FIELD ET AL. v. MANS
No. 94-967
Supreme Court of the United States
Argued October 2, 1995—Decided November 28, 1995
516 U.S. 59
Christopher J. Seufert argued the cause for petitioners. With him on the brief was William J. Schultz.
Alan Jenkins argued the cause for the United States as amicus curiae. With him on the brief were Solicitor General Days, Assistant Attorney General Hunger, Deputy Solicitor General Bender, William Kanter, and Bruce G. Forrest.
W. E. Whittington IV, by appointment of the Court, 515 U. S. 1156, argued the cause for respondent. With him on the brief was Geoffrey J. Vitt.*
JUSTICE SOUTER delivered the opinion of the Court.
The Bankruptcy Code‘s provisions for discharge stop short of certain debts resulting from “false pretenses, a false representation, or actual fraud.”
I
In June 1987, petitioners William and Norinne Field sold real estate for $462,500 to a corporation controlled by respondent Philip W. Mans, who supplied $275,000 toward the purchase price and personally guaranteed a promissory note for $187,500 secured by a second mortgage on the property. The mortgage deed had a clause calling for the Fields’ con-
On October 8, 1987, Mans‘s corporation triggered application of the clause by conveying the property to a newly formed partnership without the Fields’ knowledge or consent. The next day, Mans wrote to the Fields asking them not for consent to the conveyance but for a waiver of their rights under the due-on-sale clause, saying that he sought to avoid any claim that the clause might apply to arrangements to add a new principal to his land development organization. The letter failed to mention that Mans had already caused the property to be conveyed. The Fields responded with an offer to waive if Mans paid them $10,500. Mans answered with a lower bid, to pay only $500, and again failed to disclose the conveyance. There were no further written communications.
The ensuing years brought a precipitous drop in real estate prices, and on December 10, 1990, Mans petitioned the United States Bankruptcy Court for the District of New Hampshire for relief under Chapter 11 of the Bankruptcy Code. On the following February 6, the Fields learned of the October 1987 conveyance, which their lawyer had discovered at the registry of deeds. In their subsequent complaint in the bankruptcy proceeding, they argued that some $150,000 had become due upon the 1987 conveyance for which Mans had become liable as guarantor, and that his obligation should be excepted from discharge under
The Bankruptcy Court found that Mans‘s letters constituted false representations on which petitioners had relied
The District Court affirmed, likewise following Circuit precedent in holding that
We granted certiorari, 514 U. S. 1095 (1995), to resolve a conflict among the Circuits over the level of reliance that
The provisions for discharge of a bankrupt‘s debts,
“(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
“(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
“(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor‘s or an insider‘s financial condition; [or]
“(B) use of a statement in writing—
“(i) that is materially false;
“(ii) respecting the debtor‘s or an insider‘s financial condition;
“(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
“(iv) that the debtor caused to be made or published with intent to deceive.”
These provisions were not innovations in their most recent codification, the Bankruptcy Reform Act of 1978 (Act), Pub. L. 95-598, 92 Stat. 2590, but had obvious antecedents in the Bankruptcy Act of 1898 (1898 Act), as amended, 30 Stat. 544. The precursor to
The sum of all this history is two close statutory companions barring discharge. One applies expressly when the debt follows a transfer of value or extension of credit induced by falsity or fraud (not going to financial condition), the other when the debt follows a transfer or extension induced by a materially false and intentionally deceptive written statement of financial condition upon which the creditor reasonably relied.
III
The question here is what, if any, level of justification a creditor needs to show above mere reliance in fact in order to exempt the debt from discharge under
The argument relies on the apparent negative pregnant, under the rule of construction that an express statutory requirement here, contrasted with statutory silence there, shows an intent to confine the requirement to the specified instance. See Gozlon-Peretz v. United States, 498 U. S. 395, 404 (1991) (“‘[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‘“) (quoting Russello v. United States, 464 U. S. 16, 23 (1983)). Thus the failure of
First, assuming the argument to be sound, the most it would prove is that the reasonableness standard was not intended. But our job does not end with rejecting reasonableness as the standard. We have to discover the correct standard, and where there are multiple contenders remaining (as there are here), the inference from the negative pregnant does not finish the job.
There is, however, a more fundamental objection to depending on a negative pregnant argument here, for in the present circumstances there is reason to reject its soundness even as far as it goes. Quite simply, if it proves anything here, it proves too much. If the negative pregnant is the reason that
The attempt to draw an inference from the inclusion of reasonable reliance in
IV
“It is ... well established that ‘[w]here Congress uses terms that have accumulated settled meaning under ... the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.‘” Community for Creative Non-Violence v. Reid, 490 U. S. 730, 739 (1989) (quoting NLRB v. Amax Coal Co., 453 U. S. 322, 329 (1981)); see also Nationwide Mut. Ins. Co. v. Darden, 503 U. S. 318, 322 (1992). In this case, neither the structure of
Since the District Court treated Mans‘s conduct as amounting to fraud, we will look to the concept of “actual fraud” as it was understood in 1978 when that language was added to
“required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation. Thus, if one induces another to buy a horse by representing it to be sound, the purchaser cannot recover even though the horse has but one eye, if the horse is shown to the purchaser before he buys it and the slightest inspection would have disclosed the defect. On the other hand, the rule stated in this Section applies only when the recipient of the misrepresentation is capable of appreciating its falsity at the time by the use of his senses. Thus a defect that any experienced horseman would at once recognize at first glance may not be patent to a person who has had no experience with horses.” Id., § 541, Comment a.
