Minnesota Bankruptcy Case: Representation About Future Action Can Be Fraudulent if Speaker Lacks Intent to Act

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

Minnesota Bankruptcy Case:

R&R Ready Mix v. Freier (In re Freier) 604 F.3d 583 (8th Cir. (Minn.) 5/10/10) (Melloy, J.).

Case Summary:

Representation About Future Action Can Be Fraudulent if Speaker Lacks Intent to Act

The Eighth Circuit Court of Appeals reverses the BAP’s conclusion that the bankruptcy court committed clear error when it held a debt non-dischargeable. The individual debtor was the sole shareholder and principal of a concrete company that owed a supplier. In negotiations with the supplier to forbear from collection and to extend further credit, the debtor represented, among other things, that he was not taking any funds from the company. In fact, the debtor later took at least $70,000 from the company for his personal use. The supplier extended additional credit and the company eventually failed to pay as agreed, and the individual debtor filed Chapter 7. The bankruptcy court pierced the corporate veil and held the company’s debt non-dischargeable in the debtor’s individual case under §§523(a)(2)(A) and (B) and (a)(4). The BAP reversed for clear error regarding misrepresentation and reliance. On appeal, the Eighth Circuit holds that the bankruptcy court did not commit clear error. The debtor’s representations were not necessarily of a future action when he stated that he “was” not taking any corporate funds. Even if they were statements regarding the future, such representations can constitute fraud when made with an intent to defraud and without an intention to perform consistent with the statements. Nor did the bankruptcy court commit clear error in finding that the supplier justifiably relied, even when there were “red flags” like an obviously erroneous financial statement. Whether to credit one party’s or the other’s version of the facts is for the trier of fact, and the bankruptcy court did not commit clear error by choosing to reject the debtor’s version.

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.