                               In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 14-3213
BRIAN T. SULLIVAN,
                                                  Plaintiff-Appellant,

                                 v.

MICHELE A. GLENN and MICHAEL R. GLENN, JR.,
                                    Defendants-Appellees.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
              No. 14 C 329 — James B. Zagel, Judge.
                     ____________________

    ARGUED FEBRUARY 10, 2015 — DECIDED APRIL 2, 2015
                ____________________

   Before POSNER, MANION, and TINDER, Circuit Judges.
    POSNER, Circuit Judge. This appeal presents a pair of ques-
tions of bankruptcy law: whether, if a debt is the result of
fraud, the debtor can discharge the debt in bankruptcy if he
was not complicit in the fraud; and whether he can dis-
charge the debt even if the fraud was created by his agent,
provided, again, that the debtor himself was not complicit in
it.
2                                                 No. 14-3213


    The defendants, the Glenns, were in the real estate devel-
opment business. In 2007 they encountered financial difficul-
ties and asked a loan broker named Karen Chung to try to
get them a short-term loan of $250,000. She asked a lawyer
named Brian Sullivan, of whom she was a friend and an oc-
casional client, whether he’d be interested in making such a
loan. He was, and agreed to lend the Glenns the $250,000 re-
payable in two to three weeks with interest of $5,000 per
week. The Glenns needed the money for more than two
weeks, but Chung told them and Sullivan that a bank had
agreed to give the Glenns a $1 million line of credit, though
it would take a few weeks for the line of credit to become
available—hence the need for the “bridge” loan from Sulli-
van, which the Glenns would easily be able to repay as soon
as they could draw on the line of credit.
    At the meeting in the fall of 2007 at which these ar-
rangements were discussed, Sullivan asked about the cur-
rent status of the bank loan. One of Chung’s employees
stepped out of the room, ostensibly to call the bank. When
he returned he told Sullivan that the bank had indeed ap-
proved the $1 million line of credit. In fact, as Chung well
knew, her employee hadn’t called the bank and the line of
credit had not been (and never was) approved—indeed it
had never been applied for. Sullivan was left in the dark. But
before the meeting broke up he asked and eventually re-
ceived promissory notes from the Glenns and from Chung,
committing them personally to repay his $250,000 loan if re-
payment was not made from the bank’s line of credit.
   The loan was never repaid. Chung declared bankruptcy.
Sullivan filed an adversary complaint against her in the
bankruptcy proceeding, claiming that she was not entitled to
No. 14-3213                                                     3


discharge the debt to him created by her promissory note
because it was her fraudulent assurance that the bank line of
credit had been approved that had induced him to make the
$250,000 loan secured by promissory notes including
Chung’s. The Bankruptcy Code bars discharge of an indi-
vidual debtor for a debt “obtained by … false pretenses, a
false representation, or actual fraud … .” 11 U.S.C.
§ 523(a)(2)(A). So the court refused to grant Chung her dis-
charge.
    The Glenns had also declared bankruptcy, and Sullivan
had filed similar adversary complaints against them, which
were consolidated. But in the consolidated proceeding the
bankruptcy judge found that neither of the Glenns had
committed fraud, and he refused to impute Chung’s fraud to
either of them under an agency theory argued by Sullivan—
he ruled that Chung had not been the Glenns’ agent. He also
rejected two alternative arguments of Sullivan—that if a debt
is a product of fraud even the debtor’s complete innocence is
nevertheless no defense to the nondischargeability of the
debt, and that Glenn had committed fraud rather than being
simply the innocent beneficiary of Chung’s fraud and his
fraud had enabled the Glenns to induce Sullivan to make the
bridge loan. The bankruptcy judge therefore concluded that
the Glenns’ debt to Sullivan was dischargeable, precipitating
this appeal to us.
   Sullivan’s “debt not the debtor” theory is consistent with
the language of the fraud exception to discharge, quoted
above. But this just illustrates the limitations of literal inter-
pretation of statutory language. If his interpretation were
correct, then had Chung assigned the debt that she owed to
Sullivan to some innocent third party, who as a result of the
4                                                     No. 14-3213


