In a May 10, 2007 ruling, the Bankruptcy Court for the Central District of Illinois found that a Debtor did not commit fraud when she borrowed money from her employer. In this interesting case, the Debtor asked her employer (the owner of the McDonald’s franchise she worked for) to borrow money. The Debtor was going through a divorce and needed some financial assistance to make ends meet.
The employer considered the Debtor to be a valued employee and personally made a number of loans to the Debtor. A promissory note was signed by the Debtor wherein she agreed to make payments every two weeks until the balance was paid, or until she received funds in her divorce to pay the balance. Payments on the loan were automatically deducted from the Debtor’s paycheck. Six months after obtaining the last loan, the Debtor quit her job. About two years later, the Debtor filed a Chapter 7 petition.
The employer filed an Adversary Proceeding seeking to prevent the loan from being discharged. The employer argued that the Debtor had obtained the note by fraud and false pretenses, which is true, would prevent discharge of the debt under Section 523(a)(2) of the code. First the employer attempted to claim that because the Debtor had promised to repay the loan and did not, this amounted to a misrepresentation. The employer also claimed that the employee represented that she would keep working for the employer and because she did not, that also constituted fraud.
The Court did not agree. First, the mere fact that the Debtor did not pay the loan is a simple issue of breach of contract and “without more, cannot support a finding of non-dischargeability.” Additionally, because state law provides that employment is “at-will” unless there is an express agreement stating otherwise, both employer and employee had the right to terminate the employment at any time, and for any reason.
Other facts also supported dischargeability: the Debtor had borrowed approximately $3,600 in 2002, and made “substantial progress in paying that loan” before she borrowed more money. In addition, there was no evidence when the employer made the last loan that the Debtor knew she would be quitting her job six months later. For all of those reasons, the debt to the employer was discharged.
The case is Dubski v. Butler, Adversary No. 06-7174 (In re Butler, 06-70541).
