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
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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
1Although 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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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"
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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 nondischargeability 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
2Several 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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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
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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.