Sauer Inc. v. Lawson (In re Lawson)
505 B.R. 117
Bankr. D.R.I.2014Background
- Sauer obtained a ~$168,000 judgment against James Lawson (father) and alleges post-judgment transfers of ~$100,000 to CCMC (an entity formed by debtor Carrie Lawson but controlled by James) and $80,000 from CCMC to Carrie.
- Rhode Island Superior Court found the transfers fraudulent under the UFTA and issued executions against CCMC and Carrie for the transferred amounts.
- Sauer sued Carrie in bankruptcy seeking a declaration that Carrie’s debt to Sauer is nondischargeable under 11 U.S.C. § 523(a)(2)(A) on the theory Carrie knowingly received fraudulent transfers with intent to hinder Sauer.
- Carrie moved to dismiss for failure to state a claim; the complaint does not allege any false representation by Carrie.
- Sauer argued § 523(a)(2)(A)’s phrase “actual fraud” reaches fraudulent-transfer schemes (relying on McClellan), while Carrie argued First Circuit precedent requires a debtor misrepresentation.
- The bankruptcy court dismissed Sauer’s § 523(a)(2)(A) claim, holding First Circuit and Supreme Court precedent require a misrepresentation as part of “actual fraud” under § 523(a)(2)(A).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a debt incurred by receipt of a fraudulent transfer (without a debtor misrepresentation) is nondischargeable under § 523(a)(2)(A) | § 523(a)(2)(A)’s term “actual fraud” is broader than misrepresentation and covers knowingly receiving fraudulent transfers (citing McClellan) | First Circuit law requires a false representation as an essential element of § 523(a)(2)(A); complaint alleges no misrepresentation so it fails | Court held § 523(a)(2)(A) in this circuit requires a debtor misrepresentation; Sauer’s claim dismissed |
Key Cases Cited
- McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000) (held “actual fraud” may extend beyond misrepresentations to cover knowing receipt of fraudulent transfers)
- Spigel v. McCrory (In re Spigel), 260 F.3d 27 (1st Cir. 2001) (First Circuit requires a knowingly false representation and reliance for nondischargeability under § 523(a)(2)(A))
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) (articulated elements for § 523(a)(2)(A) fraud claims centered on misrepresentation)
- Field v. Mans, 516 U.S. 59 (1995) (supreme-court guidance that “actual fraud” imports common-law elements and the Restatement formulation)
- Blacksmith Investments, LLC v. Woodford (In re Woodford), 403 B.R. 177 (Bankr. D. Mass. 2009) (declined to adopt McClellan; held First Circuit approach controls)
- Morrissette v. Sorbera (In re Sorbera), 483 B.R. 580 (Bankr. D. Mass. 2012) (followed Woodford; limited “actual fraud” to Spigel/Palmacci standard)