Field v. Mans

• Citation: 157 F.3d 35
• Decision Date: 05 December 1997
• Docket Number: No. 97-9007,97-9007
• Parties: 40 Collier Bankr.Cas.2d 1148, 33 Bankr.Ct.Dec. 368 William FIELD and Norinne Field, Plaintiffs, Appellants, v. Philip W. MANS, Defendant, Appellee. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 35

157 F.3d 35

40 Collier Bankr.Cas.2d 1148, 33 Bankr.Ct.Dec. 368

William FIELD and Norinne Field, Plaintiffs, Appellants, v. Philip W. MANS, Defendant, Appellee.

No. 97-9007.

United States Court of Appeals First Circuit.

Heard Dec. 5, 1997.

Decided Oct. 13, 1998.

Christopher J. Seufert with whom Seufert Professional Association was on brief for appellants.

W.E. Whittington IV with whom Brooks McNally Whittington Platto & Vitt was on brief for appellee.

Before SELYA, Circuit Judge, CAMPBELL, Senior Circuit Judge, and LYNCH, Circuit Judge.

CAMPBELL, Senior Circuit Judge.

William and Norrine Field (the "Fields") appeal from a judgment of the Bankruptcy Appellate Panel for the First Circuit (the "BAP") allowing defendant-appellee Philip W. Mans ("Mans") to discharge in bankruptcy a debt owed to the Fields. The debt in question arose from a personal guarantee by Mans of a note issued by his corporation and secured by a second mortgage on development property sold to him by the Fields. Events occurring after Mans's undisclosed sale of the mortgaged property to a third party led the Fields to charge that Mans had defrauded them into extending him credit. The Fields urge us to reverse the BAP's judgment and hold the debt non-dischargeable. For the reasons discussed below, we reverse the BAP's determination and affirm the most recent judgment of the bankruptcy court denying Mans a discharge.

I.

The facts have been set out in a number of previously published opinions, including the Supreme Court's opinion in Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). See also Field v. Mans (In re Mans ), 210 B.R. 1 (B.A.P. 1st Cir.1997); Field v. Mans (In re Mans ), 203 B.R. 355 (Bankr.D.N.H.1996); Field v. Mans (In re Mans ), 200 B.R. 293 (Bankr.D.N.H.1996). Because of this, our recitation below is limited to the essentials.

On June 23, 1987, the Fields sold development real estate (an inn) to a corporation wholly owned by Mans for $462,500. Mans's corporation paid $275,000 in cash and gave the Fields a promissory note for $187,500. The note, personally guaranteed by Mans, had a ten-year repayment period and was secured by a second mortgage on the real estate.

Under the terms of the second mortgage deed, Mans, as mortgagor, covenanted and agreed not to convey the property to anyone else without the prior written consent of the mortgagees, the Fields. If Mans conveyed without their consent, the whole of the unpaid balance and interest of the mortgage and note became immediately due and payable, at the Fields' option.

On October 8, 1987, Mans caused his corporation to transfer, without the Fields' knowledge or consent, the mortgaged real estate to a newly formed development partnership between himself and one DeFelice. The transfer was by deed executed on October 8, 1987, and recorded on October 19, 1987. In consideration, Mans received $447,500 in cash at the closing of the October 8 conveyance. At the time of this sale, Mans had made only four payments on the second mortgage held by the Fields. He still owed them approximately $180,000 in principal and $145,000 in future interest.

The day following the October 8 sale, Mans's attorney--without revealing that the conveyance had already occurred--wrote to the Fields' lawyer requesting that the Fields consent to what appeared to be a still-unconsummated sale of the mortgaged real estate. This letter stated:

Obviously, we do not want to trigger the "due-on-sale" clause by reason of the transfer of the property into the development partnership. We ask that Mr. and Mrs. Field, as the holders of the second mortgage, consent in writing to the transfer of the property.

We would appreciate your earliest response to this. We could avoid the issue entirely by simply putting the stock of [Mans's corporation] into the partnership instead of conveying title to the underlying real property, but for a variety of reasons it is preferable to convey the property.

Ten days later, the Fields, through their attorney, replied that they would consent to sale of the real estate in return for $10,000 and the fulfillment of several other minor conditions.

On October 27, Mans's attorney let the Fields know by letter that, although Mans would happily comply with the minor conditions, the Fields' request for $10,000 was "out of the question." Like its predecessor, the October 27 letter did not disclose that the proposed sale had already taken place. There the matter rested; discussions came to a close and the possibility of a sale was not mentioned again by either party.

