Linarducci v. Murena - Court Denies Dismissal of Receiver's Ponzi Scheme Claims

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March 13, 2026 Get Citation Alerts Download PDF Add Note

In re: Gerardo Lorenzo Linarducci v. Kenneth D. Murena, in his capacity as court-appointed Receiver of Drive Planning, LLC

United States Bankruptcy Court, S.D. Indiana

• Citations: None known
• Docket Number: 25-50110

• Precedential Status: Unknown Status

• Opinion

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Trial Court Document

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% As Jatnes ‘M. Carr
aha Jnjted States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

IN RE: )
)
GERARDO LORENZO LINARDUCCI, ) Case No. 25-03768-JMC-13
)
Debtor. )

)
KENNETH D. MURENA, in his capacity as )
court-appointed Receiver of Drive Planning, LLC, )
)
Plaintiff, )
)
Vv. ) Adversary Proceeding No. 25-50110
)
GERARDO LORENZO LINARDUCCTI, )
)
Defendant. )

ORDER ON MOTION TO DISMISS
THIS MATTER comes before the Court on Defendant’s Motion to Dismiss Receiver’s
Amended Complaint to Except Debts from Discharge Pursuant to 11 U.S.C. § 523 filed by
Gerardo Lorenzo Linarducci (“Debtor”) on November 17, 2025 (Docket No. 9) (the “Motion”’).
The Motion seeks dismissal of the Amended Complaint to Except Debts from Discharge
Pursuant to 11 U.S.C. § 523 filed by Kenneth D. Murena, in his capacity as the court-appointed
receiver of Drive Planning, LLC (“Receiver”), on October 16, 2025 (Docket No. 3) (the

“Complaint”).
The Court, having reviewed the Complaint, the Motion, Defendant’s Brief in Support of
Motion to Dismiss Receiver’s Amended Complaint to Except Debts from Discharge Pursuant to 11 U.S.C. § 523 filed on November 17, 2025 (Docket No. 9-1), Plaintiff’s Response In

Opposition to Defendant’s Motion to Dismiss Amended Complaint to Except Debts from
Discharge Pursuant to 11 U.S.C. § 523 filed by Receiver on December 8, 2025 (Docket No. 10)
(“Receiver’s Initial Brief”), Defendant’s Reply in Support of Motion to Dismiss Receiver’s
Amended Complaint to Except Debts from Discharge Pursuant to 11 U.S.C. § 523 filed on
December 22, 2025 (Docket No. 11) and Receiver’s Supplemental Brief in Support of Stay Relief
Motion (Doc. 77) Regarding Legal Bases for Claims, Standing of Receiver, and Effect of
Bankruptcy on the Receiver’s Constructive Trust Remedy filed on February 11, 2026 in the
underlying bankruptcy case (Bankruptcy Case Docket No. 95), and the Court having heard
counsel regarding this matter at hearings held in the underlying bankruptcy case on January 29,
2026 and February 18, 2026, and being otherwise duly advised, now DENIES the Motion.

