IS PRINCIPAL LIABLE FOR AGENT’S FRAUD IN BANKRUPTCY?

You are probably familiar with a principal and agent arrangement. The most common is where a person designates another to be his agent for a general or specific purpose using a power of attorney. The principal allows the agent to bind the principal in certain transactions making the principal legally liable for the acts of the agent on behalf of the principal. For example, A designates B to buy a house for A. In pursuit of the power of attorney given to him, B signs a purchase contract on behalf of A for a house in Arcadia for $2.0 million. B agrees further to pay the seller $1.0 million within 10 days of signing the purchase contract, with the balance $1.0 million payable within 30 days of signing. A only has $1.5 million to give to seller in 30 days. Seller sues A for the balance of half a million. A answers that he is not liable for the half million because it was B, his agent, who signed the contract, not him. Is A liable to seller for half a million even though A did not sign the contract, and it was B who signed the contract as agent for A? Of course A is liable because the actions of an agent bind the principal. This is basic agency and contract law.

But let’s change the situation a bit. Let’s say that A is a realtor, B his sales agent. B defrauded a client of the realty office resulting in a judgment of $2.0 million against B. A files for Chapter 7 relief. Plaintiff files an adversarial complaint against A asking the court to find that the $2.0 million judgment against B should be excepted from discharge in A’s bankruptcy because B was an agent of A when A defrauded client. A responds to the complaint saying the $2.0 million should be discharged because he had no knowledge of B’s fraudulent activity. Can B’s fraudulent action bind A such that the $2.0 million judgment against B is not dischargeable in A’s bankruptcy?

In Re Huh was decided by the 9th Circuit court of appeals last month. Benjamin Huh was a licensed real estate broker. He operated as a sole proprietorship using dba America Realty & Investment. In August 2004, he incorporated his business as Amerity, Inc. but did not cancel his personal registration of ARI. Jay Kim, relying on Huh’s license, was Amerity and Huh’s sales agent from 2004 to 2005. Anil Sachan met with Kim in September 2004 at the ARI office to discuss a potential acquisition of La Mexicana Market. Kim represented that the market generated $35,000 in monthly profits from a monthly gross of $340,000. Sachan signed a purchase contract that identified ARI as the selling agent and broker. After the sale closed, Sachan discovered that the market generated sales at a far lower rate than Kim had represented. Alleging fraud, Sachan successfully sued Kim and ARI in state court. The state court granted Sachan’s motion to add Huh as a defendant, and entered an amended judgment determining that Huh was jointly and severally liable to pay Sachan $913,867.

Huh filed for Chapter 7 relief. Sachan filed a complaint objecting to discharge of his claim under Section 523(a)(2)(A). The bankruptcy court in the Central District of California, after trial, ruled in Huh’s favor, finding that Kim was Huh’s agent but declining to impute Kim’s fraud to Huh. The bankruptcy court found that Huh never communicated with Sachan or Sachan’s company regarding the market’s purchase; Huh made no misrepresentations to Sachan or Sachan’s company; Kim made no misrepresentations to Sachan on Huh’s behalf; prior to the sale, Huh was not aware of the market and so knew of no defects of, or, if the market was generating profits; and Huh was not aware of the purchase of the market by Sachan until after the sale closed. Sachan appealed. The 9th circuit found that “more than a principal/agent relationship is required to establish a fraud exception to discharge….the creditor must show that the debtor knew, or should have known, of the agent’s fraud.”

This week, 2014 years ago, Jesus Christ the One and only Son of the One true God, willingly suffered torture and death on the cross, to redeem mankind from the consequences of sin because He loves us so.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years.  He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California.  He speaks Mandarin and Fujien and looks forward to discussing your case with you personally.  Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave, Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.