[Regarding: Glencove Holdings, LLC v Bloom (In re Bloom), No. 22-1005 (10th Cir. July 12, 2022)]
The Tenth Circuit Court of Appeals recently affirmed the bankruptcy court and bankruptcy appellate panel rulings that a debtor owner and officer of a company may have a nondischargeable debt for a fraud claim even if the owner/officer did not personally benefit from the fraud.
The owner and manager of a consulting company provided aircraft sales consulting services. The debtor entered into a contract to represent a family seeking to acquire an aircraft. The debtor misrepresented the purchase price, which ultimately resulted in the family paying $250,000 more than what the debtor’s company paid the seller for the aircraft. Further, the company pocketed the $250,000 and used the funds to pay company creditors including its attorney.
The family eventually discovered that the debtor overcharged them and when the debtor filed personal bankruptcy, the family filed a claim for fraud as well as an adversary proceeding to declare the debt nondischargeable. The bankruptcy court found the debt to be non-discharged in the amount of $460,000 under Bankruptcy Code Sections 523(a)(2)(A) (false representation and fraudulent concealment) and 523(a)(6) (willful and malicious conduct) .
Fraud Claim Independent of the Contract Claim
The debtor argued that the claim was based on a breach of a contractual duty and not fraud absent an independent duty of care under tort law. The Tenth Circuit disagreed and held that the fraud claims were independent from a contract claim that arose between the family and the debtor’s corporation.
Tenth Circuit: Debtor Benefit Not Necessary
The debtor then argued that since Section 523(a)(2)(A) states that the debtor must have obtained money by “false pretenses,” and since he did not receive the $250,000, the debt was dischargeable. The Tenth Circuit reviewed prior court decisions and found three separate analyses. The Ninth, Eleventh and Fifth Circuits have held that the debtor must only receive some benefit from the fraud to render the claim non-dischargeable under Section 523(a)(2)(3). Other courts have held that the debtor must have simply caused the fraud, even though the debtor did not receive a direct benefit, to fit within Section 523(a)(2). The Tenth Circuit noted that an increasing number of courts have simply held that a debtor need not have personally obtained or benefited from the money or property obtained by fraud for the debt to be deemed non-dischargeable.
Since the bankruptcy court found that that the debtor did receive the benefit from the fraud, the Tenth Circuit really did not take a position one way or the other as to the three views taken by other courts. Instead, it held the debt was nondischargeable under Section 523(a)(2)(A)
The Tenth Circuit further held that the debt was 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.
The takeaway from this and other opinions is that a debtor owner or officer may not hide behind the corporate shield of limited liability by taking the position that he did not benefit from his fraud. If there was some benefit obtained, whether direct or indirect, in all likelihood, if the creditor is able to show fraud, the debt of the company may very well be a debt of the owner/officer of the company and further may be non-dischargeable.