United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 10-6043
In re: *
*
Nathan Paul Reuter, *
*
Debtor. *
*
*
Nathan Paul Reuter, *
*
Debtor - Appellant. *
* Appeal from the United States
v. * Bankruptcy Court for the
* Western District of Missouri
Tana S. Cutcliff; James A. Fields; *
James D. Fields; Joshua P. Haeflinger; *
LaDonna S. Henderson, as Trustee for *
LaDonna S. Henderson Living Trust; *
Patricia A. Reitz, as Trustee for Frances *
L. Reitz Trust; Terry J. Schippers; James *
D. Teegarden II; Michael S. Trom, *
*
Movants - Appellees. *
*
No. 10-6069
In re: *
*
Nathan Paul Reuter, *
*
Debtor. *
*
*
Tana S. Cutcliff; James A. Fields; *
James D. Fields; Joshua P. Haeflinger; *
LaDonna S. Henderson, as Trustee for *
LaDonna S. Henderson Living Trust; * Appeal from the United States
Patricia A. Reitz, as Trustee for Frances * Bankruptcy Court for the
L. Reitz Trust; Terry J. Schippers; James * Western District of Missouri
D. Teegarden II; Michael S. Trom, *
*
Plaintiffs - Appellees. *
*
v. *
*
Nathan Paul Reuter, *
*
Defendant - Appellant. *
*
Submitted: January 11, 2011
Filed: January 31, 2011
Before KRESSEL, Chief Judge, SALADINO, and NAIL, Bankruptcy Judges.
SALADINO, Bankruptcy Judge.
The debtor appeals from orders of the bankruptcy court1 denying confirmation
of his Chapter 11 plan, granting the creditors’ motion to convert the case to Chapter
1
The Honorable Dennis R. Dow, United States Bankruptcy Judge for the
Western District of Missouri.
2
7, and entering judgment in favor of the creditors on certain dischargeability claims
raised in an adversary proceeding. For the reasons stated below, we affirm.
I. Background
Mr. Reuter, the debtor, was a founding member of Vertical Group, LLC, a
financial services company in Columbia, Missouri. The company handled mortgages,
insurance, and investments. Mr. Reuter’s expertise was in mortgages, but he induced
clients, including the appellees here, to invest funds through the company in late 2004
and early 2005. The investments did not go well – evidently, all of the investors lost
their investments.2 In May 2005, the State of Missouri filed a civil suit against Vertical
Group, LLC, and its officers, members, and/or directors, including Mr. Reuter, for,
inter alia, selling unregistered securities and misrepresenting the nature of certain
financial instruments they sold to investors other than the Cutcliff group of creditors
(however, there is one investor common to both groups). Mr. Reuter entered into a
2
Here is a succinct description of the investment scheme, from the bankruptcy
court’s opinion:
[T]he Plaintiffs were induced to transfer money into an escrow
account. The[y] were told that they were participating in an exclusive,
high-yield, investment program, where their principal investment would
be 100% safe, and they would start receiving returns in as early as
fourteen to thirty days after they invested. The specifics related to how
their investments were suppose[d] to remain in the escrow account and
create such fantastic returns are obtuse, however, the evidence is
essentially that Plaintiffs thought their principal investment was going
to be leveraged against, or be used to acquire, standby letters of credit,
which would somehow generate the incredible returns. The fact is,
however, that because [certain individuals affiliated with Vertical other
than Mr. Reuter] were criminals, Plaintiffs never received their principal
investment back or a single penny of the promised returns.
Mem. Op. of Apr. 14, 2010, at 5-6.
3
consent judgment with the Missouri Attorney General in September 2008,
permanently enjoining him from selling, attempting to sell, or acting as an agent or
advisor regarding the sale of investments, securities, or financial instruments, and
assessing a civil penalty of $10,000.00 against him, with payment of $5,000.00 of that
penalty suspended. One of the company’s principals – Daryl Brown – was convicted
in federal court in 2008 of seven counts of wire fraud, two counts of causing interstate
travel in execution of a scheme to defraud, three counts of engaging in monetary
transactions in criminally derived property, and one count of conspiracy to commit
money laundering, all of which garnered him a sentence of 180 months in prison.
