Summary
This Ninth Circuit Bankruptcy Appellate Panel opinion affirms a bankruptcy court's determination that a debtor's debt to a factoring company is nondischargeable under 11 U.S.C. § 523(a)(2)(A). The court found that the debtor fraudulently omitted a material fact—specifically, the termination of a major revenue-generating contract with Anheuser-Busch—when seeking financing. The panel clarified the standards for establishing a duty to disclose and materiality in claims involving fraudulent omissions under the Bankruptcy Code.
Topics
Practice areas
Questions Presented
- Whether the debtor's failure to disclose Anheuser-Busch's termination of Draft Bars's out-of-state bar-pod operations was an omission rather than a statement for purposes of 11 U.S.C. § 523(a)(2)(A).
- Whether the debtor had a duty to disclose the loss of Draft Bars's Anheuser-Busch operations.
- Whether the loss of those operations was a basic and material fact supporting nondischargeability under § 523(a)(2)(A).
- Whether an omission concerning financial condition constitutes a statement governed exclusively by § 523(a)(2)(B).
- Whether the bankruptcy court clearly erred in finding the elements of fraudulent omission and intent to deceive.
Holdings
- A debtor's failure to disclose a material fact is an omission, not a statement, for purposes of § 523(a)(2)(A). A broad contractual representation that no material adverse changes occurred does not convert a related but non-inverse omission into a statement requiring analysis under § 523(a)(2)(B).
- The debtor had a duty to disclose that Draft Bars no longer operated Anheuser-Busch's out-of-state bar pods because the fact was basic to the transaction and the Factoring Agreement required disclosure of material adverse changes in Draft Bars's financial condition.
- The loss of Draft Bars's national bar-pod operations was both basic to the factoring transaction and material because a reasonable party would attach importance to the fact in deciding whether to provide funding.
- The bankruptcy court did not clearly err in finding that the debtor knowingly omitted a material fact, intended to deceive Kapitus, and caused a nondischargeable debt under § 523(a)(2)(A).
Key quotations
“We publish to clarify the standards applicable to a claim for fraudulent omissions under § 523(a)(2)(A).” (2)
“One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated . . .” (12-13)
“In holding that omissions do not qualify as “statements,” the Panel reasoned:” (23)
“The bankruptcy court did not err in determining that the debt Debtor owes to Kapitus is nondischargeable under § 523(a)(2)(A). We therefore AFFIRM.” (24)
Factual background
Manion owned an interest in Draft Bars, LLC, which operated mobile bar units for Anheuser-Busch and initially generated substantial revenue from that relationship. In May or June 2016, before Draft Bars entered into a factoring agreement with Kapitus, Anheuser-Busch terminated Draft Bars's out-of-state bar-pod operations and began repossessing the pods. Manion nevertheless provided Kapitus financial information and entered into an agreement representing that there had been no material adverse changes in Draft Bars's condition, without disclosing the termination. Kapitus advanced $350,000, Draft Bars defaulted, and Manion later filed chapter 7 bankruptcy.
Procedural history
Kapitus obtained a default judgment against Manion and others in Virginia state court on breach-of-contract and fraud claims. After Manion filed a chapter 7 bankruptcy petition, Kapitus commenced an adversary proceeding seeking a determination that its debt was nondischargeable under several provisions of § 523. Following a January 2023 trial, the bankruptcy court held the debt nondischargeable under § 523(a)(2)(A), denied relief under the other asserted provisions, and entered judgment for Kapitus. Manion timely appealed, and the BAP affirmed.