# United Stat es Court of Appeals For the First C ircuit

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. Macdonaldfor appellant. Gary L. Meyers with whom Law Office of Gary L. Meyers was on brief for the appellee.

January 14, 2003-2- BOUDIN, Chief Judge . In July 1994, John Lentz began to lease space in his auto body shop in Revere, Massachusetts to his friend, Dante Spadon i. Spadoni used the space, comprising an office and repai r 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 De cember 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 disch arg eable 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--3-

dischargeable "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtainedby . . . false pretenses, a false representation, or actual fraud . . . ."

Afte r a bench trial, the bankruptcy judge ruled that Spadoni's promises to pay were knowingly false when made and were intendedto deceive Lentz. Spadoni denied this but had already admittedunder 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.3d781, 786 (1st Cir. 1997). The ba nkru ptcy 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 th at he took no action again st t he debtor during the period when he made the promises to pay. Mr. Lentz should hav e known after a couple of months that th e debtor's promises were suspect and taken action against him. His action aga i nst the debtor for unpaid re nt wa s not filed until December of 1999, more than a y ear after the debtor left and almost t wo ye ars after the debtor stopped paying rent. On review, the Bankruptcy Appellate Panel ("BAP") sustainedthe bankruptcy judge on the groundthat her finding of no actual reliance by Lentz was not clearly erroneous. Lentz now appeals to us, arguing that the bankruptcy judge made no such1 Although purely legal and purely factual questions have quite

fixedstandards of review, review of decisions applying general standards to known facts varies from issue to issue, partly because it is affectedby policy considerations peculiar to particular issues. See, e.g. , Ornelas v. United States , 517 U.S. 690, 697-98 (1996). -4- finding. Spadoni responds that the bankruptcy judge ruled in "the conjunctive" that ther e wa s no "actual and justifiable reliance" and--be c ause the former finding is not "clearly erroneous"--the determination on justifiability need not be considered.

The standard of review on this appea l requires that we respect, unless "clearly erroneous," all findi ngs of fact by the bankruptcycourt, which includes any finding of actual reliance and anyraw 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 stan dard o f 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 SanfordInst. 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 t o the exte nt that the moneyor other property or services were "obtainedby" deliberately false statements. Here, the debt is for rent due, and the property

or services--the use of the subleased space--were "obtained by"-5-

Spadoni insofar as Lentz continued to lease the space to Spadoni basedon the latter's statements that the rent would be paid despite the temporary arrearage. Lentz testified that he relied on Sp adoni' 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 clai m of actual reliance and held that the decision on this issue was not clearly erroneous. Conceivably, the bankruptcy judge couldhave 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; andthere 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 t he reasonableness of the reliance, not its existence; it would be-6-

quite a different matter if she had said that Lentz "did know" that the promises were false.

In the passage quoted above, the b ankr uptcy 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 seem s 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, Sp ad oni argues that the bankruptcy judge necessarilyfound 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 j udge did, then to say that the reliance was not justifiable means that the element of "a ctual 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 bankruptcyjudge's decision rested, namel y , her conclusion that Lentz's reliance was unjustified. "Reasonable reliance"--measured by an objective standard--is a requirement under various doctrines.-7-

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). Fieldv. Mans , 516 U. S. 59, 73-74 (1995). In particular, the Court said that the circumstances of the reliance claimmust be taken into account and that th e individu al 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 cre dito r-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 simplyconcluded that after a few months Lentz "should have known" th at 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 whethe r (a s 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 perfectlycreditable at the start of 1998. According to Lentz's uncontradictedtestimony, Spadoni said that business hadbeen slow but was developing. To us, there is no obvious reason why Lentz's trust, even if tested, couldno t rationally endure from January2 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). -8- into early September, as Spadoni's assurances were renewed from month to month. Perha ps th e 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 C ourt 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 p revented 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 ha s 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 Fieldappea rs t o be in some tension with this tradition, it reflects another over-generalization, namely, that the fresh start-9-

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 te ndency 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 fromJanuary 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 unpaidin 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 1 998. 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 remande dto the BAP with directions to remand the case to the BankruptcyCourt so it may proceed in accordance with this opinion.