Transactions and Loans Fully Disclosed in Company’s Books are Not False Representations, Embezzlement, or Larceny

By Karl Johnson posted 30 days ago

  
​BANKRUPTCY BULLETIN
Editors-in-Chief
Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.

 Contributing Editor: Karl Johnson, Hellmuth & Johnson, PLLC
Judge_Kressel___Kassebaum_v__Smith.pdf

In Kassebaum v. Smith (In re Smith), No. 18-05004-RJK, (Bankr. D. Minn. Nov. 1, 2018), the bankruptcy court held that (1) transfers made to the debtor and other employees of a company did not involve fraudulent misrepresentations under § 523(a)(2)(A) when the transfers were fully disclosed in the company’s books and records and (2) borrowing money from a company with the intent to pay it back is neither embezzlement nor larceny under § 523(a)(4).

The debtor was a shareholder, officer, and employee of a company. Other shareholders sought exception from discharge for debts allegedly owed to the company for (1) bonuses that were paid to all employees allegedly without required approvals; (2) payments made to the debtor, (3) personal loans to purchase a vehicle that was used by the company; (4) expenses and payroll paid for another company, and (5) payroll and dividend advances paid to the debtor.

  • 523(a)(2)(A)

The court reiterated the standard for fraudulent false representation under § 523(a)(2)(A) as stated in In re Moen, 238 B.R. 785 (B.A.P. 8th Cir. 1999): (1) the debtor made a representation; (2) at the time the representation was made the debtor knew it was false; (3) the debtor made the representation deliberately and intentionally with the intent and purpose to deceive the creditor; (4) the creditor justifiably relied upon such representation; and (5) the creditor sustained injury as a proximate result of the representation.

The court found that the evidence did not demonstrate that the debtor made a false representation either affirmatively or through omission. All of the payments to the debtor were documented in written records, including written checks and credit card statements. The plaintiffs’ forensic expert testified that it was difficult to trace the transactions, but the court determined that any difficulty in tracing the transactions was due to the bookkeeper’s decisions concerning how to describe and account for the transactions, not to the debtor’s attempt to hide them. Because there was no false representation, the other elements also failed. Even if there had been false representations, there would have been no justifiable reliance because an inspection of the company’s books would have shown all the transactions.

  • 523(a)(4)

The court determined that the plaintiffs failed to prove embezzlement because there was no evidence to show that they “entrusted” property to the debtor, or that he was instructed to use the money for a certain purpose. In other words, plaintiffs failed to establish that the debtor was not lawfully entitled to use the funds for the purposes for which it was in fact used.

The court determined that the plaintiffs failed to prove the intent requirement for larceny because the debtor testified that he borrowed the money with the intent to pay it back, and that he in fact had paid back over half of the money. 

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