Diamond v. Vickery (In re Vickery)

No. 10-41118 (B.A.P. 10th Cir. Mar. 13, 2013)
Reversing and remanding in part, the Bankruptcy Appellate Panel (“BAP”) for the Tenth Circuit held that, contrary pretrial order of the bankruptcy court (“BC”), a trustee was not required to establish a false representation to prevail on his claim for “actual fraud” under § 523(a)(2)(A). This provision excepts from discharge debts obtained by “false pretenses, a false representation, or actual fraud.” The court noted that although Tenth Circuit precedent had not drawn distinctions among these phrases, each remained a distinct basis for nondischargeability. After reviewing case law from other circuits, the court determined that to prove actual fraud only fraudulent intent needed to be established and remanded the trustee’s claim to the BC to apply the correct definition of actual fraud. The court then affirmed the BC’s determination that the trustee failed to establish a nondischargeability claim for “false representation” under § 523(a)(2)(A) against the debtor, Terry Vickery ("Vickery"). Section 523(c)(1) dictates that the only party with standing to bring a § 523(a)(2)(A) claim is “the creditor to whom such debt is owed.” The trustee was standing in the shoes of IVDS Interactive Acquisition Partners (“IIAP”) as a creditor of Vickery and asserting a judgment IIAP obtained against Vickery in a fraudulent transfer action. However, this statutory authority could not extend to the trustee’s allegations that Vickery misrepresented to the investors of IIAP the nature of their investment. In this case, the the creditor was IIAP, not the investors. Lastly, the court held that the BC did not abuse its discretion in concluding that the trustee’s complaint had not been amended to include a claim for embezzlement under § 523(a)(4). The trustee raised the claim briefly for the first time in his summary judgment motion. The trustee never moved to conform the pleadings to the evidence to raise the unplead claim pursuant to Fed. R. Civ. P. 15(b) (incorporated by Fed. R. Bankr. P. 7015). Finally, Vickery had not not impliedly consented to the trial of the claim because the trustee did not establish from the record that the claim was actually raised and argued.
Procedural context:
The trustee filed an adversary proceeding in the BC against Vickery seeking to have the IIAP judgment deemed nondischargeable pursuant to § 523(a)(2)(A), (a)(4), and (a)(6). The BC ruled in favor of the trustee on his (a)(6) claim and in favor of Vickery on the (a)(2)(A) and (a)(4) claims. Vickery appealed the judgment on the (a)(6) claim and the trustee appealed on the (a)(2)(A) and (a)(4) claims. The trustee timely elected to have Vickery’s appeal heard by the district court pursuant to 28 U.S.C. §158 and Bankruptcy Rule 8001(e), but the trustee’s election to have his own appeal heard by the district court was defective, and consequently, denied. Therefore, the BAP heard the trustee’s appeal.
Vickery created IIAP to acquire Interactive Video and Data Services (“IVDS”) licenses from the Federal Communications Commission. At the same time IIAP was created, Vickery created Digital Interactive Associates, Inc. (“DIA”). Vickery got individuals to invest in IVDS licenses by having them purchase partnership interests in IIAP. IIAP investors were not told about an arrangement between IIAP and DIA whereby both entities would share the investment money. IIAP obtained three IVS licenses from an FFC auction for $6 million. IIAP made a down payment on the licenses and was required to pay the remaining $4.8 million over the next 5 years. Thereafter, $3.6 million of IIAP’s investment money was transferred to DIA, leaving IIAP without sufficient funds to pay for the licenses. IIAP filed bankruptcy and the trustee sued Vickery and other “co-conspirators” for receiving fraudulent transfers. A federal district court entered a judgment for the entire $3.6 million jointly against each named defendant, plus punitive damages of $1,000,000 against Vickery. Vickery filed a petition for Chapter 7. The trustee filed an adversary proceeding against Vickery.
Karlin, Somers, and Mosier (sitting by designation), bankruptcy judges.

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