In the Supreme Court of the United States

Transcription

1 No In the Supreme Court of the United States BRIAN T. SULLIVAN, Petitioner, v. MICHAEL R. GLENN, JR. AND MICHELE A. GLENN Respondents. On Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit PETITION FOR WRIT OF CERTIORARI (WITH CORRECTED APPENDIX) Brian T. Sullivan, Esq., Pro Se Petitioner 919 W. George St., Apt. 3E Chicago, IL, (773) brian@sullivancompanies.com

2 (I) QUESTIONS PRESENTED 11 U.S.C. 523(a)(2)(A) of the Bankruptcy Code excludes from discharge in bankruptcy any debts that were obtained by fraud. The questions presented here are the following: 1. Is a debt obtained by the fraud of a debtor s agent nondischargeable in bankruptcy only if the debtor knew of, or should have known of the agent s fraud, or was recklessly indifferent as to the agent s acts? 2. May a Court of Appeals overrule Supreme Court precedent?

3 (II) PARTIES TO THE PROCEEDINGS The Petitioner is Brian T. Sullivan. Sullivan was the plaintiff in the bankruptcy court proceeding and the appellant in both the district court and court of appeals proceedings. Respondents are Michael R. Glenn, Jr. and Michele A. Glenn. The Glenns were the defendants in the bankruptcy court proceeding and the appellees in both the district court and court of appeals proceedings.

4 (III) TABLE OF CONTENTS QUESTIONS PRESENTED... I PARTIES TO THE PROCEEDINGS...II TABLE OF CONTENTS...III TABLE OF AUTHORITIES... V PETITION FOR A WRIT OF CERTIORARI... 1 OPINIONS BELOW... 1 JURISDICTION... 1 STATUTE INVOLVED IN THIS CASE... 1 STATEMENT OF THE CASE... 2 I. Relevant Law at Issue... 2 II. Purpose Of This Petition... 4 III. Factual Background... 5 IV. Procedural History & Lower Court Rulings.. 10 V. Jurisdiction of the Court of First Instance REASONS FOR GRANTING THE PETITION I. The Court of Appeals Erred By Requiring That A Debtor Knew, or Should have Known, or was Recklessly Indifferent to The Acts of Their Agent In Order to Establish Nondischargeability Under 11 U.S.C 523(a)(2)(A) For A Debt Obtained by an Agent s Fraud A. The Court of Appeals Decision Overrules this Court s Decision in Strang v. Bradner B. The Court of Appeals Decision Also Purports to Overrule Supreme Court Authority

5 (IV) Establishing that the Policy of Protecting Creditors from Fraud takes Priority over that of Providing Debtors with a Fresh Start in Bankruptcy C. The Court of Appeals Relied on the Eighth Circuit s Decision in In re Walker as the Basis for its New Rule on the Nondischargeability of Debts Obtained by an Agent s Fraud. Walker was Wrongly Decided II. The Seventh Circuit s Decision Creates a Split with Three Other Circuit Courts of Appeal III. Sullivan Reasonably and Justifiably Relied on Karen Chung s Representations Concerning the Sullivan Loan This issue was Decided at Trial and was never A Subject of this Appeal IV. A Court of Appeals Must Follow Supreme Court Precedent CONCLUSION APPENDIX A Court of Appeals Opinion (April 2, 2015)... 1a APPENDIX B Court of Appeals Judgment Order (April 2, 2015)... 11a APPENDIX C District Court Opinion & Order (September 9, 2014)... 13a APPENDIX D Bankruptcy Court Opinion (November 15, 2013)... 25a

6 (V) APPENDIX E Bankruptcy Court Judgment Order re: Michael Glenn (November 15, 2013)... 83a APPENDIX F Bankruptcy Court Judgment Order re: Michele Glenn (November 15, 2013)... 85a APPENDIX G Court of Appeals Order Denying Rehearing (April 30, 2015)... 87a APPENDIX H - Pretrial Statement (excerpts) (July 3, 2013)... 89a TABLE OF AUTHORITIES CASES BancBoston Mortg. Corp. v. Ledford, 127 B.R. 175 (M.D. Tenn. 1991) BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d 1556 (6th Cir. 1992) Brown, III v. Felsen, 442 U.S. 127 (1979)... 15, 16 Casablanca Lofts LLC. v. Abrham (In Re Abrham), 436 B.R. 530 (N.D. Ill. 2010)... 13, 21 Chenaille v. Palilla (In re Palilla), 493 B.R. 248 (Bankr. Colo. 2013)... 14, 17 Cohen v. De La Cruz, 523 U.S. 213 (1998)... 15, 16 Deodati v. M.M. Winkler & Associates (In re M.M. Winkler & Associates), 239 F.3d 746 (5th Cir. 2001) Field v. Mans, 516 U.S. 59 (1995)... 23, 24

7 (VI) Grogan v. Garner, 498 U.S. 279 (1991)... 15, 16 Hoffend v. Villa, 261 F.3d 1148 (11th Cir. 2001)... 13, 19 In re Aguilar, No. 14-C-5290 (N.D. Ill., Apr. 25, 2015) In re Beasley, 202 B.R. 979 (Bankr. W.D. Mo. 1996) In re Calhoun, 131 B.R. 757 (Bankr. D.C. 1991) In re Croft, 150 B.R. 955 (Bankr. E.D. Mo. 1993) In re Guse, 150 B.R. 950 (Bankr. E.D. Mo. 1993) In re Huh, 506 B.R. 257 (9th Cir. BAP 2014) In re Paolino, 75 B.R. 641 (Bankr. E.D. Pa. 1987). 13, 17 In re Reuter, 686 F.3d 511 (8th Cir. 2012) In re Smith, 98 B.R. 423 (Bankr. C.D. Ill. 1989)13, 14 In re Walker, 53 B.R. 174 (Bankr. W.D. Mo. 1985) 17, 18 Ojeda v. Goldberg, 599 F.3d 712 (7th Cir. 2010) Owens v. Miller, 276 F.3d 424 (8th Cir. 2001) Rodriguez De Quijas v. Shearson American Express, Inc., 490 U.S. 477 (1989)... 5, 13, 25 Sargis v. Aguilar, 511 B.R. 507 (Bankr. E.D. Ill. 2014) Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014 (7th Cir. 2002)... 13, 25 Strang v. Bradner, 114 U.S. 555 (1885)...passim Sullivan v. Glenn, 782 F.3d 378 (7th Cir. 2015)... 19