In June 2006, Ms. Cutcliff and a number of other Vertical clients filed a civil
suit in federal court in the Western District of Missouri against Mr. Reuter and
Vertical Group, LLC, alleging violation of the Racketeer Influenced and Corrupt
Organizations Act (“RICO”), conspiracy, violation of the Federal Securities Act,
violation of the Missouri Securities Act, breach of fiduciary duty, violation of the
Missouri Merchandising Practices Act, and fraudulent inducement. In July 2007, Mr.
Reuter filed a Chapter 11 bankruptcy petition, which stayed the civil lawsuit. In his
bankruptcy schedules, he listed the plaintiffs as holding contingent, unliquidated, and
disputed claims totaling more than $2.9 million. Ms. Cutcliff and the eight other
plaintiffs then filed an adversary proceeding alleging that Mr. Reuter operated a Ponzi
scheme, objecting to dischargeability under 11 U.S.C. §§ 523(a)(2), (a)(4), (a)(6), and
(a)(19) and objecting to discharge under 11 U.S.C. §§ 727(a)(3), (a)(4), and (a)(5).3
Because many of the issues in the adversary proceeding were similar to the
same group of aggrieved investors’ objection to the debtor’s plan, both matters were
3
The bankruptcy court deemed the claims under § 523(a)(4), RICO, the
Missouri Merchandising Practices Act, and the Federal Securities Act to be
abandoned, and declined to rule on the § 523(a)(6) claim because it would provide no
additional benefit to the creditors. This portion of the ruling is not at issue in this
appeal.
4
tried simultaneously. In March 2010, the Cutcliff group of creditors moved to convert
the case to a Chapter 7. In April 2010, the court issued an opinion denying
confirmation of the plan and entering judgment in the creditors’ favor regarding the
non-dischargeability of the debts under §§ 523(a)(2)(A) (false representation and false
pretense) and (a)(19) (fraud and securities law violations). In May 2010, the court
granted the motion to convert.
A. The adversary proceeding
In addition to holding the debtor liable under § 523(a)(2)(A) for his own fraud,
the court also held him vicariously liable under that section for the fraud of his
business associate, Daryl Brown. The court noted an open question with regard to the
Eighth Circuit’s legal interpretation of attributing vicarious liability to an otherwise
innocent partner and whether a creditor has to show more than the mere existence of
an agent-principal relationship before the agent’s fraud may be imputed to the
debtor-principal, but ruled that under the evidence presented by the creditors, at a
minimum the debtor and Mr. Brown acted as partners and the debtor could be held
liable for Mr. Brown’s fraud. Moreover, the court ruled that the debtor willfully
ignored the myriad warning signs about Mr. Brown and his activities and either knew
or should have known of Mr. Brown’s fraud.
In considering the § 523(a)(19) cause of action, the court recognized divergent
opinions as to the import of the 2005 Bankruptcy Abuse Prevention and Consumer
Protection Act amendments to § 523(a)(19) and whether a bankruptcy court has
jurisdiction to render a determination of liability for securities law violations or
whether the court may only decide the dischargeability of a liability determination
made in a non-bankruptcy forum. The court ruled in this case that Mr. Reuter had
consented to the bankruptcy court’s jurisdiction to determine liability as well as
dischargeability on the basis of the consent judgment he executed with the Missouri
Attorney General during the pendency of the bankruptcy case, which specifically
5
stated that the creditors’ claims for monetary relief would be fully determined and
adjudicated by the bankruptcy court.
The court then found that the debtor was subject to a private cause of action by
the creditors under the Missouri Securities Act of 2003 and was liable for his direct
violations of securities law, although he was not subject to liability under the federal
Securities Exchange Act of 1934 as a “controlling person” for the securities violations
of others.
The court performed its damages calculations under two separate measures of
damages: common law damages stemming from the debtor’s “direct and vicarious
fraudulent representations and false pretenses,” and statutory damages for his
securities violations under the Missouri statutory code. The amount of actual damages
was the principal amount of each plaintiff’s investment. That also was the amount of
the statutory damages. No consequential damages were awarded. The court awarded
punitive damages based on “egregious” evidence of the debtor’s recklessness and
indifference to the creditors. The court adopted the debtor’s calculation of double the
actual damages, as used in his plan, for the appropriate amount of punitive damages.
The court also awarded attorneys’ fees to the five creditors who were found to
hold valid claims for the debtor’s violation of Missouri securities laws.
