Century 21 v. Menna

• Court: Court of Appeals for the First Circuit
• Decided: February 10, 1994
• Docket: 93-1767
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT

____________________

        No. 93-1767
                                        IN RE

                                   PHILIP G. MENNA

                           CENTURY 21 BALFOUR REAL ESTATE,

                                Plaintiff, Appellant,

                                          v.

                                   PHILIP G. MENNA,

                                 Defendant, Appellee.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

                              FOR THE DISTRICT OF MAINE

                     [Hon. D. Brock Hornby, U.S. District Judge]
                                            ___________________

____________________

                                        Before

                              Torruella, Cyr and Stahl,

                                   Circuit Judges.
                                   ______________

____________________

Daniel  L. Cummings,  with whom  Norman, Hanson  & DeTroy  was on
             ___________________              ________________________
        brief for appellant.
             John E. Geary for appellee.
             _____________

____________________
                                  February 10, 1994
                                                     
                                 ____________________

CYR,  Circuit Judge.    Plaintiff-appellant Century  21
                    CYR,  Circuit Judge.
                          _____________

          Balfour Real Estate ("Balfour") commenced an adversary proceeding

          to determine  whether its claim against defendant-appellee Philip

          G. Menna  is dischargeable in  bankruptcy.  The  bankruptcy court

          ruled against Balfour, the district court upheld the  ruling, and

          we now affirm.

I
                                          I

                                      BACKGROUND
                                      BACKGROUND
                                      __________

                    Menna retained Balfour to sell his business.  Following

          the sale, the buyers, Robert and Brenda Pawloski, brought a state

          court  action against Menna  and Balfour for  fraud and negligent

          misrepresentation,   respectively,   and   Balfour  cross-claimed

          against  Menna for  equitable indemnification.    The jury  found

          Menna  and Balfour jointly  and severally liable  and awarded the

          Pawloskis  $128,500 in  compensatory damages.    The state  court

          entered   judgment   for   Balfour   on   its   cross-claim   for

          indemnification against  Menna because Balfour's  mere negligence

          made it  less culpable than  Menna, whose conduct had  been found

          fraudulent.   The Pawloskis  thereafter  recovered $110,000  from

          Balfour on their judgment.

                    After  Menna  filed  a voluntary  chapter  7  petition,

          Balfour commenced an  adversary proceeding against Menna  to have

          its $110,000 indemnification claim against Menna declared nondis-

          chargeable,  pursuant to  Bankruptcy  Code    523(a)(2)(A)  (debt

2

"for money . . .  to the extent obtained by  . . . actual fraud")

          and  523(a)(6) (debt  "for  willful and  malicious injury  by the

          debtor  to another entity"),  11 U.S.C.    523  (a)(2)(A), (a)(6)

          (1993).  On the cross-motions for summary judgment the bankruptcy

          court  ruled that Balfour's  indemnification claim  is discharge-

          able, see Century 21 Balfour Real Estate v. Menna (In re  Menna),
                ___ ______________________________    _____  ____________

          152  B.R.  5, 6  (Bankr. D.  Me.  1993), and  the  district court

          summarily affirmed.

II
                                          II

                                      DISCUSSION
                                      DISCUSSION
                                      __________

          A.   Standard of Review
          A.   Standard of Review
               __________________

                    We  review the  grant  of  summary  judgment  de  novo,
                                                                  __  ____

          employing the same  standards incumbent on the  bankruptcy court,

          in  order  to  determine  whether "'the  pleadings,  depositions,

          answers to interrogatories, and admissions on file, together with

          the affidavits, if any, show that there is no genuine issue as to

          any  material fact  and  that  the moving  party  is entitled  to

          judgment as  a matter  of law.'"   Gaskell  v. The  Harvard Coop.
                                             _______     __________________

          Soc'y, 3 F.3d 495,  497 (1st Cir. 1993) (quoting Fed.  R. Civ. P.
          _____

          56(c)); see also Fed. R. Bankr. P. 7056.  Although all reasonable
                  ___ ____

          inferences are to be drawn in favor of the nonmoving party, "[a]s

          to  any essential  factual  element  of its  claim  on which  the

          nonmovant would bear the burden of proof at trial, its failure to

          come forward with  sufficient evidence to generate  a trialworthy

          issue  warrants summary  judgment to  the moving  party."   Ralar
                                                                      _____