assignment became a debtor of Sullivan and later went
bankrupt, the assignee could not discharge the debt in bank-
ruptcy, because the debt had originated in fraud—even if
Chung had lied to the assignee about the debt’s fraudulent
origin. That would make no sense. It would be a form of at-
tainder: an innocent person punished for the misdeed of an
ancestor, or in this case an assignor.
     Sullivan’s alternative theory, based on the law of agen-
cy—that Chung was the Glenns’ agent and the misdeeds of
the agent within the scope of the agency are imputed to the
principal—has greater promise. The Glenns deny that
Chung was their agent. They argue that as a loan broker
Chung was an independent contractor. But if you hire some-
one to negotiate a deal for you, subject to your approval, that
someone is your agent. Petty v. Cadwallader, 482 N.E.2d 225,
228 (Ill. App. 1985) (Illinois law); Whitley v. Taylor Bean &
Whitacker Mortgage Corp., 607 F. Supp. 2d 885, 903–04 (N.D.
Ill. 2009) (same); First National Bank v. El Camino Resources,
Ltd., 447 F. Supp. 2d 902, 910 (N.D. Ill. 2006) (same); Arm-
strong v. Republic Realty Mortgage Corp., 631 F.2d 1344, 1348–
50 (8th Cir. 1980) (Missouri law). In addition, the principal is
liable for a misrepresentation made by its agent if the person
to whom the misrepresentation was made would have no
reason to doubt that it was a true statement, authorized by
the principal. American Society of Mechanical Engineers, Inc. v.
Hydrolevel Corp., 456 U.S. 556, 565–68 (1982).
    But the issue in this case is not the Glenns’ liability to Sul-
livan, which is anyway fully grounded on their promissory
notes, making any vicarious tort liability that might be im-
posed on them irrelevant. The issue is whether their agent’s
fraud is grounds for denying them their discharge in bank-
No. 14-3213                                                   5


ruptcy. Sullivan is emphatic that it is. His opening brief de-
clares that “nondischargeability … does not turn on whether
the debtor himself did something bad”—“guilt or innocence
has nothing to do with it.” In other words you can do noth-
ing bad but still be denied a discharge in bankruptcy—no
fresh start for the innocent. As Sullivan nostalgically re-
marks, “Contrary to popular belief, bankruptcy was initially
created for the benefit and protection of creditors, not debt-
ors.” Yes, and debtors used to be sent to prison.
    We don’t think that Chung’s fraud should result in the
denial of the Glenns’ discharge in bankruptcy. “Proof that a
debtor’s agent obtains money by fraud does not justify the
denial of a discharge to the debtor, unless it is accompanied
by proof which demonstrates or justifies an inference that
the debtor knew or should have known of the fraud.” In re
Walker, 726 F.2d 452, 454 (8th Cir. 1984). That condition for
denial of the discharge is not satisfied in this case. Moreover,
Sullivan, the victim of the fraud, was in as good a position as
the Glenns to have detected it before it could have done any
harm. All he would have had to do—and should have done
anyway, as a matter of elementary precaution—before mak-
ing a $250,000 loan was to call the bank for verification that
the Glenns’ line of credit—the sine qua non of his being as-
sured of repayment of his bridge loan—had been approved.
If the bank refused to give him the information without
Glenn’s approval, he had only to ask Glenn for that ap-
proval. Sullivan had to have known that if the line of credit
hadn’t been approved, his chances of being repaid his bridge
loan would plummet. He may have realized this—such re-
alization may have been the reason for his insisting on
promissory notes from the Glenns and Chung. But he should
have called the bank, since if it confirmed the issuance of the
6                                                 No. 14-3213


line of credit he would have less need for those notes—and
since if the Glenns and Chung were unable to pay the notes
and declared bankruptcy and were discharged in bank-
ruptcy he would have little chance of collecting the Glenns’
debt to him. He thus is mistaken to say that the Glenns
“were in a far superior position than [he] to prevent the
fraud from happening in the first place.”
    This is not to say that Chung would have been entitled to
a discharge in bankruptcy of a debt owed to Sullivan, on the
ground that Sullivan should have protected himself against
any possible fraud by her or the Glenns by asking the bank
whether it had authorized the loan to the Glenns. As be-
tween fraudulent and careless, careless wins. Mayer v. Spanel
Int’l Ltd., 51 F.3d 670, 672, 675–76 (7th Cir. 1995). But the
question is whether the Glenns, who have not been shown to
be careless in hiring and relying on Chung, should lose their
discharge in bankruptcy to Sullivan, who would not have
lost his $250,000 had he exercised even slight care.
    Sullivan was eager to make the loan; it constituted a very
lucrative opportunity. A loan of $250,000 outstanding for a
year that pays $5,000 in interest every week will return the
lender $260,000 in interest (52 weeks times $5,000 per week)
over the course of the year. The aggregate interest will be
104 percent of the principal of the loan. It’s not every day
that one is offered interest on a loan at an annual rate of 104
percent (not that the loan was expected to be outstanding for
anywhere near a year). It appears, moreover, that in agree-
ing to make the loan Sullivan was relying not only on
Chung’s being the borrowers’ agent but also on his friend-
ship with her. His opening brief describes the two as “good
friends,” and at the trial he described them as “very good
No. 14-3213                                                    7


