Sauer Inc. v. Lawson (In re Lawson)

• Decision Date: 01 July 2015
• Docket Number: No. 14–2058.,14–2058.
• Citation: 791 F.3d 214
• Parties: In re Carrie D. LAWSON, Debtor Sauer Incorporated, d/b/a Sauer Southeast, Appellant, v. Carrie D. Lawson, Appellee.
• Court: U.S. Court of Appeals — First Circuit

791 F.3d 214

In re Carrie D. LAWSON, DebtorSauer Incorporated, d/b/a Sauer Southeast, Appellant

v.Carrie D. Lawson, Appellee.

No. 14–2058.

United States Court of Appeals, First Circuit.

July 1, 2015.

Michael J. Jacobs and LaPlante Sowa Goldman, on brief for appellant.

Christopher M. Lefebvre, with whom Claude Lefebvre, Christoper Lefebvre, P.C., John Boyajian, and Boyajian, Harrington, Richardson & Furnesswere on brief, for appellee.

Before LYNCH, THOMPSON, and KAYATTA, Circuit Judges.

Opinion

LYNCH, Circuit Judge.

Sauer Incorporated (“Sauer”) filed an adversary proceeding objecting to the discharge of a debt owed by Carrie Lawson (“Ms. Lawson”) that she allegedly obtained as part of a fraudulent scheme to prevent Sauer from collecting a previous judgment from her father, James Lawson. See 11 U.S.C. §§ 523(a)(2)(A), 523(a)(6). The bankruptcy court dismissed for failure to state a claim on the ground that a debt for value “obtained by ... actual fraud” under § 523(a)(2)(A) is limited to debts for value obtained through fraudulent misrepresentations. The court felt First Circuit precedent in the line of Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997), required such a conclusion. See Sauer, Inc. v. Lawson (In re Lawson), 505 B.R. 117, 125–26 (Bankr.D.R.I.2014) (citing McCrory v. Spigel (In re Spigel), 260 F.3d 27, 32 (1st Cir.2001) ; Palmacci, 121 F.3d 781 ); see also id. (citing Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ).

On direct appeal, we are asked to resolve this narrow but significant issue of whether a debt that is not dischargeable in Chapter 13 bankruptcy as a debt for money or property “obtained by ... actual fraud” extends beyond debts incurred through fraudulent misrepresentations to also include debts incurred as a result of knowingly accepting a fraudulent conveyance that the transferee knew was intended to hinder the transferor's creditors. See 11 U.S.C. §523(a)(2)(A). We join the Seventh Circuit in concluding that it does. See McClellan v. Cantrell, 217 F.3d 890 (7th Cir.2000).¹

Having adopted this new standard, we vacate and remand for further proceedings consistent with this opinion. We decline to reach the issue of the adequacy of Sauer's pleadings of actual fraud under Rule 9(b), and the possibility of amendment if inadequate. Because we have adopted a new standard, the bankruptcy court should address these issues in the first instance. Cf. N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8, 16–18 (1st Cir.2009) (Boudin, J.).

I.

We recount the facts as alleged in Sauer's First Amended Complaint, accepting them as true and drawing “all reasonable inferences” in Sauer's favor.See Ruivo v. Wells Fargo Bank, N.A., 766 F.3d 87, 90 (1st Cir.2014). In brief, Sauer alleges that Ms. Lawson incurred the debt at issue by knowingly receiving a fraudulent conveyance from her father, James, that was designed to prevent Sauer from collecting a judgment against him. The details are as follows.

In January 2007, Sauer sued James in Providence Superior Court based on their previous business dealings. Three years later, on February 5, 2010, the Superior Court found those transactions to be fraudulent, and awarded Sauer a judgment against James in the amount of $168,351.59, including punitive damages.

Just before the judgment was entered, Ms. Lawson had formed a shell entity, Commercial Construction M & C, LLC (“Commercial Construction”).² Upon entry of judgment, James transferred $100,150 to Commercial Construction, allegedly to impede Sauer's collection. Commercial Construction is owned by Ms. Lawson, but controlled by James.³

Ms. Lawson then transferred $80,000 of the $100,150 from Commercial Construction to herself sometime over the course of the following year, from February 2010 through early 2011. In March 2011, James filed for Chapter 13 bankruptcy.

Pursuant to the Rhode Island Uniform Fraudulent Transfer Act, R.I. Gen. Laws § 6–16–1 et seq. (“UFTA”), Sauer traced portions of its original judgment against James first to Commercial Construction, and then to Ms. Lawson. The Providence Superior Court found these transfers to be fraudulent under the UFTA, and issued executions against both Commercial Construction and Ms. Lawson for the full amounts transferred ($100,150 and $80,000, respectively). The latter judgment entered against Ms. Lawson is the debt at issue.

