United States Court of Appeals
For the First Circuit
No. 02-9002
IN RE: DANTE ANTHONY SPADONI,
Debtor.
__________
JOHN LENTZ,
Plaintiff, Appellant,
v.
DANTE ANTHONY SPADONI,
Defendant, Appellee.
ON APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Boudin, Chief Judge,
Torruella and Howard, Circuit Judges.
Bruce T. Macdonald for appellant.
Gary L. Meyers with whom Law Office of Gary L. Meyers was on
brief for the appellee.
January 14, 2003
BOUDIN, Chief Judge. In July 1994, John Lentz began to
lease space in his auto body shop in Revere, Massachusetts to his
friend, Dante Spadoni. Spadoni used the space, comprising an
office and repair bay, to operate a cellular telephone business.
By the beginning of 1998, Spadoni had fallen several months behind
on the rent, then $900 per month. Lentz asked Spadoni about the
overdue rent and Spadoni assured Lentz that he would take care of
it. In fact, Spadoni paid no rent thereafter, apart (possibly) for
a single payment of $1,500 in July 1998.
Lentz later testified that during much of 1998 he pressed
Spadoni for the rent each month and was assured that the rent would
be paid. Lentz said that he "trusted" Spadoni and gave him "the
benefit of the doubt" because they were friends. In September 1998
Spadoni quit the premises without notice and notified Lentz that he
was leaving the towing business that he and Lentz were then
operating together. According to Lentz, Spadoni at that time owed
$9,700 in back rent.
Over a year later, in December 1999, Lentz initiated a
state court action to recover the rent. Spadoni immediately filed
a Chapter 7 bankruptcy proceeding, listing Lentz as an unsecured
creditor in the amount of $10,000. Lentz asserted his rent claim
in the bankruptcy court, claiming that it was not dischargeable
under section 523(a)(2)(A) of the Bankruptcy Code. 11 U.S.C. §
523(a)(2)(A) (2000). That provision, in pertinent part, makes non-
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dischargeable "any debt . . . for money, property, services, or an
extension, renewal, or refinancing of credit, to the extent
obtained by . . . false pretenses, a false representation, or
actual fraud . . . ."
After a bench trial, the bankruptcy judge ruled that
Spadoni's promises to pay were knowingly false when made and were
intended to deceive Lentz. Spadoni denied this but had already
admitted under oath in another proceeding that he did not intend to
pay rent after 1997. However, to invoke section 523(a)(2)(A) the
claimant must also show that he "actually and justifiably relied"
on the false statement or statements. Palmacci v. Umpierrez, 121
F.3d 781, 786 (1st Cir. 1997). The bankruptcy judge said that
Lentz had failed to prove this "element," "namely, that he actually
and justifiably relied . . . ." By way of explanation, the judge
said as follows:
Mr. Lentz conceded that he took no action
against the debtor during the period when he
made the promises to pay. Mr. Lentz should
have known after a couple of months that the
debtor's promises were suspect and taken
action against him. His action against the
debtor for unpaid rent was not filed until
December of 1999, more than a year after the
debtor left and almost two years after the
debtor stopped paying rent.
On review, the Bankruptcy Appellate Panel ("BAP")
sustained the bankruptcy judge on the ground that her finding of no
actual reliance by Lentz was not clearly erroneous. Lentz now
appeals to us, arguing that the bankruptcy judge made no such
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finding. Spadoni responds that the bankruptcy judge ruled in "the
conjunctive" that there was no "actual and justifiable reliance"
and--because the former finding is not "clearly erroneous"--the
determination on justifiability need not be considered.
The standard of review on this appeal requires that we
respect, unless "clearly erroneous," all findings of fact by the
bankruptcy court, which includes any finding of actual reliance and
any raw fact findings pertinent to the issue of justifiable
reliance. Brandt v. REPCO Printers & Lithographics, Inc., 132 F.3d
104, 107-08 (1st Cir. 1997). The definition of the standard of
justifiability is a purely legal issue, reviewable de novo (this is
uncontroversial), and a divided panel of this court held that the
same standard governs application of the justifiability standard to
particular facts--a law application or "mixed" question. See
Sanford Inst. for Sav. v. Gallo, 156 F.3d 71, 74 (1st Cir. 1998).1
We begin with the "actual reliance" requirement. The
statute prevents the discharge of a debt to the extent that the
money or other property or services were "obtained by" deliberately
false statements. Here, the debt is for rent due, and the property
or services--the use of the subleased space--were "obtained by"
1
Although purely legal and purely factual questions have quite
fixed standards of review, review of decisions applying general
standards to known facts varies from issue to issue, partly because
it is affected by policy considerations peculiar to particular
issues. See, e.g., Ornelas v. United States, 517 U.S. 690, 697-98
(1996).
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Spadoni insofar as Lentz continued to lease the space to Spadoni
based on the latter's statements that the rent would be paid
despite the temporary arrearage. Lentz testified that he relied on
Spadoni's statements in continuing the lease ("I trusted him," I
gave him "the benefit of the doubt").
The BAP read the bankruptcy judge's decision as rejecting
this claim of actual reliance and held that the decision on this
issue was not clearly erroneous. Conceivably, the bankruptcy judge
could have found no actual reliance, although this would have been
surprising. Lentz testified under oath that he did rely; no
obvious reason exists why he should not have done so at the outset;
and there was certainly no direct evidence that Lentz was lying.