B. Denial of plan confirmation
In his plan, Mr. Reuter proposed to liquidate his partial ownership/stock
interests in three title companies and pay the net proceeds to the Cutcliff group of
creditors pro rata in full payment and satisfaction of their claims, plus make 60
monthly payments to them which “would be equal to the difference of all other
property to be distributed under the Plan to the holders of claims and Debtor’s
projected disposable income.” The Cutcliff creditors objected to the plan on the
6
grounds that it was not proposed in good faith under 11 U.S.C. § 1129(a)(3), it was
not feasible under 11 U.S.C. § 1129(a)(11), and it was not in the best interest of
creditors under 11 U.S.C. § 1129(a)(7).
The court held that bad faith was evident from the totality of the circumstances
of the case: namely, that a larger purpose for the debtor’s bankruptcy filing was to
lessen the effects of the Cutcliff group’s litigation rather than to reorganize his
financially troubled business enterprises. Moreover, he had no debt other than the
Cutcliff group’s claims, he failed to report the value of certain assets and a particular
source of income, and he appeared to the court to be purposely under-employed. The
court also surmised that, prior to filing bankruptcy, he structured all of his assets to
shield them from creditors. In finding a lack of good faith, the court said,
[T]he Debtor’s admitted motivation for seeking
chapter 11 relief suggests that his Plan was proposed not
with the intention of satisfying Plaintiffs’ claims to the
greatest extent possible, but with the intention of avoiding
payment of those claims to the greatest extent possible, and
the meager repayment percentage proposed by the Debtor’s
plan supports this conclusion. Such a purpose is the
antithesis of good faith and not consistent with the spirit
and purpose of Chapter 11.
Mem. Op. of Apr. 14, 2010, at 67.
In addition to bad faith, the court found the plan lacked feasibility. Mr. Reuter
expected to have disposable income of $100.00 each month, which was insufficient
to cover his proposed payment of the Missouri Attorney General’s fine, much less any
administrative expenses of the case or any of the Cutcliff creditors’ claims.
The issue on the best interest of creditors test was whether the debtor’s assets,
which were held in revocable trusts owned by him and his wife and which the debtor
7
claims were held by the couple as tenants by the entirety, would be available to
creditors in a Chapter 7 liquidation. The court determined that the Reuters’ creation
of and transfer of their property into the trusts necessarily severed their tenancy by the
entirety, so the property was not exempt. Therefore, his plan, which did not account
for this property, was not in the best interest of creditors.
At a subsequent hearing on the Cutcliff motion to convert or dismiss, Mr.
Reuter did not oppose conversion to Chapter 7. The court agreed that conversion was
preferable to dismissal because the debtor had assets to be administered and
liquidated, and because a trustee would be in a position to investigate the trust
property and determine whether or not it was exempt and what its value for the estate
might be. A trustee would also be able to pursue possible fraudulent or preferential
transfers.
II. Appellant’s position
Mr. Reuter purports to raise four issues on appeal:
1. The bankruptcy court erred in recognizing claims of “false pretenses” and/or
“false representation” as distinct, nominate “torts” arising under 11 U.S.C. §
523(a)(2)(A) or “federal common law,” independent of the Missouri law of fraud; in
declaring that the Cutcliff plaintiffs were the holders of liquidated, allowable and
non-dischargeable claims against Mr. Reuter under or upon such newly-created
“torts”; and in finding that Mr. Reuter’s plan had been proposed in bad faith, was
infeasible or was contrary to the “best interests” of the Cutcliff plaintiffs as the holders
of such claims;
2. The bankruptcy court erred in holding that Mr. Reuter had “sold unregistered
securities” in violation of the Missouri Securities Act of 2003, notwithstanding the
failure of the Cutcliff plaintiffs to prove such claims; in creating a new private right
8
of action under the Missouri securities act; in declaring that the Cutcliff plaintiffs were
the holders on that basis of allowable and non-dischargeable claims for damages
against Mr. Reuter and in determining that Mr. Reuter’s plan had been proposed in
bad faith, that it was infeasible and that it was contrary to the “best interests” of the
Cutcliff plaintiffs as the holders of such claims;
3. The bankruptcy court erred in denying confirmation of Mr. Reuter’s plan
and converting his case to liquidation under Chapter 7 on the grounds that the Cutcliff
plaintiffs were the holders of liquidated, allowable and non-dischargeable claims
against Mr. Reuter resulting from frauds practiced and/or securities violations
committed by Mr. Reuter’s alleged “partner,” Daryl M. Brown, and that Mr. Reuter’s
plan had, as to the Cutcliff plaintiffs, been proposed in bad faith, was infeasible or was
contrary to their best interests; and
4. The bankruptcy court erred in holding that all or some portion of the assets
of the Kathleen S. Reuter Revocable Trust should be included in Mr. Reuter’s plan
and Mr. Reuter’s failure to so include them supported a finding that his plan had been
proposed in bad faith, that his plan was infeasible and/or that his plan was not in the
“best interests” of the Cutcliff plaintiffs.