          Distribs.,  Inc.  v.  Rubbermaid, Inc.  (In  re  Ralar Distribs.,
          ________________      ________________   ________________________

                                          3

Inc.), 4 F.3d 62, 67 (1st Cir. 1993); see also Milton v. Van Dorn
          ____                                  ___ ____ ______    ________

          Co., 961 F.2d 965, 969 (1st Cir. 1992).
          ___

B.   Applicable Law
          B.   Applicable Law
               ______________

                    Exceptions  to  discharge  are  narrowly  construed  in

          furtherance of the Bankruptcy Code's "fresh start" policy and the

          claimant must  show  that  its  claim comes  squarely  within  an

          exception enumerated in  Bankruptcy Code   523(a).   See Commerce
                                                               ___ ________

          Bank & Trust Co. v. Burgess (In re Burgess), 955 F.2d 134, 136-37
          ________________    _______  _____________

          (1st Cir.  1992); see  also Werner v.  Hofman, 5 F.3d  1170, 1172
                            ___  ____ ______     ______

          (8th Cir. 1993); LSP Inv. Partnership v. Bennett (In re Bennett),
                           ____________________    _______  _____________

          970 F.2d 138, 148  (5th Cir. 1992);  Stackhouse v. Hudson (In  re
                                               __________    ______  ______

          Hudson), 859 F.2d 1418, 1425 (9th Cir. 1988).  Section 523(a)(2)-
          ______

          (A) excepts  from discharge "any debt . . .  for money, property,

          [or] services . . . to the  extent obtained by false pretenses, a

          false representation, or  actual fraud."  Bankruptcy  Code   523-

          (a)(2)(A),  11 U.S.C.    523(a)(2)(A).1   The  complaint  alleges

          that Balfour's claim against Menna is "based on indemnification,"

          and  "thus based  upon [Menna's]  fraudulent  conduct toward  the
                     _____  ____                                ______  ___

          Pawloskis," as evidenced by the Pawloskis' fraud judgment against
          _________

          Menna.  (Emphasis added.)  Section 523(a)(6) further excepts from

          discharge "any debt . . . for willful and malicious injury by the

          debtor to another  entity or to the property  of another entity."

          Id.    523(a)(6), 11 U.S.C.    523(a)(6).  The  complaint alleges
          ___

____________________

               1The  claimant  in  a  nondischargeability proceeding  under
            523(a)(2)(A) must  prove fraud by  a preponderance of  the evi-
          dence.  See Grogan v. Garner, 498 U.S. 279, 287-90 (1991).
                  ___ ______    ______

                                          4

that  Balfour's indemnification  claim is  "based  upon [Menna's]
                                                      _____  ____

          malicious  conduct toward  the Pawloskis,"  as  evidenced by  the
                             ______  ___ _________

          Pawloskis'  $25,000  punitive  damages   verdict  against  Menna.

          (Emphasis added.)   Balfour concedes, however, that  it presented

          no competent evidence that Menna either acted with malice toward,
                                                                    ______

          or intended to defraud, Balfour.2  
                                  _______

                    Balfour principally complains that the bankruptcy court

          failed  to  recognize that  section  523(a)  does not  require  a

          showing that the  claimant was the direct or  immediate target of
                                             ______     _________

          the  debtor's fraudulent intent or malicious conduct.  Therefore,

          it  argues, since Menna  exposed both Balfour  (Menna's equitable
                                           ____

          indemnitee) and  the Pawloskis  to the  $128,500 loss,  Balfour's

          claim  for  equitable  indemnification is  one  "for  money . . .
                                                           ___

          obtained  by [the  debtor's] actual  fraud," or "for  willful and
                                                           ___

          malicious  injury by  the debtor  to  another entity."   Were  it

          otherwise, Balfour says, dishonest debtors like Menna who embroil

          less  culpable third  parties like  Balfour  in their  fraudulent

          schemes  could  easily  subvert the  Code's  central  strategy of

          restricting the  "fresh start"  discharge to  "honest but  unfor-
                                                         ______

          tunate" debtors.   Local  Loan Co.  v.  Hunt, 292  U.S. 234,  244
                             _______________      ____

          (1934) (emphasis added); see also  Brown v. Felsen, 442 U.S. 127,
                                   ___ ____  _____    ______
                              
          ____________________

               2We are not persuaded by Balfour's contention that it should
          have been given an  opportunity to prove that Menna's  fraudulent
          intent or  malicious conduct  was directed  toward Balfour.   The
                                            ________  ______ _______
          district court correctly  noted that the  complaint made no  such
          allegation, nor  did Balfour assert  such an argument  before the
          bankruptcy court.   See  Mark Bell Furniture  Warehouse, Inc.  v.
                              ___  ____________________________________
          D.M. Reid  Assocs., Ltd.  (In re  Mark Bell Furniture  Warehouse,
          ________________________   ______________________________________
          Inc.), 992  F.2d 7,  9 (1st Cir.  1993) (arguments not  raised in
          ____
          bankruptcy court cannot be raised for first time on appeal).

