In re Mans
| Citation | 210 BR 1 |
| Decision Date | 25 June 1997 |
| Docket Number | BAP No. NH 96-085. |
| Parties | In re Philip W. MANS William and Norinne FIELD, Plaintiffs/Appellees, v. Philip W. MANS, Defendant/Appellant. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit |
W.E. Whittington IV, Brooks McNally Whittington Platto & Vitt, P.C., Norwich, VT, were on brief for defendant/appellant.
Christopher J. Seufert and Seufert Professional Association, Franklin, NH, were on brief for appellees.
Before QUEENAN, FEENEY and BOROFF, Bankruptcy Judges.
Having already made its mark on the fraud exception to a debt's discharge in bankruptcy, this case bids fair to do so again. In a prior appeal by the present appellees, William and Norinne Field (the "Fields"), the Supreme Court ruled in their favor. It held the degree of reliance required under section 523(a)(2)(A) of the Bankruptcy Code is merely justifiable reliance, the predominant standard at common law, rather than the more exacting standard of reasonable reliance imposed by the lower courts in dismissing the Fields' fraud claim. Field v. Mans, ___ U.S. ___, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Upon remand, the initial trial judge recused himself. Another judge made new findings, ruled the Fields had justifiably relied upon the misrepresentation of Philip W. Mans (the "Debtor") and entered judgment declaring the Fields' debt nondischargeable by reason of the fraud. With the consent of the parties, the second judge made findings based solely on the transcript of the trial. The Debtor's present appeal followed.
We leave undisturbed the court's ruling of justifiable reliance. But we reverse its judgment because the Debtor's fraud was unrelated to an "extension . . . of credit" within the meaning of section 523(a)(2)(A). This is an issue the Supreme Court declined to pass on.
The undisputed evidence and the findings of the second judge, who will be referred to simply as the "trial judge," disclose the following. In June of 1987, the Fields sold property on Mascoma Lake, located in Enfield, New Hampshire and known as Mascoma Lake Lodge, to the Debtor's corporation, Sequoia Security Investment Corp. ("Sequoia"). The price was $462,500, of which $275,000 was paid in cash from the proceeds of a first mortgage placed on the property. The balance of the purchase price was represented by Sequoia's $187,500 note payable in equal monthly installments of principal and interest over ten years. The note was guaranteed by the Debtor and secured by a mortgage on the property. The mortgage provided that if the property was transferred without the Fields' prior consent the note's entire balance would become immediately payable at the option of the Fields.
On October 8, 1987, the Debtor executed a deed on behalf of Sequoia transferring the property to Crescent Beach Development, a partnership he had formed with DeFelice and Sons, Inc. The next day, the Debtor's lawyer sent a letter to the Fields' attorney stating the Debtor had formed Crescent Beach Development with a "substantial investor." He said he did not wish to trigger the "due on sale" mortgage clause, and requested that the Fields consent to the property being transferred to the partnership. The letter also stated: "We could avoid the issue entirely by simply putting the stock of another of the Debtor's corporations 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." The letter did not mention that the deed had already been signed.
On October 19, 1987, the Fields' attorney responded by letter. He offered to consent to the transfer in return for a one-time fee of $10,000, plus attorney fees, lost interest totaling $500 and payment of future monthly payments by direct bank transfer. The deed signed on October 8th was recorded the same day this letter was sent, October 19th. The Debtor's attorney replied on October 27th, stating the $10,000 fee was "out of the question." There was no further correspondence concerning the transfer. Monthly payments on the note continued.
Sometime in 1988, the Fields learned from a third party that a Mr. DeFelice was on the property and had stated that he was the owner. The Fields did not examine the registry of deeds to see whether a transfer had taken place. William Field had occasion to speak to the Debtor more than once after he heard about DeFelice. In these conversations, the Debtor brought him up to date on the property's development. The Fields never asked the Debtor about DeFelice, and the Debtor never told them of the transfer.
The trial judge found that the Debtor, through the correspondence, had impliedly represented that no transfer of the real estate had occurred. The trial judge concluded that the Fields had justifiably relied upon the misrepresentation and hence had proven their case under section 523(a)(2)(A).1
The Debtor attacks the trial judge's determination of justifiable reliance.2 Rather than being a finding of fact, the Debtor says, it was a conclusion of law fully reviewable by this court.
