City Bank & Trust Co. v. Vann ( 1995 )


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  •                         United States Court of Appeals,
    
                                    Eleventh Circuit.
    
                                        No. 94-2384.
    
                             In re Edwin Leo VANN, Debtor.
    
                    CITY BANK & TRUST CO., Plaintiff-Appellant,
    
                                             v.
    
                          Edwin Leo VANN, Defendant-Appellee.
    
                                       Oct. 19, 1995.
    
    Appeal from the United States District Court for the Middle
    District of Florida. (No. 93-817-CIV-T-21C), L. Clure Morton,
    Judge., and Bankruptcy Court (No. 90-10082-8B7), Thomas E. Baynes,
    Jr., Judge.
    
    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, in the alternative, that their 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
    
    City    Bank    for    the   opening    of    a       cheese    processing      plant   in
    
    Tennessee.            Vann     submitted          a     financial       statement       to
    
    plaintiff-appellant City Bank & Trust Company's ("City Bank"), and
    a representative from City Bank visited 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 (1)
    
         1
          Section 523(a)(2) provides that an individual debtor's debt
    incurred
    
                     (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
    that, although the bank had been "hoodwinked" by Vann, there was no
    
    actual fraud, (2) that, 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) that 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.    See Haas v. Internal Revenue Service (In re
    
    Haas), 
    48 F.3d 1153
    , 1154 (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
    
                    (iv) that the debtor caused to be made or
                    published with intent to deceive....
    
         will not be discharged in bankruptcy.       § 523(a)(2) (emphasis
         added).
    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
                                                                                       2
    Bud v. Kimzey (In re Kimzey), 
    761 F.2d 421
    , 423 (7th Cir.1985).
    
    The similarity, however, ends there.               Three standards of reliance
    
    apparently     are   used    by   the    circuit    courts:       (1)    reasonable
    
    
    
    
         2
          The American Law of Torts provides that
    
                    [i]t is a fundamental principle of the law of
               fraud throughout the United States, regardless of the
               form of relief sought, that in order to secure redress,
               the representee (person to whom or which the
               misrepresentation was made) must have relied upon the
               statement or representation as an inducement to his
               action or injurious change of position. As the general
               American law declares, a representation must have been
               acted upon in the manner contemplated by the party
               making it, or else in some manner reasonably probable.
    
         Stuart M. Speiser, Charles F. Krause, & Alfred W. Gans, 9
         American Law of Torts § 32:49 (1992).
    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 §
    
    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 § 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
    
         3
          Because of the split in the circuits, the Supreme Court has
    granted certiorari to a First Circuit case to answer this
    question. Field v. Mans, 
    1994 WL 497614
    , No. 94-1391, 1994
    U.S.App. LEXIS 24927 (1st Cir. Aug. 29, 1994), cert. granted, ---
    U.S. ----, 
    115 S. Ct. 1821
    , 
    131 L. Ed. 2d 743
     (1995).
           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 § 523(a)(2)(A) and §
    
    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. § 523(a)(2)(A).5
    
           4
          To the extent that the reasonable reliance cases use a
    subjective standard to determine whether or not the reliance is
    adequate to prevent discharge, we would categorize the cases as
    adhering not to a true reasonable reliance standard, but rather
    to a justifiable reliance standard. See In re Kirsh, 973 F.2d at
    1459-60 ("This use of the word "reasonable' in place of
    "justifiable' is of no real moment unless a later reader is led
    away from the true content of the reliance element.").
           5
          We address first the claim by Vann that we have already
    answered this question. Relying on Schweig v. Hunter (In re
    Hunter), 
    780 F.2d 1577
     (11th Cir.1986), and St. Laurent v.
    Ambrose (In re St. Laurent), 
    991 F.2d 672
     (11th Cir.1993), Vann
    argues that this court has expressly adopted a standard of
    reasonable reliance. Vann rests his argument on the following
    passage of In re St. Laurent:
    A. STATUTORY CONSTRUCTION
    
          Although section 523(a)(2)(A) is silent with respect to the
    
    
              For purposes of § 523(a)(2)(A), a creditor must prove
              that (1) the debtor made a false representation with
              intent to deceive the creditor, (2) the creditor relied
              on the representation, (3) that his reliance was
              reasonably founded, and (4) that the creditor sustained
              loss as a result of the representation.
    
