AGENT’S FRAUD MAY BE IMPUTED TO DEBTOR

What happens when two persons are partners and agents of each other and one of them defrauds a creditor? If creditor objects to the dischargeability of the debt in question can the fraud committed by that one agent be imputed to the other partner for purposes of excepting the debt from discharge in the other partner's bankruptcy? For example, John and Judy are husband and wife. John obtains a loan of $100,000 from Wells Fargo bank under false pretenses. Judy is unaware of the false pretense committed by John. Next year, John and Judy file for Chapter 7 relief. Wells Fargo then files an adversarial case to object to the discharge of the $100,000 as to both John and Judy even though it was only John who committed the fraud. Can John's fraud be imputed to Judy who is innocent?

 In Re Treadwell, the debtors who were husband and wife had a travel agency that booked a group into the Glenstone Lodge. Debtors absconded from the lodge without paying the bill of $50,851. Glenstone sued the debtors in state court, and obtained a default judgment of $153,611 in November 2006. The debtors filed for Chapter 7 relief in August 2008 after Glenstone filed a Notice of Levy and Sheriff's Sale on the debtors' home. In other words, Glenstone used the judgment of $153,611 to force the auction sale of debtor's house. Many people think that a judgment cannot be used to force the sale of debtor's residence. Well, now you know that a judgment can be used to force the sale of debtor(s) house.

 Debtors then brought an adversary proceeding to avoid Glenstone's judicial lien. Glenstone responded that its claim was nondischargeable. The bankruptcy court ruled that Golenstone's claim for $50,000 was not excepted from discharge. The court also ruled that the lien could be avoided because lien avoidance was not depended on the dischargeability of the underlying debt. Glenstone appealed the decision under Section 523(a)(2)(A) to the 8th Circuit Bankruptcy Appellate Panel, which affirmed in part, but reversed on the issue of justifiable reliance. Section 523(a)(2)(A) excepts from discharge a debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by- (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;". This ruling meant that the debt was not dischargeable as to debtor WIFE because the bankruptcy court had found for Glenstone as to all the other elements. So, as to the debtor HUSBAND, the debtor remained excepted from discharge because the bankruptcy court also found that the debtor HUSBAND was unaware that the representations made by the wife were false was affirmed. The BAP also rejected Glenstone's argument that the wife's liability should be imputed to the husband under a PARTNERSHIP OR AGENCY theory. Don't forget debtors were partners in a travel agency. But it was WIFE who made misrepresentations to Glenstone Lodge, not HUSBAND. Should HUSBAND be liable for WIFE's misrepresentations to Glenstone?

The 8th Circuit REVERSED the BAP’s ruling on the HUSBAND’S imputed liability, and the matter was remanded to the bankruptcy court on that issue. In other words, the Court of Appeals sent the issue regarding HUSBAND’s imputed liability back to the bankruptcy court and told the bankruptcy court to think about that issue some more. Therefore, the only issue was whether HE KNEW, SHOULD HAVE KNOWN, OR WAS RECKLESSLY INDIFFERENT to his wife’s fraud. I think at this point we know what is going to happen.

 In Re Walker, (8th Cir.1984), the court said that a debtor” who abstains from all responsibility for his affairs cannot be held innocent for the fraud of his agent if, had he paid minimal attention, he would have been alerted to the fraud.” The court said that description applied to the debtor HUSBAND, who had access to the account holding money owed to Glenstone. Thus, the bankruptcy court on remand, ruled that the WIFE’S fraud should be imputed to HUSBAND.

 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 Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.