Background Facts
The following “background facts” are taken from the numbered paragraphs of Receiver’s
Complaint. These “facts” are taken as true solely for purposes of resolution of the Motion (see
pp. 6-7 infra):
1. [Receiver was] appointed pursuant to the Order Appointing
Receiver [(the “Receivership Order”)] entered by the United States District Court
for the Northern District of Georgia in SEC v. Drive Planning, LLC, et al., Case
No. 1:24-cv-03583-VMC (the “SEC Action”). …
2. [Debtor] is an individual who, upon information and belief, resides
at 12162 Pearl Bay Ridge, Indianapolis, Indiana.
3. Debtor commenced this Chapter 13 case by filing a petition on
June 27, 2025 (the “Petition Date”).
…
8. This action arises out of the massive Ponzi scheme orchestrated by
Drive Planning, LLC (“Drive Planning”) and its principals. From 2020 through
2024, Drive Planning misled more than 2,400 investors [(the “Investors”)] into
investing approximately $380 million into a fraudulent real estate and tax lien
investment scheme having many of the attributes of a classic Ponzi scheme. The
Ponzi scheme is the subject of the pending SEC Action, which was filed on
August 13, 2024.
9. [Debtor] was one of Drive Planning’s most prolific agents and
promoters. He received more than $5.9 million in commissions for soliciting
investors into the scheme, making him the second-highest paid Drive Planning
agent. [Debtor] lured investors (often unsophisticated individuals persuaded to
borrow against retirement accounts or home equity) to place their savings into
Drive Planning’s fraudulent investment products.
10. In addition to his substantial commissions, on July 10, 2023, Drive
Planning diverted $1,920,535.75 of investor funds to enable [Debtor] to purchase
a residence located at 12162 Pearl Bay Ridge, Indianapolis, Indiana 46236 (the
“Pearl Bay Property”). Although title to the Pearl Bay Property is in the name of
[Debtor] and his wife, the property is held in constructive trust for the benefit of
Drive Planning’s defrauded investors and the Receivership Estate.
11. In the SEC Action, the United States District Court for the
Northern District of Georgia has authorized the Receiver to pursue claims against
[Debtor].
12. The Receiver has filed two proofs of claim against the Debtor:
Claim No. 25 for the ill-gotten commissions in the amount of $5,949,611.41, and
Claim No. 26 for the diverted funds in the amount of $1,920,535.75 used to
acquire the Pearl Bay Property (collectively, the “[Claims]”).

The Receiver and Standing to Assert the Claims
Receiver is a federal equity receiver appointed by the Receivership Court pursuant to 28 U.S.C. §§ 754, 959 and 1692 and Fed. R. Civ. P. 66. The Receivership Court appointed
Receiver by its Receivership Order dated August 13, 2024.
Generally, a federal equity receivership is established by a federal court under its
equitable powers, often in the context of an enforcement action by a federal agency, such as the
SEC, FTC or CTC. From his appointment in August 2024, Receiver assumed comprehensive
control over the assets of Drive Planning. See Financial Poise Faculty, Federal Equity
Receiverships: Key Concepts and Strategies, THE NATIONAL LAW REVIEW, Apr. 13, 2025, at 1-
2, https://natlawreview.com/node/297337/printable/print.
Pursuant to the Receivership Order, Receiver took some level of ownership interest in
and the right to possess, control and dispose of all proceeds1 of the fraudulent Ponzi scheme
funds that were received and disbursed by Drive Planning, as such proceeds were, in effect, the
“fruit of the poisonous” Ponzi scheme tree. See the Receivership Order, pp. 1-2, defining

“Recoverable Assets”. The Receiver is cloaked with various other rights, powers and property
interests by the Receivership Order including the authorization to “… institute such actions and
legal proceedings, for the benefit and on behalf of the Receivership Estate … ; the Receiver may
seek … disgorgement of profits, … avoidance of fraudulent transfers, … collection of debts …”.
(Receivership Order, ¶ 43, pp. 18-19.)
Receiver, in effect, stands in the shoes of one of the alleged defrauders, Drive Planning,
not the Investors who were the victims of the Ponzi scheme. Said another way, Receiver “does
not have standing to sue on behalf of … creditors [of Drive Planning, such as Investors]”.
Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995) (hereinafter, “Scholes”). Receiver asserts
as the basis for his Claims “fraudulent transfer.” (See ¶ 8 of each of the Claims.) So how does

Receiver have standing to make recovery from third parties, such as Debtor, of funds or other
proceeds arguably transferred and acquired through the fraudulent Ponzi scheme?
The Court considers two judicial decisions to be authoritative in resolving the standing of
Receiver to make the fraudulent transfer claims that are the bases of Receiver’s Claims. Those
decisions are Scholes and Wiand v. Lee, 753 F.3d 1194 (11th Cir. 2014) (hereinafter, “Wiand”).2

