In re Rountree

• Decision Date: 27 February 2007
• Docket Number: No. 05-1123.,05-1123.
• Citation: 478 F.3d 215
• Parties: In re June L. ROUNTREE, Debtor. Pamela C. Nunnery, Plaintiff-Appellant, and Keith Nunnery, Plaintiff, v. June L. Rountree, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

478 F.3d 215

In re June L. ROUNTREE, Debtor Pamela C. Nunnery, Plaintiff-Appellant, and Keith Nunnery, Plaintiff, v. June L. Rountree, Defendant-Appellee.

No. 05-1123.

United States Court of Appeals, Fourth Circuit.

Argued November 28, 2006.

Decided February 27, 2007.

ARGUED:

John Edwin Bedi, Virginia Beach, Virginia, for Appellant. Anthony Franklin Radd, Wolcott, Rivers & Gates, Virginia Beach, Virginia, for Appellee.

ON BRIEF:

Paul I. Klein, Crews & Klein, P.C., Charlotte, North Carolina, for Appellant.

Before WILKINSON, MOTZ, and GREGORY, Circuit Judges.

Affirmed by published opinion. Judge GREGORY wrote the opinion, in which Judge WILKINSON joined. Judge WILKINSON wrote a separate concurring opinion. Judge MOTZ wrote an opinion concurring in the judgment.

OPINION

GREGORY, Circuit Judge.

Pamela C. Nunnery appeals the district court's reversal of the bankruptcy court's determination that a judgment debt owed to her by June L. Rountree was not dischargeable in bankruptcy. Because Rountree did not obtain "money, property, services, or an extension, renewal, or refinancing of credit" via her fraud on Nunnery, we affirm the district court's decision and hold that the exception to discharge does not apply.

I.

In 1991 Nunnery was involved in an automobile accident with Eric Baucom in Charlotte, North Carolina. Florists' Mutual Insurance ("the insurance company") defended Baucom and his company in the subsequent lawsuit in the Superior Court of Gaston County, North Carolina. To help prepare its defense, the insurance company hired Rountree to investigate the validity of Nunnery's injuries. Rountree was a private investigator but was not licensed by the State of North Carolina. Rountree befriended Nunnery and convinced her to attempt activities in which Nunnery was reluctant to participate because of her injuries. Rountree videotaped Nunnery water skiing, jet skiing, riding horses, and enjoying amusement park rides. The insurance company used these videotapes in its defense to Nunnery's personal injury suit.

After the original litigation, Nunnery filed suit against Rountree in the Superior Court of Gaston County, alleging, inter alia, fraud, intentional and negligent infliction of emotional distress, and unfair and deceptive trade practices. A non-binding arbitration awarded Nunnery $1,000,000, but the superior court granted Rountree a trial de novo. Rountree then filed for bankruptcy in the Eastern District of Virginia, prompting a stay of the North Carolina trial. Nunnery petitioned the bankruptcy court to determine the dischargeability of the arbitration award. The bankruptcy court transferred the case to the United States District Court because the underlying complaint was a personal injury tort claim. The district court then granted Nunnery's motion to abstain, and the trial proceeded in Gaston County. The jury awarded Nunnery $70,000 in compensatory damages for emotional distress and $930,000 in punitive damages, which the trial court reduced to $250,000 pursuant to North Carolina law.

Nunnery then revived her complaint to determine the dischargeability of the judgment debt and moved the bankruptcy court for summary judgment. The bankruptcy court, without oral argument, granted summary judgment to Nunnery. The court considered the applicability of two subsections of 11 U.S.C. § 523 (2000), "Exceptions to discharge": (a)(2)(A) and (a)(6).

Subsection (a)(6) provides that the Bankruptcy Act will not discharge a debtor from any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." § 523(a)(6). The bankruptcy court stated that to prove an exception under this subsection, Nunnery would have to show that Rountree injured Nunnery, acted with intent to injure Nunnery, and acted maliciously. The court found that the judgment Nunnery obtained in North Carolina was not sufficient to establish that Rountree acted willfully with intent to injure and so denied the application of subsection (a)(6). Nunnery has chosen not to appeal the bankruptcy court's ruling that § 523(a)(6) does not apply to her claim.