                                          5

128 (1979)  (same); H.R. Rep. No. 595, 95th Cong., 1st Sess. 125,

          reprinted in 1978 U.S.C.C.A.N. 5963, 6086 (same).
          _________ __

                    We  conduct plenary  review of  the bankruptcy  court's

          construction  of the legislative  language     "debt for"     em-

          ployed in  Bankruptcy Code   523(a).   The Travelers Ins.  Co. v.
                                                 _______________________

          Cambridge Meridian Group,  Inc. (In re  Erin Food Servs.,  Inc.),
          _______________________________  ______________________________

          980 F.2d 792,  799 (1st  Cir. 1992).   First, we underscore  that

          section 523(a)  does not  employ the  terms adopted  in Balfour's

          paraphrase     "debt based upon"     nor does the  statutory lan-

          guage remotely  suggest that nondischargeability attaches  to any

          claim  other than  one  which arises  as a  direct result  of the

          debtor's  misrepresentation or malice.3   Moreover, Balfour cites

          no case in which it has been argued, let alone decided,  that the

          nonfraud-based  indemnification claim  of an entity  whose negli-

          gence  has combined  with the  fraud of  its joint  tortfeasor to

          cause injury  to a third  party is nondischargeable in  the bank-

____________________

               3The parties  devote considerable attention  to whether both
          the   Balfour  and the  Pawloski  "claims" derive  from the  same
                                                                       ____
          "debt,"  or  from two  distinct  "debts."   However,  neither the
                                 ________
          Bankruptcy  Code's  austere  definitions,  see  Bankruptcy   Code
                                                     ___
            101(11),  11  U.S.C.    101(11)  ("debt"  is  "liability  on  a
          claim"),    101(4)(A), 11 U.S.C.   101(4)(A) ("claim" is "a right
          to payment, whether  or not such right is  reduced to judgment"),
          nor  the broad  pronouncements on  the common  law principles  of
          equitable  indemnification,  see  Northeast Bank  of  Lewiston  &
                                       ___  _______________________________
          Auburn v. Murphy, 512 A.2d 344 (Me. 1986), afford helpful insight
          ______    ______
          into the  substantive concerns presently  at issue.  We  will not
          reverse a bankruptcy court's grant of discharge relief except for
          reasons both "real and substantial."  See In re Burgess, 955 F.2d
                                                ___ _____________
          at 137.

                                          6

ruptcy  of the  fraudulent tortfeasor.4   Given  the strict  con-

          struction afforded all dischargeability exceptions under  section

          523(a), see In re Burgess, 955 F.2d at 137, we have been provided
                  ___ _____________

          with  neither authority nor  reason to extend  the statutory lan-

          guage as urged by Balfour.

                    Second,  Balfour  wrongly presumes  that  exceptions to

          discharge  serve only  to  penalize  the debtor.    Rather, as  a

          function  of its  essentially equitable  nature,  a nondischarge-

          ability determination  under section 523(a) is  designed concomi-

          tantly to protect the inculpable creditor, cf. H.R. Rep. No. 595,
                                __________           ___

          supra,  at 130,  reprinted  in 1978  U.S.C.C.A.N.  at 6091  ("The
          _____            _________  __

          premise of  [  523(a)  (2)(B)] is that  a creditor  that extended

          credit based  on misinformation or  fraudulent information trans-

          mitted by  the debtor  should be  protected.") (emphasis  added).
                                 ______ __  _________

          Thus, the legislative  purposes served by sections  523(a)(2) and

          523(a)(6) are at once retributive and protective.
                                            ___ __________

                    Section  523(a)(2) requires  showings  by the  claimant

          that  (1)  the debtor  knowingly  or recklessly  made  a material

          misrepresentation  with intent to  deceive the creditor;  and (2)

          the  creditor "reasonably" relied on the misrepresentation to its
                                     ______

