Source: https://openjurist.org/260/f3d/27/in-re-robert-spigel
Timestamp: 2019-02-16 15:10:58
Document Index: 571531993

Matched Legal Cases: ['§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523']

260 F3d 27 in Re: Robert Spigel | OpenJurist
260 F. 3d 27 - in Re: Robert Spigel
260 F3d 27 in Re: Robert Spigel
260 F.3d 27 (1st Cir. 2001)
IN RE: ROBERT T. SPIGEL Debtor
GLENN MCCRORY & ANN MCCRORY, Plaintiffs, Appellants,
ROBERT T. SPIGEL, Defendant, Appellee.
Heard May 8, 2001
Decided August 13, 2001
Glenn and Ann McCrory appeal from the judgment of the Bankruptcy Appellate Panel (BAP) reversing the bankruptcy court and holding that the debt owed them by Robert Spigel as a result of a Rhode Island Superior Court judgment was not exempt from discharge pursuant to 11 U.S.C. §a523(a)(2)(A). The McCrorys claim that the collateral estoppel effect of the Superior Court judgment creating the debt establishes that Spigel committed fraud in a transaction related to that debt, and hence that debt should be exempt from discharge. The BAP disagreed, concluding that the Superior Court did not find that Spigel engaged in fraud, thereby precluding reliance on collateral estoppel. We disagree with the BAP's analysis because the Superior Court judgment reflected findings that Spigel engaged in fraudulent conduct. However, that judgment did not establish a sufficient link between Spigel's fraudulent conduct and the debt Spigel owes the McCrorys to allow an exception to discharge under §a523(a)(2)(A) on the basis of collateral estoppel. Consequently, we affirm for a different reason.
Spigel appealed to the Rhode Island Supreme Court. During the pendency of that appeal, Spigel filed for bankruptcy. The McCrorys responded with the present adversary proceeding, seeking to have the debt created by the Superior Court judgment deemed nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The bankruptcy court stayed the proceeding pending the Rhode Island Supreme Court's decision. Shortly after the Supreme Court affirmed, Spigel and the McCrorys filed cross-motions for summary judgment in the bankruptcy court, agreeing that the court should take judicial notice of the decision and record in the Rhode Island courts. In a terse order, the bankruptcy court granted the McCrorys' motion and denied Spigel's, thereby ruling that Spigel's debt to the McCrorys was nondischargeable. Spigel appealed to the BAP, which reversed and ordered judgment in favor of Spigel. The McCrorys now appeal.
A motion for summary judgment in an adversary proceeding under § 523(a)(2)(A) to have a debt declared nondischargeable is governed by the same standards applicable to motions under Fed. R. Civ. P. 56. Fed. R. Bankr. P. 7056. In reviewing the application of those standards by the bankruptcy court, we apply "the same regimen that the intermediate appellate tribunal must use, [while] exhibit[ing] no particular deference to the conclusions of that tribunal (be it the district court or the BAP)." In re Healthco Int'l, Inc., 132 F.3d 104, 107 (1st Cir. 1997). Consequently, we review the grant of summary judgment de novo. Stoehr v. Mohamed, 244 F.3d 206, 208 (1st Cir. 2001); In Re I Don't Trust, 143 F.3d 1, 3 (1st Cir. 1998) ("In an appeal from a bankruptcy court decision, this court--like the district court or the bankruptcy appellate panel--affords de novo review to the bankruptcy court's conclusions of law."). Under the familiar summary judgment standards, we must "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." Century 21 Balfour Real Estate v. Menna, 16 F.3d 7, 9 (1st Cir. 1994) (quotations and citations omitted). Although we view the evidence in the light most favorable to the nonmovant, "[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 trial worthy issue warrants summary judgment to the moving party." Id. (quoting Ralar Distribs., Inc. v. Rubbermaid, Inc., 4 F.3d 62, 67 (1st Cir. 1993)) (alteration in original).
As the party seeking to prevent Spigel from discharging his debt to them, the McCrorys bear this burden to show that Spigel's debt comes squarely within an exemption from discharge. They focus their argument solely on 11 U.S.C. § 523(a)(2)(A), which exempts from discharge a 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, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A). Applying this language, we have said that the statutory language does not "remotely suggest that nondischargeability attaches to any claim other than one which arises as a direct result of the debtor's misrepresentations or malice." Century 21 Balfour Real Estate, 16 F.3d at 10.5 Thus, in order to establish that a debt is nondischargeable because obtained by "false pretenses, a false representation, or actual fraud," we have held that a creditor must show that 1) the debtor made a knowingly false representation or one made in reckless disregard of the truth, 2) the debtor intended to deceive, 3) the debtor intended to induce the creditor to rely upon the false statement, 4) the creditor actually relied upon the misrepresentation, 5) the creditor's reliance was justifiable,6 and 6) the reliance upon the false statement caused damage. Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997). Though the first two elements of the Palmacci test describe the conduct and scienter required to show fraudulent conduct generally, the last four embody the requirement that the claim of the creditor arguing nondischargeability in an adversary proceeding must arise as a direct result of the debtor's fraud.7
Reading the statute to require such a direct link is supported by the legislative history. Prior to 1984, some courts had interpreted § 523(a)(2)(A) as preventing the discharge of an entire debt even though the fraudulent conduct of the debtor was directly related only to a part of that debt. See, e.g., Birmingham Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir. 1985) (holding that debtor's misrepresentations regarding ownership of collateral caused entire debt, rather than just the value of the collateral, to be nondischargeable). Congress responded by adding "to the extent obtained by" to §a523(a)(2), Pub. L. 98-353 §a454(a)(1)(B), a change that other courts have interpreted as "expressly limit[ing] the exception to discharge to the extent that [the debt] was actually obtained by the fraudulent conduct." Muleshoe State Bank v. Black, 77 B.R. 91, 92 (N.D. Texas 1987); see also Nova Home Health Servs., Inc. v. Casagrande, 143 B.R. 893, 899 n.6 (Bankr. W.D.Mo. 1992). Thus, in order to prevail in the adversary proceeding, the McCrorys must show that the debt Spigel owes to them "arises as a direct result of the debtor's misrepresentations or malice." Century 21 Balfour Real Estate, 16 F.3d at 10.
