516 U.S. 59 (1995), 94-967, Field v. Mans

Docket Nº:Case No. 94-967
Citation:516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351, 64 U.S.L.W. 4015
Party Name:FIELD et al. v. MANS
Case Date:November 28, 1995
Court:United States Supreme Court
 
FREE EXCERPT

Page 59

516 U.S. 59 (1995)

116 S.Ct. 437, 133 L.Ed.2d 351, 64 U.S.L.W. 4015

FIELD et al.

v.

MANS

Case No. 94-967

United States Supreme Court

November 28, 1995

Argued October 2, 1995

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

Syllabus

After respondent Mans filed for relief under Chapter 11 of the Bankruptcy Code, petitioners William and Norinne Field alleged, in effect, that letters Mans had written to them constituted fraudulent representations on which they relied in continuing to extend credit to a corporation controlled by Mans, and that, accordingly, Mans's obligation to them as guarantor of the corporation's debt should be excepted from discharge under 11 U.S.C. § 523(a)(2)(A) as a debt resulting from fraud. The Bankruptcy Court found that Mans's letters constituted false representations, but followed Circuit precedent in requiring that the Fields show their reasonable reliance on the letters. Finding the Fields unreasonable in relying without further enquiry on Mans's misrepresentations, the court held Mans's debt dischargeable. The District Court and the Court of Appeals affirmed.

Held:

The standard for excepting a debt from discharge as a fraudulent representation within the meaning of § 523(a)(2)(A) is not reasonable reliance but the less demanding one of justifiable reliance on the representation. Pp. 64-77.

(a) Section 523(a)(2)(A) had an antecedent in the 1903 amendments to the Bankruptcy Act of 1898, and has changed only slightly since 1903, from "false pretenses or false representations" to "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." Section 523(a)(2)(B), which applies to false financial statements in writing, also grew out of a 1903 amendment to the Bankruptcy Act of 1898, but it changed more significantly over the years. One of these changes occurred in 1978, when Congress added a new element of reasonable reliance. Pp. 64-66.

(b) The text of § 523(a)(2)(A) does not mention the level of reliance required, and the Court rejects as unsound the argument that the addition of reasonable reliance to § 523(a)(2)(B) alone supports an inference that, in § 523(a)(2)(A), Congress did not intend to require reasonable reliance. That argument relies on the apparent negative pregnant, under the rule of construction that an express statutory requirement in one place, contrasted with statutory silence in another, shows an intent

Page 60

to confine the requirement to the specified instance. Assuming this argument to be sound, it would prove at most that the reasonableness standard was not intended, but would not reveal the correct standard. Here, however, there is reason to reject the negative pregnant argument even as far as it goes. If the argument proves anything here, it proves too much: this reasoning would also strip § 523(a)(2)(A) of any requirement to establish causation and scienter, an odd result that defies common sense. Moreover, the argument ignores the fact that § 523(a)(2)(A) refers to common-law torts and § 523(a)(2)(B) does not. The terms used in paragraph (A) imply elements that the common law has defined them to include, whereas the terms in paragraph (B) are statutory creations. Pp. 66-69.

(c) This Court has an established practice of finding Congress's meaning in the generally shared common law where, as here, common-law terms are used without further specification. Since the District Court treated Mans's conduct as amounting to fraud, the enquiry here is into the common-law understanding of "actual fraud" in 1978, when it was added to § 523(a)(2)(A). The Restatement (Second) of Torts states that justifiable, rather than reasonable, reliance is the applicable standard. The Restatement rejects a general, reasonable person standard in favor of an individual standard that turns on the particular circumstances, and it provides that a person is justified in relying on a factual representation without conducting an investigation, so long as the falsity of the representation would not be patent upon cursory examination. Scholarly treatises on torts, as well as state cases, similarly applied a justifiable reliance standard. The foregoing analysis does not relegate the negative pregnant to the rubbish heap, but merely indicates that its force is weakest when it suggests foolish results at odds with other textual pointers. The Court's reading also does not leave reasonableness irrelevant, for the greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact. Pp. 69-76.