1 At least such “proceeds” in the actual or constructive possession and/or control of the “Relief Defendants”.
2 In Wiand v. ATC Brokers Ltd., 96 F.4th 1303 (11th Cir. 2024), the 11th Circuit again considered whether a
federal equity receiver appointed following a Ponzi scheme has “standing” to assert fraudulent transfer claims, as
well as common tort law claims. The 11th Circuit affirmed its position in Wiand that the “ ‘receiver of entities used
to perpetuate a Ponzi scheme … h[as] standing to sue on behalf of the [entities] that were injured by the Ponzi
scheme operator.’ ” Id. at 1309 (quoting Wiand, 753 F.3d at 1202).
Many states, including Indiana and Georgia, have adopted as that state’s fraudulent or
avoidable transfer statute a version of one of the model uniform statutes regarding “fraudulent”
and/or “voidable” transfers, such as IND. CODE §§ 32-18-2-1 through -23 (Indiana’s version of
the UVTA) and GA. CODE ANN. §§ 18-2-70 through -85 (Georgia’s version of the UVTA).

Fraudulent transfer statutes generally set forth elements by which a “creditor” of a “debtor” may
avoid a transfer to a third-party transferee, as being either “actually” or “constructively”
fraudulent as to the creditor. To understand whether Receiver has standing to assert the Claims,
it is therefore necessary to define and understand a triangular or three-party relationship that is
necessary for relief under such fraudulent transfer statutes.
Wiand defines the necessary triangular relationship that must be constructed for a federal
equity receiver to assert a fraudulent transfer claim against a third-party transferee, such as
Debtor. In such a triangle, as explained in Wiand, (1) the “receivership entity” (here, Drive
Planning) is the “creditor”; (2) the principal perpetrator of the fraud and controlling party with
respect to the receivership entity, here presumably Russell Todd Burkhalter (“Burkhalter”), is the

“debtor”; and (3) Debtor is the transferee. Wiand and Scholes describe the nature of the claim
held by the receivership entity against the perpetrator/controlling party, determine how a “Ponzi
scheme presumption” establishes actual intent, and explain how Receiver may satisfy the other
elements of the applicable fraudulent transfer statute.
Positions of the Parties
By the Complaint, Receiver asks the Court to determine that the Debts arising from the
Claims are non-dischargeable pursuant to 11 U.S.C. §§ 523 (a)(2)(A), (a)(2)(B), (a)(4), (a)(6) and
(a)(19).
By the Motion, Debtor argues that Counts IV (§ 523(a)(2)(6)) and V (§ 523(a)(19)) of the

Complaint should be dismissed because they are premature and/or the Court lacks subject matter
jurisdiction over them. Receiver acquiesces to the dismissal of Counts IV and V, without
prejudice. (Receiver’s Initial Brief, p. 2.)
Debtor argues that Counts I (§ 523(a)(2)(A)), II (§ 523(a)(2)(B)) and III (§ 523(a)(4)) of
the Complaint should also be dismissed, pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b), made

applicable to this adversary proceeding by Fed. R. Bankr. P. 7012(b) and 7009, respectively,
because Receiver failed to plead fraud with sufficient particularity to satisfy the heightened
pleading requirements for fraud.
Standard of Review
Courts review and resolve Rule 12(b)(6) motions as follows:
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the
sufficiency of the complaint and not the merits of the suit. See Gibson v. City of
Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In ruling on such a motion, the
Court accepts as true all of the well-pleaded facts alleged by the plaintiff and all
reasonable inferences that can be drawn therefrom. See Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555–56 (2007); see also Tamayo v. Blagojevich, 526
F.3d 1074, 1082 (7th Cir. 2008).