A missing eye in a “sound” horse is one thing; long teeth in a “young” one, perhaps, another.
Similarly, the edition of Prosser‘s Law of Torts available in 1978 (as well as its current successor) states that justifiable reliance is the standard applicable to a victim‘s conduct in cases of alleged misrepresentation and that “[i]t is only where, under the circumstances, the facts should be apparent to one of his knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation of his own.” W. Prosser, Law of
These authoritative syntheses surely spoke (and speak today) for the prevailing view of the American common-law courts. Of the 46 States that, as of November 6, 1978 (the day the Act became law), had articulated the required level of reliance in a common-law fraud action, 5 required reasonable reliance,10 5 required mere re-
It should go without saying that our analysis does not relegate all reasoning from a negative pregnant to the rubbish heap, or render the reasonableness of reliance wholly irrelevant under
As for the reasonableness of reliance, our reading of the Act does not leave reasonableness irrelevant, for the greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact. Naifs may recover, at common law and in bankruptcy, but lots of creditors are not at all naive. The subjectiveness of justifiability cuts both ways, and reasonableness goes to the probability of actual reliance.
V
There remains a fair question that ought to be faced. It makes sense to protect a creditor even if he was not quite reasonable in relying on a fraudulent representation; fraudulence weakens the debtor‘s claim to consideration. And yet, why should the rule be different when fraud is carried to the point of a written financial statement? Does it not count against our reading of the statute that a debtor who makes a misrepresentation with the formality of a written financial statement may have less to bear than the debtor who commits his fraud by a statement, perhaps oral, about something other than his bank balance? One could answer that the question does have its force, but counter it by returning to the statutory history and asking why Congress failed to place a requirement of reasonable reliance in
VI
In this case, the Bankruptcy Court applied a reasonable person test entailing a duty to investigate. The court stated that
“the case law establishes an objective test, and that is what would be reasonable for a prudent man to do under those circumstances. At a minimum, a prudent man, I think, would have asked his attorney, could he transfer it without my consent? And the answer would have to be yes, and then the next question would be, well, let‘s see if he‘s done it? And those questions simply were not asked, and I don‘t think on balance that was reasonable reliance.” App. 43-44.
Because the Bankruptcy Court‘s requirement of reasonableness clearly exceeds the demand of justifiable reliance that we hold to apply under
It is so ordered.
I concur in the Court‘s opinion and write separately to highlight a causation issue still open for determination on remand: Was the debt in question, as the statute expressly requires, “obtained by” the alleged fraud? See
Mans prevailed on the reliance issue before the bankruptcy, district, and appellate courts on the basis of then-governing Circuit precedent. See In re Burgess, 955 F. 2d 134, 140 (CA1 1992) (creditor required to prove that its reliance was reasonable). With the Circuit law on reliance solidly in his favor, Mans understandably did not advance in the lower courts the argument that the debt was not “obtained by” fraud. When the “reliance must be reasonable” rule solid in the Circuit was challenged in this Court, however, Mans raised the causation point as an alternate justification for the judgment in his favor. See Brief for Respondent 32-33 (argument heading V. reads: “Since the credit here was not ‘obtained by’ the alleged fraud, petitioners have failed to meet the [causation] requirement of
At oral argument, the following exchange between the Court and the Fields’ attorney occurred:
“QUESTION: ... Suppose the debtor here had simply transferred th[e] property without saying one word to the creditor. [W]ould [the debt] then be dischargeable? There would be no representation at all, just in violation of the agreement the debtor sells the property .... Dischargeable, right?
“MR. SEUFERT: While [those are] not the facts of this case, I would agree with you, it would be dischargeable.” Id., at 8-9.
It bears consideration whether a debt that would have been dischargeable had the debtor simply transferred the property, in violation of the due-on-sale clause with never a word to the creditor, nonetheless should survive bankruptcy because the debtor wrote to the creditor of the prospect, albeit not the actuality, of the transfer. Because this Court is not positioned to provide a first view on questions of this order, I express no opinion on the appropriate resolution of the unsettled causation (“obtained by“) issue.
JUSTICE BREYER, with whom JUSTICE SCALIA joins, dissenting.
I agree with the Court‘s holding that “actual fraud” under
First, the Bankruptcy Court, while using the wrong words, did the right thing. That court essentially found that in mid-1987, Mr. Field and his wife sold their inn for about $500,000 to Mr. Mans, a developer. To secure the $187,000 that Mans still owed them, the Fields kept a mortgage, which had a term that accelerated the debt should Mans transfer the property to anyone else without their permission. A few months later, Mans wrote to the Fields saying that he wanted to transfer the inn to a development partnership which Mans had formed with a new partner, Mr. De Felice. Mans observed that because the Fields had transferred the inn to a corporation, the stock of which was wholly owned by Mans, Mans could effectively accomplish the transfer to the new partnership by simply conveying the stock of the holding company to the partnership, thereby avoiding the “debt acceleration” clause. But, Mans said, he would prefer to transfer the inn outright, and therefore was seeking their permission to do so without accelerating the debt. The Fields did not give permission. Mans transferred the inn anyway. Nothing more was heard of the matter until 1991, when real estate values fell, Mans went bankrupt, and the Fields brought this lawsuit in an effort to prevent the $150,000 they were then owed from disappearing in the bankruptcy.