8 (VII) Walker v. Citizens State Bank of Maryville, Missouri (In re Walker), 726 F.2d 452 (8th Cir. 1984) passim STATUTES 11 U.S.C. 523(a)(2)(A)...passim 11 U.S.C. 727(a) U.S.C. 1254(1) U.S.C. 1254(2) U.S.C U.S.C. 1408(1) U.S.C Bankruptcy Act of 1867, Bankruptcy Act of 1898, OTHER AUTHORITIES Lawrence Ponoroff, VICARIOUS THRILLS: THE CASE FOR APPLICATION OF AGENCY RULES IN BANKRUPTCY DISCHARGEABILITY LITIGATION, 70 TUL. L. REV (1996) RESTATEMENT (THIRD) OF AGENCY 7.03 (Am. Law Inst. 2006)... 3

9 1 PETITION FOR A WRIT OF CERTIORARI Brian T. Sullivan, for himself and on his own behalf, petitions the Court for a writ of certiorari to review the judgment of the United States Court of Appeals for the Seventh Circuit in this case. OPINIONS BELOW The opinion of the Court of Appeals, App., infra, 1a-10a, is reported at 782 F.3d 378. The opinion of the District Court, App., infra, 13a-23a, is reported at 526 B.R The opinion of the Bankruptcy Court, App., infra, 25a-82a, is reported at 502 B.R JURISDICTION The Court of Appeals entered its judgment on April 2, App., infra, 11a-12a. The Court of Appeals denied Sullivan s petition for rehearing on April 30, Id. at 87a-88a. This Court has jurisdiction under 28 U.S.C. 1254(1). STATUTE INVOLVED IN THIS CASE This case involves the interpretation and application of 11 U.S.C. 523(a)(2)(A) of the Bankruptcy Code, which states the following: Exceptions to discharge (a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt * * *

10 2 (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor s or an insider s financial condition; * * * * STATEMENT OF THE CASE I. RELEVANT LAW AT ISSUE This case involves the question of whether a $250,000 loan that Sullivan made to the Glenns (the Sullivan Loan ) is dischargeable in their respective bankruptcies. 11 U.S.C. 523(a)(2)(A) of the Bankruptcy Code excepts from discharge debts that were obtained by fraud. This statute has two requirements for nondischargeability: (1) that the debt is a valid debt of the debtor, and (2) that the debt was obtained by fraud. Collectively, the courts below decided the following: 1. The Sullivan Loan was a valid debt of both Michael and Michele Glenn, App., infra, 52a-56a, and 2. Karen Chung obtained the Sullivan Loan for the Glenns by make false statements to Sullivan that Sullivan reasonably and justifiably relied on in making the loan, App., infra, 35a-40a, 11-21; 28a, 6; 57a; 91a-93a, 81-87, and

11 3 3. Karen Chung was acting as the Glenns agent when she fraudulently obtained the Sullivan Loan for the Glenns. App., infra, 4a-5a. Under well-settled common law rules for agency, the fraud of an agent is imputed to the principal for purposes of establishing the principal s liability for damages caused to third-parties by an agent s fraudulent acts. RESTATEMENT (THIRD) OF AGENCY 7.03 (Am. Law Inst. 2006). In Strang v. Bradner, 114 U.S. 555 (1885), the Court held, based on common law agency principles applied to a partnership, that a debt obtained by the fraud of one partner (acting as an agent for the other partners) is nondischargeable as to all the other partners, even those who were neither involved in the fraud, nor had any knowledge of it. Strang, 114 U.S. at 561. Strang decided nondischargeability under Sect. 33 of the Bankruptcy Act of 1867, the forerunner to 11 U.S.C. 523(a)(2)(A), which like today s statute excepts from discharge all debts obtained by fraud. 1 In the courts below, Sullivan sought to have the Sullivan Loan declared nondischargeable because it was fraudulently obtained by Karen Chung, the Glenns agent. In accordance with Strang and common law agency rules, Chung s fraud is imputed to the Glenns making the loan nondischargeable. 1 Sect. 33 of the Bankruptcy Act of 1867 states: 33. And be it further enacted. That no debt created by the fraud or embezzlement of the bankrupt, or by his defalcation as a public officer, or while acting in any fiduciary character, shall be discharged under this act.... The Bankruptcy Act of 1867, 33, 14 Stat. 517, 39 Cong. Ch. 176 (emphasis added).

12 4 At issue in this case is the Seventh Circuit s pronouncement of a new rule that adds to 523(a)(2)(A) the requirement that a debtor either knew, or should have known of their agent s fraud, or was recklessly indifferent to the agent s actions, in order to establish nondischargeability. Sullivan claims this was not statutory interpretation but rather an outright overruling of Strang. Sullivan seeks Supreme Court review on this issue of law. II. PURPOSE OF THIS PETITION Sullivan is petitioning the Court for a Writ of Certiorari for the following reasons: 1. The Seventh Circuit s decision below directly conflicts with the Court s decision in Strang v. Bradner, and overrules that decision, sub silentio. 2. By failing to following the Court s precedent set forth in Strang, which makes any debt obtained by an agent s fraud nondischargeable, regardless of a debtor s knowledge, recklessness, or participation in the fraud, the Seventh Circuit created a conflict with three other Circuits that follow Strang. Lower courts in the Circuits that do not follow Strang, such as the Seventh Circuit, are now faced with conflicting authority and the uncomfortable choice between following the law of a directly superior court, or that of the Supreme Court. And in the Circuits where the Courts of Appeal have not taken up the issue, lower courts are likely to decide similar matters in an ad hoc and inconsistent manner. 3. The Seventh Circuit, like all lower courts, had no authority to overrule a Supreme Court decision.

