mary would be so moved by her plight as to one day spontaneously offer a loan. 

Such a scenario is certainly not impossible, though it strikes the Court as highly 

implausible. In the Court’s view, a more likely explanation for Tammy’s conduct, and borne out

circumstantially by unrebutted, credible evidence offered by Mary as to her motivation in offering

the loan, begins with a recognition that during the relevant time period Tammy was likely feeling

some level of dissatisfaction with living at the St. Marys Property. This would have included the

ongoing Allan Dispute, as well as a desire to have more land so she could pursue her interest in

raising vegetables and fruits. That dissatisfaction, coupled with the human penchant to vent or

unburden oneself of one’s troubles to someone with a willing and sympathetic ear, would naturally

have led Tammy to confide with Mary about her feelings. 

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While the Court accepts that such discussions may have started out innocently on

Tammy’s part, with no intent to deceive, a natural tendency to embellish obviously could come into

play leading to an overstatement of her level of stress, or perhaps, Mary just misinterpreted what she

was being told. In any event, at some point Mary said or did something in response to what Tammy

was telling her that indicated to Tammy that Mary was willing to help her out financially so the

family could move from the St. Marys Property. Tammy turned down this initial suggestion, but

as the record supports, being an intelligent and perceptive person, she then realized that it was within

her power to get Mary to offer her money any time she wished merely by saying something or

behaving in such a manner that would play on Mary’s concerns about Tammy and her family. The

truth of that conclusion was borne out in November, 2011, when a declaration by Tammy that she

was “going nuts” led to Mary insisting on the loan.

In short, the Court finds that Tammy did not set out from the beginning with an intent

to deceive Mary about the level of stress she was feeling over the Allan Dispute, but it became an

intentional matter once she learned that Mary could in effect be manipulated into loaning money by

exaggerating and highlighting such stress. See, e.g., In re Fosco, 289 B.R. 78, 87 (Bankr. N.D. Ill.

2002) (an intent to deceive may logically be inferred from a false representation which the debtor

knows or should know will induce another to advance money to the debtor). The third required

element has therefore been proven.9

9 Although the present case arises under the exception to discharge provisions set forth

in Section 523(a) of the Bankruptcy Code, the factual circumstances are such that the Court cannot

help but be struck by the likeness to cases based on the common law doctrine of undue influence. 

Undue influence has been defined as a “subtle, intangible and illusive thing ... generally

accomplished by a gradual, progressive inculcation of a receptive mind ... Consequently, its

manifestation may not appear until long after the weakened intellect has been played upon.” Owens

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The fourth required element is proof that Mary justifiably relied upon the false

pretense or representation in offering the loan. “Justifiable reliance” is a term of art describing an

intermediate level of reliance, between “mere reliance” on the one hand and “reasonable reliance”

on the other. See, Field v. Mans, 516 U.S. 59, 73–74 (1995). Justifiable reliance is distinguished

from reasonable reliance in that the latter is measured with respect to the hypothetical reasonable

person, thereby establishing a community standard of conduct applicable in all cases, whereas the

former takes into account the qualities and characteristics of the particular plaintiff and the

circumstances of the particular case. Id. at 71. The Field court also quoted with approval from a

well-known text on tort law to the effect that 

“it is only where, under the circumstances the facts should be

apparent to one of his knowledge and intelligence from a cursory

glance, or he has discovered something which should serve as a

warning that he is being deceived, that he is required to make an

investigation of his own.”

Id. at 71-72 (quoting W. Prosser, Law of Torts §108, p. 718 (4th ed. 1971)).

v. Mazzei, 847 A.2d 700, 706 (Pa. Super. 2004) (quoting In re Estate of Clark, 461 Pa. 52 (1975)). 

The prototypical undue influence scenario, of course, involves an elderly victim who is taken

advantage of by being led to make an inter vivos gift or testamentary bequest to a person outside the

usual ambit of the recipients of such bounty whom the victim has come to trust and rely upon. The

parallels to the present case are obvious.

