- Citation:
- Sullivan v. Glenn, No. 14-3213 (7th Cir. Apr. 2, 2015)
- Tag(s):
-
- Ruling:
- The court AFFIRMED the ruling of the district court. The court accepted that the loan broker was the Glenns' agent, as the Glenns hired the loan broker to negotiate a short-term loan on their behalf. However, for purposes of dischargeability, the Court adopted In re Walker, 726 F.2d 452 (8th Cir. 1984) for the proposition that "[p]roof that a debtor's agent obtains money by fraud does not justify the denial of a discharge to the debtor, unless it is accompanied by proof which demonstrates or justifies an inference that the debtor knew or should have known of the fraud." Reviewing the Glenns' testimony, the court found that the proof did not demonstrate that the Glenns should have known of the loan broker's fraud. Moreover, the court noted that the short-term lender, as a friend of the loan broker, was in the same position as the Glenns to discover the fraud, and the short-term lender should have called the bank himself to confirm the line of credit. The court credited the lender's argument that imposing liability on the Glenns would cause similarly situated parties to police their agents more carefully, but the court noted that such a rule would also increase the complexity and cost of commercial transactions, and thus would provide no net social benefit--"[b]ankruptcy creates a form of limited liability, which encourages transacting."
- Procedural context:
- Appeal to the United States Court of Appeals for the Seventh Circuit, from the United States District Court for the Northern District of Illinois, Eastern Division.
- Facts:
- The Glenns, a married couple, asked a loan broker to help them obtain a short-term loan of $250,000. The loan broker reached out to a friend, who agreed to make the loan. In the process of finalizing the loan, the broker falsely told both the Glenns and the short-term lender that the Glenns were approved for a $1 million bank line of credit that would become available in the next few weeks, and the loan broker fraudulently portrayed to the parties a telephone call to the bank confirming the line of credit approval. The short-term loan was made to the Glenns but never repaid, and the line of credit never materialized as it was never actually applied for.
Thereafter the Glenns filed bankruptcy, and the short-term lender filed an adversary complaint to declare the short-term debt non-dischargeable, as debt obtained by false pretenses, a false representation, or actual fraud under Section 523(a)(2)(A).
At trial, the Glenns testified that they, like the short-term lender, believed they were approved for the $1 million line of credit and had no reason to believe that the loan broker's statement was false. To support this position, Mr. Glenn testified that his usual method for obtaining bank loans was to send an e-mail request to which he would receive an informal notice. Thus, the seeming informality of the purported line of credit approval did not cause Mr. Glenn any reason to doubt its authenticity.
After trial, the bankruptcy court ruled that the debt was dischargeable, because the Glenns did not commit fraud, and because the short-term lender could not impute the loan broker's fraud on the Glenns as the loan broker was not an agent of the Glenns. The bankruptcy court further rejected the lender's theory that if a debt is a product of fraud, the debtor's innocence is not a defense to non-dischargeability. The district court affirmed, and the lender appealed to the circuit court.
- Judge(s):
- Posner, Manion, and Tinder.
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