III. Standard of review
We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. First Nat’l Bank of Olathe v. Pontow (In re Pontow), 111
F.3d 604, 609 (8th Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888
(8th Cir. 1997); Fed. R. Bankr. P. 8013. The bankruptcy court’s interpretation of state
law is reviewed de novo. CIT Group/Equip. Fin., Inc. (In re M & S Grading, Inc.),
457 F.3d 898, 899 (8th Cir. 2006). The bankruptcy court’s factual findings regarding
feasibility and bad faith in connection with plan confirmation are reviewed for clear
9
error. Northwest Village Ltd. P’ship v. Franke (In re Westpointe, L.P.), 241 F.3d 1005,
1007 (8th Cir. 2001).
The determination of whether a requisite element of a claim under § 523(a)(2)
is present is a factual finding. Lindau v. Nelson (In re Nelson), 357 B.R. 508, 512
(B.A.P. 8th Cir. 2006); Merchants Nat’l Bank of Winona v. Moen (In re Moen), 238
B.R. 785, 790 (B.A.P. 8th Cir. 1999). The bankruptcy court’s findings of fact will not
be set aside unless those findings are clearly erroneous. Fed. R. Bankr. P. 8013. A
finding is clearly erroneous if, after examining the entire record, we are left with a
definite and firm conviction that the bankruptcy court has made a mistake. Anderson
v. City of Bessemer City, 470 U.S. 564, 573 (1985). Also, when reviewing the
evidentiary record, we will give due deference to the bankruptcy court’s opportunity
to judge the credibility of witnesses. Fed. R. Bankr. P. 8013.
IV. Discussion
With regard to the first issue, the debtor argues that because the creditors did
not file proofs of claim and therefore were not subject to the presumption of having
a valid claim, they should have engaged in a two-step process of first proving up their
claims and then proving the non-dischargeability of those claims. In response, the
creditors assert that Mr. Reuter conceded the claims to be both liquidated and allowed
by providing for them in his plan. The debtor’s plan classified each of the nine
creditors involved in this case separately, referring to each individual’s “unliquidated
and disputed claim” in a “potentially allowable amount.” The plan then deemed each
class of claims to be liquidated and allowed in specified amounts. It proposed to sell
Mr. Reuter’s assets – his fractional ownership interests in three entities – and pay the
claims pro rata. A later section of the plan recognized the debtor’s obligation to pay
restitution to these creditors according to the terms of the plan. The creditors argue
that Mr. Reuter is raising the issue of claim allowance for the first time now, having
seemingly acquiesced in the issue by not raising it at trial or in post-trial briefing.
10
It is clear from the debtor’s plan language that he conceded the validity of the
claims, so it was unnecessary for the bankruptcy court to devote its resources to
determining whether liability had been established before determining the non-
dischargeability of the debts.
The debtor further argues that the bankruptcy court improperly considered the
“false representation” and “false pretenses” aspects of § 523(a)(2)(A) when the
creditors alleged only actual fraud. He specifically references the bankruptcy court’s
response to his assertion that the Eighth Circuit Court of Appeals’ decision in
Sindecuse v. Katsaros, 541 F.3d 801 (8th Cir. 2008), requires the creditors to prove
under Missouri law that the debtor made a misrepresentation about a past or existing
fact, but the proof cannot be predicated upon a statement regarding what an
independent third party would or would not do. Mr. Reuter argues that the creditors
attempted to do just that, basing their claims on how a so-called escrow agent was to
handle their investment funds. The bankruptcy court distinguished the Sindecuse
opinion, describing how the creditors asserted claims under the false pretenses and
false representations prongs of § 523(a)(2)(A) and noting that the creditors’ claims
were based on what Mr. Reuter told them about how the money was going to be
handled, not on any statements by the escrow agent or any other third party. This is
neither clear error nor an incorrect legal conclusion.
