Bankruptcy: Environmental Claim- Dischargeability

Plaintiff, who had purchased real property from company whose sole officer and 98% shareholder was defendant, sought a ruling that any obligation of defendant arising out of the transaction should be declared non-dischargeable under 11 U.S.C. 523(a)(2)(A), because of silent fraud caused by defendant's failure to disclose the existence of certain environmental contamination. The bankruptcy court held that defendant had not committed silent fraud and plaintiff appealed to district court.

In reviewing the decision of the bankruptcy court on appeal, the district court analyzed the claim under elements of fraud as set forth by federal courts in bankruptcy cases and the Restatement of Torts, rather than Michigan law, pursuant to U.S. Supreme Court precedent interpreting Section 523 of the Bankruptcy Act. Accordingly, the court found that defendant had not engaged in silent fraud by failing to disclose everything he knew about the environmental contamination at the site as there was no fiduciary or other relationship that would create a duty to disclose on defendant's part. Further the court found that defendant's knowledge of the environmental contamination was within the "fair and reasonable reach" of plaintiff who could have discovered the results of prior inspections by reviewing public records, as he did after the purchase. Although that issue is dispositive, the court went on to note that under the Restatement, plaintiff would also have to show intent on the part of defendant, even though that may not be required under Michigan law. Second, district court held that the bankruptcy court erred in finding that plaintiff was required to demonstrate "reasonable reliance" as applicable Supreme Court precedent only required a showing of "justifiable reliance" which is a less stringent standard. This error, however, was harmless since plaintiff did not have a duty to disclose. In re William H. Forrester; Milan S. Krstich v. William H. Forrester, Case No. 96-CV-75636, 12/10/97, O'Meara, J.C. (dkt. #11).

This article was prepared by William F. Frey, a partner in our Litigation Department, and previously appeared in the May 1998 issue of the Michigan Bar Journal.