Thomas v. Cundiff: Nondischargeable Debts and Affirmative Misrepresentations

Case AnalysisMartha Posey

In re Cundiff, No. 14-80112-G3-7, 2015 WL 5706928 (Bankr. S.D. Tex. Sept. 28, 2015).

Opinion issued Sept. 28, 2015. Westaw Link.

Written by: Martha Posey, Staff Member

Debtor ran a construction company that mined sand and gravel for use in concrete manufacturing.[1] The debtor operated the company for one year prior to acquiring $250,000 from an investor in 2012.[2] When determining to invest, the investor claimed he relied on the business plan created by the debtor, as well as an oral agreement for royalties and a promise of a $400,000 return on investment upon the sale of the business.[3] Shortly after the debtor filed for bankruptcy, the investor alleged that the debtor solicited investments through fraudulent means and was therefore liable for a nondischargeable debt.[4] The investor specifically claimed that the business plan used to solicit his investment misrepresented the business’s mining rights, misrepresented the promise of royalty payments and the return on investment after its sale, and concealed the business’s financial condition.[5]

The debtor’s business plan was not a false representation since it did not contain any false statements or conceal the business’s financial condition.[6] The court outlined the following elements for a nondischargeable debt: (1) the debtor must have made a representation; (2) that the debtor knew was false; (3) with the intent to deceive; (4) which was justifiably relied on by the creditor; (5) and that the creditor sustained a loss due to reliance.[7] First, a false representation requires an affirmative statement that falsely depicts current or past facts.[8] The court held that the business plan never misrepresented the mining rights since it never made any affirmative representation about such rights.[9] Second, false representations must be made upon current or past facts.[10] The promise of royalties and payment upon sale of the business were promises of future gains and by definition were not false representations of current or past facts.[11] Finally, there was insufficient evidence that the business plan concealed the business’s financial condition.[12] Fraudulent concealments made by an insider must be in writing; since the business plan did not fraudulently conceal the business’s financial condition, the court found no misrepresentation.[13] The court also stated that Texas law does not recognize a duty to disclose facts in a commercial transaction and therefore reliance on partial disclosure was not reasonable.[14] The investor failed to establish all requirements for a nondischargeable debt.[15]

It is important to note that the debtor was an insider of the company, which creates the burden of having any fraudulent concealment to be in writing. [16] The court placed heavy emphasis on the reasonableness of the creditor’s reliance.[17] Furthermore, creditors face a heavy burden when trying to prove fraudulent misrepresentation because courts will construe all facts strictly against creditors.[18]

[1] Thomas v. Cundiff (In re Cundiff), No. 14-80112-G3-7, 2015 WL 5706928, at *1 (Bankr. S.D. Tex. Sept. 28, 2015).

[2] Id.

[3] Id. at *4.

[4] 11 U.S.C. § 523(a)(2) (2015), In re Cundiff, 2015 WL 5706928, at *4.

[5] In re Cundiff, 2015 WL 5706928, at *4.

[6] Id. at *6.

[7] Id. at *5.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id. at *6.

[13] Id.

[14] Id. (citing In re Bentley, 531 B.R. 671 (Bankr. S.D. Tex. 2015)).

[15] Id. at 6.

[16] See id.

[17] See id.

[18] Id.