Farmers & Merchants State Bank v. Perry (In Re Perry), 448 B.R. 219

Debtors David and Cindy Perry filed a Chapter 7 case; Farmers & Merchants State Bank seeks to determine dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A).
The dispute centers on transfers from A & A Cattle to the Perrys, totaling about $49,238.47, with no immediate disclosure on tax returns.
A & A Cattle, run by Robert and Ralph Allen, had a long-running business relationship with the Perrys through family ties; transfers to the Perrys occurred in 2007.
The Bank extended a line of credit to A & A Cattle since 1994; in 2006 a cognovit promissory note was created, the line was terminated in August 2007, and a cognovit judgment was entered against A & A and its principals in December 2007.
Ralph Allen discharged; Robert Allen discharged in Chapter 7; Ralph waived discharge after a fraud complaint; the Bank sued in state court for fraudulent transfers and then filed the current 523(a)(2)(A) action in 2010.
The Court holds that actual fraud can be proven without a misrepresentation and that the Defendants participated in a scheme with A & A Cattle to defraud the Bank, resulting in a nondischargeable debt.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether actual fraud under §523(a)(2)(A) requires a direct misrepresentation.	Plaintiff argues 'actual fraud' covers schemes where a third party defrauds and the debtor participates.	Defendants contend liability requires a direct misrepresentation to the creditor.	Yes; actual fraud can exist without a direct misrepresentation.
Whether the Perrys can be liable for actual fraud based on their participation in A & A Cattle's fraud.	Plaintiff contends the Perrys knowingly participated in the fraud.	Defendants argue they did not knowingly participate or were unaware of A & A Cattle's frauds.	Yes; the Perrys actively participated or knowingly aided the fraud.
Whether the 2007 transfers from A & A Cattle to the Perrys were fraudulent transfers under §548 and related§§ 101(31)(A) and 548.	Plaintiff asserts the transfers were part of a fraudulent scheme to deprive the Bank.	Defendants argue ordinary business compensation and no clear fraudulent intent.	Yes; transfers were part of a fraudulent scheme and to insiders, supporting liability.
Whether the Bank’s reliance and the presence of a third party affect the §523(a)(2)(A) claim.	Plaintiff asserts third-party fraud with debtor participation supports nondischargeability.	Defendants rely on lack of direct representation and reliance issues.	Reliance not required where actual fraud is proven; the debtor’s participation establishes liability.

McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000) (actual fraud broader than misrepresentation; deceit includes schemes to defraud.)
In re Rembert, 141 F.3d 277 (6th Cir. 1998) (actual fraud assessed via subjective intent; reliance not required when no misrepresentation.)
In re Vitanovich, 259 B.R. 873 (6th Cir. BAP 2001) (debtor's scheme to cheat constitutes actual fraud; accomplice liability based on totality of circumstances.)
In re Marroquin, 441 B.R. 586 (Bankr.N.D.Ohio 2010) (affirms broad application of §523(a)(2)(A) to frauds beyond misrepresentation.)
Ron Pair Enterprises, Inc. v. United States, 489 U.S. 235 (1989) (plain meaning of statutes; enactments interpreted in light of purpose.)