13 5 The precedence of this Court s decisions and the rule that only this Court may overrule its own decisions was irrefutably established in Rodriguez De Quijas v. Shearson American Express, Inc., 490 U.S. 477, 484 (1989). 4. The Seventh Circuit strongly believed that Sullivan was at fault for his loss by not further investigating Karen Chung s false statements that he relied on in making the Sullivan Loan. However, the Bankruptcy Court found at trial, based on the parties stipulations of fact, that Sullivan reasonably and justifiably relied on Chung s statements. This finding was never an issue on appeal. Yet the Court of Appeals extensive discussion of the reliance issue suggests that this was its predominant concern when it decided to discharge the Sullivan Loan. If this is true, then the court was substituting its own version of the facts instead of properly limiting its review to the uncontroverted facts in the record. III. FACTUAL BACKGROUND In the fall of 2007, Michael Glenn was actively involved in developing commercial and residential real estate in Illinois and Indiana through various limited liability companies (the Glenn Companies Business and the Glenn Companies respectively). App., infra, 32a, 1. The Glenn Companies were owned by Michael and Michele Glenn, and their children. Id. at 32a-33a, 2. The Glenn Companies were a small business with approximately 16 employees. Id. at 28a, 6; 90a, 22. Michael Glenn controlled the entire business. Id. at 28a, 6; 90a,

14 6 Also in the fall of 2007, Karen Chung and Nomadic Consulting, Inc. ( Nomadic ), a company Chung owned and controlled, were hired by Michael Glenn to secure debt financing for the Glenn Companies projects. Id. at 35a-36a, 11. At the time, one of Nomadic s main businesses was raising debt and equity capital for various individual and corporate clients. Id. at 33a, 4. Chung and Glenn had an ongoing agreement going back several years whereby Chung and Nomadic would obtain financing for certain projects owned by the Glenn Companies and in return be compensated for successful transactions. Id. at 30a, 33a-34a, 5. In late October, 2007, Chung asked Sullivan to make a short-term loan of $250,000 to Michael Glenn for use in the Glenn Companies Business. Id. at 35a-36a, 11. She told Sullivan that Glenn had an immediate need for funds and Sullivan would be repaid in a few weeks from a bank line of credit she recently obtained for Glenn and his business. Id. Sullivan had known Chung since 2003 and previously worked with her on several business projects. Id. at 28a, 6; 91a, 37. He also did legal work in the past for several of her companies including Nomadic. Id. In addition, Sullivan and Chung were good friends and fellow entrepreneurs. Id. On October 31, 2007 at Nomadic s offices in Chicago, Sullivan met with Chung, Michael Glenn, and Adrian Lopez, one of Chung s employees ( October 31 Meeting ). Id. at 36a-37a, 12. Lopez told Sullivan and Glenn that he and Chung had secured final approval for an approximately $1 million line of credit from LaSalle Bank for Glenn and the Glenn Companies (the LaSalle Loan ). Id. Lopez also told Sullivan that he expected the funds from this financ-

15 7 ing to be available in a few weeks pending completion of required loan documents. Id. Lopez further told Sullivan that the funds from the LaSalle Loan would be used to pay off the $250,000 short-term loan that he and Chung proposed Sullivan make to Glenn. Id. Glenn told Sullivan that he needed this money right away, before the LaSalle Loan actually funded, in order to complete asphalt and grading work at one of his commercial projects that would eventually become a Walgreens store. Id. Glenn explained that asphalt companies shut down in the winter and he needed to get this work done during the fall so the property could be refinanced or sold by spring, Id. Glenn told Sullivan that a large portion of the loan would be used for this construction work while a smaller portion of the funds would be used for working capital. Id. at 9a; 36a-37a, 12. Sullivan then asked Lopez to call LaSalle Bank and confirm that the LaSalle Loan was indeed approved. Id. at 37a, 14. Lopez stepped away for a short time and then returned and told Sullivan, in Michael Glenn s presence, that he had spoken on the phone with LaSalle Bank and the bank confirmed that the LaSalle Loan was approved. Id. In a separate conversation with Sullivan, Chung also confirmed the existence of the approved LaSalle Loan. Id. Sullivan told Chung he would only make the loan on the condition that Chung execute the promissory note for the loan as a co-obligor along with Michael and Michele Glenn. Id. Chung agreed to this condition. Id. In reliance on the representations made by Chung, Lopez and Glenn, Sullivan loaned the Glenns $250,000 on November 1, 2007 (the Sullivan Loan ). Id. at 37a-38a, 15. The Sullivan Loan is evidenced

16 8 by a written promissory note, payable on November 16, 2007, that was executed by Chung, Michael Glenn, and a person purporting to be Michele Glenn (the Glenn Note ) all as co-makers of the Note. Id. at 37a-38a, 15; 52a-56a. At trial, the Glenns tried to persuade the Bankruptcy Court that Michele s signature on the Note was forged by some unknown third-party and that she should not be held liable for the debt. Id. at 52a- 56a. But Judge Barnes found that Michael Glenn s testimony on this issue was entirely lacking in credibility and that Michele Glenn s testimony was not credible, and ruled that Michele was legally bound as a co-maker of the Note. Id. at 41a, 24; 56a. In December, 2007 or early January, 2008, Chung and Lopez told Sullivan that LaSalle Bank had never approved the LaSalle Loan. Id. at 39a, 19. This was contrary to their representations to Sullivan at the October 31 Meeting. Id. Later, in 2009, Sullivan found out from LaSalle Bank that no one had ever applied for the supposed LaSalle Loan in other words, it never existed in any form, approved or unapproved. Id. at 39a, 20. In addition, Michael Glenn said he never had any communications with LaSalle Bank concerning this supposed LaSalle Loan. 2 Sullivan also found out later that none of the Sullivan Loan proceeds had been used for the purposes that Michael Glenn represented to Sullivan. Instead of being used for asphalt and grading work, the loan funds were directly used to pay off an approximate 2 Michael Glenn Trial Test., Trial Tr. Vol. III, July 17, 2013, pp