The Court does not wish to stretch the analogy too far. In most instances where a

transaction is set aside on the basis of undue influence, it has been proven that the victim and the

perpetrator were in a “confidential relationship” when the undue influence occurred. Under

Pennsylvania law a confidential relationship exists under circumstances that “make it certain that

the parties did not deal on equal terms; where on the one side there is an overmastering influence,

or on the other, weakness, dependence or trust, justifiably reposed.” Leach v. Davis, 2015 WL

7571967 *4 (Pa. Super. Ct. Feb. 5, 2015) (quoting Hera v. McCormick, 625 A.2d 682 (Pa. Super.

Ct. 1993). Showing the existence of a confidential relationship was not an element of Plaintiff’s

case so the Court need not make that determination. Still, it can at least be noted there are obviously

some indicia of a confidential relationship present given Mary’s weakness (age and medical

condition), dependence (inability to travel outside the home or transact business affairs without

assistance) and trust (allowing complete access to her bank accounts). 

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The relevant circumstances of Mary’s condition here would include that she was of

advanced years, that she suffers from eyesight difficulties, that she is dependent upon others for

assistance with such tasks as paying bills and going to places outside the home, and that she was in

a relationship with Tammy that, while perhaps not quite rising to the level of a confidential or

fiduciary one, was at the least trusting and close. Moreover, there was nothing in the nature of a

“warning” prior to the creation of the loan that should have alerted Mary that she should make her

own investigation before offering to make the loan. The Court thus finds that the justifiable reliance

element has been met.10

The final required element is proof that Mary was damaged as a proximate result of

the false pretense or representation. This element too has been met. In the absence of the false

pretense by Tammy it can be confidently presumed that Mary would never have offered to make the

loan. She did, however, make the loan and as a result she is now faced with a large unpaid balance

and the existence of a mortgage on her property that must be paid off or else she risks losing the

house. These are clearly damages that were proximately caused by Tammy’s fraudulent conduct.

Mary has thus met her burden of proof as to all of the elements required to have the remaining debt

from the $58,000 loan declared to be non-dischargeable under Section 523(a)(2)(A).

In her complaint Mary also raised Sections 523(a)(4) (fraud or defalcation while

acting in a fiduciary capacity) and 523(a)(6) (willful and malicious injury by the debtor) as

additional grounds for finding the loan obligations non-dischargeable. She did not, however, argue

10 See also fn 9, above.

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at trial for the application of those provisions or provide any evidence to support them, nor did she

address them at all in her post-trial brief. For these reasons, the Court finds that Plaintiff has

abandoned any claim for nondischargeability based on those provisions. See, e.g., In re Ice Cream

Liquidation, Inc., 2005 WL 976935 (Bankr. D. Conn. Apr. 21, 2005) (by failing to brief or argue

issue party was deemed to have abandoned it). 

 Even if Mary had not abandoned those alternative claims, the Court would find

against her on them. Very briefly, as to Section 523(a)(4), Mary has failed to prove that Tammy was

acting in a fiduciary capacity. See, e.g., In re Bayer, 521 B.R. 491 (Bankr. E.D. Pa. 2014)

(explaining that the concept of a “fiduciary” for purposes of Section 523(a)(4) is narrower than the

traditional common law definition and generally requires the existence of an express or technical

trust); In re Librandi, 183 B.R. 379 (Bankr. M.D. Pa. 1995) (rejecting argument that fiduciary

capacity could be found based only on alleged “special relationship” between parties).

As to Section 523(a)(6), Mary has failed to prove that Tammy acted maliciously with

an intent to harm Mary, or that such injury was substantially certain to occur, in connection with the

loan, elements that would be required under that provision. Kawaauhau v. Geiger, 523 U.S. 57, 61-

62 (1998). The fact that Tammy did make timely payments on the loan for approximately 11⁄2 years

after it was made is sufficient to negate any suggestion that she entered into that loan with an intent

never to repay it and thereby injure Mary. See, e.g., In re Gemme, 459 B.R. 493, 499 (Bankr. D.

