Opinion ID: 198162
Heading Depth: 2
Heading Rank: 2

Heading: Whether Mans's Fraud Caused the Fields to Grant an Extension of Credit.

Text: 41 Section 523(a)(2)(A) disallows the discharge of an individual debtor from any debt for ... an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud. The BAP determined that Mans did not lose his discharge right under this section because the Fields' failure to accelerate, to the extent caused by fraud, was not an extension of credit within § 523(a)(2)(A). The Fields now reply that their fraud-induced misapprehension that a sale had not yet occurred frustrated their option to have called the debt, causing them, in effect, to have extended credit involuntarily. We review that argument de novo. 3 42 We look first to the text of the statute. See Shawmut Bank, N.A. v. Goodrich (In re Goodrich ), 999 F.2d 22, 24 (1st Cir.1993) ([T]he simple language of section 523(a)(2)(B) is the starting point for analysis and, in the end, the basis for our decision.). Because the Bankruptcy Code does not define the word extension, we inquire into the term's ordinary meaning. There are at least two meanings of the word extension that could apply to § 523(a)(2)(A). First, an extension can refer to an offer to make available (as a fund or privilege). Webster's Third New International Dictionary 804 (1971) (noting that an extension is the action of extending, and that to extend can mean to proffer). Under this definition, the Fields' only extension of credit came four months prior to Mans's fraudulent letters, when the Fields accepted part of the purchase price for their real property in the form of a note secured by a mortgage payable over a ten-year period. That credit extension was not obtained by the fraud. See Leeb v. Guy (In re Guy ), 101 B.R. 961, 979 (Bankr.N.D.Ind.1988) (noting that, in order to prevent discharge under § 523(a)(2)(A), a creditor must have given present consideration based on the ... actual fraud); Marine Bank Southwest, N.A. v. Hoffman (In re Hoffman ), 80 B.R. 924, 926 (Bankr.N.D.Ill.1988) (dismissing the possibility that a bank relied on fraudulent statements made after it issued a loan). 43 Second--and more relevantly--an extension may be an increase in length of time or an agreement on or concession of additional time (as for meeting an overdue debt or fulfilling a legal formality). Webster's Third New International Dictionary 804-05 (1971). Granting additional time to pay the note would, for example, have met this definition. Did misleading the Fields into believing no sale had occurred, thereby preventing them from exercising their acceleration right, constitute, in this sense, an extension of credit? But for the fraud they could have withdrawn the credit they had previously extended. The fraud ensured that the Fields would continue to extend credit to Mans even though they now possessed and, absent the fraud, would have known they possessed, the absolute right to withdraw it. 44 To be sure, the fraudulently concealed sale did not alter the existing terms of credit, assuming the loan was not called. Instead, it undermined the Fields' right to have forthwith terminated that credit--because of the unpermitted sale--had they wished to do so. Still, it is no great leap to say that fraudulent concealment and frustration of the Fields' acceleration right was tantamount to an extension, i.e. continuation, of the existing credit. Section 523(a)(2)(A) is said to encompass[ ] virtually every form of new agreement with respect to existing credit, 4 Lawrence P. King, Collier Bankruptcy Practice Guide p 76.05, at 76-17 (15th ed.1997) (emphasis added). While the concealed sale was not technically a new agreement concerning the existing credit, it triggered legal rights under the existing credit agreement which markedly altered the credit relationship between the parties. We, therefore, agree with the Fields that, by deceiving them into continuing a credit arrangement they now had the right to terminate, the fraud related to what can properly be called an extension of credit. As the Fields would or could have called the note had they known the truth, Mans's fraud tended to perpetuate--hence extend--credit that otherwise the Fields would or could have stopped. 45 It is, of course, implicit in the Fields' argument that they would, or at least might, have called the note had they known of Mans's sale. The Fields were never allowed to decide for themselves whether to call the note because Mans's fraud prevented them from knowing that the property had been sold without their permission, giving them the acceleration option. The first bankruptcy court believed that, in the good times then prevailing, it was uncertain whether the Fields would have called the note had they learned of the sale. There was contemporaneous documentary evidence that the Fields said they would agree to the proposed sale only if paid $10,000, and these facts are essentially undisputed. This suggests that they might well have exercised their acceleration right had the consummated, unpermitted, sale come to their attention. But regardless of any uncertainty as to what the Fields would have done had they not been lulled into believing that no sale had yet occurred, we disagree with the BAP that--in order for failure to accelerate to be equivalent to an extension of credit--there would have to be virtual certainty that acceleration would have taken place. We think it enough, see below, that the Fields were in a position to have accelerated effectively and might well have done so. 46 When interpreting § 523, a court must weigh two competing policies. On the one hand, the bankruptcy system is designed to afford a financially distressed individual or entity a fresh start. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). On the other hand, § 523 prevents a deceitful debtor from prospering as a result of his fraud. See id. Putting these policies together, the Supreme Court in Grogan explained that the Bankruptcy Act limits the opportunity for a completely unencumbered new beginning to the 'honest but unfortunate debtor.'  