Treadwell v. Glenstone Lodge, Inc. (In re Treadwell)

Citation:
8th Circuit Court of Appeals - No. 1499
Tag(s):
Ruling:
The decision of the 8th Circuit BAP is reversed and vacated. The 8th Circuit remanded to the bankruptcy court for further factual findings.
Procedural context:
Nondischargeability action under Section 523(a)(2)(A). Bankruptcy court held debt is not excepted to discharge for failure to demonstrate justifiable reliance. BAP reversed the bankruptcy court's determination that Wife's debt to the hotel were dischargeable, ruling the bankruptcy clearly erred in finding no justifiable reliance. BAP affirmed the bankruptcy court's determination that Husband's debt to the hotel was dischargeable, and considered the imputed fraud issue, specifically finding Husband was not a partner in the Wife's business. 8th Circuit reversed and remanded to the bankruptcy court. The BAP should not have made factual findings; it is empowered only to review factual findings. Remanded to the bankruptcy court for further factual findings on the imputed fraud issue. In reversing, the Circuit Court instructed the bankruptcy court to consider substantial evidence that Husband was in a partnership and knew or should have known of Wife's fraud.
Facts:
Larry Treadwell ("Husband") and Carole Treadwell ("Wife") arranged a social event at a hotel. Husband and Wife each own 50% membership interests of Memory Travel ("MT"). MT advertised the social event and entered into a written contract with the hotel which Wife and MT's director of sales signed. The contract required MT to pay (1) pay a $250 deposit, (2) pay the first night's deposit by March 31, 2006, and (3) pay the balance at check-in. In total, MT agreed to pay over $64,000 for lodging, meeting space, food, and entertainment. MT collected $33,000 from attendees, an amount insufficient to pay in full the bill soon to be due. Wife did not tell the hotel about the shortfall. MT paid the $250 deposit, but failed to pay the first night's lodging expenses by the March 31 deadline. Despite obtaining room keys and a registration table from the hotel, MT did not pay the balance due under the contract. Other than payment issues, the event was a success. MT owed a balance of more than $60,000. Days later, Wife assured the hotel she would pay and eventually did pay $15,000. The hotel sued Wife and Husband in state court alleging fraud, conversion, and breach of contract, as well as violations of the Tennessee Consumer Protection Act, which provided for treble damages if there is a willful and knowing violation of its terms. The state court entered default judgment in the amount of $153,611.44. The hotel then registered its judgment and placed a judicial lien on Wife's and Husband's home, and began foreclosure proceedings. Wife and Husband filed relief under chapter 7 prior to the foreclosure. The hotel sought a declaration the debt was nondischargeable under Section 523(a)(2)(A) "for money, property or services obtained by false pretenses, a false representation, or actual fraud." To prove nondischargeability under Section 523(a)(2)(A), among other elements, a creditor must prove it justifiably relied on the debtor's representation. Further, in the 8th Circuit, if a creditor proves a partnership between two of its debtors, nondischargeability may be imputed form one partner to the other if the otherwise innocent debtor knew or should have known (a showing of reckless indifference is sufficient) of the partner's fraud. The bankruptcy court held a trial on the nondischargeability issue. In their post-trial brief, Wife and Husband conceded that if the hotel showed Wife defrauded the hotel then the court may impute her misrepresentations to Husband. The bankruptcy court held the debt was not excepted to discharge because the hotel had failed to prove justifiable reliance as to either Wife or Husband. The bankruptcy court did not decide whether Wife and Husband were partners in MT and, if so, whether the partnership would impute fraud of Wife to Husband. 8th Circuit reversed and remanded to the bankruptcy court, and held the BAP's role is to review, not make, factual findings and should have instructed the bankruptcy court to decide whether Wife and Husband were partners and, if so, whether Husband knew or should have known of Wife's fraud. The BAP should not have made the factual finding that Husband was not a partner because the BAP may only review factual findings, not make them. In reversing the BAP, the Circuit Court instructed the bankruptcy court to consider substantial evidence that Husband was in a partnership and knew or should have known of Wife's fraud.

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