17 9 $244,000 bank overdraft in the Glenn Companies main checking account that had been outstanding since October 23, 2007, more than a week before Sullivan and Glenn first met to discuss the loan. Id. at 38a, 17; Pl. Tr. Ex. 11, pp.12, 13, 15. At trial, the Glenns never produced any evidence showing that either a large portion of the Sullivan Loan proceeds, or the $345, deposited into the Glenn Companies bank account the following day from another deal, was ever used for asphalt and grading work in November, 2007 as Glenn had represented. Id. at 36a-37a, 12; 38a, 17. On December 17, 2008, Sullivan filed an amended adversary complaint against Karen Chung in the Bankruptcy Court (N.D., Ill.) in response to Chung s Chapter 7 bankruptcy petition filed in June, 2008 (Case No. 08-ap-00739) (the Chung Adversary ). Id. at 28a, 6; 93a, 86-87; 39a-40a, 21. Sullivan objected to Chung s discharge of the Sullivan Loan because she and her employee Adrian Lopez falsely claimed the LaSalle Loan existed and was approved, and would be the source of funds to pay off the Sullivan Loan when they both knew it never existed. Id. On May 18, 2010, after a three-day trial, the Bankruptcy Court issued a final judgment ruling that the Sullivan Loan was nondischargeable as to Karen Chung under 11 U.S.C 523(a)(2)(A). Id. In its findings of fact and conclusions of law, the court determined that the LaSalle Loan never existed; that Chung lied to Sullivan about its existence with the intent to deceive Sullivan into making the Sullivan Loan; and that Sullivan justifiably and reasonably relied on Chung s false statements in making the loan. Id. at 93a, 87. The court also determined that the interest rate on the Sullivan

18 10 Loan was not unconscionable. Id. at 93a, 87(d). The Glenns were not parties to the Chung Adversary. In October, 2012, Sullivan filed suit against Adrian Lopez for his part in fraudulently obtaining the Sullivan Loan (Cook County, Illinois, Circuit Court No L ). In September 2014, Sullivan obtained a Consent Judgment against Lopez finding that Lopez committed fraud against Sullivan in connection with the Sullivan Loan. IV. PROCEDURAL HISTORY & LOWER COURT RULINGS In 2011 and 2013, Sullivan filed adversary complaints against Michele Glenn and Michael Glenn in each of their respective Chapter 7 bankruptcy matters objecting to discharge of the Sullivan Loan on the basis it was obtained by their agent Karen Chung s fraud, as well as by Michael Glenn s own direct fraud. App., infra, 25a-26a. Both adversary matters were combined for trial and tried simultaneously over a four-day period in July, Id. In November 2013, the Bankruptcy Court ruled in favor of the Glenns and declared the Sullivan Loan dischargeable. Id. at 82a-86a. The Bankruptcy Court found that the Sullivan Loan was indeed a debt of both Michael and Michele Glenn. Id. at 52a-56a. However, the court found that Chung was not acting as the Glenns agent when she obtained the Sullivan Loan for the Glenns, and consequently her fraud could not be imputed to the Glenns for purposes of establishing nondischargeability. Id. at 69a-80a. In addition, the court found that Michael Glenn himself did not directly commit any fraud in obtaining the loan. Id. at 62a-69a.

19 11 After judgment, the court consolidated both cases for all purposes. In December, 2013, Sullivan filed his appeal to the District Court and in September, 2014, the District Court affirmed the Bankruptcy Court s judgment. Id. at 13a-24a. In October, 2014, Sullivan appealed the District Court Judgment to the Seventh Circuit Court of Appeals and on April 2, 2015, the Seventh Circuit affirmed the judgment. Id. at 11a-12a. However, on the issue of agency, the Seventh Circuit reversed the lower courts and determined that Karen Chung was indeed the Glenns agent when she fraudulently obtained the Sullivan Loan from Sullivan. Id. at 4a- 5a. But the Seventh Circuit also ruled that in order to establish nondischargeability for a debt obtained by the fraud of an agent, the creditor must prove that the debtor knew, or should have known of the agent s fraud, or was recklessly indifferent to the agent s actions. Id. at 5a-9a. In making this ruling, the Court of Appeals followed Walker v. Citizens State Bank of Maryville, Missouri (In re Walker), 726 F.2d 452 (8th Cir. 1984) ( Walker ). Id. at 8a. The court also found that Michael Glenn was neither aware of, nor should have been aware of Chung s fraud. Id. at 8a-9a. On April 30, 2015, the Seventh Circuit denied Sullivan s Combined Petition for Rehearing en Banc & Rehearing by Panel. Id. at 87a-88a. V. JURISDICTION OF THE COURT OF FIRST INSTANCE The Bankruptcy Court in the proceedings below had jurisdiction to decide Sullivan s adversary claims against the Glenns under 28 U.S.C 157 and

20 , and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Because the adversary matters were actions to declare the Glenns debt nondischargeable under 11 U.S.C 523(a)(2)(A), they were also core proceedings as defined by 28 U.S.C. 157(b)(2)(I). REASONS FOR GRANTING THE PETITION I. THE COURT OF APPEALS ERRED BY REQUIRING THAT A DEBTOR KNEW, OR SHOULD HAVE KNOWN, OR WAS RECKLESSLY INDIFFERENT TO THE ACTS OF THEIR AGENT IN ORDER TO ESTABLISH NONDISCHARGEABILITY UNDER 11 U.S.C 523(a)(2)(A) FOR A DEBT OBTAINED BY AN AGENT S FRAUD. A. The Court of Appeals Decision Overrules this Court s Decision in Strang v. Bradner. The Seventh Circuit below ruled that in order to establish a debt as being nondischargeable under 11 U.S.C. 523(a)(2)(A), where the debt was fraudulently obtained by a debtor s agent, a creditor must prove that the debtor knew, or should have known of the agent s fraud, or was recklessly indifferent as to the agent s acts. App., infra, 8a-9a. This directly contravenes Strang v. Bradner, 114 U.S. 555, 561 (1885), where the Supreme Court held that a debt obtained by the fraud of one partner in a partnership is nondischargeable as to all the other innocent partners that had no participation in the fraud, nor any knowledge of the fraud. The court in Strang based its ruling on common law principles of agency