Sometime in 1988, William Field was informed by a business associate that there was a "new owner" of the property. Although the Fields visited the property often and talked with Mans about the development of the property, they did not request a title search nor did they ever ask Mans whether he had sold the property. The Fields spoke with an officer at Mascoma Savings Bank, the holder of the first mortgage on the property, who told them that he knew nothing about a transfer of the property. Even after the transfer, Mans continued to make regular payments to the Fields in accordance with the second mortgage.

Real estate prices tumbled in the following years, and on December 10, 1990, Mans filed for protection under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Hampshire. Around the same time, he stopped making payments to the Fields. At the time of the bankruptcy, Mans still owed the Fields $144,266. Eventually, the first mortgagee foreclosed, leaving nothing for the Fields.

Three months after Mans filed for bankruptcy, the Fields learned about the October 1987 conveyance. The Fields filed a complaint in the bankruptcy proceeding alleging that Mans's personal obligation to them should not be discharged under 11 U.S.C. § 523(a)(2)(A). ¹ The Fields contended that Mans's attorney's two letters, seeking after-the-fact permission to sell the real estate, fraudulently caused them to believe that it had not yet been sold, and hence to forgo their right to accelerate the note under the due-on-sale clause. As a consequence, they said, Mans obtained an extension of credit by fraud.

The bankruptcy court, ruling from the bench, found that the letters from Mans's lawyer contained an implicit misrepresentation "that the property had not yet been transferred and that it would be transferred upon the consent of the Fields." The court also stated that "the evidence clearly establishe[d] that the Fields relied on the implicit [mis]representation in these letters" and "that they relied ... to their detriment." In respect to the latter finding, the bankruptcy court noted that in October of 1987, "the real estate market was still booming in this state and [the Fields] could have extracted their balance of [$]187,000, approximately, out of either a foreclosure or forcing Mans to pay out of the funds that he was getting invested in the property or otherwise." Subsequently, as the court went on to note, real estate values slumped, so that when the property was foreclosed in 1991, the first mortgagee, in effect, wiped out the Fields' position. Nevertheless, the court discharged the debt because it found that the Fields had not acted reasonably. See Commerce Bank & Trust Co. v. Burgess (In re Burgess ), 955 F.2d 134, 140 (1st Cir.1992) (requiring a creditor to demonstrate reasonable reliance), abrogated by Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). The court found that Mr. Field was put on notice that someone claiming to be the new owner was on the property and had acquired other information that put him on inquiry notice. The bankruptcy court's judgment was affirmed, in unpublished opinions, by the district court and by this court. See Field v. Mans, 36 F.3d 1089 (1st Cir.1994) (table), vacated by Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).

The Fields brought their challenge to the Supreme Court, arguing that § 523(a)(2)(A) does not require "reasonable" reliance. The Supreme Court agreed, holding that a creditor's reliance on fraudulent statements need only be "justifiable." See Field, 516 U.S. at 73-75, 116 S.Ct. 437. Accordingly, the Court vacated and remanded the case for further proceedings consistent with its opinion. ² See id. at 77, 116 S.Ct. 437. In a separate concurrence, Justice Ginsburg expressed her opinion that "the causation issue [is] still open for determination on remand." Id. at 78, 116 S.Ct. 437 (Ginsburg, J., concurring). Justices Breyer and Scalia, dissenting, believed that the court below had performed the correct analysis, even if it had used the wrong words. See id. at 80, 116 S.Ct. 437 (Breyer, J. dissenting).

On remand, a different bankruptcy court reviewed the original record and found that the Fields had justifiably relied upon Mans's fraud. See In re Mans, 200 B.R. at 295. As a result, the court refused to allow Mans's debt to the Fields to be discharged in the bankruptcy proceeding. See id. at 296. Mans filed a motion to alter or amend the judgment in which he sought to argue that the Fields' forbearance did not constitute an extension of credit and was not obtained by fraud. The court denied Mans's motion, holding that the "law of the case" precluded him from raising those points. See In re Mans, 203 B.R. at 357-58.

Mans appealed from the second bankruptcy court's judgment to the BAP, which reversed and dismissed the Fields' complaint. See In re Mans, 210 B.R. at 7. The BAP, after consideration, declined to disturb the lower court's finding of justifiable reliance. See id. at 5. However, it went on to address whether the Fields' failure to exercise their option to accelerate the note was an extension of credit within the § 523(a)(2)(A) exception to dischargeability. See id. at 6. Holding that it was not, the BAP ruled that Mans was entitled to a discharge.

On appeal, the Fields now argue...