         Id. at 676 (emphasis added). Indeed, we have stated that a
         creditor's reliance must be "reasonably founded." See id.;
         In re Hunter, 780 F.2d at 1579. Vann contends that because
         In re St. Laurent was addressing the application of
         collateral estoppel to section 523(a)(2)(A), our statement
         regarding "reasonably founded" is binding on us.
    
              We do not view In re St. Laurent with the same effect.
         Our finding that collateral estoppel precluded the
         bankruptcy court from relitigating fraud was based on our
         conclusion that the "elements of common law fraud in Florida
         " "closely mirror" the requirements of section 523(a)(2)(A)
         and, hence, are "sufficiently identical ... to meet the
         first prong of the test for collateral estoppel." ' " In re
         St. Laurent, 991 F.2d at 676 (omission in original) (quoting
         In re Jolly, 
    124 B.R. 365
    , 367 (Bankr.M.D.Fla.1991)).
         Moreover, the Florida standard of reliance we cited in In re
         St. Laurent was actual reliance. Id. at 676 ("To prove
         fraud under Florida law, a plaintiff must establish that the
         defendant made a "deliberate and knowing misrepresentation
         designed to cause, and actually causing detrimental reliance
         by the plaintiff.' ") (quoting First Interstate Dev. Corp.
         v. Ablanedo, 
    511 So. 2d 536
    , 539 (Fla.1987)). In In re
         Hunter, we concluded that there were no false
         representations or false pretenses, and accordingly, we
         never reached the issue of reliance. In re Hunter, 780 F.2d
         at 1580. We made no statement in In re St. Laurent or in In
         re Hunter, regarding what "reasonably founded" means, and we
         refuse to be bound by dicta. See New Port Largo, Inc. v.
         Monroe County, 
    985 F.2d 1488
    , 1500 n. 7 ("For good or for
         bad, opinion-writing judges—unlike legislators—can make
         cases decide no more than the cases present. For example,
         no matter how often or how plainly a judicial panel may put
         in its opinion that "we hold X,' "X' is not law and is not
         binding on later panels unless "X' was squarely presented by
         the facts of the case and was a proposition that absolutely
         must have been decided to decide the concrete case then
         before the court.") (Edmondson, J., concurring), cert.
         denied, --- U.S. ----, 
    114 S. Ct. 439
    , 
    126 L. Ed. 2d 373
         (1993). Hence, we now address for the first time directly
         what standard of reliance is required under section
         523(a)(2)(A).
    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 the 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 contained a lengthy statement
    
    regarding the use of false financial statements to obtain money,
    
    property, services, or credit.             See H.R.Rep. No. 595, 95th Cong.,
    
    1st Sess. 129-32 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6090-
    
    93.       Section 523(a)(2)(B) specifically was enacted to protect
    
    consumers against "abuse in consumer cases," and to guard "the
    
    fresh start goal of the bankruptcy discharge."               Id. at 130, 1978
    
    U.S.C.C.A.N.     at     6091    (emphasis    added).       The    report,    where
    
    discussing the effect of false financial statements, states in
    
    pertinent part:       "[t]he difference[ ] [is] that current law ...
    
    requires only reliance, not reasonable reliance, by the creditor on
    
    the statement.     The courts have recently begun to require that the
    
    reliance be reasonable, however."            Id.   Nowhere in the report is a
    
    reference made to a requirement of reasonable reliance to prevent
    
    discharge on the basis of unwritten false statements. 6               Thus, our
    
    
          6
          In fact, the statements of one Representative, 124
    Cong.Rec. 11,089 (1978) (statement of Rep. Edwards), reprinted in
    1978 U.S.C.C.A.N. 6436, 6453, and one Senator, 124 Cong.Rec.
    17,406 (1978) (statement of Sen. DeConcini), reprinted in 1978
    U.S.C.C.A.N. 6505, 6522 emphasize that sections 523(a)(2)(A) and
    523(a)(2)(B) are mutually exclusive in their purposes, supporting
    the construction that reasonable reliance cannot be read into
    section 523(a)(2)(A).
    conclusion        that    only   section    523(a)(2)(B)     requires   reasonable
    
    reliance is fortified.
    
