Debtor sold leases that never existed: Non-Dischargeable Debt

Hong v. Merzoug; 11-10372-BFK; 3/12/2012

Chapter 7 Debtor convinced Plaintiffs to make an investment of $500,000.00 in an oil and gas concern that came to be known as Whistler, LLC. (not Whistler, BC, as pictured below).  Whistler, LLC was purported to own oil and gas leases in the Gulf of Mexico.  However, the Debtor deposited all of the funds in the bank account of another company, which used the funds to pay business expenses.

The Plaintiffs became increasingly concerned about their investments and eventually demanded their money back.  As of the filing date of the bankruptcy, none of the $500,000.00 has been repaid.


The Plaintiffs filed this suit to determine the dischargeability of the debt pursuant to 11 USC 523(a)(2)(A).

Under 523(a)(2)(A), in order to prove “false pretenses, a false representation, or actual fraud,” the Plaintiffs must prove that the Debtor “made a representation; [that] the debtor knew the representation was false at the time the representation was made; [that] the debtor made the false representation with the intention of deceiving the creditor; [that] the [Plaintiffs] justifiably relied on the representation; and [that]the [Plaintiffs] sustained the alleged loss and damage as the proximate result of the false representation.”  Fowler v. Gary (In re Gary), 258 B.R. 356, 361 (Bankr. E.D. Va. 2000).  The standard of proof is preponderance of the evidence. Id.

In the Supreme Court case of Field v. Mans, the Court decided that, in order to prove a case of actual fraud under Section 523(a)(2)(A), the Plaintiffs needed only prove “justifiable reliance,” not the more demanding standard of “reasonable reliance.”  The Court explained the standard of justifiable reliance as follows:

“. . . a person is justified in relying on a representation of fact “although he might have ascertained the falsity of the representation had he made an investigation.” Significantly for our purposes, the illustration is given of a seller of land who says it is free and clear of encumbrances; according to the Restatement, a buyer’s reliance on this factual representation is justifiable; even if he could have “walked across the street to the office of the register of deeds in the courthouse” and easily have learned of an unsatisfied mortgage.  The point is otherwise made in a later section noting that contributory negligence is no bar to recovery because fraudulent misrepresentation is an intentional tort.  Here a contrast between justifiable and reasonable is clear:  “Although the plaintiff’s reliance on the misrepresentation must be justifiable. .  . this does not mean that his conduct must conform to the standard of a reasonable man.  Justification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct in all cases.”  W. Prosser, Law of Torts, (4th Ed. 1971).

While Judge Kenney was careful to note that the misrepresentation must be of an existing fact with present intention not to perform, Structured Invs. Co., LLC v. Dunlap, 458 B.R. 301, 329 (Bankr. E.D. Va. 2011), he nonetheless found that the Plaintiffs justifiably relied on misrepresentations of present fact and that $500,000.00, plus interest, was non-dischargeable.

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