the essential elements of an exception to discharge under Section 523(a)(2)(A), false representations, false pretenses, or actual fraud, were not plead, litigated in, or determined by the state court. The McCrorys' state court complaint does not mention fraud, false representations, false pretenses, misrepresentation or deceit as a basis for indemnification. Moreover, neither party, in the summary judgment pleadings and in oral argument before the state court, argued fraud. . . . The judgment of the state court established the debtor's liability under equitable indemnification principles, not fraud.
However, this showing in the Superior Court action of fraudulent conduct by Spigel is not identical to the fraud showing required by § 523(a)(2)(A). The finding of the Rhode Island Superior Court that Spigel engaged in fraudulent conduct is, at most, identical only to the first two elements of the Palmacci test, i.e., that Spigel made a false statement with an intent to deceive. That finding does not demonstrate that the McCrorys' claim "arises as a direct result of the debtor's misrepresentations or malice," Century 21 Balfour Real Estate, 16 F.3d at 10, as required by the remaining four elements of Palmacci and the identity of issues element of collateral estoppel. We explain.
All six of the Palmacci elements, however, and thus the direct link between the fraud and the debt, are arguably present between Spigel and Tarbox. Thus, if the Superior Court judgment for equitable indemnification permitted the McCrorys to succeed to Tarbox's position with respect to the transaction, they might be able to cure the defect we have identified here. The McCrorys have not shown, as they must, that they stand in Tarbox's shoes. It is far from clear that Rhode Island law permits the McCrorys as equitable indemnitees to succeed to Tarbox's position; most likely, it does not. Silva v. Home Indemnity Co., 416 A.2d 664, 668 (R.I. 1980); Hawkins v. Gadoury, 713 A.2d 799, 803 (R.I. 1998) (noting that though statute of limitations in subrogation action runs from the date of the original injury, equitable indemnification causes of action accrue upon the discharge from common liability). Consequently, we conclude that the collateral estoppel effect of the Superior Court judgment was an insufficient basis for demonstrating that Spigel's debt was nondischargeable under § 523(a)(2)(A).
We understand that exceptions to discharge serve both to punish the debtor and "concomitantly to protect the inculpable creditor." Century 21 Balfour Real Estate, 16 F.3d at 10. The McCrorys are inculpable creditors who are not protected by the outcome here. However, that protective policy must be balanced against the policy that exceptions to discharge are construed narrowly. Moreover, the result here is not solely attributable to the strictures of the Bankruptcy Code. In pursuing their claim under § 523(a)(2)(A), the McCrorys relied entirely upon the collateral estoppel effect of the Superior Court judgment instead of supplementing that judgment with evidence that might have addressed the remaining four elements of Palmacci. Thus, they failed to meet their burden under § 523(a)(2)(A), and Spigel's debt to them must be discharged.
We note that the Seventh Circuit has recently called into question whether the Palmacci test should properly be considered the exclusive test to determine nondischargeability under § 523(a)(2)(A). In McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), that court noted that Palmacci and similar cases have adopted a test that focuses solely upon false representations as the total universe of fraud under § 523(a)(2)(A), in large part because false representations were the only fraud before those courts. Id. at 892. §a523(a)(2)(A), however, explicitly lists both "actual fraud" and "false representations" as grounds for denying a discharge, a distinction in the statutory language that the McClellan court relied upon to hold that "actual fraud" encompasses more than misrepresentations. Id. at 892-93; see also Mellon Bank N.A. v. Vitanovich, 259 B.R. 873, 876 (B.A.P. 6th Cir. 2001) (adopting McClellan's definition of actual fraud to evaluate nondischargeability of a debt created by a check kiting scheme). Though there are differences between McClellan and Palmacci-the most significant of which concerns whether reliance is required--we do not decide whether we would adopt the Seventh Circuit's reasoning. McClellan is consistent with our existing precedent in that it also requires a direct link between the alleged fraud and the creation of the debt. McClellan, 217 F.3d at 894-95 (noting that the actual fraud denied discharge under § 523(a)(2)(A), as opposed to constructive fraud, requires a showing that the fraud created the debt); see also, e.g., Century 21 Balfour Real Estate, 16 F.3d at 10.