Of course, friendship may have reinforced the decision but it is
enough for reliance if the false statements contributed to it. In
re Vann, 67 F.3d 277, 281, 284 (11th Cir. 1995).
In our view, the BAP misread the bankruptcy judge's
decision in attributing to her a finding that Lentz did not
actually rely. She never said that she disbelieved Lentz on this
point or that he did not actually rely on Spadoni's promises. The
explanation she did give for finding that Lentz's claim of non-
dischargeability failed--quoted in full above--is that after a few
months Lentz "should have known" that the promises were unreliable.
The "should have known" language clearly refers to the
reasonableness of the reliance, not its existence; it would be
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quite a different matter if she had said that Lentz "did know" that
the promises were false.
In the passage quoted above, the bankruptcy judge also
mentioned briefly Lentz's failure to bring suit for the back rent
for just over a year after Spadoni left in September 1998. What
this further delay has to do with Lentz's actual trust or lack of
it in Spadoni's promises is unclear, nor is the record clear as to
why the lawsuit was delayed until December 1999. Primarily, this
later delay seems to have been cited as a consonant example of
Lentz's lack of diligence--an issue connected, if at all, primarily
to the question of justifiable reliance.
On appeal, Spadoni argues that the bankruptcy judge
necessarily found a lack of actual reliance because she, in the
"conjunctive," said that Lentz had failed to establish the element
of "actual and justifiable reliance." The argument is a non
sequitur. If one chooses verbally to lump the two issues together
as a single "element," as the bankruptcy judge did, then to say
that the reliance was not justifiable means that the element of
"actual and justifiable reliance" has not been established,
regardless of whether actual reliance existed or not.
This brings us to the ground on which we think the
bankruptcy judge's decision rested, namely, her conclusion that
Lentz's reliance was unjustified. "Reasonable reliance"--measured
by an objective standard--is a requirement under various doctrines.
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See, e.g., Restatement (Second) of Contracts § 139 (1981) (reliance
must be reasonable in a contract action). However, the Supreme
Court has held that a less demanding "intermediate" standard, which
it calls "justifiable reliance," applies under section
523(a)(2)(A). Field v. Mans, 516 U.S. 59, 73-74 (1995). In
particular, the Court said that the circumstances of the reliance
claim must be taken into account and that the individual is not
obliged to investigate statements made to him (although he cannot
shut his eyes to an obvious falsehood). See id. at 71.
In applying this creditor-friendly test to the case at
hand, we would be obligated to defer to any pertinent findings of
raw fact made by the bankruptcy judge but there are none: the judge
simply concluded that after a few months Lentz "should have known"
that Spadoni was not to be trusted. This is essentially a
normative judgment. Since we are obliged under Gallo to make our
own de novo judgment on this ultimate question, it is of no moment
whether (as Lentz claims on appeal) the bankruptcy judge's
locution suggests her use of the reasonable man standard discarded
by the Supreme Court.
In a nutshell, we think that Spadoni's assurances were
perfectly creditable at the start of 1998. According to Lentz's
uncontradicted testimony, Spadoni said that business had been slow
but was developing. To us, there is no obvious reason why Lentz's
trust, even if tested, could not rationally endure from January
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into early September, as Spadoni's assurances were renewed from
month to month. Perhaps the friendship between the two men made
the assurances more palatable than normal; but this is one of those
"characteristics of the particular plaintiff and circumstances of
the case" that the Supreme Court allows to the plaintiff. See
Field, 516 U.S. at 71.2
In oral argument--although not in his brief in this
court--Spadoni contends that his relations with Lentz were
worsening from 1997 onward due to other disagreements that were
Lentz's fault. This may be so but Spadoni does not explain why
this prevented Lentz from relying justifiably upon Spadoni's
specific promises as to rent payments. Spadoni's further claim at
oral argument--that inherently Lentz had an obligation to conduct
an investigation into Spadoni's ability to pay--is on these facts
at odds with the Supreme Court's expressed views in Field.
In general, the "fresh start" objective of the Bankruptcy
Code has led courts to construe strictly non-dischargeability
claims. See, e.g., In re Rembert 141 F.3d 277, 281 (6th Cir.),
cert. denied, 525 U.S. 978 (1998). If the Supreme Court's decision
in Field appears to be in some tension with this tradition, it
reflects another over-generalization, namely, that the fresh start
2
Several cases have relied on friendship or like relationships
as a reinforcing factor helping to justify the lender's trust. See
In re Tillman, 197 B.R. 165, 171 (Bankr. D.D.C., 1996) (collecting
cases).
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is for the "honest but unfortunate debtor." Grogan v. Garner, 498
U.S. 279, 286-87 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S.
234, 244 (1934)). In all events, in light of Field, the natural
tendency of judges to insist on reasonable-man prudence from the
creditor must be somewhat tempered and, on de novo review, we think
Lentz's forbearance was "justifiable."
Accordingly, the rent from January 1998 through September
1998 qualifies as a non-dischargeable debt. Lentz did not show
that Spadoni made false promises prior to January 1998, so the rent
unpaid in 1997 does not fall within section 523(a)(2)(A). On
remand, the bankruptcy judge should make her own best estimate of
how much rent Lentz showed to be attributable to 1998. Although
she is free to conduct further proceedings at her discretion, she
is equally free to hold the parties to the evidence already
tendered and bring this case to a swift conclusion.
The judgment of the BAP is vacated and the matter
remanded to the BAP with directions to remand the case to the
Bankruptcy Court so it may proceed in accordance with this opinion.
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