    C. COMMON LAW
    
               Because neither the statute nor the legislative history
    
    indicates whether a creditor must demonstrate actual reliance7 or
    
    justifiable reliance to prevent discharge according to section
    
    523(a)(2)(A), we turn to the common law.             See In re Kirsh, 973 F.2d
    
    at 1457-58;          Cf. Astoria Fed. Sav. & Loan Ass'n v. Solimino, 
    501 U.S. 104
    , 106-108, 
    111 S. Ct. 2166
    , 2169, 
    115 L. Ed. 2d 96
     (1991)
    
    ("Congress is understood to legislate against a background of
    
    common-law adjudicatory principles.");             Briscoe v. LaHue, 
    460 U.S. 325
    ,       330-34,    
    103 S. Ct. 1108
    ,    1113-15,   
    75 L. Ed. 2d 96
        (1983)
    
    (concluding that witness immunity was " "so well grounded in
    
    history and reason' that we cannot believe that Congress impinged
    
    on it "by covert inclusion in the general language before us' "
    
    (quoting Tenney v. Brandhove, 
    341 U.S. 367
    , 376, 
    71 S. Ct. 783
    , 788,
    
    
    95 L. Ed. 1019
     (1951)));             United States v. Turley, 
    352 U.S. 407
    ,
    
    411, 
    77 S. Ct. 397
    , 399, 
    1 L. Ed. 2d 430
     (1957) ("We recognize that
    
    where       a   federal     criminal   statute   uses   a    common-law      term    of
    
    established meaning without otherwise defining it, the general
    
    practice is to give that term its common-law meaning.").                            The
    
    Restatement (Second) of Torts provides the common law rule in these
    
    cases:
    
           The recipient of a fraudulent misrepresentation can recover
           against its maker for pecuniary loss resulting from it if, but
    
           7
          The statement in House Report No. 595 that "current law ...
    requires only reliance" pertains to § 523(a)(2)(B), and thus, the
    statement does not reveal congressional intent regarding §
    523(a)(2)(A).
           only if,
    
                (a) he relies on the misrepresentation in acting or
           refraining from action, and
    
                  (b) his reliance is justifiable.
    
    Restatement (Second) of Torts § 537 (1977) (emphasis added).
    
           Another generally recognized authority, Prosser & Keeton on
    
    Torts states that "[n]ot only must there be reliance but the
    
    reliance must be justifiable under the circumstances."                  W. Page
    
    Keeton, Prosser & Keeton on Torts § 108, at 749 (5th ed. 1984).
    
    The     justifiability       requirement     provides      "some      objective
    
    corroboration to plaintiff's claim that he did rely."              Id. at 750.
    
            To    constitute     justifiable   reliance,      "[t]he   plaintiff's
    
    conduct must not be so utterly unreasonable, in the light of the
    
    information apparent to him, that the law may properly say that his
    
    loss is his own responsibility."           Id.   This conclusion, however,
    
    does not mean that the reliance must be objectively reasonable.
    
    "Although the plaintiff's reliance on the misrepresentation must be
    
    justifiable, ... this does not mean that his conduct must conform
    
    to the standard of the reasonable man."             Restatement (Second) of
    
    Torts § 545A cmt. b.            Justifiable reliance is gauged by "an
    
    individual     standard    of   the   plaintiff's   own    capacity     and   the
    
    knowledge which he has, or which may fairly be charged against him
    
    from   the    facts   within    his   observation   in    the   light   of    his
    
    individual case."         Prosser & Keeton on Torts at 751 (emphasis
    
    added).      Additionally,
    
           [i]t is only where, under the circumstances, the facts should
           be apparent to one of [plaintiff's] 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.
    Id. at 752 (footnotes omitted);       see also Mayer v. Spanel Int'l
    
    Ltd. (In re Mayer), 
    51 F.3d 670
    , 676 (7th Cir.1995) ("A victim who
    
    lacks access to the truth, and has not been alerted to the facts
    
    that would alert him to the truth, is not to be ... blocked by a
    
    discharge under the bankruptcy laws—just because he did not conduct
    
    a more thorough investigation.").      Under the common law, a person
    
    was not barred from recovery because he failed to undertake an
    
    investigation of the truth of a misrepresentation even where "the
    
    reasonable man of ordinary caution would do so."            Restatement
    
    (Second) of Torts § 545A cmt. b.      This subjective construction is
    
    consistent with the Supreme Court's interpretation of the statutory
    
    purpose.     See Grogan v. Garner, 
    498 U.S. 279
    , 287, 
    111 S. Ct. 654
    ,
    
    659, 
    12 L. Ed. 2d 755
     (1991) ("We think it unlikely that Congress ...
    
    would have favored the interest in giving perpetrators of fraud a
    
    fresh start over the interest in protecting victims of fraud.").
    