____________________

               4Balfour asserts  neither subrogation rights  nor assignment
          of  the Pawloskis' nondischargeable claim.  See, e.g., Bankruptcy
                                                      ___  ____
          Code   509(a),  11 U.S.C.   509(a); McCain Foods, Inc. v. Gerard,
                                              __________________    ______
          489 A.2d  503, 504  (Me. 1985) (state  law doctrine  of equitable
          subrogation).   Compare, e.g.,  In re Fields,  926 F.2d  501, 504
                          _______  ____   ____________
          (5th Cir.)  (creditor who pays  debtor's taxes  is subrogated  to
          IRS's  nondischargeable claim  under   523(a)(1)),  cert. denied,
                                                              _____ ______
          112 S. Ct.  371 (1991), with National Collection  Agency, Inc. v.
                                  ____ _________________________________
          Trahan,  624 F.2d  906, 907  (9th Cir.  1980) (reaching  opposite
          ______
          result under Bankruptcy Act).
                       __________ ___

                                          7

detriment.   In re  Burgess, 955 F.2d  at 140; see  also Longo v.
                       ______________                    ___  ____ _____

          McLaren (In re  McLaren), 3 F.3d 958, 961 (6th  Cir. 1993) (reli-
          _______  ______________

          ance  must be  the "proximate  cause"  of claimant's  loss).   If

          section 523(a)(2) had been intended simply to deter all bad faith
                                                              ___

          conduct by the debtor irrespective of its effect upon the partic-
                                ____________ __ ___ ______ ____ ___ _______

          ular  creditor, as  Balfour's  argument impliedly  assumes, there
          ____  ________

          would have been no  need to condition the  creditor's right to  a

          nondischargeability ruling  on a showing of reasonable reliance.5

          Even assuming  arguendo that an equitable  indemnitee's vicarious
                         ________

          injury might satisfy the first constituent element of the "fraud"

          test under section 523(a)(2), thereby  generally establishing bad
                                                 _________

          faith or  misconduct on the part of the debtor,  Balfour nonethe-

          less must make  the "reasonable reliance" showing  required under

          section     523(a)(2)     that  it  reasonably  and detrimentally
                                          __

          relied on Menna's misrepresentations.6
                              
          ____________________

               5The legislative  history of  the Bankruptcy  Reform Act  of
          1978 confirms that   523(a)(2)(A) deliberately abandoned a purely
                                                                     ______
          retributive  purpose.  Bankruptcy  Act   17a.(2), as  amended, 11
                                                            __  _______
          U.S.C.   35(a)(2) (1964),  the predecessor  to   523(a)(2),  con-
          tained  no explicit requirement  that the creditor's  reliance be
          "reasonable."   See BancBoston Mortgage  Corp. v. Ledford  (In re
                          ___ __________________________    _______   _____
          Ledford), 970 F.2d 1556, 1559  (6th Cir. 1992), cert. denied, 113
          _______                                         _____ ______
          S. Ct.  1272  (1993).    Moreover, under  former  Bankruptcy  Act
            14c.(3), as amended,  11 U.S.C.   32(c)(3), obtaining  money or
                     __ _______
          credit  on a materially  false financial statement  constituted a
          ground for denial  of the debtor's general  discharge, not merely
                                             _______
          for establishing the nondischargeability  of the particular  debt
          or  debts incurred  as a consequence  of the  fraudulent conduct.
          See  Philip Shuchman, The Fraud Exception in Consumer Bankruptcy,
          ___                   __________________________________________
          23 Stan. L. Rev. 735, 739 (1971).

               6Just as    523(a)(2) requires  that the  debtor's fraud  be
          assessed  in  light of  its  effect  upon  the creditor,  section
          523(a)(6), which  simultaneously uses  the phrase  "debt for"  in
          reference  to an  analogous form  of  debtor "misconduct"  (i.e.,
                                                                      ____
          malice),  must require  that  an  indemnitee  make  some  minimal

                                          8

C.   Summary Judgment
          C.   Summary Judgment
               ________________

                    Reasonable  reliance is an issue of fact, see Coston v.
                                                              ___ ______

          Bank  of Malvern (In re  Coston), 991 F.2d  257, 260-61 (5th Cir.
          ________________  _____________

          1993) (  523(a)(2)), on which Balfour would have borne the burden

          of proof  at trial.   Yet it presented no  evidence whatever from

          which  the bankruptcy court could have determined whether Balfour

          actually or reasonably relied on  Menna's misrepresentations when

          it communicated the unspecified misinformation about  the pending

          sale  to the  Pawloskis.   Indeed, the  record is even  devoid of

          evidence  of the circumstances surrounding the November 1987 sale

          transaction, the nature, duration or history of the Menna-Balfour

          business  relationship, or whether Balfour might have detected or

          thwarted Menna's  misrepresentations by  "minimal investigation."