A plaintiff's reliance on a misrepresentation is justifiable so long as the falsity of the representation is not obvious to someone of the plaintiff's knowledge and intelligence, even though an investigation would have disclosed the falsehood. Field, ___ U.S. at ___, 116 S.Ct. at 444. This differs from the standard of reasonable reliance, which requires the plaintiff's conduct to conform to that of a reasonable person. Id. Justifiable reliance is a standard kinder to the naive. It looks to the characteristics of the particular plaintiff rather than a community standard. Id. Although it places no initial duty on the plaintiff to investigate so as to discover a falsehood not apparent to him, the plaintiff bears that obligation once he discovers something that should warn him he has been deceived. Id.
The trial judge did not believe the Fields received such a warning when they learned from a third party that DeFelice was on the property claiming to be the owner. He rejected the Debtor's contention that this information required the Fields to check the records at the registry of deeds or to at least ask the Debtor whether the property had been transferred. He then stated:
Debtor\'s representation in the October 9, 1987 letter, which specifically stated that Debtor wished to avoid the due on sale clause and could accomplish his goals without a transfer of the property, coupled with the fact that payments under the note were kept current for more than three years after the transfer, satisfy this Court that the facts support the Fields\' representations that they had no reason to believe and did not believe that Debtor had in fact transferred the property. This Court finds that the Fields justifiably relied on Debtor\'s representations and no further investigation by them was warranted or required.
Under the familiar mandate of Rule 52(a), findings of fact "shall not be set aside unless clearly erroneous. . . ."3 This means a reviewing court "ought not to upset findings of fact or conclusions therefrom unless, on the whole of the record, the appellate judges form a strong, unyielding belief that a mistake has been made." Cumpiano v. Banco Santander Puerto Rico, 902 F.2d 148, 152 (1st Cir.1990). A trial judge's findings are entitled to this deference even when, as here, they are based upon a transcript of evidence which is equally available to the reviewing court. Boroff v. Tully (In re Tully), 818 F.2d 106, 108-09 (1st Cir.1987).4 Rule 52(a) applies to general as well as specific findings. It "does not divide findings of fact into those that deal with `ultimate' and those that deal with `subsidiary' facts." Pullman-Standard v. Swint, 456 U.S. 273, 287, 102 S.Ct. 1781, 1789, 72 L.Ed.2d 66 (1982).
All this is perhaps basic. What is not so apparent is the nature of the trial judge's determination of justifiable reliance. Is it a finding of an ultimate fact to be set aside only if clearly erroneous, or is it a conclusion of law fully reviewable by this court?
Guidance is provided in this circuit by Reich v. Newspapers of New England, Inc., 44 F.3d 1060 (1st Cir.1995). The court there reviewed the district court's determination of whether certain newspaper employees were "professional employees" exempt from the overtime and record keeping provisions of the Fair Labor Standards Act of 1938, 29 U.S.C. § 201 et seq. Reich, 44 F.3d at 1060. It viewed the question as one of mixed fact and law involving a three-step process: (i) findings of historical fact regarding the day-to-day duties of the employees, (ii) application of the regulations of the United States Secretary of Labor, which involves inferences from the historical facts, for example, whether an employee's work requires "invention, imagination, or talent" and whether such work constitutes the employee's "primary duty," and (iii) the ultimate conclusion on whether a particular employee is a "professional employee" within the meaning of the statute. Id. at 1073. As the court saw it, the first two inquiries constitute findings of fact entitled to the protection of the clearly erroneous standard; the third is purely a legal conclusion, fully reviewable.5Id.
A similar approach is appropriate here. The trial judge's determination of justifiable reliance was a conclusion of law to the degree it applied the legal standard of justifiable reliance, which looks to the individual knowledge and intelligence of the deceived party and requires an investigation for falsity only when he receives a warning that should indicate to him he has been deceived. It is a finding of fact to the extent it determined the plaintiff's knowledge and intelligence and whether the information which he received was a warning of deception to one of that knowledge and intelligence.
The trial judge concentrated his findings upon whether a warning of...
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