The Federal Court for the Northern District recently reiterated that not all debts are dischargeable in bankruptcy. It has long been true that debts procured by way of fraud are barred from being discharged in bankruptcy. In Sullivan v. Glenn, however, the Seventh Circuit Court of Appeals took this a step further, reaffirming that this prohibition to discharge even extends to situations where a debtor “knew or should have knows of [its] agent’s fraud,” or where the debtor “was recklessly indifferent to the acts of [its] agent.”
In Sullivan, a loan broker negotiated a business loan between an individual person (the creditor) and two business owners who personally guaranteed the loan (the debtors). As part of the transaction, the loan broker committed fraud by lying about whether the debtor’s business had applied for and received a line of credit that would be used to back the loan. While the debtors were successful in getting the debt discharged, the Court noted that debts procured by a debtor’s fraud—or by the fraud of the debtor’s agent when the debtor knows about, should know about, or is recklessly indifferent to the fraud—are barred from being charged in bankruptcy.
The moral of the story is two-fold. First, trust but verify. If you’re loaning money, don’t just rely on a blanket reassurance that the conditions to the loan have been met. You need to require that you receive some sort of documentation backing up those reassurances. Second, know who you hire to work on your behalf. Here, even though the debtors were eventually able to discharge their debts, they still had to have the fight over whether the debts were dischargeable. If they had been more careful about who was representing them in the transaction (indeed, if they, too, had verified what their loan broker was telling them), they may have actually had the successful business transaction they thought they were getting.
Contact us today to learn more about whether your debts (or those of people who owe you money) might be dischargeable in bankruptcy, and how you can better protect yourself when you or your business loans or borrows money.