The bankruptcy court also found, however, that Nunnery had satisfied the requirements of subsection (a)(2)(A), which excepts from discharge any debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—false pretenses, a false representation, or actual fraud." § 523(a)(2)(A). The court considered all five elements of fraud—(1) false representation, (2) knowledge that the representation was false, (3) intent to deceive, (4) justifiable reliance on the representation, and (5) proximate cause of damages—and concluded that Nunnery's North Carolina judgment proved all five. Without considering the "to the extent obtained by" language, the court ruled that under § 523(a)(2)(A) Rountree could not discharge her judgment debt (both compensatory and punitive) in bankruptcy proceedings and granted Nunnery's motion for summary judgment.

Rountree appealed to the district court, and that court, emphasizing the "obtained by" language, reversed the bankruptcy court's ruling. The district court found that the bankruptcy court had properly applied the law of fraud but erred in applying § 523(a)(2)(A) because Rountree never obtained anything by defrauding Nunnery. The court relied on Cohen v. De La Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), and Collier on Bankruptcy¹ and distinguished Pleasants v. Kendrick, 219 F.3d 372 (4th Cir.2000), to make its ruling. The court emphasized that for the exception to apply, either the debtor must obtain or the creditor must lose "money, property, services, or an extension, renewal, or refinancing of credit." Nunnery appealed the district court's ruling that her claim did not satisfy the requirements of § 523(a)(2)(A) to this Court.

II.

We review "the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court." Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir.1999). Because the district court made no factual findings, we review its conclusions of law de novo. Id. at 130.

III.

The Bankruptcy Act provides several exceptions to its general discharge of an individual's debts. Under 11 U.S.C. § 523(a)(2)(A), the code will not discharge a debtor from any debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—false pretenses, a false representation, or actual fraud." When considering the applicability of an exception to discharge, we construe the exception narrowly "to protect the purpose of providing debtors a fresh start." Biondo, 180 F.3d at 130.

The plain language of the subsection under which Nunnery seeks relief requires the debtor to have obtained money, property, services, or credit through her fraud or use of false pretenses. It is clear from the structure of the phrase that "to the extent obtained" modifies the money, property, services, or credit that constitute the debt. A plain reading of this subsection demonstrates that Congress excepted from discharge not simply any debt incurred as a result of fraud but only debts in which the debtor used fraudulent means to obtain money, property, services, or credit. Structurally, the subsection can have no other meaning.

We adhere to the principle of statutory construction that advises us to "account for a statute's full text." U.S. Nat'l Bank of Or. v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439, 455, 113 S.Ct. 2173, 124 L.Ed.2d 402 (1993). We thus note that in the exceptions to discharge articulated in § 523, Congress provided protection for creditors injured by the torts of bankrupt debtors in subsection (a)(6), which excepts from discharge a debt incurred as a result of the debtor's "willful and malicious injury" to the creditor or her property. It would be unnecessary for subsection (a)(2)(A) also to provide relief for judgment creditors injured in tort. The additional subsection of § 523(a)(2), which excepts from discharge debts for money, property, services, or credit to the extent obtained by use of a false written statement, § 523(a)(2)(B), makes clear that Congress intended § 523(a)(2) to protect creditors who were tricked by debtors into loaning them money or giving them property, services, or credit through fraudulent means. In Nunnery's case, Rountree's fraud may have injured her, but Rountree did not commit the fraud in order to obtain anything in the sense contemplated by § 523(a)(2).

Both Supreme Court and our own precedent support our interpretation of the exception in this case. The Supreme Court explained the rationale behind Congress's adoption of the exceptions to discharge in Local Loan v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). The Court stated that bankruptcy proceedings provide "a new opportunity in life and a clear field for future effort" to an individual burdened by excessive debt, but it also cautioned that such a new opportunity is available only for the "honest but unfortunate debtor." Hunt, 292 U.S. at 244, 54 S.Ct. 695. When a debtor has acquired debt through fraudulent means, the exceptions to discharge protect the duped creditor and demand that the debtor make good for her misdeeds. Brown v. Felsen, 442 U.S. 127, 138, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979).

The Supreme Court has provided some guidance for our analysis of the specific question in this case. It has ruled that a bankruptcy court may look behind the record of the underlying judgment to determine if the debtor indeed obtained the debt through fraudulent means. Brown, 442 U.S. at 138-39, 99 S.Ct. 2205. The Court has held that a bankruptcy court should use a preponderance of the evidence standard to determine fraud in exception cases. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). It has determined...