Mass. 2011) (debtor’s two-year track record of loan repayments suggested that at the time of the

loan proposal and closing he had every intention of repaying it).

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To sum up with respect to the claim against Tammy under Section 523(a)(2)(A), the

Court finds, that as to the $58,000 loan obligation, Mary has proven each of the required elements

by a preponderance of the evidence. As such, the debt which Tammy owes to Mary resulting from

the $58,000 loan obligation will be excepted from discharge. The Court was also asked to determine

the amount of that debt but that item was disputed (see Complaint and Answer at ¶8) and no

evidence as to the remaining amount owed was specifically provided at trial. Furthermore, it is

unclear how the subsequent $1,600 loan factors into the Plaintiff’s contention that $49,000 should

be established as the non-dischargeable amount. 

In the Complaint it appears that Plaintiff alleges that both the $58,000 and $1,600

came from the same equity line of credit, and the purported $49,000 balance is thus a combination

of both loans. See, Complaint at ¶41. In the post-trial brief, however, the Plaintiff seems to relate

the $49,000 balance specifically to the $58,000 loan. Post-trial Brief at ¶¶6–7. Given the

uncertainty as to the proper amount of non-dischargeable debt, the Court will schedule an argument

to address that point with the Parties in more detail. They remain free in the meantime, of course,

to talk and try to arrive at an agreed-upon figure. Therefore, as a result, the Court makes no finding

of a specific amount at this time. The Court further finds that Mary has waived her alternative

claims under Sections 523(a)(4) and (6) by failing to argue them in her post-trial brief, and that even

in the absence of such waiver she has failed to prove them. Having decided Mary’s claims as to

Tammy, the Court turns next to Lee.

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Liability and Discharge of Lee

 It was undisputed that Lee had nothing to do with securing the loan from Mary. The

various conversations leading up to and culminating in the loan all involved only Tammy and Mary. 

Lee never asked Mary for a loan nor did he ever agree to be responsible for the loan either as a

principal obligor or a guarantor. In fact, he testified credibly that Tammy had broached with him

the possibility of a loan from Mary sometime prior to the purchase of the Kersey Property and he

specifically told her “no way.” In the absence of any evidence that Lee was involved in any

fraudulent conduct himself, or that he was a party to the loan agreement, Mary seeks to hold him

liable, and to have that liability found to be nondischargeable, on the basis of his status as Tammy’s

husband.

As a general rule, the fraudulent practices of one spouse are not imputed to the other

spouse for purposes of nondischargeability under Section 523(a)(2)(A). See, In re Antonius, 358

B.R. 172, 184 (Bankr. E.D. Pa. 2006) (citing In re Carp, 340 F. 3d 15 (1st Cir. 2003) and In re

Tsurkowa, 258 B.R. 192 (9th Cir. BAP 2000)); In re Davis, 476 B.R. 191, 199 (Bankr. W.D. Pa.

2012). The fraud of a culpable spouse can, however, be imputed to an “innocent” spouse in certain

instances. Under partnership or agency principles, where the spouses are engaged in a business

venture or if one spouse knowingly aided and abetted in the fraud, the fraud of one can be imputed

to the other. Antonius, 358 B.R. at 185. These “exceptions” to the protection provided to an

innocent spouse do not apply in this case. There was no evidence to show that Tammy and Lee were

engaged in any kind of business or for-profit venture that could be characterized as a partnership,

separate from and in addition to their marital relationship, or in which Tammy could be viewed as

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having acted as an agent for Lee in her dealings with Mary. There was also no evidence that Lee

aided and abetted Tammy with respect to the conduct the Court found to be fraudulent. It would

therefore appear that there is no reason why Lee should be found liable to Mary on the loan, or, even

assuming he was somehow liable, why such liability would not be discharged in this bankruptcy.