The Bankruptcy Judge found that Mans’ mid-1987 letters implied that he had not yet transferred the inn to the partnership as of the time he wrote the letters. But this impli-
To hold this is, in my view, to apply the commentators’ “justifiable reliance” standard. The court focused upon the individual circumstances and capacity of the plaintiff, Mr. Field. See Prosser & Keeton § 108, at 751. The court found that Mr. Field should have looked into the matter, not because of any general “duty to investigate,” but because, in the particular circumstances, he “discovered something which should serve as a warning that he [was] being deceived.” Id., § 108, at 752. That is, the court did not use the “objective” test as an improper search for “contributory negligence“—i. e., to deny recovery to one also at fault for failing to exercise “the care of a reasonably prudent person for his own protection.” Id., § 108, at 750. Rather, the court viewed the failure to investigate, in light of the clear warnings of deception, as a means of testing whether there was “some objective corroboration to plaintiff‘s claim that
Second, the Bankruptcy Court‘s use of what turned out to be the wrong words (“reasonable” and “prudent man” rather than “justifiable“) is not grounds for reversal, for no one brought the “correct” terminology to the lower courts’ attention. The Fields did not argue in the Bankruptcy Court, or in their briefs to the District Court or the Court of Appeals, or in their petition for certiorari, that there was any difference between “reasonable reliance” and “justifiable reliance.” To the contrary, the Fields took the view (which the Court now unanimously rejects) that actual reliance alone—whether or not it meets any objective standard—is sufficient for recovery. Indeed, it appears that the Fields did not even mention the word “justifiable” below, but, rather, used the term “reasonable” throughout to refer to any kind of objective standard. The first time the word “justifiable” appears in this case seems to be in the Fields’ brief on the merits in this Court where they point to the Restatement‘s use of the term “justifiable,” Restatement (Second) of Torts § 540 (1976), and argue that “[j]ustifiable reliance does not require that the recipient of misrepresentation investigate the underlying assertion.” Brief for Petitioners 20 (emphasis in original). But see Prosser & Keeton § 108, at 752.
Third, the “correct” terminology would not have appeared obvious to a judge, certainly not to a judge who was not a special expert in the common law of misrepresentation. Prior case law was not neat in its use of the terminology. The commentaries do not refer to the old prudent person standard as a “reasonable reliance” standard, but, instead, distinguish between the “justifiable reliance” standard as it has been understood in cases now disapproved, and the “justifiable reliance” standard as it is applied in most modern cases. See id., § 108; 2 F. Harper, F. James, & O. Gray, Law of Torts § 7.12, pp. 455-464 (2d ed. 1986). Indeed, the majority‘s footnotes distinguish between cases in which a court (1)
Fourth, while I understand that sometimes this Court might appropriately announce a legal standard and remand the case to the lower courts for application of the chosen standard, I do not agree that it should do so here. The record below is brief (87 pages of transcript plus exhibits). The Bankruptcy Judge‘s findings are reasonably clear. And, further litigation is expensive. Mr. Mans is bankrupt, representing himself until this Court appointed a lawyer for him; the Fields are not wealthy and should not be encouraged to pursue what is, in my view, the impossible dream of eventually recovering the $150,000 (minus legal fees). And, the example this Court sets by not looking more closely into the details of the case is not a happy one—particularly if it sug-
For these reasons, I dissent.
Notes
“are liabilities for obtaining money or property by false pretenses or false representations, or for obtaining money or property on credit or obtaining an extension or renewal of credit in reliance upon a materially false statement in writing respecting [the bankrupt‘s] financial condition made or published or caused to be made or published in any manner whatsoever with intent to deceive.” Act of July 12, 1960, Pub. L. 86-621, 74 Stat. 409.
See Beavers v. Lamplighters Realty, Inc., 556 P. 2d 1328, 1331 (Okla. App. 1976) (requiring actual reliance only); Campanelli v. Vescera, 75 R. I. 71, 74-75, 63 A. 2d 722, 724 (1949) (stating that actual reliance is sufficient, notwithstanding relying party‘s failure to investigate or verify); Negyessy v. Strong, 136 Vt. 193, 194-195, 388 A. 2d 383, 385 (1978) (stating that actual reliance is sufficient, even if plaintiff might have discovered the wrong but for his own neglect); Horton v. Tyree, 104 W. Va. 238, 242, 139 S. E. 737, 738 (1927) (holding that one to whom a representation is made has the right to rely without any further inquiry); Johnson v. Soulis, 542 P. 2d 867, 872 (Wyo. 1975) (requiring actual reliance only).