The debtor also argues that the bankruptcy court somehow enlarged the scope
of the known jurisprudence with “an unprecedented interpretation of § 523(a)(2)(A)”
by creating “new and independent ‘causes of action’ for the establishment/liquidation
of ‘tort’ claims based upon ‘false pretenses’ and/or ‘false representation,’ independent
of non-bankruptcy law.” The United States Supreme Court has made clear that the
terms of § 523(a)(2)(A) “incorporate the general common law of torts, the dominant
consensus of common-law jurisdiction, rather than the law of any particular State,”
Field v. Mans, 516 U.S. 59, 70 n.9 (1995), so it is unclear how the bankruptcy court
expanded the existing applicability of the statute. Moreover, the creditors’ brief on
11
appeal cites to numerous Missouri cases recognizing the common-law torts of false
pretenses and false representation as forms of fraud.
The same legal authority applies to Mr. Reuter’s corollary argument that the
creditors failed to establish every element of a fraud action under Missouri law. A
finding of non-dischargeability under § 523(a)(2)(A) is not premised on state law, so
the creditors here need not have met the requirements of proving fraud in Missouri.
The debtor also argues that the bankruptcy court improperly inferred fraudulent
intent on the part of the debtor, in contravention of Missouri law. However, the
bankruptcy court followed established law within the Eighth Circuit regarding the
intent element of false representation and permitting the use of circumstantial
evidence to draw the inference that a debtor intended to deceive another. Caspers v.
Van Horne (In re Van Horne), 823 F.2d 1285, 1287 (8th Cir. 1987); Merchants Nat'l
Bank v. Moen (In re Moen), 238 B.R. 785, 791 (B.A.P. 8th Cir. 1999). The record
contains abundant circumstantial evidence from which intent can be inferred,
particularly from Mr. Reuter’s numerous statements to the creditors, either to induce
them to invest or to keep them from going to authorities once they realized their
“investment” had disappeared, regarding matters that he either knew or should have
known – had he not willfully or recklessly ignored the evidence to the contrary – were
false.
The debtor also argues that the creditors could not reasonably have relied on his
statements under Missouri law. Once again, the bankruptcy court properly stated the
law of justifiable reliance – the lesser standard of reliance which the United States
Supreme Court has declared applicable to false representations under § 523(a)(2)(A)
– and found that the creditors had met that standard. Field v. Mans, 516 U.S. 59
(1995).
12
With regard to the second issue, the debtor argues that the bankruptcy court
erroneously held that he had violated Missouri securities laws because the creditors
had not established each element required. He specifically argues that there was no
evidence before the court that the “unregistered securities” he was found to have sold
or offered for sale in violation of the Missouri Securities Act were in fact unregistered.
This argument appears to be raised for the first time on appeal, as the debtor admitted
in testimony and conceded in his post-trial brief that the securities were unregistered.
“Ordinarily, we do not consider an argument raised for the first time on appeal. We
consider a newly raised argument only if it is purely legal and requires no additional
factual development, or if a manifest injustice would otherwise result.” Duncan v.
LaBarge (In re Duncan), 418 B.R. 278, 282 (B.A.P. 8th Cir. 2009) (quoting Orr v.
Wal-Mart Stores, Inc., 297 F.3d 720, 725 (8th Cir. 2002)). Neither of those
circumstances exists here.
He further argues that the sections of the Missouri Securities Act upon which
the bankruptcy court relied are applicable only to criminal enforcement, not private
rights of action, and he asserts that the section of the Act which does create a private
right of action does so only against actual sellers of investments or against investment
advisors who are compensated for their advice, neither of which apply to him. He
further argues that the Missouri Securities Act does not support the court’s imposition
of vicarious liability against him.
13
The statute at issue, Mo. Rev. Stat. § 409.5-509,4 is a portion of the Missouri
Securities Act of 2003. It permits a purchaser of securities to bring a private cause of
action against the seller if the seller sold the securities in violation of § 409.3-3015 of
the Missouri Securities Act of 2003.
The bankruptcy court ruled that Mr. Reuter is liable for statutory securities
fraud under Mo. Rev. Stat. § 409.5-509(b) because (1) the plaintiffs established that
the contracts they executed were “investment contracts” under Missouri case law and
4
In pertinent part, that statute is as follows:
409.5-509. Liabilities – violations – damages – remedies
...