    Thus, we adopt the standard of justifiable reliance.
    
           The    bankruptcy   court   embraced   the   reasonable   reliance
    
    standard as stated by the Tenth Circuit and concluded that the bank
    
    would have been "better served by demanding an appraisal," of
    
    certain property and should have made other inquiries of the debtor
    
    to ascertain the status of other properties.          R1-1-90-292.    The
    
    court found that because the bank failed to do so, it was not
    
    entitled to discharge on the basis of either section 523(a)(2)(A)
    
    or section 523(a)(2)(B).       Although the bankruptcy court, with
    
    hindsight, can see plainly that the bank would have been "better
    
    served by demanding an appraisal" and by making further inquiries
    
    of the debtor, even the cases upon which the court relied admonish
    that the court should not " "second guess a creditor's decision to
    
    make a loan' " or " "base its decision regarding discharge on
    
    whether it would have extended the loan.' "    In re Mullet, 817 F.2d
    
    at 681 (quoting Northern Trust Co. v. Garman (In re Garman), 
    643 F.2d 1252
    , 1258 (7th Cir.1980) (interpreting section 17(2) of the
    
    Bankruptcy Act), cert. denied, 
    450 U.S. 910
    , 
    101 S. Ct. 1347
    , 
    67 L. Ed. 2d 333
     (1981)).
    
         By   adopting   the   standard   of   justifiable   reliance,   we
    
    necessarily reject the standard of actual reliance employed by the
    
    Eighth Circuit in In re Ophaug and the Fifth Circuit In re Allison.
    
    It cannot be argued that a standard of actual reliance is supported
    
    by the plain language of the statute.       Section 523(a)(2)(A) does
    
    not mention reliance in any form and, to the extent that reliance
    
    is required, it is as an element of actual fraud, false pretenses
    
    or false representations that must be proven to prevent discharge
    
    of the debt.     Moreover, a standard of actual reliance does not
    
    "reflect a fair balance between the[ ] conflicting interests" of
    
    discouraging fraud and of providing the honest but unfortunate
    
    debtor a fresh start that are present in the dischargeability
    
    provisions.    Grogan, 498 U.S. at 287, 111 S.Ct. at 659.   A standard
    
    of actual reliance requires little of the creditor;           whereas,
    
    justifiable reliance requires the creditor to act appropriately
    
    according to his individual circumstances.       Therefore, the fresh
    
    start policy of the Bankruptcy Code is intact while fraudulent
    
    debtors are precluded from profiting from their misdeeds.
    
    D. APPLICATION OF JUSTIFIABLE RELIANCE STANDARD
    
          With respect to section 523(a)(2)(A), the bankruptcy court
    found that, although Vann "hoodwinked" City Bank, there was no
    
    actual fraud in Vann's obtaining the loan from City Bank. R1-1-90-
    
    297. The bankruptcy court, however, refused to make any additional
    
    factfinding to assist our review.    If Vann obtained the loan from
    
    City Bank by false pretenses or by a false representation, and if
    
    City Bank justifiably relied on his misrepresentations, then Vann
    
    is not entitled to discharge of that debt.        City Bank is not
    
    required   to   prove   that   it   reasonably   relied   on   Vann's
    
    misrepresentations.
    
                              III. CONCLUSION
    
         This appeal required us to decide the standard of reliance
    
    that a creditor must satisfy under section 523(a)(2)(A) of the
    
    Bankruptcy Code to prevent discharge of a debt. We have determined
    
    that standard to be justifiable reliance.    Because the bankruptcy
    
    court did not make sufficient factfindings for our review, we
    
    REVERSE and REMAND to the district court with instructions to
    
    remand to the bankruptcy court for proceedings consistent with this
    
    opinion.
    

Document Info

DocketNumber: 94-2384

Filed Date: 10/19/1995

Precedential Status: Precedential

Modified Date: 3/3/2016

Authorities (25)

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