[author: Sarah Schofield]

On January 18, 2022, Judge Whitman L. Holt of the U.S. Bankruptcy Court for the District of Montana ruled that a broad release provided in connection with a court-approved asset sale barred a bankruptcy trustee from later asserting claims alleging fraudulent concealment against two of the debtor’s secured lenders. Shoot the Moon, LLC filed the underlying Chapter 11 petition after its numerous restaurants’ profitability declined sharply. Concerned by the rapidly dwindling bankruptcy estate, the parties quickly entered into a bankruptcy-court-approved asset sale, which included a broad release of claims against creditors. Shortly after entry of the approval order, the trustee sought to invalidate the release, alleging that the debtor entities suffered financial injury after an investor in the debtor engaged in a check-kiting scheme using the debtor and affiliated entities, which the lenders knew of and participated in, but never disclosed.

The court granted the lenders’ motion to dismiss, holding that the allegations were insufficient to invoke fraudulent concealment as a basis to invalidate the plain language of the release that was part of the asset sale. The court emphasized the importance of the legal distinction between action and inaction, explaining that more affirmative conduct than simple nondisclosure was needed to establish fraudulent concealment. The court thus held that the trustee’s failure to allege affirmative acts to mislead, hinder, or otherwise create any misimpressions was a “fatal defect.” The complaint contained no allegations that the trustee made inquiries or that the defendants provided false responses, and it set forth no allegations that the defendants concealed information or hindered the trustee’s ability to learn of relevant facts elsewhere. Instead, the complaint alleged passive nondisclosure—a failure to volunteer information—which the court found legally insufficient to invalidate the release.

The case is Foster v. First Interstate Bank (In re Shoot the Moon, LLC), No. 2:21-ap-2005 (Bankr. D. Mont. Jan. 18, 2022). The trustee is represented by Cotner Law PLLC. Defendant-lender American Bank Center is represented by Moulton Bellingham PC and Doug James. Defendant-lender First Interstate Bank is represented by Boone Karlberg P.C., Hansberry & Jourdonnais, PLLC, and Ennis & Hawley, LLP. The order is available here.