Ms. Lawson filed for Chapter 13 bankruptcy the same month that the Providence Superior Court issued the execution against her, in March 2013. Sauer initiated this adversary proceeding in June 2013, objecting to the discharge of this debt under § 523(a)(2)(A) as being for money “obtained by ... actual fraud.”⁴ In particular, Sauer alleged that because Ms. Lawson “knowingly receiv[ed]” the fraudulent transfer and acted in a “willful and malicious” manner toward Sauer, her acceptance of the fraudulent conveyance constitutes actual, not merely constructive, fraud.⁵

The bankruptcy court dismissed Sauer's adversary proceeding. The court reasoned that it was constrained by First Circuit and Supreme Court precedent to find that a misrepresentation is a required element of “actual fraud” under § 523(a)(2)(A). See Sauer, 505 B.R. at 118, 125–26 (citing Field, 516 U.S. 59, 116 S.Ct. 437 ; Spigel, 260 F.3d at 32 ). Because Sauer concededly could not allege that Ms. Lawson had made a misrepresentation, Sauer could not establish that § 523(a)(2)(A) barred discharge of Ms. Lawson's debt. See id. at 126.

Sauer appealed to the Bankruptcy Appellate Panel and, shortly thereafter, petitioned for direct appeal to the First Circuit. See 28 U.S.C. § 158(d)(2). The Panel granted certification on the ground that the order “involves a matter of public importance,” 28 U.S.C. § 158(d)(2)(A)(i), and agreeing, we granted authorization.

II.

The sole issue on appeal is whether the bankruptcy court erred in concluding that “a misrepresentation by a debtor to a creditor is an essential element of establishing a basis for the nondischarge of a debt under § 523(a)(2)(A).” Sauer, 505 B.R. at 118. This is a question of law, which we review de novo. See N. Am. Catholic Educ., 567 F.3d at 12 ; United States v. Nippon Paper Indus. Co., 109 F.3d 1, 3 (1st Cir.1997).

A. The Fraud Exception of § 523(a)(2)(A)

The Bankruptcy Code aims to strike a balance between providing debtors with a fresh start by discharging debts upon plan confirmation, and avoiding abuse of the system. See Spigel, 260 F.3d at 31–32. To this end, the Code exempts from discharge certain types of debt in an attempt to “limit [ ] th[e] opportunity [for discharge] to the ‘honest but unfortunate debtor.’ ” Id. at 32 (second and third alteration in original) (quoting Brown v. Felsen, 442 U.S. 127, 128, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) ). Such exceptions are “narrowly construed ... and the claimant must show that its claim comes squarely within an [enumerated] exception.” Id. (first alteration in original) (quoting Century 21 Balfour Real Estate v. Menna (In re Menna), 16 F.3d 7, 9 (1st Cir.1994) ).

This case concerns an exemption to Chapter 13 discharge. Although “discharge under Chapter 13 ‘is broader than the discharge received in any other chapter,’ ” Chapter 13 still “restricts or prohibits entirely the discharge of certain types of debts.” United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 268, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (quoting 8 Collier on Bankruptcy ¶ 1328.01 (rev. 15th ed.2008)). As relevant here, Chapter 13 does not discharge any debt “for money ... to the extent obtained by ... false pretenses, a false representation, or actual fraud ....” 11 U.S.C. § 523(a)(2)(A) (emphasis added); id. § 1328(a)(2) (making § 523(a)(2)(A) expressly applicable to Chapter 13).

Although many courts have “assume[d] that fraud [under this provision] equals misrepresentation,” McClellan, 217 F.3d at 892–93 (collecting cases), it remains an open question in this circuit whether “actual fraud” includes fraud effected by means other than fraudulent misrepresentation, such as through schemes of fraudulent conveyance, Spigel, 260 F.3d at 32–33 n. 7 (expressly declining to reach the issue).⁶

The Supreme Court has directed us that in construing the meaning of “actual fraud” under this provision, we are to rely on the common law “concept of ‘actual fraud’ as it was understood in 1978 when that language was added to § 523(a)(2)(A).” Field, 516 U.S. at 70, 116 S.Ct. 437. “Then, as now, the most widely accepted distillation of the common law of torts was the Restatement (Second) of Torts (1976), published shortly before Congress passed the Act.” Id. Accordingly, we look to the same Restatement as relied upon in Field.

That Restatement recognizes several types of “fraud,” including both fraudulent misrepresentations and “fraudulent interference with [property rights],” a tort that is broader than misrepresentation itself. See Restatement (Second) of Torts, index, “Fraud” (1977); see also id. § 871 (“One who intentionally deprives another of his legally protected property interest or causes injury to the interest is subject to liability to the other if his conduct is generally culpable and not justifiable under the circumstances.”). The comments to the relevant Restatement provision, § 871, make clear that this includes fraudulent conveyance, like that alleged here. Id. § 871 cmt. a (“[T]he rule applies when title to land has been obtained by fraud ... and has been transferred to one other than a bona fide purchaser, in which case, until its sale by the transferee, the original owner's sole redress against the transferee is by an action seeking its recovery.”) That is, the common law concept of “fraud” as distilled by the Restatement to which the Court directs us extends beyond fraudulent misrepresentations to at least include fraudulent conveyances.See id.; see also id. § 871 cmt. e.

This comports with other examples of the common understanding of “fraud.” See McClellan, 217 F.3d at 893 (“No...