FIELD et al. v. MANS
516 U.S. 59 (1995)
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Rule of Law:
To except a debt from discharge under § 523(a)(2)(A) of the Bankruptcy Code for actual fraud, a creditor must prove their reliance on the debtor's misrepresentation was justifiable, not that it was reasonable.
Facts:
- In June 1987, William and Norinne Field sold real estate to a corporation controlled by Philip W. Mans, with Mans personally guaranteeing a $187,500 promissory note.
- The mortgage agreement contained a due-on-sale clause, requiring the Fields' consent before the property could be conveyed to another party.
- On October 8, 1987, Mans's corporation transferred the property to a new partnership without the Fields' knowledge or consent, thereby triggering the due-on-sale clause.
- The next day, October 9, 1987, Mans wrote to the Fields requesting a waiver of the due-on-sale clause but fraudulently omitted that the transfer had already occurred.
- The Fields responded with an offer to waive the clause for a fee, and Mans made a counteroffer, again failing to disclose the completed conveyance.
- Believing the transfer had not yet happened and that their consent was still required, the Fields did not accelerate the debt by invoking the due-on-sale clause.
- In 1990, Mans filed for bankruptcy.
Procedural Posture:
- Philip W. Mans petitioned for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of New Hampshire.
- William and Norinne Field filed a complaint in the bankruptcy proceeding, asking the court to find Mans's debt to them non-dischargeable due to fraud under § 523(a)(2)(A).
- The Bankruptcy Court found that the Fields' reliance on Mans's misrepresentations was not reasonable and held the debt was dischargeable.
- The Fields appealed the decision to the U.S. District Court for the District of New Hampshire, which affirmed the Bankruptcy Court.
- The Fields, as appellants, then appealed to the U.S. Court of Appeals for the First Circuit, which also affirmed the lower courts' rulings.
- The Fields successfully petitioned the U.S. Supreme Court for a writ of certiorari.
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Issue:
Does § 523(a)(2)(A) of the Bankruptcy Code require a creditor's reliance on a debtor's fraudulent misrepresentation to meet an objective 'reasonable reliance' standard, or is a subjective 'justifiable reliance' standard sufficient to make the debt non-dischargeable?
Opinions:
Majority - Justice Souter
No, § 523(a)(2)(A) requires justifiable reliance, a less demanding standard than reasonable reliance. The term 'actual fraud' is a common-law term of art, and Congress is presumed to have incorporated its established meaning. At the time the statute was enacted, the prevailing common-law standard for fraud, as reflected in the Restatement (Second) of Torts, required justifiable reliance. This standard is subjective, turning on the qualities and characteristics of the particular plaintiff and the specific circumstances, not on an objective 'prudent person' test. A person is justified in relying on a representation of fact even if they could have discovered its falsity through an investigation, unless the falsity is patent or there are clear warning signs of deception. The Bankruptcy Court erred by applying the higher, objective standard of reasonable reliance.
Dissenting - Justice Breyer
While agreeing that 'justifiable reliance' is the correct legal standard, the dissent argues that the lower court's decision should be affirmed because its analysis, despite using the wrong terminology ('reasonable'), was substantively correct. The Bankruptcy Judge properly considered the specific circumstances and Mr. Field's individual capacity, finding that he had discovered warning signs that should have prompted an investigation. The dissent contends that the Fields never argued for the 'justifiable' standard below and that remanding the case for a technical correction in terminology is an inefficient use of judicial and private resources that is unlikely to change the outcome.
Concurring - Justice Ginsburg
Yes, justifiable reliance is the correct standard. However, a key causation issue remains unresolved for the lower court on remand. The statute requires that the debt be 'obtained by' the fraud. It is questionable whether Mans's debt, which was incurred before his fraudulent letters were sent, was truly 'obtained by' the misrepresentation. The fraud induced the Fields to forbear from calling the loan due—an extension of credit—not to create the original debt. This question of whether such forbearance satisfies the 'obtained by' requirement must be addressed on remand.
Analysis:
This decision resolved a significant circuit split, establishing 'justifiable reliance' as the uniform national standard for fraud-based non-dischargeability actions under § 523(a)(2)(A). By adopting a subjective standard from common-law tort, the Court made it easier for creditors to prove fraud in bankruptcy proceedings, as they no longer need to show their actions met an objective 'prudent person' standard. The ruling protects less sophisticated creditors who may have genuinely, though perhaps not reasonably, relied on a debtor's misrepresentations, thereby strengthening the fraud exception to bankruptcy discharge.
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