477 B.R. 156
10th Cir. BAP2012Background
- Johnson pledged 10.4 acre-feet of Water Right and stock as collateral for a DSC loan, relying on State DWR records and professionals who accessed those records.
- DSC obtained a title report and relied on the 10.4 acre-feet ownership representation in extending credit.
- The State DWR report carried a disclaimer that water rights records may be inaccurate; Johnson did not independently verify ownership.
- Dean (title expert) found Johnson did not own the Water Right at the time of the DSC loan due to transfers not reported to the State DWR.
- Johnson testified he relied on his attorney, Marta Johnson, and the State DWR; he did not maintain a ledger of transfers.
- Bankruptcy court found intent to deceive based on reckless disregard for truth; panel reverses, finding no sufficent evidence of subjective intent to deceive
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether DSC proved Johnson acted with intent to deceive under 523(a)(2)(A) | DSC argues Johnson knowingly misrepresented ownership | Johnson relied on others and believed the State DWR records were accurate | No clear evidence of intent to deceive; reversal and judgment for Johnson |
| Whether reckless disregard can satisfy scienter under 523(a)(2)(A) | Reckless disregard supports intent to deceive | Recklessness alone not enough without belief of deception | Reckless disregard not shown; insufficient to infer scienter |
| Whether reliance on State DWR and professionals excuses lack of independent verification | DSC reasonably relied on representations | Reliance does not negate lack of diligence by Johnson | Reliance alone insufficient to establish intent to deceive |
| Whether Restatement-based interpretation governs scienter standard | Restatement supports finding of deceit | Restatement clarifies distinction between negligent vs fraudulent misrepresentation | Court applied Restatement framework; no sustained finding of scienter |
| Whether the case should be remanded or judgment for Johnson should stand | Remand appropriate to re-evaluate intent | Record insufficient to support intent to deceive; remand unnecessary | Remand to enter judgment in favor of Johnson |
Key Cases Cited
- Field v. Mans, 516 U.S. 59 (U.S. 1995) (fraudulent misrepresentation standard; intent requires more than negligence)
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) (intent to deceive (scienter) informed by knowledge and information basis)
- In re Cribbs, 327 B.R. 668 (10th Cir. BAP 2005) (reckless disregard as evidence of scienter; standard applied regionally)
- Kukuk v. Kukuk, 225 B.R. 778 (10th Cir. BAP 1998) (clarifies limits of reckless disregard in 523(a)(2)(A))
- In re Gramolino, 183 B.R. 565 (Bankr. E.D. Mo. 1995) (negligent misrepresentation distinguished from fraudulent misrepresentation)
- Quackenbush v. Allstate Ins. Co., 517 U.S. 706 (U.S. 1996) (appropriate standard for appellate review in dischargeability)