A Court May Refuse to Discharge Debt Resulting from a Fraud Even Absent a Showing that the Debtor Benefited from the Fraud

Elizabeth Tighe

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


Title 11 of the United States Code (the “Bankruptcy Code”) provides debtors with  “a fresh start” by granting them a discharge of most debts.[1] However, there are exceptions to discharge, including 11 U.S.C. § 523(a)(2)(A), which states a debt is not dischargeable when the debt relates to “money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.”[2] In In re Bloom, the United States Court of Appeals for the Tenth Circuit held a debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) even when the debtor does not “personally obtain money, property, or services” from the fraud.[3]

Steven Bloom, the debtor, was the manager of Bloom Business Jets, LLC (“BBJ”).[4] Bloom agreed to assist Jennifer and Huw Peirce find and buy a private jet.[5] After locating a jet, the Pierces authorized BBJ to negotiate a purchase of the jet for a price of up to f $3,600,000.[6] After several rounds of discussions, the seller agreed to sell the jet for $3,300,000.[7] However, Bloom told the Pierces that the price was $3,550,000.[8]  In order to effectuate the transaction, Bloom created Big Horn Exploration, LLC (“Big Horn”), which purchased the jet from the seller for $3,300,000 and then sold the jet to the Pierces for $3,550,000.[9] As a result, the Pierces paid an extra $250,000 above the actual negotiated price and Big Horn distributed this extra amount to Bloom’s attorney, an aircraft finance corporation, and BBJ.[10] Thus, none of the funds personally went to Bloom.[11]  

A subsequent state court lawsuit by BBJ against the Pierces over a contract dispute revealed BBJ’s fraud.[12]Bloom then filed a petition for relief under chapter 11 of the Bankruptcy Code.[13] The Pierces filed a complaint against Bloom asserting that their claims were nondischargebale under 11 U.S.C. § 523(a)(2)(A).[14] The bankruptcy court awarded damages to the Pierces for BBJ’s fraud and ruled their claim was nondischargeable per 11 U.S.C. § 523(a)(2)(A).[15] On appeal by Bloom, the Bankruptcy Appellate Panel for the Tenth Circuit affirmed the bankruptcy court’s ruling.[16] Bloom then appealed to the United States Court of Appeals for the Tenth Circuit, which affirmed the bankruptcy court’s decision.[17]

According to the Pierces, their claims were nondischargeable because Bloom derived a benefit as a result of the fraud that resulted in the claim.[18]  Bloom contended that the Pierces  failed to satisfy the elements of section 523(a)(2)(A).[19] According to Bloom, in addition to the requirements of intentional fraud and the creditor’s reasonable reliance and loss, he had to personally obtain the money from his fraudulent actions for his debt to be nondischargeable.[20] Thus, according to Bloom, because he did not receive any of the money paid by the Pierces, their claims could be discharged.[21] The Tenth Circuit rejected Bloom’s assertion and concluded that while some courts have suggested through dicta that a personal receipt of the money is required, no court has actually applied this strict interpretation of section 523(a)(2)(A).[22] Further, the court noted that the United States Supreme Court previously found that section 523(a)(2)(A) does not require “that the debtor personally obtain money, property, or services to render the debt nondischargeable.”[23]

 According to the Tenth Circuit, a debtor does not need to personally obtain the money from the fraud for the debt to be nondischargeable.[24] Here, while Bloom did not personally obtain the benefit of the fraud, he clearly received benefits from his fraud because he was the sole member of BBJ.[25] Consequently, the court found that Bloom’s debt related to the lies and fraud he committed against the Pierces were not dischargeable despite him not having personally received the money.[26]

The Bankruptcy Code provides a debtor with a fresh start through a discharge of debts.[27] However, not all debts are dischargable.[28] Section 523(a) identifies several debts that will not be discharged, including debt obtained by fraud to be nondischargeable when the debtor received a benefit as a result of the fraud.[29] The court in In re Bloom concluded that a creditor does not have to show a direct benefit to the debtor for the debt to not be dischargeable.[30]

[1] See In re Glencove Holdings, LLC v. Bloom (In re Bloom), No. 22-1005, 2022 U.S. App. LEXIS 19089, at *12 (10th Cir. July 12, 2022).

[2] Id. at *13.

[3] Id. at *17.

[4] Id. at *2

[5] Id.

[6] Id.

[7] Id.

[8] Id. 

[9] Id. at *4. 

[10] Id. 

[11] Id. 

[12] Id. 

[13] Id. 

[14] Id. at *13.

[15] Id. at *5.

[16] Id.

[17] Id. at *21.

[18] See id at *5.

[19] See id. at *14

[20] Id

[21] Id.

[22] See id.

[23] See id. at *17 (citing Cohen v. de la Cruz, 523 U.S. 213 (1998)).

[24] See id. at *17.

[25] See id. 

[26] See id. 

[27] Id. at *12

[28] Id.

[29] Id. at *18. 

[30] Id. at *18.