Upholding the bankruptcy court and the Bankruptcy Appellate Panel, the Tenth Circuit explained when a corporate officer can be saddled with a nondischargeable debt for causing a corporation to defraud a customer.
The debtor provided aircraft sales consultancy services through a corporation of which he was the owner and manager. On behalf of the corporation, he signed a contract for the corporation to represent a family in purchasing an aircraft.
The debtor identified an aircraft that the purchasers decided to buy. The debtor misrepresented the purchase price, telling his clients that the price was higher than he would be paying. The buyers ended up paying $250,000 more for the aircraft than the debtor paid the seller. The debtor kept none of the $250,000 for himself. It went to his lawyer and other third parties.
Later, the debtor sued the buyers about the management of the aircraft. In the course of the litigation, the buyers discovered that they had been defrauded in the purchase. So, they counterclaimed.
The debtor filed personal bankruptcy, in which the buyers filed a claim for fraud together with an adversary proceeding to declare the debt to be nondischargeable. Bankruptcy Judge Thomas B. McNamara of Denver held a trial on the tort claims and allowed a claim for almost $460,000, which he declared to be nondischargeable under Sections 523(a)(2)(A) and (a)(6) for false representation and fraudulent concealment.
The Tenth Circuit Bankruptcy Appellate Panel affirmed in an opinion by Robert H. Jacobvitz of Albuquerque, N.M. The Tenth Circuit affirmed a second time in a July 12 opinion by Circuit Judge Carolyn B. McHugh.
In the circuit, the debtor argued principally that Colorado’s “economic loss rule” barred the tort claims for fraud and fraudulent concealment because the creditors had a claim based on a contract. The argument wasn’t a winner.
Judge McHugh quoted the Colorado Supreme Court for holding that “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.” Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000).
More recently, Judge McHugh cited the Colorado high court for saying that “the economic loss rule generally should not be available to shield intentional tortfeasors from liability for misconduct that happens also to breach a contractual obligation.” Bermel v. BlueRadios, Inc., 440 P.3d 1150, 1154 n.6 (Colo. 2019).
Even if the economic loss rule were to protect a corporate officer, Judge McHugh held that “the duty not to commit fraud arises from the common law, independent of the [contract with the corporation].” In that respect, she alluded to the Colorado Supreme Court as having said that “intentional tort claims such as common law fraud generally arise from duties independent of contracts and are outside the economic loss rule.” Id.
Judge McHugh held that the “common law fraud and fraudulent concealment claims are both tort claims that arise independent of a contract, so they would not be barred by the economic loss rule.” In other words, the intentional torts arose from common law and were independent of claims that might arise under the contract between the creditors and the debtor’s corporation.
Having decided that the economic loss rule did not bar the claims outright, Judge McHugh turned to dischargeability under Section 523(a)(2)(A) for obtaining money by “false pretense, a false representation, or actual fraud.” The debtor argued that Section 523(a)(2)(A) did not apply because he had received none of the $250,000.
On the question of whether a debtor must have received property for the subsection to apply, courts fall mostly into two camps. One requires the debtor to receive “some benefits,” while other courts “have held that the debtor need not have personally obtained or benefited from the money or property obtained by fraud,” Judge McHugh said.
Judge McHugh found guidance from Cohen v. de la Cruz, 523 U.S. 213 (1998), where the Supreme Court held that Section 523(a)(2)(A) “prevents the discharge of all liability arising from the fraud, including treble damages which do not represent money the debtor obtained.”
After Cohen, Judge McHugh said that “an increasing number of courts” have taken the view “that the debtor need not have personally obtained or benefitted from the money or property obtained by fraud.”
Judge McHugh did not take a position because she saw the debt as nondischargeable under Section 523(a)(2)(A), given the bankruptcy court’s finding that the debtor did receive benefit from the fraud.
The debt was also nondischargeable under Section 523(a)(6) as a “willful and malicious injury” because the bankruptcy court found evidence of willful intent to have the creditors pay too much. Affirming the bankruptcy court, Judge McHugh said there was no requirement to show “personal animus.”
The opinion is Glencove Holdings LLC v. Bloom (In re Bloom), 22-1005 (10th Cir. July 12, 2022).
Observations
The issue before the Tenth Circuit is somewhat similar to a circuit split the Supreme Court will resolve in the term to begin in October. In Bartenwerfer v. Buckley, 21-908 (Sup. Ct.), the high court will decide whether a debtor is saddled with a nondischargeable debt for a false representation or actual fraud under Section 523(a)(2)(A) based entirely on the fraud of a partner or agent. To read ABI’s report on Bartenwerfer, click here.
In Bartenwerfer, the question is whether the debtor must have committed fraud personally before a debt is nondischargeable. In the Tenth Circuit, the question was whether the debtor must have received benefit from the fraud personally, an entirely different factual question.
Even if the Supreme Court erects the higher standard in Bartenwerfer by requiring fraud by the debtor, the outcome should not affect the Tenth Circuit case because the appeals court upheld the bankruptcy court’s finding that the debtor himself received benefit from the fraud.
Upholding the bankruptcy court and the Bankruptcy Appellate Panel, the Tenth Circuit explained when a corporate officer can be saddled with a nondischargeable debt for causing a corporation to defraud a customer.
The debtor provided aircraft sales consultancy services through a corporation of which he was the owner and manager. On behalf of the corporation, he signed a contract for the corporation to represent a family in purchasing an aircraft.
The debtor identified an aircraft that the purchasers decided to buy. The debtor misrepresented the purchase price, telling his clients that the price was higher than he would be paying. The buyers ended up paying $250,000 more for the aircraft than the debtor paid the seller. The debtor kept none of the $250,000 for himself. It went to his lawyer and other third parties.
Later, the debtor sued the buyers about the management of the aircraft. In the course of the litigation, the buyers discovered that they had been defrauded in the purchase. So, they counterclaimed.