OCTOBER TERM, 1995
FIELD ET AL. v. MANS
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT
No. 94-967. Argued October 2, 1995-Decided November 28,1995
Mter respondent Mans filed for relief under Chapter 11 of the Bankruptcy Code, petitioners William and Norinne Field alleged, in effect, that letters Mans had written to them constituted fraudulent representations on which they relied in continuing to extend credit to a corporation controlled by Mans, and that, accordingly, Mans's obligation to them as guarantor of the corporation's debt should be excepted from discharge under 11 U. S. C. § 523(a)(2)(A) as a debt resulting from fraud. The Bankruptcy Court found that Mans's letters constituted false representations, but followed Circuit precedent in requiring that the Fields show their reasonable reliance on the letters. Finding the Fields unreasonable in relying without further enquiry on Mans's misrepresentations, the court held Mans's debt dischargeable. The District Court and the Court of Appeals affirmed.
Held: The standard for excepting a debt from discharge as a fraudulent representation within the meaning of § 523(a)(2)(A) is not reasonable reliance but the less demanding one of justifiable reliance on the representation. Pp.64-77.
(a) Section 523(a)(2)(A) had an antecedent in the 1903 amendments to the Bankruptcy Act of 1898, and has changed only slightly since 1903, from "false pretenses or false representations" to "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." Section 523(a)(2)(B), which applies to false financial statements in writing, also grew out of a 1903 amendment to the Bankruptcy Act of 1898, but it changed more significantly over the years. One of these changes occurred in 1978, when Congress added a new element of reasonable reliance. Pp. 64-66.
(b) The text of § 523(a)(2)(A) does not mention the level of reliance required, and the Court rejects as unsound the argument that the addition of reasonable reliance to § 523(a)(2)(B) alone supports an inference that, in § 523(a)(2)(A), Congress did not intend to require reasonable reliance. That argument relies on the apparent negative pregnant, under the rule of construction that an express statutory requirement in one place, contrasted with statutory silence in another, shows an intent
to confine the requirement to the specified instance. Assuming this argument to be sound, it would prove at most that the reasonableness standard was not intended, but would not reveal the correct standard. Here, however, there is reason to reject the negative pregnant argument even as far as it goes. If the argument proves anything here, it proves too much: this reasoning would also strip § 523(a)(2)(A) of any requirement to establish causation and scienter, an odd result that defies common sense. Moreover, the argument ignores the fact that § 523(a)(2)(A) refers to common-law torts and § 523(a)(2)(B) does not. The terms used in paragraph (A) imply elements that the common law has defined them to include, whereas the terms in paragraph (B) are statutory creations. Pp. 66-69.
(c) This Court has an established practice of finding Congress's meaning in the generally shared common law where, as here, common-law terms are used without further specification. Since the District Court treated Mans's conduct as amounting to fraud, the enquiry here is into the common-law understanding of "actual fraud" in 1978, when it was added to § 523(a)(2)(A). The Restatement (Second) of Torts states that justifiable, rather than reasonable, reliance is the applicable standard. The Restatement rejects a general, reasonable person standard in favor of an individual standard that turns on the particular circumstances, and it provides that a person is justified in relying on a factual representation without conducting an investigation, so long as the falsity of the representation would not be patent upon cursory examination. Scholarly treatises on torts, as well as state cases, similarly applied a justifiable reliance standard. The foregoing analysis does not relegate the negative pregnant to the rubbish heap, but merely indicates that its force is weakest when it suggests foolish results at odds with other textual pointers. The Court's reading also 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. Pp. 69-76.
(d) It may be asked whether it makes sense to protect creditors who were not quite reasonable in relying on a fraudulent representation, but to apply a different rule when fraud is carried to the point of a written financial statement. This ostensible anomaly may be explained by Congress's apparent concerns about creditors' misuse of financial statements. Pp. 76-77.
(e) The Bankruptcy Court's reasonable person test entailing a duty to investigate clearly exceeds the demands of the justifiable reliance standard that applies under § 523(a)(2)(A). P. 77.
36 F.3d 1089, vacated and remanded.