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In re Saenz – Case Brief Summary (Texas)

In In re Saenz, 515 B.R. 521 (S.D. Tex. 2014), the creditor, Pizza Patron, Inc. ("PPI"), a franchiser of pizza restaurants, was sued based on an allegation by a buyer of a franchise that the debtor, PPI's agent Saenz, committed fraud against the buyer. Id. at 524.

PPI filed a Complaint for Determination of Non-Dischargeable Debt, asserting that, if it was held vicariously liable for the tortious conduct committed by Saenz, Saenz would be liable to PPI, and requesting that Saenz's liability to PPI be declared nondischargeable under § 523(a)(2). Id.

Saenz argued that PPI failed to state a claim for fraud under § 523(a)(2) because PPI did not allege that it was defrauded by him. Id. at 526-28.

The court rejected this argument, stating: "Section 523(a)(2) does not state that the alleged fraud must be committed against the movant creditor.

Nothing in this subsection precludes PPI from asserting an exception to discharge just because PPI wasn't the target of the debtor's alleged fraudulent conduct." Id. at 526.

It explained:

"Saenz's contention that PPI must be the target of debtor's fraud in order to sustain a § 523(a)(2) claim is at odds with the Supreme Court's broad interpretation. In Cohen v. de la Cruz, 523 U.S. 213, 217, 118 S. Ct. 1212, 140 L. Ed. 2d 341 (1998), the Supreme Court stated that § 523(a)(2) prevents the discharge of all liability arising from fraud. In this case, accepting PPI's factual allegations as true, then any liability that Saenz would have to PPI would arise from Saenz's fraudulent conduct. Moreover, although PPI may not have been the target of debtor's fraud, PPI will be a victim of the fraud if PPI is held vicariously liable. Permitting Saenz to discharge a debt that was incurred due to his fraud merely because PPI was not the target of the debtor's fraud is inconsistent with the basic policy that bankruptcy relief is reserved for the "honest but unfortunate debtor." See Cohen, 523 U.S. at 217 ("the Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an honest but unfortunate debtor"). Accordingly, the Court rejects the argument that the fraud debt is only excepted from discharge under § 523(a)(2) if Saenz defrauded PPI." (Id. at 528.)