To survive a 12(b)(6) motion to dismiss for failure to state a claim, the complaint
must first comply with Rule 8(a) by providing “a short and plain statement of the
claim showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), such
that the defendant is given “fair notice of what the ... claim is and the grounds
upon which it rests.” Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355
U.S. 41, 47 (1957)); see also Ashcroft v. Iqbal, 556 U.S. 662, 677–78 (2009).
Second, the “complaint must contain sufficient factual matter, accepted as true, to
‘state a claim to relief that is plausible on its face.’ ” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 570); see also Tamayo, 526 F.3d at 1082. The
Supreme Court explained that the “plaintiff's obligation to provide the grounds of
his entitlement to relief requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (quotation marks and brackets omitted); see also Iqbal, 556 U.S.
at 678–79; Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009). Determining
whether a complaint states a plausible claim for relief requires the Court to draw
on its judicial experience and common sense. Iqbal, 556 U.S. at 679.

Trustees of Teamsters Union Local No. 142 Pension Trust Fund v. Cathie's Cartage, Inc., 2013
WL 2402990 at *3 (N.D. Ind. 2013).
Reasoning
Objection to Dischargeability of Debt – § 523
Exceptions to discharge under § 523 “are to be construed strictly against a creditor and
liberally in favor of the debtor.” In re Zarzynski, 771 F.2d 304, 306 (7th Cir. 1985). “The

burden is on the objecting creditor to prove exceptions to discharge.” Goldberg Secs., Inc. v.
Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir. 1992) (citation omitted). The burden of
proof required is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111
S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
Section 523 provides, in relevant part:
(a) A discharge under section 727 … of this title does not discharge an individual
debtor from any debt –
…
(2) for money, property, services, or an extension, renewal, or refinancing of
credit, to the extent obtained by –
(A) false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing –
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such
money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to
deceive;
…
(4) for fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny;
…
(6) for willful and malicious injury by the debtor to another entity or to the
property of another entity … .
§ 523(a)(2)(A)
Receiver alleges that the Debts are nondischargeable pursuant to § 523(a)(2)(A) because
the Debts arose from fraudulent transfers to Debtor.
The Seventh Circuit Court of Appeals distinguishes material differences among the three

possible grounds for nondischargeability under § 523(a)(2)(A) and has formulated two different
tests, one for both “false pretenses” and “false representation” and another for “actual fraud.”
See Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 699-700 (Bankr. N.D. Ill. 2002) (citing
McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir. 2000)).
To prevail on a nondischargeability claim under the “false pretenses” or “false
representation” theory, a creditor must prove all of the following elements: “(1) the debtor made
a false representation or omission, (2) that the debtor (a) knew was false or made with reckless
disregard for the truth and (b) was made with the intent to deceive, (3) upon which the creditor
justifiably relied.” Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010) (citations omitted).
“What constitutes ‘false pretenses’ in the context of § 523(a)(2)(A) has been defined as

‘implied misrepresentations or conduct intended to create and foster a false impression.’ ”
Mem’l Hosp. v. Sarama (In re Sarama), 192 B.R. 922, 927 (Bankr. N.D. Ill. 1996) (quoting
Banner Oil Co. v. Bryson (In re Bryson), 187 B.R. 939, 959 (Bankr. N.D. Ill. 1995) (quotations
omitted)). “False pretenses do not necessarily require overt misrepresentations. Instead,
omissions or a failure to disclose on the part of the debtor can constitute misrepresentations
where the circumstances are such that omissions or failure to disclose create a false impression
which is known by the debtor.” Id. at 928 (citation omitted).
A “false representation” can be shown by the debtor’s written statement, spoken
statement or conduct. Deady v. Hanson (In re Hanson), 432 B.R. 758, 772 (Bankr. N.D. Ill.

