560 B.R. 475
Bankr. N.D. Ohio2016Background
- Three state-court judgments (Sheen Falls Strategies LLC; Daniel Geib; Kevin McGinty) arose from a failed trading business built around a trading “model” James Keane claimed to own; Keane filed Chapter 7 bankruptcy and creditors sued to except the judgments from discharge.
- Keane represented the model as a confidential, highly successful proprietary formula (alleged 24% annual back-tested returns); in reality the model was an ad-hoc combination of publicly available TradeStation indicators that produced minimal real returns.
- Geib opened a TradeStation account in 2011 and authorized Keane to trade; Geib and McGinty formed Sheen Falls Strategies LLC in 2012; Geib and McGinty each made $25,000 personal loans to Keane in March 2012; Geib later made additional $10,000 and $15,000 loans; the LLC loaned Keane $50,000 in August 2013 for business purposes.
- Over 2011–2013 Keane traded infrequently, produced low realized returns, missed repayment schedules, and solicited further loans despite red flags; Geib and McGinty removed Keane from the LLC in May 2014 and obtained state-court judgments against him in 2014.
- Creditors sought nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), and (a)(4); the bankruptcy court granted summary judgment to Keane on (a)(2)(B) and defalcation under (a)(4), tried the remaining claims, and issued the decision below.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debts are nondischargeable under § 523(a)(2)(A) (fraud/false representation) | Creditors: Keane obtained loans by materially misrepresenting the model’s nature/performance and intent to repay, and creditors justifiably relied | Keane: either no actionable misrepresentation, or creditors unreasonably relied (red flags existed) | Geib’s initial $25,000 and McGinty’s $25,000 loans are nondischargeable under § 523(a)(2)(A) (court found misrepresentation, intent, proximate cause; reliance varied) |
| Whether Geib’s later $10,000 and $15,000 loans are nondischargeable under § 523(a)(2)(A) | Geib: continued reliance on Keane’s representations justified additional loans | Keane: later loans were made after obvious red flags; reliance was not justifiable | Court: those later loans are dischargeable — justifiable reliance defeated by successive red flags |
| Whether Sheen Falls Strategies’ $50,000 judgment is nondischargeable under § 523(a)(2)(A) | LLC: loan was obtained by Keane’s misrepresentations about the model | Keane: LLC had access to information and red flags (including McGinty’s refusal to lend more) | Court: did not decide (a)(2)(A) for LLC; instead found nondischargeability under § 523(a)(4) (embezzlement) |
| Whether debts are nondischargeable under § 523(a)(4) (embezzlement/larceny) | Creditors: Keane misused funds entrusted for business purposes (LLC loan) and thus committed embezzlement | Keane: loans were transfers without fraudulent intent or were personal loans (for Geib’s later loans) | Court: LLC’s $50,000 loan is nondischargeable under § 523(a)(4) (embezzlement); Geib’s two later personal loans are dischargeable under § 523(a)(4) |
Key Cases Cited
- Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277 (6th Cir.) (creditor bears preponderance burden; intent assessed subjectively)
- Husky Intern. Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (U.S.) (actual fraud in § 523(a)(2)(A) covers fraudulent schemes even without express misrepresentations)
- Field v. Mans, 516 U.S. 59 (U.S.) (distinguishes justifiable reliance from reasonable reliance)
- Brady v. McAllister (In re Brady), 101 F.3d 1165 (6th Cir.) (embezzlement defined as fraudulent appropriation of property entrusted to debtor)
- Bd. of Trs. of the Ohio Carpenters’ Pension Fund v. Bucci (In re Bucci), 493 F.3d 635 (6th Cir.) (elements for proving embezzlement under § 523(a)(4))