(b) A person is liable to the purchaser if the person sells a security
in violation of section 409.3-301 or, by means of an untrue statement of
a material fact or an omission to state a material fact necessary in order
to make the statement made, in light of the circumstances under which
it is made, not misleading, the purchaser not knowing the untruth or
omission and the seller not sustaining the burden of proof that the seller
did not know and, in the exercise of reasonable care, could not have
known of the untruth or omission. . . .
5
409.3-301. Registration requirement – securities
It is unlawful for a person to offer or sell a security in this state
unless:
(1) The security is a federal covered security;
(2) The security, transaction, or offer is exempted from
registration under sections 409.2-201 to 409.2-203; or
(3) The security is registered under this act.
In the context of the Securities Act, “sale” includes every contract of sale,
contract to sell, or disposition of, a security or interest in a security for value, and
“offer to sell” includes every attempt or offer to dispose of, or solicitation of an offer
to purchase, a security or interest in a security for value. Mo. Rev. Stat.
§ 409.1-102(26).
14
should have been, but were not, registered with the Missouri Securities Commission;
and (2) Mr. Reuter “sold” and “offered to sell” securities – specifically, investment
contracts – under the expansive interpretations traditionally given to those terms in the
federal and Missouri securities acts, by personally soliciting the plaintiffs to invest,
by serving as the primary sales contact for some of the plaintiffs, and by advocating
the purportedly tremendous returns to be made on these investments. These state-law
securities violations rendered the debts associated with the violations non-
dischargeable under § 523(a)(19).
On appeal, Mr. Reuter argues that he did not “actually sell” securities because
Mr. Brown and other entities through which the investment transactions were handled
were the “actual sellers” of the security instruments. The bankruptcy court found
ample evidence that Mr. Reuter “sold” or “offered to sell” the investments, in
violation of § 409.5-509(b).6 This court reviews the bankruptcy court’s interpretation
6
As the bankruptcy court explained:
The record supports the Court’s finding that Debtor “sold” and
“offered to sell” the investment contract to Trom, Henderson, J. Fields,
T. Fields and Reitz. Debtor specifically solicited these Plaintiffs to invest
their money in the investment opportunity that he, Brown and Williams
were promoting. Debtor offered numerous assurances and explanations
to quell any apprehension they may have had. Debtor did much more
than simply announce an opportunity about some arbitrary investment
program. Bowman testified that Debtor was personally involved in the
sales of investments, that he was likely the main sales contact for Trom
and Henderson, and that for the two Fields and Reitz, he sat in on the
meeting at Vertical’s office, answered questions and explained the
program. He was described as the “closer.” Debtor was not sitting on the
side-lines while the investments were being sold through his company,
he was a key player. Bowman testified convincingly that Debtor’s
day-to-day work at Vertical involved working the investment side of the
shop with Williams. He may not have sold mutual funds, or stocks, but
(continued...)
15
of state law de novo and its factual findings for clear error. We do not find the factual
findings to be erroneous, nor do we find the bankruptcy court’s legal interpretation to
be incorrect.
Contrary to the debtor’s argument, the court imposed vicarious liability only
under § 523(a)(2)(A), not under the Missouri Securities Act, so that portion of his
argument is inapplicable here.
With regard to the third appellate issue, the debtor appears to be challenging the
bankruptcy court’s holding that debtor is vicariously liable under § 523(a)(2)(A) for
the fraud of Mr. Brown.7 Debtor argues that he cannot be vicariously liable for Mr.
Brown’s fraudulent conduct because they did not have a formal partnership under
Missouri law. However, the Supreme Court and Eighth Circuit cases discussing
vicarious liability in this context do not require the formalities of a state law business
partnership for the liability of one to be imposed on the other. In fact, common law
agency principles are discussed as being sufficient to support the imputation of fraud
from one to another. See, Strang v. Bradner, 114 U.S. 555, 561 (1885); Owens v.
Miller (In re Miller), 276 F.3d 424, 429 (8th Cir. 2002); Walker v. Citizens Bank of
Maryville, Mo. (In re Walker), 726 F. 2d 452, 454 (8th Cir. 1984). The bankruptcy
court cited numerous examples of Mr. Reuter acting on behalf of Mr. Brown in
6
(...continued)
there is ample evidence in the record to support the Court’s finding that
he sold investment contracts. . . . There is competent and substantial
evidence in the record to support the Court’s finding that Debtor “offered
to sell” and “sold” “investments contracts” to Henderson, J. Fields, T.