2010) (citing Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr. N.D. Ill. 2001)). “A
debtor’s failure to disclose pertinent information may be a false representation where the
circumstances imply a specific set of facts and disclosure is necessary to correct what would
otherwise be a false impression.” Id. (citing Trizna & Lepri v. Malcolm (In re Malcolm), 145
B.R. 259, 263 (Bankr. N.D. Ill. 1992)). “An intentional falsehood relied on under § 523(a)(2)(A)

must concern a material fact.” Scarpello, 272 B.R. at 700 (citing Jairath, 259 B.R. at 314).
Justifiable reliance is an intermediate level of reliance which is less stringent than
“reasonable reliance” but more stringent than “reliance in fact.” See Field v. Mans, 516 U.S. 59,
72-73, 116 S.Ct. 437, 445, 133 L.Ed.2d 351 (1995). Justifiable reliance requires only that the
creditor did not “blindly [rely] upon a misrepresentation the falsity of which would be patent to
him if he had utilized his opportunity to make a cursory examination or investigation” and
imposes no duty on the creditor to investigate unless the falsity of the representation is readily
apparent. Id. at 71, 116 S.Ct. at 444 (quotations omitted). Justifiable reliance is not measured
from the objective person standard, but rather from the experiences and characteristics of the
particular creditor. Id. (quotation omitted).

“Scienter, or intent to deceive, is … a required element under § 523(a)(2)(A) whether the
claim is for a false representation, false pretenses, or actual fraud.” Gasunas v. Yotis (In re
Yotis), 548 B.R. 485, 495 (Bankr. N.D. Ill. 2016) (citation omitted).
A debtor’s intent to deceive for purposes of the false pretenses and false representation
prongs on § 523(a)(2)(A) “is measured by a debtor’s subjective intention at the time the
representation was made.” Scarpello, 272 B.R. at 700 (citing Mercantile Bank v. Canovas, 237
B.R. 423, 428 (Bankr. N.D. Ill. 1998)). “Because direct proof of fraudulent intent is often
unavailable, fraudulent intent may be inferred from the surrounding circumstances.” Hanson, 432 B.R. at 773 (internal citations omitted).
The core assertion of Debtor’s Motion is that Receiver has failed to sufficiently plead the
circumstances of one or more misrepresentations or omissions of material fact by Debtor that
form the bases of Receiver’s fraud claims against Debtor. However, a creditor, such as Receiver,
may plead and prove that a debtor is guilty of “actual fraud” that will cause a resulting debt to be

excepted from discharge without specifying any misrepresentation by the debtor.
“[A]ctual fraud is broader than misrepresentation,” McClellan, 217 F.3d at 893, in that
neither a debtor’s misrepresentation nor a creditor’s reliance is necessary to prove
nondischargeability for “actual fraud.” Scarpello, 272 B.R. at 700 (citing McClellan, 217 F.3d at
894). “Actual fraud” is defined as “any deceit, artifice, trick, or design involving direct and
active operation of the mind, used to circumvent and cheat another” which includes “all surprise,
trick, cunning, dissembling, and any unfair way by which another is cheated.” McClellan, 217
F.3d at 893 (quotations omitted). See also Husky Int’l Elecs., Inc. v. Ritz, 578 U.S. 356, 359-60, 136 S.Ct. 1581, 1586, 194 L.Ed.2d 655 (2016) (“The term ‘actual fraud’ in § 523(a)(2)(A)
encompasses forms of fraud … that can be effected without a false representation. … The word

‘actual’ has a simple meaning in the context of common-law fraud: It denotes any fraud that
‘involv[es] moral turpitude or intentional wrong.’ … [A]nything that counts as ‘fraud’ and is
done with wrongful intent is ‘actual fraud.’ ”) (internal citation omitted). In such cases, a
creditor must prove “(1) a fraud occurred; (2) the debtor intended to defraud the creditor; and (3)
the fraud created the debt that is the subject of the discharge dispute.” Hanson, 432 B.R. at 772 (citing McClellan, 217 F.3d at 894).
“[T]he focus of an ‘actual fraud’ claim is on the defendant's state of mind at the time of
his purportedly fraudulent conduct.” Merritt v. Wiszniewski (In re Wiszniewski), 2010 WL
3488960 at *5 (Bankr. N.D. Ill. 2010) (citation omitted).

