In litigation over dischargeability, the notion of “don’t ask, don’t tell” protects the debtor, according to the First Circuit.

Needing a loan to help his faltering business, a man went to the woman with whom he was “romantically involved,” Circuit Judge Bruce M. Selya said in his April 20 opinion. Perhaps suspecting that neither the relationship nor the business would endure, the woman hired a lawyer to document the $30,000 loan.

The lawyer told the man to draw up a list of property “belonging” to him “either by title or by physical possession.” The man complied and added the cost of each item to the list. The lawyer turned the list into a document entitled “List of Collateral” that was attached to the loan agreement.

The woman had the right to sign and file a financing statement for the borrower, but she never did. Consequently, the loan was unperfected.

The list showed $22,000 as the cost of equipment and $64,000 for two trucks. The list did not reveal that one of the trucks had a lien.

The business and the romance both went sour. After the man filed a chapter 7 petition, the woman objected to discharge of the debt under Sections 523(a)(2)(B) and (a)(2)(A).

On what amounted to a motion to dismiss, the bankruptcy judge dismissed the dischargeability objection, saying the woman could not show reliance because she never perfected the security interest. The Bankruptcy Appellate Panel upheld the bankruptcy court.

On the next appeal, Judge Selya upheld dismissal, but on a different theory. He said the woman never made allegations to support a claim under either subsection.

Why? Because the “plaintiff does not claim that the substance of the list was in any way untrue,” Judge Selya said.

The woman claimed that the list was untrue because it did not show that one of the trucks was subject to a lien. Nonetheless, Judge Selya said, a “failure to speak becomes a misrepresentation by omission only if the context requires the debtor to speak . . . . Here, however, the complaint contains no facts indicating that the debtor was obliged to tell the plaintiff that the truck was encumbered.”

The absence of a critical allegation was fatal under both subsections. Section 523(a)(2)(B) results in denial of discharge of a debt if it was obtained by use of a writing that was materially false regarding the debtor’s financial condition. The creditor must have reasonably relied, and the debtor must have had intent to deceive.

However, “material falsity is an element of a claim” under that subjection, the judge said, but the list did not represent that the truck was free and clear. In substance, the man had no obligation to reveal any encumbrances when the borrower did not ask him to do so.

Similarly, the allegations failed to state a claim under Section 523(a)(2)(A), which requires, among other things, a knowingly false representation.

Judge Selya said the “list was exactly what it purported to be,” a list of property and acquisition costs. He said the “debtor was never asked about whether or to what extent the listed items were encumbered.”