21 13 applied to partnerships, explaining that partners are agents of each other in conducting partnership business. Strang, 114 U.S. at 561. See also Hoffend v. Villa, 261 F.3d 1148, 1152 (11th Cir. 2001) ( Strang imputed liability for fraud in bankruptcy based on the common law of partnership and agency. ). The rule in Strang is applied to both partnership and principal-agent situations. E.g., In re Paolino, 75 B.R. 641, (Bankr. E.D. Pa., 1987). Because the Court of Appeals reversed the lower courts on the issue of agency, ruling that Chung was indeed the Glenns agent when she fraudulently obtained the Sullivan Loan, the court was dutybound to follow Strang. Rodriguez De Quijas v. Shearson American Express, Inc., 490 U.S. 477, 484 (1989); Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014, (7th Cir. 2002) ( [W]e have no authority to overrule a Supreme Court decision no matter how dubious its reasoning strikes us, or even how out of touch with the Supreme Court's current thinking the decision seems. ). Strang is still good law and until the Court of Appeals decision here, was followed by lower courts in the Seventh Circuit as recently as Casablanca Lofts LLC. v. Abrham (In Re Abrham), 436 B.R. 530, (N.D. Ill. 2010). In addition, the rule expressed in Strang has been followed in other cases as well. E.g., In re Smith, 98 B.R. 423, (Bankr. C.D. Ill. 1989) (debt found nondischargeable where obtained by the fraud of debtor s agent even though debtor had no knowledge or participation in

22 14 the fraud). 3 Furthermore, the District Court and Bankruptcy Court below acknowledged without any disagreement the prior precedent in the Seventh Circuit that a debt obtained by an agent s or partner s fraud is nondischargeable even if the debtor had no knowledge of, nor involvement in the fraud. App., infra, 20a, 59a-60a. Strang has neither been overruled nor called into question by any subsequent Supreme Court case. It is the seminal case regarding vicarious liability in the nondischargeability context and continues to be followed by lower courts. Chenaille v. Palilla (In re Palilla), 493 B.R. 248, (Bankr. Colo. 2013) ( Nothing in Strang supports the existence of an element of reckless indifference. ) And although the Seventh Circuit doesn t mention Strang anywhere in its opinion, it s highly doubtful the court mistakenly overlooked this case since it was discussed at some length in the parties briefings. Strang is not a case anyone would miss when researching this area of law. Sullivan contends that the Seventh Circuit clearly intended to overrule Strang but did so without directly addressing the decision. 3 Many decisions like In re Smith follow the rule stated in Strang without directly referring to the Strang decision. Like the decision in Strang, these decisions refer to the common law rule that principals are liable for their agents fraud and then impute the agent s fraud to the debtor to establish nondischargeability.

23 15 B. The Court of Appeals Decision Also Purports to Overrule Supreme Court Authority Establishing that the Policy of Protecting Creditors from Fraud takes Priority over that of Providing Debtors with a Fresh Start in Bankruptcy. The Seventh Circuit s decision here not only overrules Strang and well-settled agency law, but it also reverses the policy priorities established by Congress in the Bankruptcy Code that have been acknowledged by this Court in previous decisions. It does so by allowing certain debtors to keep the benefits of a valid debt, which was solely the product of fraud, while allowing them to be relieved of the obligation to repay that debt which they benefitted from. The Supreme Court has repeatedly stated that the goal of protecting creditors from fraud takes priority over a debtor s fresh start. Cohen v. De La Cruz, 523 U.S. 213, (1998); Grogan v. Garner, 498 U.S. 279, (1991); Brown, III v. Felsen, 442 U.S. 127, 138 (1979). In Cohen v. De La Cruz, the Court explained in its interpretation of 523(a)(2)(A) that [t]he various exceptions to discharge in 523(a) reflect a conclusion on the part of Congress that the creditors interest in recovering full payment of debts in these categories outweigh[s] the debtors' interest in a complete fresh start. Cohen, 523 U.S. at 222 (quoting Grogan, 498 U.S. at 287). [T]he text of 523(a)(2)(A), the meaning of parallel provisions in the statute, the historical pedigree of the fraud exception, and the general policy underlying the exceptions

24 16 to discharge all support [the] conclusion that any debt... for money, property, services, or... credit, to the extent obtained by fraud encompasses any liability arising from money, property, etc., that is fraudulently obtained.... Cohen, 523 U.S. at 223. Likewise, the Court noted in Grogan that [t]he statutory provisions governing nondischargeability reflect a congressional decision to exclude from the general policy of discharge certain categories of debts such as child support, alimony, and certain unpaid educational loans and taxes, as well as liabilities for fraud. Grogan, 498 U.S. at 287. And in Brown, III v. Felsen, the Court determined that Congress intended the fullest possible inquiry by a bankruptcy court into debts obtained by fraud, particularly the source of the fraud, and that the broad language contained in 523 s predecessor statute ( 17 of the Bankruptcy Act of 1898) suggests that all debts obtained by fraud should be nondischargeable. Brown, III, 442 U.S. at 138. Given the Supreme Court s clear interpretation of what constitutes a nondischargeable debt under the fraud exception, which is a broad description, and the primacy of protecting creditors from fraud, it makes sense that Strang is still good law even after 130 years. And the only way to protect creditors from fraud, after the fact, is to require debtors to repay their debts obtained by fraud, just as they would have to do outside of bankruptcy.