“The term ‘actual fraud’ in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent
conveyance schemes, that can be effected without a false representation.” Husky Int’l Elecs.,
Inc. v. Ritz, 578 U.S. 355, 359, 136 S.Ct. 1581, 1586 (2016).
An exception to discharge under § 523(a)(2)(A) “encompasses any liability arising from
money, property, etc., that is fraudulently obtained, including treble damages, attorney's fees, and

other relief that may exceed the value obtained by the debtor.” Cohen v. De La Cruz, 523 U.S.
213, 223, 118 S. Ct. 1212, 1219, 140 L.Ed.2d 341 (1998).
In this case, Receiver alleges that Debtor was the recipient of fraudulent transfers for
which Receiver may recover under applicable fraudulent transfer law. Receiver alleges that the
transfers were products of actual (not constructive) fraud with the requisite fraudulent intent
shown by the fact that the transfers were part and parcel of the Ponzi scheme. See Wiand, 753
F.3d at 1200 -01 (citing many cases).
§ 523(a)(2)(B)
As discussed earlier, Receiver’s claim of fraud is not of the misrepresentation variety but
is instead of the fraudulent scheme variety endorsed by the Supreme Court in Husky.

However, it is more difficult to fit such a scheme into § 523(a)(2)(B). “In order to prevail
on a claim under ... § 523(a)(2)(B), a creditor must prove by a preponderance of the evidence
that a debtor made, with an intent to deceive, a materially false written statement regarding his
financial condition and that the creditor relied on that statement.” In re Sheridan, 57 F.3d 627,
633 (7th Cir. 1995).
“Material falsity has been defined as ‘an important or substantial untruth.’ ” In re
Bogstad, 779 F.2d 370, 375 (7th Cir. 1985) (citations omitted). “A recurring guidepost used by
courts has been to examine whether the lender would have made the loan had he known of the
debtor’s true financial condition.” Id. (citations omitted). This guidepost is sometimes referred

to as the “causa sine qua non” or “but for” test. Selfreliance Fed. Credit Union. v. Harasymiw
(In re Harasymiw), 895 F.2d 1170, 1172 (7th Cir. 1990). Courts have also described a materially
false statement as “one that paints a substantially inaccurate picture of a debtor’s financial
condition by misrepresenting information of the type which normally would affect the decision
to grant credit.” Midwest Cmty. Fed. Credit Union v. Sharp (In re Sharp), 357 B.R. 760, 765 (Bankr. N.D. Ohio 2007) (citations omitted).
“[A] statement about a single asset can be a ‘statement respecting the debtor’s financial
condition’ under § 523(a)(2) of the Bankruptcy Code.” Lamar, Archer & Cofrin, LLP v.
Appling, 584 U.S. 709, 725, 138 S.Ct. 1752, 1764, 201 L.Ed.2d 102 (2018). “[A] statement is
‘respecting’ a debtor’s financial condition if it has a direct relation to or impact on the debtor’s
overall financial status.” Id. at 720, 138 S.Ct. at 1761.
“The reasonableness of a creditor’s reliance should be determined on a case by case
basis.” Webster Bank, Nat’l Ass’n v. Contos (In re Contos), 417 B.R. 557, 566 (Bankr. N.D. Ill.
2009) (citing In re Bonnett, 895 F.2d 1155, 1157 (7th Cir. 1989)).
The Seventh Circuit has recognized that, in considering the reasonableness of a
creditor’s reliance, the court should not undertake a subjective evaluation and
judgment of a creditor’s lending policy and practices, nor use the requirement to
second-guess a creditor’s lending decisions. So while the concept of reasonable
reliance does not generally require creditors to conduct an investigation prior to
entering into agreements with prospective debtors, a lender may not ignore
evidence of deceit and expect the court to later grant an exception to the debtor’s
discharge.

