555 B.R. 1
10th Cir. BAP2016Background
- Stephen Thompson controlled Promise McLoud, LLC, which operated the Nursing Center after Thompson obtained a certificate of need from the Oklahoma Department of Health based on representations about his active involvement and insurance coverage.
- Thompson allegedly never intended to fulfill those representations, collected $1,500 per facility per month (total $6,000), switched insurance from occurrence to claims-made, and diverted LLC funds to other businesses.
- Wanda Hatfield died at the Nursing Center; Hatfield sued Promise McLoud, LLC and Thompson in state court; Promise McLoud defaulted and the state court awarded $1,000,000 against Promise McLoud (actual and punitive damages).
- Hatfield sued Thompson in bankruptcy, alleging veil-piercing liability and nondischargeability under 11 U.S.C. § 523(a)(2)(A) (actual fraud). Thompson moved for summary judgment invoking lack of fraud-based debt and insufficiency under Oklahoma law.
- The bankruptcy court granted summary judgment for Thompson, concluding the debt was not the type excepted under § 523(a)(2)(A) and that Oklahoma fraud elements were not met; Hatfield appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Whether a debt established under non-fraud state-law theories can nonetheless be nondischargeable under § 523(a)(2)(A) | Hatfield: § 523(a)(2)(A) excepts any debt arising from actual fraud; state-law theory (e.g., negligence judgment) does not limit dischargeability | Thompson: Debt must be a debt "obtained by" actual fraud or meet state-law fraud elements to be excepted | Court: Reversed — state-law claim need not itself be a fraud claim; the Code governs nondischargeability separate from state-law validity of the underlying obligation. |
| 2. Whether Hatfield must plead and prove Oklahoma common-law fraud to except the debt from discharge | Hatfield: He asserts a fraud-based veil-piercing theory; § 523(a)(2)(A) requires federal actual-fraud analysis, not strict state fraud elements | Thompson: Bankruptcy court required Oklahoma fraud elements and found them lacking | Court: Reversed — bankruptcy court erred by imposing state-law fraud as prerequisite; federal actual-fraud inquiry controls dischargeability. |
| 3. Whether summary judgment was appropriate given disputed material facts on the § 523(a)(2)(A) elements (actual fraud; obtained money/property by fraud; debt arising from fraud) | Hatfield: Facts (false representations to obtain certificate, intent not to perform, diversion of funds, Thompson’s receipt of monthly payments and certificate benefit) could show actual fraud and that Thompson obtained value traceable to the fraud | Thompson: No debt for something Thompson obtained from Hatfield; insufficient evidence of fraud under state law | Held: Reversed — genuine disputes exist on all three § 523(a)(2)(A) elements, so summary judgment improper; remanded for further proceedings. |
Key Cases Cited
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (actual fraud under § 523(a)(2)(A) can include fraudulent transfers and participation in schemes that defeat creditors)
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (§ 523(a)(2)(A) bars discharge of all liability arising from fraud; “obtained by” modifies money/property, not the term debt)
- Grogan v. Garner, 498 U.S. 279 (1991) (validity of state-law claims determined by state law; nondischargeability governed by federal Bankruptcy Code)
- In re Vickery, 488 B.R. 680 (10th Cir. BAP 2013) (dischargeability action is distinct; § 523(a)(2)(A) inquiry focuses on actual fraud for nondischargeability)
- In re McKendry, 40 F.3d 331 (10th Cir. 1994) (distinguishing the state-law validity of the underlying debt from the federal nondischargeability determination)