          See BancBoston  Mortgage Corp.  v. Ledford  (In re  Ledford), 970
          ___ __________________________     _______   ______________

          F.2d  1556, 1560 (6th Cir. 1992)  (summarizing various indicia of

          "reasonable" reliance  under   523(a)(2)), cert.  denied, 113  S.
                                                     _____  ______

          Ct. 1272 (1993).

                    Moreover,  Balfour  may  well  have  been  collaterally

          estopped  from litigating the "reasonableness" of any reliance on

____________________

          evidentiary showing that its injury was not proximately caused by
                                                  ___
          its own intervening conduct.  See In re La Flamme, 14 B.R. 21, 25
                  ___________ _______   ___ _______________
          (Bankr. 1st Cir. 1981) (the  meaning of a particular Code section
          must be  discerned from an  examination of the  overall structure
                                                          _______
          and policy of the statutory provision).
               Since Balfour  produced no  evidence which  would permit  an
          assessment of the  contribution its own intervening  conduct made
          to its injury,  see infra Section  II.C, we need not  define with
                          ___ _____
          precision the  level of  creditor "inculpability" required  under
          section 523(a)(6), nor  distinguish that standard from  the "rea-
          sonable reliance" showing required under section 523(a)(2).

                                          9

Menna's misrepresentations.  See 1B  James W. Moore, Jo D. Lucas,
                                       ___

          Thomas  S. Currier, Moore's  Federal Practice   0.419  [3.-4], at
                              _________________________

          649-50 (2d ed. 1992); Grogan v. Garner, 498 U.S. 279,  287 (1991)
                                ______    ______

          (collateral estoppel applies  in   523(a) proceeding where  prior

          judgment required same or greater  burden of proof).  Under Maine

          law,  the  Pawloskis' negligent  misrepresentation  claim against

          Balfour  required proof that,  inter alia:   (1) Balfour supplied
                                         _____ ____

          information  to the  Pawloskis as  "guidance"  in their  business

          transaction, (2) the Pawloskis justifiably relied on the informa-
                                         ___________ ______

          tion;  and (3)  Balfour  failed to  exercise  reasonable care  or
                                                        __________ ____  __

          competence  in  obtaining  or  communicating  the   information."
          __________

          Jordan-Milton Mach., Inc.  v. F/V Teresa Marie, II,  978 F.2d 32,
          _________________________     ____________________

          36 (1st Cir. 1992) (citing Chapman  v. Rideout, 568 A.2d 829 (Me.
                                     _______     _______

          1990) (adopting Restatement (Second) of Torts   552(1))).

                    Balfour argues,  nonetheless, that  collateral estoppel

          does  not bar its  claim because the  requisite "reasonable care"

          showing  for negligent misrepresentation under Maine law, and the

          "reasonable reliance" showing  required under section  523(a)(2)-

          (A), are  not necessarily coextensive;  that is, the  former con-

          cerns Balfour's  duty to  the Pawloskis, not  its duty  to Menna.

          Even so,  Balfour gains nothing.   If the two legal  standards do

          diverge, as Balfour argues, the two state  court judgments simply

          are  not  probative  of  Balfour's  "reasonable  reliance,"7  and

____________________

               7Balfour's  judgment for  indemnification against  Menna did
          not necessarily depend on whether Balfour's reliance was "reason-
              ___________
          able" but on whether Balfour was  less culpable than Menna.   See
                                            ____                        ___
          Northeast Bank, 512 A.2d at 350-51.
          ______________

                                          10

Balfour had the burden of  producing some competent evidence from

          which the  bankruptcy court could  find reasonable reliance.   On

          the  other  hand, if  the  standards do  not  diverge, collateral
                                                   ___

          estoppel barred Balfour's present contention as a  matter of law.

          See Ralar, 4 F.3d at 67.
          ___ _____

                    Affirmed.
                    Affirmed.
                    ________

11