Reuter v. Cutcliff (In Re Reuter)
443 B.R. 427
8th Cir. BAP2011Background
- Debtor Nathan Reuter, founder of Vertical Group, induced clients to invest in 2004–2005; investments were lost.
- Missouri AG civil action against Vertical Group and Reuter for unregistered securities and misrepresentation; consent judgment in 2008 enjoined securities activity and imposed a penalty.
- Daryl Brown, principal of Vertical, was convicted in federal court on multiple fraud-related counts.
- In 2006 federal suit by Cutcliffe group against Reuter and Vertical alleging RICO, securities violations, fraud, etc.; bankruptcy petition filed in 2007 to stay the actions.
- Adversary proceeding and plan confirmation were tried together; in 2010 the bankruptcy court denied confirmation, found §523(a)(2)(A) and §523(a)(19) liabilities, and ordered conversion to Chapter 7.
- Bankruptcy court held Reuter liable for his own fraud and vicariously liable for Brown’s fraud; found Missouri private securities claim actionable; awarded damages, attorneys’ fees, and punitive damages; conversion to Chapter 7 granted for asset administration.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether false pretenses/representations are independent §523(a)(2)(A) claims | Reuter: claims not independent torts; liquidation not dischargeable. | Cutcliffe: recognized as independent tort-like claims under §523(a)(2)(A). | Affirmed; court appropriately recognized and applied. |
| Whether Reuter is liable under Missouri private securities act §409.5-509 | Cutcliffe: private right of action exists and damages are dischargeable/non-dischargeable accordingly. | Reuter: no private action or liability as to him; unsupported. | Affirmed; court held private right of action exists and liability established. |
| Whether Reuter is vicariously liable for Brown's §523(a)(2)(A) fraud | Cutcliffe: agency/partnership principles justify imputation of fraud to Reuter. | Reuter: no formal partnership; cannot be liable for Brown's actions. | Affirmed; sufficient agency/partnership-like conduct supported imputation. |
| Whether plan confirmation was properly denied as bad faith/infeasible/best interests | Cutcliffe: plan was proposed in bad faith and was not feasible or in creditors' best interests. | Reuter: plan feasible and in best interests; not in bad faith. | Affirmed; bad faith and infeasibility supported; conversion to Chapter 7 affirmed. |
| Whether revocable trusts severed tenancy by the entirety affecting asset inclusion | Trust assets should be treated as estate assets; excludes none for creditors. | Trust transfers moot tenancy by entirety; assets not exempt. | Affirmed; transfer to spouse rendered tenancy by the entirety moot. |
Key Cases Cited
- Field v. Mans, 516 U.S. 59 (1995) (§523(a)(2)(A) borrows general tort law)
- Sindecuse v. Katsaros, 541 F.3d 801 (8th Cir. 2008) (reliance standard under §523(a)(2)(A))
- Caspers v. Van Horne, 823 F.2d 1285 (8th Cir. 1987) (circumstantial evidence admissible for intent under false representations)
- Merchants Nat'l Bank v. Moen, 238 B.R. 785 (8th Cir. BAP 1999) (intent and circumstantial evidence in §523(a)(2)(A))
- In re Treadwell, 423 B.R. 309 (8th Cir. BAP 2010) (partnership-based liability limitations discussed)
- In re Miller, 276 F.3d 424 (8th Cir. 2002) (agency/partnership concepts in vicarious liability)
- Strang v. Bradner, 114 U.S. 555 (1885) (early vicarious liability framework for fraud)
- Owens v. Miller, 276 F.3d 424 (8th Cir. 2002) (agency principles supporting liability)