Mary relies on a line of cases decided under Pennsylvania law recognizing an

“entireties presumption” pursuant to which either spouse presumptively has the power to act for both

in matters of entireties, without any specific authorization, provided the fruits or proceeds of such

action inures to the benefit of both and the entireties estate is not terminated. See, J.R. Christ Const.

Co. v. Olevsky, 426 Pa. 343 (1967). 

 In Olevsky, the defendants were a husband and wife who owned a farm as tenants

by the entireties. The husband contracted for the rental of some heavy equipment that was used for

grading and excavation on the farm in connection with the construction of a riding ring for horses. 

The plaintiff sued on the unpaid bill, also naming the wife as a defendant. The Pennsylvania

Supreme Court upheld a finding by the lower court that the wife could be held liable along with the

husband even though she had not been a party to the contract. In so finding it commented that there

is no general agency arising from the marital relationship, nor any presumption flowing therefrom

that either spouse has authority to convey real estate held by the entireties without the other’s

joinder, but the court noted that the foregoing was not a complete statement of the law because:

The presumption ... with respect to properties held by the entireties,

is that during the term of a marriage, either spouse has the power to 

act for both without specific authority, so long as the benefits of such

action inure to both. This presumption, as stated, does not require

knowledge on the part of the other spouse in question, but only that

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it may be rebutted if, in fact, the spouse so acting was not authorized

to act by the other spouse.

Olevsky, 426 Pa. at 349.

It can quickly be seen that for several reasons this principle of Pennsylvania law as

recognized in Olevsky and other cases cited by Mary has no application in the present case that

would require a deviation from the general rule noted above regarding non-imputation of fraudulent

conduct. First, Tammy’s dealings with Mary concerning the loan did not involve any existing

property that she held by the entireties with Lee. Second, the Pennsylvania “law” is actually only

a presumption and can be rebutted. In this case there was positive testimony, which the Court

credits, that Lee had specifically told Tammy he was not interested in obtaining a loan from Mary,

so the Court finds she was not authorized to act on his behalf regarding the loan. Third, and perhaps

most importantly, the entireties presumption concerns only the question of the liability of the nonacting spouse under Pennsylvania law. It does not address the separate question of whether such

liability can be discharged in bankruptcy under Section 523(a)(2)(A), which is a matter of federal

law. Grogan, supra, 498 U.S. at 284 (1991) (“Since 1970 ... the issue of non-dischargeability has

been a matter of federal law governed by the terms of the Bankruptcy Code”); In re Tashlitsky, 492

B.R. 640, 648 (Bankr. E.D.N.Y. 2013). As indicated by Antonius and the other cases cited above,

federal law does not generally impute the fraudulent acts of one spouse to the other innocent spouse

for purposes of nondichargeability except in special circumstances not present here.11

11 Mary does cite one bankruptcy case wherein the court did to an extent rely on the

Pennsylvania entireties presumption to deny an innocent spouse a discharge regarding an obligation

to repay $15,000 which her husband had embezzled from his client without her knowledge and then

used to acquire entireties property. See, In re Brady, 234 B.R. 652 (Bankr. E.D. Pa. 1999). 

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For the above reasons, the Court finds that, regardless of the moral or ethical

considerations that might flow from his conduct, Lee is not legally liable to Mary on the loan

obligation, and that even if he were liable such liability can be discharged in this bankruptcy case

because Mary has failed to prove that there is any basis to impute the fraudulent conduct of Tammy

to him.

Denial of Exemption and Subordination of Claim

Mary also seeks a ruling that the Debtors’ exemption in the Kersey Property be

denied, and their equity interest in it be subordinated to her claim. See, Complaint at Counts IV and

V. Mary argues that this relief is warranted because of the fraudulent conduct and bad faith of the

Debtors. She contends the Debtors will receive a windfall at her expense if this relief is denied. In

support she cites several cases in which bankruptcy courts have provided similar relief, although 

no statutory authority under the Bankruptcy Code for such relief is cited other than 11 U.S.C.

