DECISION AND ORDER GRANTING DEFENDANT’S MOTION TO DISMISS
The plaintiff, Federal Deposit Insurance Corporation (FDIC), which is acting as receiver for the National Bank of Washington (NBW), has sued the debtor Calhoun as defendant in this adversary proceeding for a determination that its claim against him is non-dischargeable under 11 U.S.C. § 523(a)(2)(A) or (B). The court will grant Calhoun’s motion to dismiss, with leave to amend, because the FDIC’s complaint fails to allege sufficient facts, which if proved, would demonstrate actual reliance as required under 11 U.S.C. § 523(a)(2)(A) or (B). The court rejects, however, Calhoun’s contention that the fraud of his law partnership cannot be imputed to him.
Facts
The complaint alleges the following facts. The debtor was a partner of Finley, Kumble, Wagner, Heine, Underberg, Manley, Meyerson & Casey (“Finley, Kumble”) a New York general partnership, when NBW made a $10 million dollar loan to Finley, Kumble on or about June 3, 1987. The full principal amount of the loan, and the interest on the loan remains outstanding.
On February 24, 1988, an involuntary petition was filed under chapter 7 of the Bankruptcy Code against Finley, Kumble, in the Southern District of New York. The case was converted to a chapter 11 case by an order of that court dated March 4,1988.
The debtor was not involved in negotiating or securing the loan, but he did materially benefit from the proceeds of the loan as a general partner of the law firm. He is jointly and severally for the Finley, Kum-ble loan and filed his own bankruptcy case in 1990.
*759 Finley, Kumble intended to, and did deceive NBW as to its financial condition and stability. Finley, Kumble made false representations with respect to pending litigation and dissension within the firm. In addition Finley, Kumble did not disclose a true and accurate presentation of the firm’s financial condition at the time of the loan, including information as to the firm’s work in progress and accounts receivable. The FDIC, as successor to NBW was injured by the fraud and deception of the debtor’s partners at Finley, Kumble.
. There is no allegation that in fact NBW relied on Finley, Kumble’s misrepresentations in making the loan. Rather, the plaintiff alleges “as a matter of law, a conclusive presumption exists that NBW relied upon the accuracy of the representa-tions_” Compl., par. 15.
Standard for Dismissal
The debtor argues that the complaint must be dismissed based on the failure of the FDIC to allege that NBW relied on the allegedly fraudulent assertions and financial statements of the debtor’s partners. The court agrees, rejecting the FDIC’s assertion that reliance is deemed present as a matter of law. The debtor also points to the FDIC’s failure to allege that the debtor had a fraudulent intent. The court holds that fraudulent intent is imputed to the debtor on the facts alleged.
Reliance Elements of a § 523(a)(2)(A) or (B) Claim
Reasonable reliance by the auditor is an express requirement of a § 523(a)(2)(B) claim.
1
However, there is no express requirement of reliance under § 523(a)(2)(A). Many courts have assumed that when Congress enacted § 523(a)(2)(A) as part of the new Bankruptcy Code in 1978 it had no intention of changing the common law standards required for a dischargeability complaint under Bankruptcy Act § 17(a)(2).
In re Hunter,
In sum, actual reliance needs to be pled as part of the creditor’s complaint under § 523(a)(2)(A), even if reasonable reliance is not required. For purposes of a complaint under 11 U.S.C. § 523(a)(2)(B), *760 reasonable reliance must be actually pled. 3 The issue thus arises whether the FDIC has pled actual reliance under § 523(a)(2)(A) and reasonable reliance under § 523(a)(2)(B).
Reliance by the FDIC
In its opposition to the motion to dismiss the FDIC insists that the “FDIC as receiver may, as a matter of law, reasonably rely on the documents in the loan file contemporaneous with the making of a loan....”
In re Smith,
The purpose of the
D’Oench, Duhme
doctrine, which was essentially codified by 12 U.S.C. § 1823(e), is to protect the FDIC from such secret dealings. Therefore, the FDIC is correct in stating that where a loan document fails to comply with § 1823(e) “the element of reliance required by § 523(a)(2)(A) and (B) is satisfied upon documentary evidence from the debt- or’s loan file, showing the written terms and conditions of the loan agreement.”