Fields, and Reitz, which were not registered.
Mem. Op. of Apr. 14, 2010, at 50-51.
7
The bankruptcy court’s vicarious liability holding affects only four of the
plaintiffs (Cutliff, Haeflinger, Teegarden and Schippers) since the court found direct
liability under § 523(a)(2) as to the remaining plaintiffs.
16
finding that a sufficient business partnership arrangement existed and that Mr. Reuter
should be liable for Mr. Brown’s fraud:
[T]here is ample evidence to support the Court’s finding
that Debtor and Brown conducted themselves as though
they were partners. The most persuasive evidence of
Debtor’s intent to form a partnership with Brown is his own
admission in the Petition for Damages which he filed
against Brown in Circuit Court of Boone County, Missouri.
In that petition, Debtor describes the way in which Brown’s
fraudulent misrepresentations induced Debtor into entering
into the “partnership agreement” whereby Debtor agreed to
allow Brown to acquire a 32.5% ownership interest in
Vertical and to make payments to certain of Brown’s
associates in exchange for acquisition of a 50% ownership
interest in the alleged Trust. Debtor testified that they had
an oral agreement to combine a portion of Debtor’s
company and some of his money with Brown’s alleged
Trust and their combined experience in the financial
services industry. According to Debtor, the plan was for
Debtor to manage the mortgage side of Vertical and for
Brown to manage the investments. Debtor believed that
Vertical would be able to make money off of the Trust,
which Brown alleged existed and alleged he had rights to
use as part of his investment plan. Debtor described the
business at Vertical as “a group of, you know, guys that
were, you know, acted as partners and worked together.”
Bowman testified that the relationship between Brown and
Debtor was a partnership. Brown brought to the partnership
his relationship with the alleged big hitter in the wealth
management industry, Al Christy, and his Trust and all of
his self-reported investment expertise and Debtor brought
a legitimate company, and “a gentleman [Debtor] that had
the money to back it up.” Bowman explained that because
Debtor was financially stable, he was going to fund the
operations until Brown could get the investments up and
running. The record is replete with examples of the manner
17
in which Brown and Debtor held themselves out as partners
and the Court finds any testimony from Debtor to the
contrary unpersuasive.
Mem. Op. of Apr. 14, 2010, at 40-41. These factual findings are not clearly erroneous.
The debtor also cites Treadwell v. Glenstone Lodge, Inc. (In re Treadwell), 423
B.R. 309 (B.A.P. 8th Cir. 2010), in support of his argument that because he was not
active as a “partner” in the business, he cannot be held responsible for Mr. Brown’s
conduct. As shown above, the facts simply do not support that argument. The
bankruptcy court found that debtor willfully ignored the warning signs about Mr.
Brown and either knew or should have known of Mr. Brown’s fraud. Also, while we
ruled that Mr. Treadwell was not liable for his wife’s non-dischargeable debt, even
though he was ostensibly a partner in her travel agency which incurred the debt, the
holding was based on Mr. Treadwell’s non-participation in the fraud. Mr. Treadwell’s
ownership interest in the business was only a marital interest. He did not participate
in any manner in the business or its financial arrangements, nor did he have any
authority to do so. On that basis alone, the present case is distinguishable from
Treadwell.
With regard to the fourth appellate issue, Mr. Reuter asserts that the bankruptcy
court erroneously held that the tenancy by the entirety had been severed as to the
assets held in trust by the debtor and his wife. He also argues that the trust provisions
exclude it from property of the bankruptcy estate. Nevertheless, it appears from
documents subsequently filed in the bankruptcy case in connection with the Chapter
7 trustee’s objection to exemptions that Mr. Reuter transferred ownership of all of the
trust property to his wife, which renders his argument here moot because the entireties
tenancy no longer exists.
Other than raising the issues in his statement of issues on appeal, none of the
debtor’s arguments on appeal appear to go to the merits of the denial of confirmation
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of the plan or the conversion of the case, so those issues are considered to be
abandoned.
V. Conclusion
The debtor’s arguments for reversal of the bankruptcy court’s orders are
unsupported by the law and the facts and are insufficient to establish legal or factual
error by the bankruptcy court. The decisions of the bankruptcy court are affirmed.
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