Vann, In re

• Decision Date: 19 October 1995
• Docket Number: No. 94-2384,94-2384
• Citation: 1995 WL 582036,67 F.3d 277
• Court: U.S. Court of Appeals — Eleventh Circuit
• Parties: , 28 Bankr.Ct.Dec. 23, Bankr. L. Rep. P 76,668 In re Edwin Leo VANN, Debtor. CITY BANK & TRUST CO., Plaintiff-Appellant, v. Edwin Leo VANN, Defendant-Appellee.

Page 277

67 F.3d 277

64 USLW 2274, 28 Bankr.Ct.Dec. 23, Bankr.

L. Rep. P 76,668

In re Edwin Leo VANN, Debtor CITY BANK & TRUST CO., Plaintiff-Appellant, v. Edwin Leo VANN, Defendant-Appellee.

No. 94-2384.

United States Court of Appeals,

Eleventh Circuit.

Oct. 19, 1995.

Charles Franklin Ketchey, Jr., Jonathan J. Ellis, Judith A. English, Ketchey, Horan, Hearn, Neukamm & Baumann, P.A., Tampa, FL, for appellant.

Josiah Ewing Hutton, Jr., Winter Haven, FL, for appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before TJOFLAT, Chief Judge, BIRCH, Circuit Judge, and HENDERSON, Senior Circuit Judge.

BIRCH, Circuit Judge:

This appeal presents the first impression issue of what standard of reliance a creditor must satisfy under section 523(a)(2)(A) of the Bankruptcy Code to prevent the discharge of a debt. The bankruptcy court held that a creditor's reliance on the debtor's misrepresentations must be reasonable. The court rejected the creditor's claim that reasonable reliance was an overly stringent standard or, alternatively, that its reliance met the reasonable reliance standard. The district court summarily affirmed; we REVERSE and REMAND for further factfinding.

I. BACKGROUND

In 1985, defendant-appellee, Edwin L. Vann, sought credit from plaintiff-appellant, City Bank & Trust Company ("City Bank") for the opening of a cheese processing plant in Tennessee. Vann submitted a financial statement to City Bank, which sent a representative to visit Vann at his home in Florida to investigate the real estate holdings and other properties relied upon by Vann to support the extension of credit. Between the initiation of credit negotiations and the eventual closing of the loan, Vann's financial condition deteriorated. City Bank did not request updated financial information from Vann prior to the closing of the loan, and Vann did not disclose these changes despite representations in the loan documents that no changes had occurred. Vann subsequently filed bankruptcy under Chapter 11.

City Bank filed an adversary proceeding challenging the dischargeability of Vann's debt to it. City Bank charged that Vann obtained the credit by false pretenses, false representations, or actual fraud under section 523(a)(2)(A), and that it reasonably relied on Vann's financial statement, which was materially false under section 523(a)(2)(B). ¹ The bankruptcy court concluded that (1) although the bank had been "hoodwinked" by Vann, there was no actual fraud, (2) even if there were false pretenses or false representations under section 523(a)(2)(A), City Bank was required to show reasonable reliance on Vann's representations and it failed to meet that standard; and (3) City Bank's reliance on Vann's materially false financial statement was unreasonable. R1-1-90-297 (Trans. of Proceedings).

Upon City Bank's motion for further findings of fact and conclusions of law as to its section 523(a)(2)(A) claim, the bankruptcy court held that City Bank's reliance must be reasonable under both section 523(a)(2)(A) and section 523(a)(2)(B). Therefore, it denied City Bank's motion and entered judgment in the adversary proceeding for Vann. The district court summarily affirmed the bankruptcy court. Because we conclude that, in contrast to section 523(a)(2)(B), section 523(a)(2)(A) does not require the creditor to show reasonable reliance on the debtor's representations, we REVERSE and REMAND.

II. DISCUSSION

We review the bankruptcy court's construction of section 523(a)(2)(A) de novo. Haas v. Internal Revenue Service (In re Haas), 48 F.3d 1153, 1155 (11th Cir.1995). Section 523(a)(2)(A) does not address the standard of reliance that a creditor must prove to prevent discharge of a debt incurred for an extension of credit obtained by false pretenses, false representation(s) or actual fraud. Nevertheless, the circuit courts agree that, before the bankruptcy court will withhold discharge, the creditor must show that it relied on the debtor's misstatements as a necessary element of recovery for false pretenses, for false representations or for actual fraud. See generally Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1457 (9th Cir.1992) (per curiam); BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d 1556, 1559-60 (6th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1272, 122 L.Ed.2d 667 (1993); Allison v. Roberts (In re Allison), 960 F.2d 481, 484 (5th Cir.1992); Commerce Bank & Trust Co. v. Burgess (In re Burgess), 955 F.2d 134, 140 (1st Cir.1992); Thul v. Ophaug (In re Ophaug), 827 F.2d 340, 343 (8th Cir.1987); Schweig v. Hunter (In re Hunter), 780 F.2d 1577 (11th Cir.1986); First Nat'l. Bank of Red Bud v. Kimzey (In re Kimzey), 761 F.2d 421, 423 (7th Cir.1985). ² The similarity, however, ends there. Three standards of reliance apparently are used by the circuit courts: (1) reasonable reliance, (2) justifiable reliance, and (3) actual reliance. ³

