In re Colquitt (Ch 13 Case No. 21-30235, Adv. Case No. 21-03010)

Debtor agreed to help finance a concrete business owned by a long-time friend and former roommate, Hill. Debtor’s loans were to be used to purchase materials with Hill supplying the labor. Debtor’s profit was 30% of the loan amount. Debtor issued a check for each loan and Hill issued a repayment check. Debtor and Hill used different banks and multiple loan and repayment checks were sometimes deposited the same day. For six months, all checks cleared the respective bank. Then Hill deposited checks totaling $550,000 into Debtor’s account and Debtor had his bank issue a cashier’s check for $535,000 to Hill. Hill’s checks were dishonored causing Debtor’s account to be overdrawn. Debtor’s bank obtained judgment against Debtor for the overdraft.

After Debtor filed a Chapter 7 case, his bank alleged that Debtor and Hill participated in a check kiting scheme and that Debtor’s debt arose from actual fraud and was nondischargeable under 11 U.S.C. §523(a)(2)(A).

The court analyzed the swapping of checks between Debtor and Hill and determined that there was no check kiting at least prior to the end of November 2017. The time gap between some deposits and debits exceeded the float time between the banks.

The court determined that the transactions over the next twenty days suggested that kiting was occurring but that Debtor was not a knowing participant, did not attempt to defraud his bank and that his debt to the bank was dischargeable in bankruptcy.

Thursday, March 2, 2023