25 17 C. The Court of Appeals Relied on the Eighth Circuit s Decision in In re Walker as the Basis for its New Rule on the Nondischargeability of Debts Obtained by an Agent s Fraud. Walker was Wrongly Decided. Like the Seventh Circuit s decision below, Walker v. Citizens State Bank of Maryville, Missouri (In re Walker), 726 F.2d 452 (8th Cir. 1984) ( Walker ) 4 directly contravenes Strang. The Eighth Circuit acknowledged this conflict in a later case decided after Walker. In re Reuter, 686 F.3d 511, 518 (8th Cir. 2012). Cf. Owens v. Miller, 276 F.3d 424, 429 (8th Cir. 2001) (acknowledging the applicability of Strang to cases involving 523(a)(2)(A)). Walker is a two-page decision that doesn t discuss Strang at all. Its reasoning has been severely criticized by courts outside the Eighth Circuit, and more importantly, by the very same bankruptcy court the case was remanded to. BancBoston Mortg. Corp. v. Ledford, 127 B.R. 175, (M.D. Tenn. 1991); In re Paolino, 75 B.R. at ; In re Walker, 53 B.R. 174, (Bankr. W.D. Mo. 1985). See also In re Palilla, 493 B.R. at ; In re Calhoun, 131 B.R. 757, (Bankr. D.C. 1991); Lawrence Ponoroff, VICARIOUS THRILLS: THE CASE FOR APPLICATION OF AGENCY RULES IN BANKRUPTCY DISCHARGEABILITY LITIGATION, 70 TUL. L. REV. 2515, , This case, and its companion case on remand, In re Walker, 53 B.R. 174 (Bankr. W.D. Mo. 1985), are well-known cases in this area of law and are referred to by courts and commentators as Walker I and Walker II respectively. For simplicity, Sullivan refers to the Eighth Circuit case, Walker I, as simply Walker.

26 (1996) (arguing that 523(a)(2) makes all debts that are the product of fraud nondischargeable). In short, Walker was wrongly decided because it confused the issue of discharge in bankruptcy with the issue of dischargeability of a specific debt. Compare 11 U.S.C. 727(a) with 523(a)(2)(A). One can receive a discharge in bankruptcy while at the same time be denied discharge of an individual debt. A creditor can both object to a debtor s discharge in bankruptcy, as well as the debtor s discharge of a specific debt. This was the situation faced in Walker. Unlike discharge of a specific debt under 523(a)(2)(A), the denial of a debtor s general discharge in bankruptcy, when the fraud at issue relates to a debtor s agent, normally requires knowledge or reckless indifference by the debtor. 5 At the time of the Walker decision, this was well-settled law in several other Circuits. In re Walker, 726 F.2d at However, the Walker court mistakenly applied this knowledge-indifference standard to determining the dischargeability of a specific debt, and ruled the debt at issue before it as being dischargeable. Id.; In re Walker, 53 B.R. at (explaining the mistake made by the Eighth Circuit in its decision prior to remand). Unfortunately, Walker has never been corrected or overruled by any subsequent Eighth Circuit decision. Instead, it remains an influential case solely because of its provenance as a Court of Appeals decision, and not because it established any 5 This seems to make sense because 727(a) requires proof of particular acts of fraud by the debtor whereas 523(a)(2)(A) simply refers to any debt... obtained by... false pretenses, a false representation, or actual fraud... without any reference to acts of the debtor.

27 19 new, ground-breaking wisdom in this area of law. Its usefulness is confined to supporting decisions of other courts that don t want to follow Strang like the decision here. See, e.g., In re Huh, 506 B.R. 257, (9th Cir. BAP 2014) II. THE SEVENTH CIRCUIT S DECISION CREATES A SPLIT WITH THREE OTHER CIRCUIT COURTS OF APPEAL. The Fifth, Sixth, and Eleventh Circuits follow the Strang rule. Deodati v. M.M. Winkler & Associates (In re M.M. Winkler & Associates), 239 F.3d 746, (5th Cir. 2001); BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d 1556, (6th Cir. 1992); Hoffend v. Villa, 261 F.3d 1148, (11th Cir. 2001) (the court followed Strang but chose not to extend the imputation of fraud to 20(a) of the Securities Exchange Act). With the Sullivan decision here, the Seventh and Eighth Circuits, along with the Ninth Circuit Bankruptcy Appellate Panel, follow the Walker rule. Sullivan v. Glenn, 782 F.3d 378, (7th Cir. 2015); In re Walker, 726 F.2d 452, (8th Cir. 1984); In re Huh, 506 B.R. 257, (9th Cir. BAP 2014). In addition to failing to mention Strang in its opinion, the Court of Appeals also failed to mention any of the cases just cited from the Fifth, Sixth, and Eleventh Circuits that conflict with the Sullivan decision. Other Circuit Courts of Appeal have not yet directly addressed the issue of whether a debt obtained by an agent s fraud is only nondischargeable if the debtor had knowledge of the fraud or was recklessly indifferent. But with the Seventh Circuit

28 20 joining the Walker adherents, we can only expect greater division among the courts on this issue. Only the Supreme Court can resolve this conflict and restore order to this important area of Bankruptcy law. Sullivan is aware of one case in the Seventh Circuit that has now been caught up in the confusion created by the Sullivan decision Sargis v. Aguilar, 511 B.R. 507 (Bankr. E.D. Ill. 2014). Like Sullivan, Sargis involved the dischargeability of a debt that was fraudulently obtained by an agent who was a loan broker. After trial in Sargis, the Bankruptcy Court declared the debt nondischargeable and the debtors appealed to the District Court. While Sargis was on appeal, Sullivan was decided. In light of Sullivan, the District Court remanded the case to the Bankruptcy Court directing it to make additional findings of fact as to whether the debtors knew or should have known of their agent s fraud. In re Aguilar, Case No. 14-C-5290 (N.D. Ill., Apr. 25, 2015, Document #42). This should have been unnecessary because Strang controls, not Sullivan. The Sullivan decision has now put lower courts in the Seventh Circuit in the difficult position of either following a recent decision of an immediately superior court or following Supreme Court precedent. A lower court would like to find a resolution that doesn t conflict with either court. So we can expect to see other courts doing what the District Court in Sargis did and remand for additional facts in the hope that those facts will support a determination on dischargeability that satisfies both courts precedent. Or else we will see bankruptcy courts engaging in additional fact-finding at the trial level to accomplish the same purpose, which is what is