Peoples Tr. and Sav. Bank v. Hanselman (In re Hanselman), 454 B.R. 460, 465 (Bankr. S.D. Ind.
2011) (internal quotations and citations omitted). “Two factors to consider when determining
whether a creditor’s reliance was reasonable are (1) whether the creditor’s standard practices in
evaluating credit-worthiness were followed and (2) whether there existed a ‘red flag’ that would
have alerted an ordinarily prudent lender to the possibility that the information is inaccurate.” Id. at 464-65 (citing Contos, 417 B.R. at 566).
“The law recognizes the duty of each to refrain from even attempted deceit of another
with whom he deals, and the right of the latter to assume that he will do so ... .” N. Tr. Co. v.
Garman (In re Garman), 643 F.2d 1252, 1260 (7th Cir. 1980) (quotation omitted). Courts have
noted that “actual intent is only rarely ascertainable by direct evidence as a debtor is unlikely to

ever admit acting in a fraudulent manner. Consequently, like with other matters where the
debtor’s state of mind is placed at issue, the use of circumstantial evidence is usually necessary
to determine whether the debtor acted with the requisite intent to deceive.” Sharp, 357 B.R. at
767 (citation omitted). For that reason, “[w]hile a creditor can prove intent to deceive through
direct evidence, … it may also be inferred where ‘a person knowingly or recklessly makes a false
representation which the person knows or should know will induce another to make a loan.’ ”
Hanselman, 454 B.R. at 465 -66 (quoting Sheridan, 57 F.3d at 633). “A debtor’s intent to
deceive may also be demonstrated by showing reckless indifference to, or reckless disregard for,
the accuracy of the information in a financial statement.” Contos, 417 B.R. at 565 (citation
omitted). In addition, a debtor’s mere “unsupported assertions of honest intent will not

overcome the natural inferences from admitted facts.” Howard, 73 B.R. at 700 (citing 3 COLLIER
ON BANKRUPTCY, ¶ 523.09, at 523–62 (L. King, 15th ed.)).
In his Motion, Debtor does not attack Count II of the Complaint on the basis that the
“writings” that are the subject of that Count (“solicitation materials” used to defraud investors)
do not on their face appear to be financial statements respecting Debtor’s financial condition.
However, the statements that are the subject of Count II may be regarding an “insider” of Debtor,
such as Drive Planning.
§ 523(a)(4)
Receiver alleges that the Debts are nondischargeable pursuant to § 523(a)(4) because

Debtor owed fiduciary duties to investors and to Drive Planning.
To prove a § 523(a)(4) claim, a creditor must establish that “ (1) ‘the debtor acted as a
fiduciary to the creditor at the time the debt was created,’ and (2) ‘the debt was caused by fraud
or defalcation.’ ” Estate of Cora v. Jahrling (In re Jahrling), 816 F.3d 921, 925 (7th Cir. 2016)
(quoting In re Berman, 629 F.3d 761, 765-66 (7th Cir. 2011)).

“The court has defined a fiduciary relationship under § 523(a)(4) as ‘a difference in
knowledge or power between fiduciary and principal which … gives the former a position of
ascendancy over the latter.’ … A fiduciary relation only qualifies under § 523(a)(4) if it
‘imposes real duties in advance of the breach.’ ” In re Frain, 230 F.3d 1014, 1017 (7th Cir.
2000) (citations omitted).
In this circuit, a fiduciary relationship for purposes of § 523(a)(4) “arises in just two
situations: (1) when there is an express trust, and (2) when there is an implied fiduciary
relationship.” Berman, 629 F.3d at 768-70. To prove an implied fiduciary relationship,3 “the
creditor must show the relationship was one of ‘special confidence’ … [that] exists when the
parties have an unequal relationship, one where there is ‘a difference in knowledge or power

between fiduciary and principal’ that gives ‘the former a position of ascendancy over the latter.’”
CR Adventures LLC v. Hughes (In re Hughes), 609 B.R. 789, 797 (Bankr. N.D. Ill. 2019)
(quoting In re Marchiando, 13 F.3d 1111, 1116 (7th Cir. 1994)).
Under § 523(a)(4), fraud means “ ‘positive fraud, or fraud in fact, involving moral
turpitude or intentional wrong, as does embezzlement; and not implied fraud, or fraud in law,
which may exist without the imputation of bad faith or immorality.’ ” Bullock v.
BankChampaign, N.A., 569 U.S. 267, 273, 133 S.Ct. 1754, 1759, 185 L.Ed.2d 922 (2013)

