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Failure to Investigate Truth of Representations May Preclude Justifiable Reliance for Finding of Fraud

By Alexander Beeby posted 09-26-2021 14:03

  
BANKRUPTCY BULLETIN
Contributing Editor: C.J. Harayda, Faegre Drinker

In Excellent Home Properties, Inc. v. Kinard (In re Kinard), 998 F.3d 352 (8th Cir. May 21, 2021), the Court of Appeals for the Eighth Circuit considered whether a claim could be excepted from discharge under 11 U.S.C. § 523(a)(2)(A) despite the claimant not investigating the alleged misrepresentations of the debtor on which it claimed it relied.

The appellant had made a loan for $47,000 to an entity owned by the debtor’s parent, where the debtor was treated as a “business partner.”  The loan was intended for use by the entity to buy, renovate, and resell a house. The entity later defaulted on the loan and the entity, the debtor, and the parent all commenced bankruptcy proceedings. The appellant foreclosed on the house and acquired it at the subsequent auction with a “full credit” bid of $50,000.  The appellant‘s bid was the only one submitted and it acquired the house “sight-unseen.” After acquiring the house, the appellant discovered that no renovation had taken place. The appellant sold the house for $19,000.  It proceeded to file unsecured claims against the debtor, the parent, and the entity.

Appellant then commenced an adversary proceeding seeking a determination that the debt related to its claim was nondischargeable for fraud under 11 U.S.C. § 523(a)(2)(A), arguing that the debtor had made fraudulent representations regarding the condition of the house. From the decision, it is not clear that the debtor made any statement to the appellant, as the only statement referred to was made by the parent. The complaint also included three claims for state law fraud claims.  The bankruptcy court dismissed the appellant’s claims, and the district court affirmed. The Eighth Circuit set forth that, to prevail on the dischargeability challenge and the three state court claims, the appellant had to show that it “justifiably” relied on the alleged misrepresentations of the debtor.  The Eighth Circuit held that the district court’s decision was not clearly erroneous because the appellant did not establish that it justifiably relied on the debtor’s statements based on the appellant’s failure to take any action to investigate the condition of the house at issue, despite having ample opportunity. The Eighth Circuit likewise affirmed in favor of the debtor.

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law

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