29 21 happening now in the Eighth Circuit. E.g., In re Beasley, 202 B.R. 979, (Bankr. W.D. Mo. 1996); In re Croft, 150 B.R. 955, 959 (Bankr. E.D. Mo. 1993); In re Guse, 150 B.R. 950, 954 (Bankr. E.D. Mo. 1993). This is wasteful, inefficient, and burdensome on courts and litigants. The conflict between the Circuits that follow Strang and those that follow Walker is not going to resolve itself. The exception to discharge for debts obtained by fraud has been around since the Bankruptcy Act of 1898 and various predecessor Acts. And since 1903, the statutory section of the Bankruptcy Code dealing with the fraud exception to discharge has changed very little. Casablanca Lofts LLC, 436 B.R. at (N.D. Ill. 2010). Furthermore, Sullivan is not aware of any legislative efforts to make any major changes to the statute. This split will also encourage more forum shopping by debtors who have acquired substantial debts through an agent s or partner s fraud. All that a debtor needs to do is move their residence, at least in the short term, and after establishing residency for six months, petition for bankruptcy the incentive to do so could be great. See 28 U.S.C. 1408(1). But more importantly, if this split of authority is allowed to persist, determinations of dischargeability will be inconsistent throughout the country, and especially in Circuits were the Courts of Appeal have not yet taken up the issue. With the Seventh Circuit now adopting Walker, the split in authority among the Circuits will continue to grow this is not a stale conflict but a dynamic one. With the Sullivan decision, another Court of Appeals has now given its stamp of approval to disregard Strang and other courts that

30 22 want to follow Walker instead will be more confident to do so. More importantly, this issue recurs frequently in bankruptcy adversary matters yet is typically resolved at the trial level where clarity in the law from higher courts is essential. For all of these reasons, the Supreme Court needs to take action now to provide clear and unambiguous guidance to lower courts that the rule set forth in Strang must be followed. Uniform application of bankruptcy law nationwide was one of the primary goals of Congress when it first enacted a federal bankruptcy code. III. SULLIVAN REASONABLY AND JUSTIFIABLY RELIED ON KAREN CHUNG S REPRESENTATIONS CONCERNING THE SULLIVAN LOAN THIS ISSUE WAS DECIDED AT TRIAL AND WAS NEVER A SUBJECT OF THIS APPEAL. In announcing the Walker standard as the new rule for determining the dischargeability of a debt obtained by an agent s fraud and declaring the Sullivan Loan discharged, the Court of Appeals could have ended its discussion there without talking about the issue of Sullivan s reliance on Karen Chung s representations. Instead, the court felt compelled to spend the better part of its opinion expressing its strong conviction that Sullivan should have done more investigation rather than simply relying on what Chung told him. But all of the court s discussion on this issue was irrelevant because at trial the Bankruptcy Court found, based on the parties stipulations of fact, that Sullivan reasonably and justifiably relied on Chung s state-

31 23 ments about the existence of the LaSalle Loan when he made the Sullivan Loan. App., infra, 35a-40a, 11-21; 28a, 6; 57a; 91a-93a, Justifiable reliance is the standard of reliance for establishing nondischargeability for debts obtained by fraud. Field v. Mans, 516 U.S. 59, (1995). This standard only requires further investigation if the falsity of an agent s representation is obvious from cursory examination. Field, 516 U.S. at Under the justifiable reliance standard, a creditor has no duty to investigate unless the falsity of the representation would have been readily apparent. Ojeda v. Goldberg, 599 F.3d 712, 717 (7th Cir. 2010). Karen Chung and her company were in the loanbrokering business and had arranged loans in the past for the Glenn Companies. App., infra, at 30a; 33a-34a, 4-5. There was nothing patently suspicious about Chung s representation, on the heels of her employee Adrian Lopez s same representation, that she had acquired yet another loan on behalf of the Glenns business this time from LaSalle, a wellknown bank. And Sullivan did attempt to confirm the LaSalle Loan by having her employee Adrian Lopez contact the bank, which Lopez claims he did, but unfortunately for Sullivan, Lopez also lied to him about the existence of the loan. Id. at 37a, 14; 93a, 87(a). Finally, just because Sullivan was good friends with Chung, and previously made loans to her business separate and apart from the Sullivan Loan, didn t make him putty in her hands. See Id. at 7a. Friends are less likely to defraud each other than are strangers. Sullivan intended to make money on his loan to the Glenns, not a gift, a point

32 24 the Court of Appeals highlights in its opinion. Id. at 6a-7a. While all of the court s discussion on the issue of reliance may be regarded as dicta, Sullivan isn t so sure But the question is whether the Glenns, who have not been shown to be careless in hiring and relying on Chung, should lose their discharge in bankruptcy to Sullivan, who would not have lost his $250,000 had he exercised even slight care. 6 Id. at 6a. Sullivan thought the question instead was whether the Glenns had to have knowledge of Chung s fraud or have been recklessly indifferent to her actions, in order for him to establish nondischargeability. The reliance issue, on the other hand, was already settled. Consequently Sullivan expected the court s opinion to contain an extensive discussion of Strang, and the leading cases that support it, with argument why Walker should be adopted as the new rule. Instead there was nothing not even a mention of Strang in the court s decision. If, as it appears, the Court of Appeals intended to hold Sullivan to a higher standard than justifiable reliance, then it did so in direct contravention of Field, which establishes justifiable reliance as the standard for fraud in determining nondischargeability. Or else if the court believed Sullivan was not justified in relying on Chung s representations about the LaSalle Loan, then it made factual findings 6 The Court of Appeals never explains why Sullivan, but not Michael Glenn, needed to further investigate the same representation that Chung made to both of them. Nor does the court explain how the Glenns could possibly have believed the LaSalle Loan existed and was approved when no one from the bank had any communications with them about processing this supposed $1 million loan for their small business.

33 25 outside of the record. Either way, if the Sullivan Loan is being discharged because the Court of Appeals believes Sullivan should have done more and further investigated Chung s representations, then the court exceeded its authority and incorrectly declared the loan dischargeable. IV. A COURT OF APPEALS MUST FOLLOW SUPREME COURT PRECEDENT. A Court of Appeals must not disregard Supreme Court precedent that directly controls an issue. Rodriguez De Quijas v. Shearson American Express, Inc., 490 U.S. 477, 484 (1989)); Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014, (7th Cir. 2002) The Court s decision in Strang directly controls and the Seventh Circuit was obliged to follow it and declare the Sullivan Loan nondischargeable. If a Court of Appeals disagrees with a Supreme Court precedent and believes it should not be followed, it has two options. It can apply the law set forth by the Supreme Court, explaining it is bound by such precedent, but then further explain why such precedent should no longer be followed. Scheiber, 293 F.3d at Or, a Court of Appeals, on its own initiative, can certify the question of law for appeal to the Supreme Court requesting directions on how to proceed. 28 U.S.C. 1254(2). In taking this route, the Court of Appeals can explain that the Supreme Court s precedent was either decided in error or that in light of recent developments in the law such precedent is no longer viable and should be overruled. The Seventh Circuit took neither of these actions.

