In re Treadwell, 423 B.R. 309 (8th Cir. 2010). The 8th Circuit addressed the "creditor’s justifiable reliance" element of Section 523(a)(2) and noted that the Supreme Court has held that the standard to be applied to exceptions to discharge for actual fraud is "justifiable reliance," which is a lower standard than "reasonable reliance," and entails no duty to investigate.
However, it is true that the receipient of a fraudulent misrepresentation is not justified in relying upon its truth if the receipient knows that it is false or its falsity is obvious to the recipient. The Treadwell court found that the facts of the particular case did not involve obvious warning signs of falsity, and the bankruptcy court had found no evidence that an investigation would have unearthed proof of the fraud.
But, the court noted a "red flag" exception for extreme situations such as a one-eyed hourse or where a debtor tells the creditor he will not be able to repay his debt.
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Sunday, May 23, 2010
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