In re Figge,
However, there has been no allegation that NBW was a party to Finley, Rumble’s fraud, and consequently the D’Oench Duhme doctrine is inapplicable in this case. Therefore, the FDIC must plead under § 523(a)(2)(A) and (B) that NBW relied on the fraudulent assertions and financial statements that it received from the debt- or’s partners and plead that such reliance was reasonable for purposes of § 523(a)(2)(B). Having failed to do so, the complaint is defective with respect to both § 523(a)(2)(A) and (B).
Imputing Fraud Under § 523(a)(2)(A)
The debtor asserts that the FDIC must allege that the debtor was a party to the fraud, knew of the fraud or should have known of the fraud. The courts have split on this issue, but the better rule is that a partner’s fraud can be imputed to a debtor regardless of the debtor’s actions or knowledge.
As far back as
Stockwell v. U.S.,
This rule is equally established in the bankruptcy context. In
Strang v. Bradner,
Each partner was the agent and representative of the firm with reference to all business within the scope of the partnership. And if, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, and without notice of any limitations upon his general authority, his partners cannot escape pecuniary responsibility therefor upon the grounds that such misrepresentations were made without their knowledge.
Id.
(emphasis added).
See also
Story on Partnership, §§ 1, 102-3, 107-8, 166, 168. This rule was restated in
McIntyre v. Kavanaugh,
The debtor relies primarily on
Walker v. Citizen State Bank of Maryville, Missouri,
The reasoning of the
Walker I
decision has been the subject of sharp criticism, beginning with the bankruptcy court which heard the case on remand. The bankruptcy court pointed out that the Eighth Circuit erred by applying the standard for a § 727 denial of discharge case to a § 523(a) dis-chargeability-of-debt case.
In re Walker,
In
In re Futscher,
In addition to
Paolino, BancBoston
and
Walker II
numerous other decisions support imputation.
4
See In re Powell,
Imputing Fraud Under § 523(a)(2)(B)
Another decision,
In re Gray,
Without exception the cases under the Act held that fraud could be imputed for dischargeability purposes to an innocent partner or principal,
In re Paolino,
I am persuaded to follow Paolino additionally because it would be anomalous to allow imputation of fraud for purposes of § 523(a)(2)(A) but not for § 523(a)(2)(B). The determination of whether an innocent partner’s debt is non-dischargeable based on imputation of another partner’s fraud ought not rest on whether the fraud was in the form of a false statement concerning financial condition versus some other fraud unless Congress clearly intended different results.
Although not very persuasive because it failed to acknowledge the difference in statutory language, the court in
In re Cecchini,
The
Anderson
decision is an attempt to avoid the harsh result that the law currently requires. Its holding seems intuitively correct, but it does not comport with the current state of the law, and it “[does] not articulate a persuasive basis for disregarding binding pre-Code precedent.”
Paolino,
Conclusion
Here the FDIC has alleged that the debt- or’s partners committed fraud with the requisite intent to satisfy both § 523(a)(2)(A) and (B). In addition, the fraud was committed within the scope of the partnership such as to impute the fraud to the debtor. The FDIC’s failure to allege that NBW actually relied on the representations is, however, a fatal flaw for purposes of § 523(a)(2)(A) and (B).
For the reasons stated above, it is thus
ORDERED that the motion to dismiss is granted without prejudice with respect to all claims. It is further
ORDERED that the plaintiffs shall file an amended complaint within 10 days of the entry of this order. It is further
ORDERED that the defendants shall respond to the plaintiffs amended complaint within 10 days of service of the amended complaint.
Notes
. Title 11 U.S.C. § 523(a) provides inter alia:
Exceptions to discharge
(a) A discharge under 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-
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(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing—
(i)that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with the intent to deceive.
. Even in these courts, holding that only actual reliance is required, the reasonableness of the creditor’s reliance remains an important factor, however, in determining whether there was actual reliance.
See In re Garman,
. Some courts hold that the standard of reasonableness under § 523(a)(2)(B) goes no further than evidence of reasonableness demonstrating actual reliance and absence of bad faith on the creditor's part, essentially, it seems, the type of evidence of reasonableness (see footnote 2) that would help carry the day in showing actual reliance under § 523(a)(2)(A).
See In re Phillips,
. This rule has also been used to hold debtors non-dischargeably liable for wilful and malicious injuries committed by their partners.
In re Cecchini,
. The court in
In re Kay,