Justifiable Reliance Entails No Duty to Investigate

Minnesota Bankruptcy Case: Justifiable Reliance Entails No Duty to Investigate; Husband is Not Vicariously Liable for Wife’s Fraud

The following is a summary of a Minnesota bankruptcy case or a case relevant to Minnesota bankruptcy law.

Minnesota Bankruptcy Case:

Treadwell v. Glenstone Lodge, Inc. (In re Treadwell), 423 B.R. 309 (B.A.P. 8th Cir. (Mo.) 2/1/10) (Kressel, C.J.).

Case Summary:

Justifiable Reliance Entails No Duty to Investigate; Husband is Not Vicariously Liable for Wife’s Fraud

The Eighth Circuit BAP reverses in part and affirms in part the bankruptcy court’s order finding a debt dischargeable as to the sole proprietor operator and her husband. Debtor-wife operated an unincorporated travel agency and contracted with a hotel for a travel event. She miscalculated the costs for participants, however, and realized before the event that she would not have enough to pay for the hotel if she paid other costs. She proceeded to pay the other event costs, as well as $10,000 for her mother’s funeral, while asking for and obtaining waivers of pre-payment requirements from the hotel. In the dischargeability action, the court held that the hotel had met all requirements under §523(a)(2)(A) except for justifiable reliance. It held the debt dischargeable as to debtor-wife and debtor-husband, who may have become aware of the fraud but did not actively participate. On appeal, the BAP reverses as to debtor-wife, holding that the hotel did meet the justifiable reliance standard, which is lower than “reasonable” reliance. Justification is determined with regard to the qualities and characteristics of the particular parties, rather than a community standard. Although under red-flag circumstances or with obvious warning signs, further investigation may be required, as a general rule there is no duty to investigate. The hotel justifiably relied on debtor-wife’s assurances. The BAP then discusses theories of partnership, vicarious liability, and agency to conclude that under no theory would the debt be non-dischargeable as to debtor-husband, who may have become aware of but did not participate in the fraud. On a related issue, the bankruptcy court had also avoided the hotel’s judgment lien as impairing an exemption, and the BAP affirms, noting that issues of dischargeability are irrelevant to whether or not a lien can be avoided under the formula set out in §522(f)(2)(A).

Credit: The preceding was a summary of a case relevant to Minnesota bankruptcy law. The case summary was prepared by the U.S. Bankruptcy Court through Judge Robert J. Kressel & attorney Faye Knowles.