No False Representation in Loan Acquisition

Posted by NCBRC - May 18, 2017

Creditors failed to prove that the debtor made false representations with respect to a loan acquired by the debtor’s father claiming to represent the debtor’s company. Hasley v. Irons (In re Irons), No. 15-40876, Adv. Proc. No. 15-4051 (Bankr. D. Neb. March 9, 2017).

Ronald and Vicki Hasley, d/b/a Swite Enterprise, brought an adversary proceeding against the chapter 7 debtor, Tyler B. Irons, seeking an order of nondischargeability under section 523(a) with respect to a state court judgment on a debt.

The litigation between the parties began when the Hasleys filed suit in state court against the debtor; his father, Jack Irons; and his company J & R Motors, LLC, to recover approximately $190,000 Jack Irons borrowed from the Hasleys. The state court rendered judgment against the defendants based, at least in part, on findings of facts resulting from Tyler Irons’s failure to respond to requests for admissions which the court then deemed admitted. Tyler Irons filed chapter 7 bankruptcy shortly thereafter and the Hasleys filed an adversary complaint, seeking an order that the debt was nondischargeable under sections 523(a)(2)(A) and (a)(4).

At trial on the adversary complaint, the debtor, Tyler Irons, testified that neither he nor his company received any money from the Hasleys and further, that the state court judgment was a default judgment caused by the legal malpractice of Mr. Irons’s state court attorney. He admitted that, at his father’s request, he signed an “Accounts Receivable/Specific Assignment,” with respect to the loan and that pursuant to that agreement, he made cash payments to the Hasleys.

Section 523(a)(2)(A) renders nondischargeable a debt acquired through false representation. The Hasleys argued that Jack Irons made such representations by claiming to be an agent of Tyler Irons’s company and that, as 100% owner of the company, Tyler was therefore liable for those misrepresentations. Because the Hasleys did not testify at the trial, they offered the factual findings that led to the summary judgment in state court as support for this claim, arguing that the doctrine of res judicata prevented Tyler Irons from denying those factual findings.

Application of res judicata requires that for a factual finding in a previous action to be admitted in a later case as a matter of law, it must have been directly addressed or litigated in the former proceeding. In this case, however, the state court judgment was based on requests for admissions that Mr. Tyler failed to answer but were not actually litigated. Moreover, Nebraska rules limit use of admissions to the case in which they were admitted. Without those admissions, there was no testimony at the adversary hearing from either Mr. Hasley or Jack Irons to support a claim that Tyler Irons made any representations at all, much less ones that were reasonably relied upon by the Hasleys.

The case also failed under section 523(a)(4) which applies to misconduct by a fiduciary. The court explained that a fiduciary relationship must pre-date the debt and does not apply to “trusts that may be imposed because of the alleged act of wrongdoing from which the underlying indebtedness arose.” As to whether the Assignment document signed by Tyler Irons created a trust, the court found that it did not. Rather, it was a general, common-law contract pursuant to which Tyler Irons apparently made some cash payments to the Hasleys but did not establish a trust or escrow account or otherwise create a trust relationship.

The court granted partial summary judgment in favor of the debtor on the causes of action under sections 523(a)(2)(A) and (a)(4).

Hasley v. Irons (In re Irons) (Bankr.Neb., 2017)

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