Although there is some debate about the exact meaning of "reasonable" reliance, see In re Kirsh, 973 F.2d at 1459-60, we conclude the requirement of reasonableness to be a more stringent standard than justifiable reliance or actual reliance. But see Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1166 (6th Cir.1985) (holding that the reasonableness requirement of section 523(a)(2)(B) "cannot be said to be a rigorous requirement, but rather is directed at creditors acting in bad faith"). Reasonable reliance connotes the use of the standard of ordinary and average person. See In re Kirsh, 973 F.2d at 1458, 1459-60. The Tenth Circuit, upon which the bankruptcy court relied, stated that

[t]his standard of reasonableness places a measure of responsibility upon a creditor to ensure that there exists some basis for relying upon the debtor's representations. Of course, the reasonableness of a creditor's reliance will be evaluated according to the particular facts and circumstances present in a given case.

First Bank v. Mullet (In re Mullet), 817 F.2d 677, 679 (10th Cir.1987). The Tenth Circuit concluded that the bank's failure to investigate precluded reasonable reliance. Id. at 681-82.

Interpreting section 523(a)(2)(B), the Fifth Circuit held that reasonable reliance would be ascertained by asking the following questions:

whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; whether there were any "red flags" that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and whether even minimal investigation would have revealed the inaccuracy of the debtor's representations.

Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir.1993) (en banc) (per curiam); see also In re Ledford, 970 F.2d at 1560 (using the same reliance standard for section 523(a)(2)(A) and section 523(a)(2)(B)). ⁴

Justifiable reliance heretofore has been used only by the Ninth Circuit. In re Kirsh, 973 F.2d at 1459. Justifiable reliance represents a compromise between the rigid reasonableness standard and the lenient actual reliance standard. At the other end of the spectrum is actual reliance. Actual reliance requires that the creditor prove that he in fact relied upon the representations of the debtor. Reasonableness of the reliance may be used as proof that the creditor did rely. In re Allison, 960 F.2d at 485. For the reasons set forth below, we join the Ninth Circuit in adopting justifiable reliance as this circuit's standard of reliance by a creditor on the debtor's misrepresentations to prevent discharge of a debt pursuant to 11 U.S.C. Sec. 523(a)(2)(A). ⁵

A. STATUTORY CONSTRUCTION

Although section 523(a)(2)(A) is silent with respect to the standard of reliance, its companion section 523(a)(2)(B) is not. Subsection (B) states prominently that the creditor's reliance on the debtor's statement must have been reasonable. We thus begin with the basic premise of statutory construction that " ' "[w]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." ' " Rodriguez v. United States, 480 U.S. 522, 525, 107 S.Ct. 1391, 1393, 94 L.Ed.2d 533 (1987) (per curiam) (quoting Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 300, 78 L.Ed.2d 17 (1983)); accord In re Haas, 48 F.3d at 1156-57; United States v. Jordan, 915 F.2d 622, 628 (11th Cir.1990), cert. denied, 499 U.S. 979, 111 S.Ct. 1629, 113 L.Ed.2d 725 (1991). Vann has pointed to no authority supporting the concept that Congress specifically intended for a reasonable reliance standard to apply. Thus, we can deduce from the exclusion of the reasonable reliance standard in the section immediately preceding section 523(a)(2)(B) only that some other standard than reasonable was intended by the legislature. Cf. In re Ophaug, 827 F.2d at 343 (relying on the purpose behind subsection (B) to conclude "having no reason to think that Congress meant anything other than what it said, we can only conclude that section 523(a)(2)(A) does not require a creditor to prove that his reliance on the debtor's fraudulent misrepresentations was reasonable").

B. LEGISLATIVE HISTORY

Because Congress failed to provide the standard of reliance in section 523(a)(2)(A), we look to the legislative history of that section to determine whether Congress's intent can be ascertained there. Sections 523(a)(2) of the 1978 Bankruptcy Code embodied the revision of Bankruptcy Act section 17(2). Although there is little information concerning the passage of section 523(a)(2)(A), specifically, it is clear that Congress intended the reasonable reliance standard only for a nondischargeability claim made pursuant to section 523(a)(2)(B). The House of Representatives Report on the Bankruptcy Code of 1978...