friends.” That they were “good friends” or “very good
friends” tarnishes Sullivan’s agency theory. He may have
been trusting her more as a friend than as the Glenns’ agent.
    We go further: Sullivan’s dealings with Chung bordered
on the irrational. Before he made the bridge loan to the
Glenns he had lent her $30,000, which she did not repay. Af-
ter the bank deal failed to close on time he lent her another
$30,000. And after he learned that the bank had not author-
ized the line of credit he lent her $35,000 more. (So far as we
know, neither of those loans was repaid, either.) Until the
fraud was exposed he was putty in her hands.
    It’s true as he argues that imposing liability for benefiting
however innocently from a fraud would make debtors, such
as the Glenns (who benefited by getting the bridge loan from
Sullivan), police their agents more carefully. But it would
also increase the complexity and cost of commercial transac-
tions. Bankruptcy creates a form of limited liability, which
encourages transacting. Withdrawing the option of a dis-
charge in bankruptcy thus increases transactional risk for
debtors. So it’s a wash—there is, so far as we can determine,
no net social benefit to be obtained by embracing the posi-
tions urged by Sullivan.
   In re Walker, supra, 726 F.2d at 454, holds that a principal,
such as Glenn, of an agent who commits fraud forfeits his
right to a discharge in bankruptcy only if he “knew or
should have known of the agent’s fraud” or “was recklessly
indifferent to the acts of his agent.” To the same effect see,
besides cases cited in id., In re Huh, 506 B.R. 257, 266–71 (9th
Cir. BAP 2014). Some cases lean the other way, see In re Bon-
nanzio, 91 F.3d 296, 302–03 (2d Cir. 1996); In re Cohn, 54 F.3d
1108, 1119 (3d Cir. 1995); In re Lansford, 822 F.2d 902, 904–05
8                                                 No. 14-3213


(9th Cir. 1987), but no appellate court has actually rejected
Walker. Granted, the Walker standard is a bit mushy; if it’s
enough to deny the discharge that the principal “should
have known of the agent’s fraud,” there will never be an oc-
casion for requiring proof of reckless indifference. No mat-
ter; there’s no indication that Glenn was aware, or should
have been aware, of Chung’s fraud.
    In any event, Sullivan didn’t try to meet the standard of
Walker. Instead, twanging the second string of his bow, he
assumed the heavier burden of trying to show that Michael
Glenn was guilty of fraud because he “knew, or had to
know, that the [Bank] Loan never existed and therefore
could never be a source of funds to pay off the Sullivan
Loan.” Obviously if Glenn was guilty of fraud he cannot dis-
charge his $250,000 debt (based on his promissory note) to
Sullivan in bankruptcy. But Glenn testified without contra-
diction that his usual method of obtaining bank loans was
just to email a loan request to a bank, rather than to submit a
formal loan application, and that he would receive informal
notice of approval of his application before receiving docu-
mentary confirmation. So when Chung’s employee told him
that the bank had confirmed over the phone its approval of
the line of credit sought by the Glenns, Glenn had no reason
to doubt that the line of credit had indeed been approved
and that therefore Sullivan’s bridge loan would be repaid.
    Sullivan further argues that Glenn told him that “a large
portion” of the bridge-loan money would be used forthwith
for grading and for asphalt paving at a construction site, but
that in fact all the money was used to pay off creditors. Sul-
livan claims that had he known the money was to be used to
pay off creditors he would not have made the bridge loan
No. 14-3213                                               9


but instead would have told Glenn to hold off paying the
creditors until he could draw on the bank’s line of credit.
This is another argument that doesn’t make sense. Why
would Sullivan have given up $10,000 or $15,000 in interest,
regardless of what use Glenn would put the proceeds of the
bridge loan to?
     And by the way, there is no keeping Karen Chung
down. See Special Learning: A Leader in Providing Digital
Training and Educational Solutions to the Autism and Spe-
cial Needs Communities Across the Globe, “Karen Chung,
CEO and Founder,” www.special-learning.com/about; Beth
Pitts, “Karen Chung, Serial Entrepreneur, on Bringing Au-
tism Services into the 21st Century,” The Next Women, July
31, 2012, www.thenextwomen.com/2012/07/31/karen-chung-
serial-entrepreneur-bringing-autism-services-21st-century
(both websites were visited on April 1, 2015).
    But the important thing of course is that the bankruptcy
judge and the district judge were right to reject Sullivan’s
contention that the Glenns’ debt to him was not discharge-
able in bankruptcy.
                                                 AFFIRMED.