3 Receiver’s Initial Brief did not argue the presence of an express trust.
(quoting Neal v. Clark, 95 U.S. 704, 709, 24 L.Ed. 586 (1878)). Section 523(a)(4) covers “only
debts for fraud while acting as a fiduciary”. Husky, 578 U.S. at 363, 136 S.Ct. at 1588.
Similarly, defalcation requires a creditor to prove “a culpable state of mind ... involving
knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary

behavior.” Bullock, 569 U.S. at 269, 133 S.Ct. at 1757. The state-of-mind requirement must
involve “at least a subjective, criminal level of recklessness … [where] the fiduciary
‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his
conduct will turn out to violate a fiduciary duty.” Jahrling, 816 F.3d at 925 (quoting Bullock, 133 S.Ct. at 1759). Defalcation, as opposed to fraud, “may be used to refer to nonfraudulent
breaches of fiduciary duty.” Id. Embezzlement is:
the “fraudulent appropriation of property by a person to whom such property has
been entrusted or into whose hands it has lawfully come.” In re Weber, 892 F.2d
534, 538-39 (7th Cir. 1989), abrogated on other grounds by Grogan v. Garner, 489
U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In order to prove
embezzlement, a creditor must show that the debtor (1) appropriated property for
her own benefit; and (2) that she did so with fraudulent intent or deceit. Id. Thus,
it is not sufficient that the debtor act without authority, but she must also have
fraudulent intent.

Wallner v. Liebl (In re Liebl), 434 B.R. 529, 537 (Bankr. N.D. Ill. 2010).
“For embezzlement, fraudulent intent ‘is knowledge that the use is devoid of
authorization, scienter for short.’ ” FNA Group, Inc. v. Demetrios Arvanitis (In re Arvanitis), 523 B.R. 633, 639 (Bankr. N.D Ill. 2015) (quoting Sherman v. Potapov (In re Sherman), 603
F.3d 11, 13 (1st Cir. 2010)). See also Bank Calumet v. Whiters (In re Whiters), 337 B.R. 326,
332 (Bankr. N.D. Ind. 2006) (“ ‘Embezzlement, for purposes of … § 523 … “requires fraud in
fact, involving moral turpitude or intentional wrong, rather than implied or constructive
fraud.” ’ ” (quotation omitted)).
“Embezzlement differs from larceny only in that the original taking was lawful.”
Schaffer v. Dempster (In re Dempster), 182 B.R. 790, 802 (Bankr. N.D. Ill. 1995).
“Larceny is proven for § 523(a)(4) purposes if the debtor has wrongfully and with
fraudulent intent taken property from its owner.” Kaye v. Rose (In re Rose), 934 F.2d 901, 903 (7th Cir. 1991) (citations omitted). “The original taking must be unlawful and the debtor must
have felonious intent at the time of the taking.” Chiromo v. Grigoletti (In re Grigoletti), 2010
WL 5055927, at *2 (Bankr. S.D. Ind. 2010) (citation omitted). It is “clear that [larceny] appl[ies]
outside of the fiduciary context.” Bullock, 569 U.S. at 275, 133 S.Ct. at 1760.
Once again, Debtor’s attack on Count III is limited to the alleged failure to plead
fraudulent misrepresentation with the required particularity. Debtor did not by the Motion
challenge any of the other aspects of Receiver’s § 523(a)(4) claim.
Decision
Because the Motion attacks only the alleged failure to plead misrepresentation with
sufficient particularity and Receiver’s claims are based on fraudulent transfers and not

misrepresentations per se, the Motion fails.
Based on Receiver’s acquiescence as set forth in Receiver’s Initial Brief, Counts IV and
V and hereby DISMISSED without prejudice.
Otherwise, the Motion is DENIED.
IT IS SO ORDERED.
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