In In re Eifler, issued yesterday, the Sixth Circuit passed up an opportunity to join the First and Fifth Circuits in adopting a “transparently plain” exception to the reliance-on-counsel defense by which a bankrupt debtor can demonstrate a lack of fraudulent intent. To qualify for the defense, a debtor must demonstrate “(1) full disclosure of all pertinent facts to counsel, and (2) good faith reliance on counsel’s advice.“ The First Circuit has adopted an exception to the defense, holding that reliance on counsel will not shield a debtor when the need to disclose is “transparently plain.” See In re Mascolo, 505 F.2d 274, 277 & n. 4 (1st Cir. 1974). The Fifth Circuit has essentially adopted the exception by blessing it in dictum. See In re Sholdra, 249 F. 3d 380, 383 (5th Cir. 2001).
In In re Eifler, the district court had relied on this “transparently plain” exception to reject the debtor’s claim that he made and/or failed to disclose certain accounts and transfers because he was relying on the advice of counsel. The Sixth Circuit affirmed the district court as to both fraudulent statements and transfers, but on an alternate ground, holding that the debtor had not disclosed the pertinent facts to his counsel as required for the defense. The court did not substantively discuss the “transparently plain” exception.
Although the Sixth Circuit did not address the doctrine in this case, at least one other bankruptcy court in the circuit has applied the exception, see, e.g., In re Colvin, 288 B.R. 477, 483 (Bankr. E.D. Mich. 2003) and there appear to be no lower courts in the Sixth Circuit who have rejected it. Although the “transparently plain” exception has not been frequently applied (a Lexis search of the phrase reveals only 38 hits, some of which are not relevant), it appears to have a small toehold in the Sixth Circuit and remains an open question.