502 B.R. 516
Bankr. N.D. Ill.2013Background
- Michael and Michele Glenn (husband and wife) ran several real-estate LLCs that failed after 2007; Michael controlled the companies (5M Investment Group, LLC among them).
- In Oct. 2007 Karen Chung (Nomadic Consulting) solicited Brian Sullivan to make a $250,000 short-term “bridge” loan, representing that a $1 million LaSalle Bank line had been approved to allow quick repayment.
- Sullivan made the $250,000 transfer to a 5M account after receiving a promissory note signed by Michael, Chung, and a signature purporting to be Michele’s. The loan was not repaid.
- It was later proven in a separate adversary that Chung’s representations about the LaSalle line were false and constituted fraud; Chung was held nondischargeable for that fraud.
- Sullivan sued Michael and Michele under 11 U.S.C. § 523(a)(2)(A), alleging the debt was nondischargeable because it was procured by fraud (either by the Glenns’ own conduct or by imputation of Chung’s fraud). The adversary proceedings were consolidated and tried; the bankruptcy court found the debt dischargeable as to both Glenns.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a debt procured by a third party’s fraud is nondischargeable against an innocent co-obligor simply because the debt arose from fraud | Sullivan: §523(a)(2)(A) requires only that the debt "be obtained by" fraud; if fraud procured the loan, any obligor cannot discharge it | Glenns: §523(a)(2)(A) requires that the debtor himself have acted with intent to deceive (or that fraud be imputed via agency/partnership) | Court: Rejected Sullivan’s plain-meaning theory; section 523 exceptions apply only where debtor committed or is vicariously liable for the fraud; an innocent obligor may discharge the debt unless fraud imputable to them is proven |
| Whether Michael personally committed fraud (forged/ misrepresented Michele’s signature; knew LaSalle loan did not exist; misrepresented use of proceeds) | Sullivan: Michael knew/signaled Michele’s signature was valid, knew or should have known LaSalle loan was false, and misused proceeds | Michael: He did not know of Chung’s lies, did not forge Michele’s signature, and used funds for working capital/asphalt as represented | Court: Found Michael credible re: lack of knowledge; signature deemed Michele’s (or signed with her authority); no evidence Michael intended to deceive—no fraud proved against him |
| Whether Michele is liable on the note (forgery vs. valid signature/authorization) | Sullivan: Michele is obligated because her signature is on the note; alternatively signature was authorized/ratified | Michele: Denied signing or authorizing signature; sought to avoid liability | Court: Notarized documents and other evidence established Michele’s signature was authentic (or signed with her authority); Michele is liable on the note |
| Whether Chung’s fraud can be imputed to Michael or Michele via agency or partnership, making the debt nondischargeable | Sullivan: Chung acted as agent of the Glenns (or Michael was Michele’s agent/partner), so her fraud imputes to them | Glenns: Chung was an independent contractor; no evidence Glenns controlled or supervised her so as to create agency; no partnership proof | Court: Sullivan failed to carry his burden to prove agency or partnership; Chung was not shown to be the Glenns’ agent for imputation purposes; therefore fraud not imputed |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (1991) (creditor bears preponderance burden to prove exception to discharge; exceptions construed narrowly to afford fresh start)
- Field v. Mans, 516 U.S. 59 (1995) (§523(a)(2)(A) requires justifiable reliance, a less demanding standard than reasonable reliance)
- McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000) (actual fraud requires more than constructive fraud; fraud includes trick or dissembling)
- Stamat v. Neary, 635 F.3d 974 (7th Cir. 2011) (discharge is the rule; exceptions are for dishonest debtors)
- In re Sherman, 658 F.3d 1009 (9th Cir. 2011) (statutory exceptions to discharge apply to debtors who themselves committed the underlying misconduct)
- Butner v. United States, 440 U.S. 48 (1979) (property interests and related legal consequences are defined by state law unless federal law requires otherwise)