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United States v. Donald Duane Klein & Norma Jean Klein (In re Klein), Ch. 12, BK22-40804-BSK, A22-4020-BSK (Dec. 7, 2022)

The bankruptcy court granted a preliminary injunction to the SBA to enjoin the debtors from spending the balance of a loan allegedly obtained by fraud.

The debtors obtained a $500,000 Covid hardship loan from the SBA by representing in their application that they were engaged in the business of farming, operating under a confirmed Chapter 12 plan, and would use the loan proceeds as working capital. None of those representations appear to be true. The debtors did not confirm a plan in their previous Chapter 12 case, they do not own any land or equipment and are about to surrender the few head of livestock they have, their only source of income is Social Security, and they have used the loan proceeds for attorney fees, litigation expenses, and personal living expenses.

The court granted the government’s motion to enjoin the debtors from spending the balance of the loan proceeds/cash collateral. The court found that all of the Dataphase factors had been met: the SBA would suffer irreparable harm if the loan proceeds were spent; SBA would suffer greater harm if an injunction wasn’t entered than the debtors would if their access to the funds was limited; the SBA is likely to succeed on its § 523(a)(2)(A) claim to except the debt from discharge; and public policy favors ensuring that the loan process is not abused and public funds are properly utilized.

Wednesday, December 7, 2022
Judge Brian S. Kruse