§105(a), the provision which says that bankruptcy courts may issue such orders or judgments as are

necessary or appropriate to carry out the provisions of the Code.

All of the cases relied upon by Mary predate the Supreme Court’s opinion in Law v.

Siegel,__U.S.__, 134 S. Ct. 1188 (2014). In that case, the court rejected the contention that

However, by that court’s own admission it was following a minority view, and its holding on this

particular point does not seem to have been followed subsequently in other cases. Brady thus

appears to be something of an outlier that this Court is not inclined to follow. In addition, the Brady

court justified the result by pointing out that the debtors had not offered any evidence that tended

to rebut the entireties presumption of agency, which clearly distinguishes it from the present case

where there was such “rebuttal” testimony. 

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bankruptcy courts have a “general equitable power” to deny exemptions to debtors based on their

bad faith conduct, holding that “federal law provides no authority for bankruptcy courts to deny an

exemption on a ground not specified in the Code.” Id. at 1196. Mary has cited nothing in the

Bankruptcy Code that would provide for a denial of the exemption under the facts of this case, and

under Law the Court must therefore deny the requested relief. 

 The request for a “subordination” of the Debtors’ equity interest in the Kersey

Property to Mary’s claim must likewise be denied. The Court’s power to engage in equitable

subordination is clear. See, 11 U.S.C. §510(c). However, the equitable subordination contemplated

by that statute is intended to allow the Court to subordinate or adjust the claim payment priority as

among creditors of the estate to avoid inequity. See, e.g., In re Enron Corp., 379 B.R. 425 (Bankr.

S.D.N.Y. 2007) (purpose of equitable subordination is to undo wrongdoing by an individual creditor

in the interest of other creditors). The Court has been pointed to no authority, nor has it found any

on its own, that would allow equitable subordination to be used as a tool to adjust the relationship

as between debtors and creditors.

Looked at somewhat differently, Mary is in effect asking the Court to impose a

mortgage on the Kersey Property in her favor. An equitable mortgage or lien can be imposed by a

bankruptcy court in certain circumstances. In re Turetsky, 402 B.R. 663 (Bankr. W.D. Pa. 2009). 

 For example, when the parties intended to make property security for a debt but a defect renders

the intended mortgage invalid, imposition of an equitable mortgage may be appropriate. See. e.g.,

Herb v. Citimortgage, Inc., 955 F. Supp. 2d 441 (M.D. Pa. 2013). In the present case, Mary never

sought a security interest in connection with the loan, nor did Tammy ever offer one. The Court

therefore finds no basis for imposition of an equitable mortgage on the Kersey Property.

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CONCLUSION

The Court finds that the balance of Tammy’s debt to Mary on the $58,000 loan

obligation is excepted from discharge pursuant to 11 U.S.C. §523(a)(2)(A). The amount of that

balance is not being determined at this time and an argument on that will be scheduled. The Court

further finds that Lee is not liable to Mary on either loan, and that even if he was liable, such liability

would not be excepted from discharge under Section 523(a)(2)(A). Finally, the Court will not deny

the Debtors their exemption in the Kersey Property or subordinate their equity interest in it to

Mary’s nondischarged claim against Tammy and all other relief requested in the Complaint is

denied.

An appropriate order of judgment will be issued separately. 

Dated: July 19, 2016 ____________________________________

Thomas P. Agresti, Judge

United States Bankruptcy Court

Case Administrator to serve:

Mark A. Lindsay, Esq.

Earl D. Lees, Esq.

David Hopkins, Esq,

Debtors

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____________________________________

Thomas P. Agresti, Judge

United States Bankruptcy Court

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