(d) It may be asked whether it makes sense to protect creditors who were not quite reasonable in relying on a fraudulent representation, but to apply a different rule when fraud is carried to the point of a written financial statement. This ostensible anomaly may be explained by Congress's apparent concerns about creditors' misuse of financial statements. Pp. 76-77.

(e) The Bankruptcy Court's reasonable person test entailing a duty to investigate clearly exceeds the demands of the justifiable reliance standard that applies under § 523(a)(2)(A). P. 77.

36 F.3d 1089, vacated and remanded.

Page 61

Souter, J., delivered the opinion of the Court, in which Rehnquist, C. J., and Stevens, O'Connor, Kennedy, Thomas, and Ginsburg, JJ., joined. Ginsburg, J., filed a concurring opinion, post, p. 78. Breyer, J., filed a dissenting opinion, in which Scalia, J., joined, post, p. 79.

Christopher J. Seufert argued the cause for petitioners. With him on the brief was William J. Schultz.

Alan Jenkins argued the cause for the United States as amicus curiae. With him on the brief were Solicitor General Days, Assistant Attorney General Hunger, Deputy Solicitor General Bender, William Kanter, and Bruce

W. E. Whittington IV, by appointment of the Court, 515 U.S. 1156, argued the cause for respondent. With him on the brief was Geoffrey J. Vitt. [*]

Justice Souter delivered the opinion of the Court.

The Bankruptcy Code's provisions for discharge stop short of certain debts resulting from "false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). In this case we consider the level of a creditor's reliance on a fraudulent misrepresentation necessary to place a debt thus beyond release. While the Court of Appeals followed a rule requiring reasonable reliance on the statement, we hold the standard to be the less demanding one of justifiable reliance and accordingly vacate and remand.

I

In June 1987, petitioners William and Norinne Field sold real estate for $462,500 to a corporation controlled by respondent Philip W. Mans, who supplied $275,000 toward the purchase price and personally guaranteed a promissory note for $187,500 secured by a second mortgage on the property. The mortgage deed had a clause calling for the Fields' consent

Page 62

to any conveyance of the encumbered real estate during the term of the secured indebtedness, failing which the entire unpaid balance on the note would become payable upon a sale unauthorized.

On October 8, 1987, Mans's corporation triggered application of the clause by conveying the property to a newly formed partnership without the Fields' knowledge or consent. The next day, Mans wrote to the Fields asking them not for consent to the conveyance but for a waiver of their rights under the due-on-sale clause, saying that he sought to avoid any claim that the clause might apply to arrangements to add a new principal to his land development organization. The letter failed to mention that Mans had already caused the property to be conveyed. The Fields responded with an offer to waive if Mans paid them $10,500. Mans answered with a lower bid, to pay only $500, and again failed to disclose the conveyance. There were no further written communications.

The ensuing years brought a precipitous drop in real estate prices, and on December 10, 1990, Mans petitioned the United States Bankruptcy Court for the District of New Hampshire for relief under Chapter 11 of the Bankruptcy Code. On the following February 6, the Fields learned of the October 1987 conveyance, which their lawyer had discovered at the registry of deeds. In their subsequent complaint in the bankruptcy proceeding, they argued that some $150,000 had become due upon the 1987 conveyance for which Mans had become liable as guarantor, and that his obligation should be excepted from discharge under § 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A), as a debt resulting from fraud.[1]

The Bankruptcy Court found that Mans's letters constituted false representations on which petitioners had relied

Page 63

to their detriment in extending credit.[2] The court followed Circuit precedent, however, see In re Burgess, 955 F.2d 134 (CA1 1992), in requiring the Fields to make a further showing of reasonable reliance, defined as "what would be reasonable for a prudent man to do under those circumstances." App. 43-44. The court held that a reasonable person would have checked for any conveyance after the exchange of letters, and that the Fields had unreasonably ignored further reason to investigate in 1988, when Mr. Field's boss told him of a third party claiming to be the owner of the property.[3] Having found the Fields unreasonable in relying without further enquiry on Mans's implicit misrepresentation about the state of the title, the court held Mans's debt dischargeable.

The District Court affirmed, likewise following Circuit precedent in holding that § 523(a)(2)(A) requires reasonable reliance to exempt a debt from discharge, and finding the Bankruptcy Court's judgment supported by...

To continue reading

FREE SIGN UP