In re Spadoni, 02-9002.

• Decision Date: 14 January 2003
• Docket Number: No. 02-9002.,02-9002.
• Citation: 316 F.3d 56
• Parties: In re: Dante Anthony SPADONI, Debtor. John Lentz, Plaintiff, Appellant, v. Dante Anthony Spadoni, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

316 F.3d 56

In re: Dante Anthony SPADONI, Debtor John Lentz, Plaintiff, Appellant, v. Dante Anthony Spadoni, Defendant, Appellee.

No. 02-9002.

United States Court of Appeals, First Circuit.

Heard September 6, 2002.

Decided January 14, 2003.

Bruce T. MacDonald for appellant.

Gary L. Meyers with whom Law Office of Gary L. Meyers was on brief for the appellee.

Before BOUDIN, Chief Judge, TORRUELLA and HOWARD, Circuit Judges.

BOUDIN, Chief Judge.

In July 1994, John Lentz began to lease space in his auto body shop in Revere, Massachusetts to his friend, Dante Spadoni. Spadoni used the space, comprising an office and repair bay, to operate a cellular telephone business. By the beginning of 1998, Spadoni had fallen several months behind on the rent, then $900 per month. Lentz asked Spadoni about the overdue rent and Spadoni assured Lentz that he would take care of it. In fact, Spadoni paid no rent thereafter, apart (possibly) for a single payment of $1,500 in July 1998.

Lentz later testified that during much of 1998 he pressed Spadoni for the rent each month and was assured that the rent would be paid. Lentz said that he "trusted" Spadoni and gave him "the benefit of the doubt" because they were friends. In September 1998 Spadoni quit the premises without notice and notified Lentz that he was leaving the towing business that he and Lentz were then operating together. According to Lentz, Spadoni at that time owed $9,700 in back rent.

Over a year later, in December 1999, Lentz initiated a state court action to recover the rent. Spadoni immediately filed a Chapter 7 bankruptcy proceeding, listing Lentz as an unsecured creditor in the amount of $10,000. Lentz asserted his rent claim in the bankruptcy court, claiming that it was not dischargeable under section 523(a)(2)(A) of the Bankruptcy Code. 11 U.S.C. § 523(a)(2)(A) (2000). That provision, in pertinent part, makes non-dischargeable "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...."

After a bench trial, the bankruptcy judge ruled that Spadoni's promises to pay were knowingly false when made and were intended to deceive Lentz. Spadoni denied this but had already admitted under oath in another proceeding that he did not intend to pay rent after 1997. However, to invoke section 523(a)(2)(A) the claimant must also show that he "actually and justifiably relied" on the false statement or statements. Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997). The bankruptcy judge said that Lentz had failed to prove this "element," "namely, that he actually and justifiably relied...." By way of explanation, the judge said as follows:

Mr. Lentz conceded that he took no action against the debtor during the period when he made the promises to pay. Mr. Lentz should have known after a couple of months that the debtor's promises were suspect and taken action against him. His action against the debtor for unpaid rent was not filed until December of 1999, more than a year after the debtor left and almost two years after the debtor stopped paying rent.

On review, the Bankruptcy Appellate Panel ("BAP") sustained the bankruptcy judge on the ground that her finding of no actual reliance by Lentz was not clearly erroneous. Lentz now appeals to us, arguing that the bankruptcy judge made no such finding. Spadoni responds that the bankruptcy judge ruled in "the conjunctive" that there was no "actual and justifiable reliance" and — because the former finding is not "clearly erroneous" — the determination on justifiability need not be considered.

The standard of review on this appeal requires that we respect, unless "clearly erroneous," all findings of fact by the bankruptcy court, which includes any finding of actual reliance and any raw fact findings pertinent to the issue of justifiable reliance. Brandt v. Repco Printers & Lithographics, Inc., 132 F.3d 104, 107-08 (1st Cir.1997). The definition of the standard of justifiability is a purely legal issue, reviewable de novo (this is uncontroversial), and a divided panel of this court held that the same standard governs application of the justifiability standard to particular facts — a law application or "mixed" question. See Sanford Inst. for Sav. v. Gallo, 156 F.3d 71, 74 (1st Cir.1998).¹

We begin with the "actual reliance" requirement. The statute prevents the discharge of a debt to the extent that the money or other property or services were "obtained by" deliberately false statements. Here, the debt is for rent due, and the property or services — the use of the subleased space — were "obtained by" Spadoni insofar as Lentz continued to lease the space to Spadoni based on the latter's statements that the rent would be paid despite the temporary arrearage. Lentz testified that he relied on Spadoni's statements in continuing the lease ("I trusted him," I gave him "the benefit of the doubt").

The BAP read the bankruptcy judge's decision as rejecting this claim of actual reliance and held that the decision on this issue was not clearly erroneous. Conceivably, the bankruptcy judge could have found no actual reliance, although this would have been surprising. Lentz testified under oath that he did rely; no obvious reason exists why he should not have done so at the outset; and there was certainly no direct evidence that Lentz was lying. Of course, friendship may have reinforced the decision but it is enough for reliance if the false statements contributed to it. In re Vann, 67 F.3d 277, 281, 284 (11th Cir.1995).

In our view, the BAP misread the bankruptcy judge's decision in attributing to her a finding that Lentz did not actually rely. She never said that she disbelieved Lentz on this point or that he did not actually rely on Spadoni's promises. The explanation she did give for finding that Lentz's claim of non-dischargeability failed — quoted in full above — is that after a few months Lentz "should have known" that the promises were unreliable. The "should have known" language clearly refers to the reasonableness of the reliance, not its existence; it would be quite a different matter if she had said that Lentz "did know" that the promises were false.

In the passage quoted above, the bankruptcy judge also mentioned briefly Lentz's failure to bring suit for the back rent for just over a year after Spadoni left in September 1998. What this further delay has to do with Lentz's actual trust or lack of it in Spadoni's promises is unclear, nor is the record clear as to why the lawsuit was delayed until December 1999. Primarily, this later delay seems to have been cited as a consonant example of Lentz's lack of diligence — an issue connected, if at all, primarily to the question of justifiable reliance.

On appeal, Spadoni argues that the bankruptcy judge necessarily found a lack of actual reliance because she, in the "conjunctive," said that Lentz had failed to establish the element of "actual and justifiable reliance." The argument is a non sequitur. If one chooses verbally to lump the two issues together as a single "element," as the bankruptcy judge did, then to say that the reliance was not justifiable means that the element of ...