636 B.R. 553
Bankr. D. Mass.2022Background
- Debtor Robert Fautz formed Silver Revolver, Inc. in 2006 to operate a NYC bar; Weiss invested $150,000 (two tranches: $100,000 and $50,000) based on Fautz's representations.
- Parties executed multiple "Schedule A" documents representing Fautz would contribute no less than $450,000; Fautz in fact contributed ~ $141,000 in cash and arranged other informal contributions (e.g., renovations by Giampa).
- Weiss testified (credibly) he increased his investment because Fautz said Weiss’s name would be on the liquor license; the license was never issued and Weiss’s name never appeared.
- Weiss obtained a New York default judgment for $150,000 plus fees; it was later domesticated in Massachusetts for a larger amount.
- Weiss sued in bankruptcy under 11 U.S.C. § 523(a)(2)(A) (false representation) and § 523(a)(4) (fraud/defalcation in fiduciary capacity).
- Court allowed amendment under Fed. R. Civ. P. 15(b)(2) to treat liquor-license evidence as an asserted basis for nondischargeability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) based on Fautz’s promise to invest $450,000 | Weiss: Fautz knowingly misrepresented he would put in $450,000, induced reliance, and obtained $150,000 | Fautz: Promised amount included sweat equity/other investors; no intent to deceive | Held: Representation was knowingly false, induced justifiable reliance, caused $150,000 loss; judgment (including interest, fees) excepted from discharge under § 523(a)(2)(A) |
| Whether debt is nondischargeable under § 523(a)(2)(A) based on liquor-license representation | Weiss: Fautz falsely told him Weiss was listed on temporary liquor license, inducing the $50,000 additional investment | Fautz: (implicit) license representations were inaccurate or not fraudulent | Held: Statement was false, knowingly made to induce reliance; $50,000 (one-third of judgment) obtained by false representation and excepted from discharge under § 523(a)(2)(A) |
| Whether debt is nondischargeable under § 523(a)(4) for fraud/defalcation while in fiduciary capacity | Weiss: As majority shareholder/director, Fautz owed fiduciary duties and committed fraud/defalcation by obtaining and misusing investments | Fautz: Acts occurred before fiduciary relationship existed and there is no proof of misappropriation or egregious management | Held: § 523(a)(4) not met — fiduciary relationship did not exist at time of inducement and plaintiff failed to prove misuse/defalcation; judgment not excepted under § 523(a)(4) |
Key Cases Cited
- Dewitt v. Stewart, 948 F.3d 509 (1st Cir.) (six‑element test for § 523(a)(2)(A) false representation)
- Sharfarz v. Goguen, 691 F.3d 62 (1st Cir.) (elements and scienter for false representation)
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir.) (fresh start policy; plaintiff bears burden in § 523 actions)
- Fields v. Mans, 516 U.S. 59 (U.S. Supreme Court) (justifiable reliance standard under § 523(a)(2)(A))
- Cohen v. de la Cruz, 523 U.S. 213 (U.S. Supreme Court) (§ 523(a)(2) exception covers full judgment amount including fees)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (U.S. Supreme Court) (defalcation requires more than negligence; degree of fault near fraud)
- Antilles Cement Corp. v. Fortuno, 670 F.3d 310 (1st Cir.) (Rule 15(b) implied consent to try unpleaded issues)
- In re Baylis, 313 F.3d 9 (1st Cir.) (fiduciary capacity for § 523(a)(4) requires trust relationship existing before the wrong)