34 26 In its opinion, the Seventh Circuit makes no attempt to explain its decision in light of Strang or long-standing agency law holding principals liable for their agents fraud. Again, there is no mention of Strang, or any of the leading cases in other Circuits that follow Strang. Likewise, there is no discussion of cases in other Circuits that call into question the Walker rule. One would get the impression from reading the court s opinion that this was an open area of law fertile for the development of new precedent. Not so. This was settled over 130 years ago. Congress and the Supreme Court have already spoken. Many loans today are obtained through loan brokers and other agents because such arrangements provide significant benefits to both lenders and borrowers. Exceptions to discharge for fraudulently obtained debts come up frequently in bankruptcy adversary matters and many times involve the question of principal-agent liability. While this area of the law doesn t attract the national attention of cases recently decided by the Court, it is nevertheless an important subject area that needs to be harmonized nationwide. Courts of Appeal should not be allowed to overrule this Court s decisions even if it appears Supreme Court review may be unlikely. This case is a good opportunity for the Court to reassert that Supreme Court precedents are to be followed in all cases, not just those that capture the national headlines. CONCLUSION By overruling Strang, the Seventh Circuit has now created a serious conflict of law with three other

35 27 Circuits that requires Supreme Court intervention to ensure uniform application of the law nationwide. This is the primary reason for Supreme Court review. But also, the Seventh Circuit s decision here far exceeded its authority. Sullivan deserved to have his case decided fairly based on the undisputed facts in the record, and the well-settled law that controlled his case. This he was denied. The Seventh Circuit deliberately disregarded this Court s decision in Strang v. Bradner. It did so evidently because it felt that Sullivan should have done more to protect himself from fraud. But the trial court and the parties themselves already established that Sullivan reasonably and justifiably relied on Chung s statements about the LaSalle Loan when he loaned the Glenns $250,000. By holding Sullivan to a higher standard of reliance than justifiable reliance, the Court of Appeals also disregarded the Court s decision in Field v. Mans. For all the reasons stated, Sullivan requests this Petition be granted. Respectfully submitted by, July 27, 2015 Brian T. Sullivan, Esq., Pro Se Petitioner 919 W. George St., Apt. 3E Chicago, IL, (773) brian@sullivancompanies.com

36 1a APPENDIX A [Reported as 782 F.3d 378] IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT BRIAN T. SULLIVAN, Plaintiff-Appellant, v. MICHELE A. GLENN and MICHAEL R. GLENN, JR., Defendants-Appellees. Case No Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. District Court Case No. 14-C-00329, James B. Zagel, Judge. ARGUED FEBRUARY 10, 2015 DECIDED APRIL 2, 2015 Judgment Issued and Entered on April 2, 2015 Before POSNER, MANION, and TINDER, Circuit Judges. POSNER, Circuit Judge. This appeal presents a pair of questions of bankruptcy law: whether, if a debt is the result of fraud, the debtor can discharge

37 2a the debt in bankruptcy if he was not complicit in the fraud; and whether he can discharge the debt even if the fraud was created by his agent, provided, again, that the debtor himself was not complicit in it. The defendants, the Glenns, were in the real estate development business. In 2007 they encountered financial difficulties and asked a loan broker named Karen Chung to try to get them a short-term loan of $250,000. She asked a lawyer named Brian Sullivan, of whom she was a friend and an occasional client, whether he d be interested in making such a loan. He was, and agreed to lend the Glenns the $250,000 repayable in two to three weeks with interest of $5,000 per week. The Glenns needed the money for more than two weeks, but Chung told them and Sullivan that a bank had agreed to give the Glenns a $1 million line of credit, though it would take a few weeks for the line of credit to become available hence the need for the bridge loan from Sullivan, which the Glenns would easily be able to repay as soon as they could draw on the line of credit. At the meeting in the fall of 2007 at which these arrangements were discussed, Sullivan asked about the current status of the bank loan. One of Chung s employees stepped out of the room, ostensibly to call the bank. When he returned he told Sullivan that the bank had indeed approved the $1 million line of credit. In fact, as Chung well knew, her employee hadn t called the bank and the line of credit had not been (and never was) approved indeed it had never been applied for. Sullivan was left in the dark. But before the meeting broke up he asked and eventually received promissory notes from the Glenns and from Chung, committing them personally to repay his

38 3a $250,000 loan if repayment was not made from the bank s line of credit. The loan was never repaid. Chung declared bankruptcy. Sullivan filed an adversary complaint against her in the bankruptcy proceeding, claiming that she was not entitled to discharge the debt to him created by her promissory note because it was her fraudulent assurance that the bank line of credit had been approved that had induced him to make the $250,000 loan secured by promissory notes including Chung s. The Bankruptcy Code bars discharge of an individual debtor for a debt obtained by... false pretenses, a false representation, or actual fraud U.S.C. 523(a)(2)(A). So the court refused to grant Chung her discharge. The Glenns had also declared bankruptcy, and Sullivan had filed similar adversary complaints against them, which were consolidated. But in the consolidated proceeding the bankruptcy judge found that neither of the Glenns had committed fraud, and he refused to impute Chung s fraud to either of them under an agency theory argued by Sullivan he ruled that Chung had not been the Glenns agent. He also rejected two alternative arguments of Sullivan that if a debt is a product of fraud even the debtor s complete innocence is nevertheless no defense to the nondischargeability of the debt, and that Glenn had committed fraud rather than being simply the innocent beneficiary of Chung s fraud and his fraud had enabled the Glenns to induce Sullivan to make the bridge loan. The bankruptcy judge therefore concluded that the Glenns debt to Sullivan was dischargeable, precipitating this appeal to us. Sullivan s debt not the debtor theory is consistent with the language of the fraud exception to dis-