Id. at 287, 111 S.Ct. 654 (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)). This description implies that the fresh start policy underlying the bankruptcy code gives way when a debtor has defrauded his creditor. While the fraud must pertain to a debt falling into one of the several categories listed in § 523(a)(2)(A), these categories [any debt ... for money, property, services, or an extension, renewal, or refinancing of credit ...] are themselves quite inclusive. They include all ordinary debts(money, property, services) as well as ones for credit renewal, or refinancing in addition to credit extension. The comprehensiveness of the debt categories, and the Supreme Court's emphasis on limiting a new beginning to the honest but unfortunate debtor, militate against a narrow and hyper-technical parsing of the individual terms. Otherwise, one dishonest debtor would receive a new beginning while another, who engaged in fraudulent conduct that was virtually identical, would not--for reasons unrelated to the object of denying bankruptcy protection to debtors whose debts were procured by fraud. We see no indication that Congress would have wished courts to construe extension, renewal, or refinancing of credit, and its companion phraseology, in other than a practical, commonsense manner, consistent with the above policy. This is not to question that the fraud must relate to a debt that fits within one or more of the statutory categories. But these debt categories, as said, are part of a listing which by its very comprehensiveness indicates Congress's desire for inclusion rather than exclusion. Mans's fraud was designed affirmatively to mislead the Fields into thinking that no sale had yet occurred when, in fact, it had. As a result of the deceit, Mans could hope to continue to enjoy the on-going credit arrangement which the Fields might otherwise have ended. 4 On this analysis, Mans's indebtedness to the Fields at the time of the bankruptcy can reasonably be construed as falling within the rubric of a fraudulently obtained extension of credit. Indeed, Mans's indebtedness might also be viewed, under a very similar analysis, as the product of a fraudulent renewal of credit. In any case, Congress's utilization of three words--extension, renewal, or refinancing of credit [emphasis supplied]--makes plain its intention to cast a net sufficiently broad to ensnare the present fraud. 47 Mans argues that we should instead construe extension of credit very narrowly, giving the phrase only its most limited and narrow meaning, while ignoring the companion terms renewal and refinancing which reinforce the comprehensive nature of Congress's design. He would have us exclude altogether a fraud designed to prevent a creditor in an existing credit arrangement from exercising an acceleration remedy. Mans stresses the uncertainty of whether the Fields would have accelerated in the optimistic financial climate prevailing at the time of the fraud. If not, Mans points out, there would be no actual extension of credit since, regardless of the fraud, the same existing credit arrangement would have continued in effect. 48 We do not accept this argument. It does not lie in Mans's mouth, having cheated the Fields of their opportunity to have decided in October of 1987 whether or not to exercise their acceleration right, to argue that they must now bear the difficult burden of demonstrating beyond question that they would, in fact, have accelerated the loan. We think it enough that the bankruptcy court found that, when the fraud occurred, the economic circumstances would have allowed the Fields to have successfully recovered their loan had they wished to do so. The original bankruptcy court found that in October 1987, when the fraud occurred, the real estate market was still booming in this state and [the Fields] could have extracted the balance of [$] 187,000, approximately, out of either a foreclosure or forcing Mans to pay out of the funds that he was getting invested in the property, or otherwise. Subsequently, by the time of Mans's bankruptcy, the market had slumped and the first mortgage had wiped out the Fields' position. This was, therefore, a situation where the Fields had an equity in the property at the time of the fraud and could have recovered their debt had they elected at that time to exercise the acceleration clause. Mans's fraud deprived them of that opportunity. 49 To establish an extension or renewal of credit, we think it suffices that the Fields were positioned rationally to have called the loan--that they would have recovered had they done so and that their choice, with its potential for benefit, was eliminated by Mans's actual fraud. To force them to prove not only that they might realistically have exercised their acceleration remedy at the time, but that they necessarily would have done so, would place the shoe on the wrong foot, allowing a defrauder to escape the consequences of his fraud in all but the most unusual and clear-cut circumstances. Mans's lawyer's misstatements are the reason why the Fields' course of action must always, in some sense, remain speculative; it is fair that the weight of uncertainty should fall on Mans. See Takeuchi Mfg. (U.S.) Ltd. v. Fields, 44 B.R. 322, 329 (Bankr.S.D.Fla.1984) (preventing discharge after noting that it was the debtor's fraud that made causation hypothetical). Our determination accords with the vast majority of cases in this area, which hold that a failure to accelerate amounts to an extension of credit. 5 50 We are, therefore, satisfied on these facts that the Fields are entitled to cause Mans to forgo his bankruptcy discharge remedy. To reiterate, we disagree with the BAP that Mans's fraud--misleading the Fields into believing that no sale had occurred and hence that they had no right then and there to terminate Mans's credit arrangement--did not create a debt for an extension, renewal, or refinancing of credit. In so concluding, we find it important that the Fields could, at the time of the fraud, have accelerated and extracted the balance then owed from the mortgaged property or from funds then available to Mans. In such circumstances, acceleration having been a reasonable option, the Fields do not now have the further burden of demonstrating to a virtual certainty that they would have elected to accelerate. Rather, for Mans to preserve his own right to the fresh start provided by bankruptcy, it was his burden, which he failed to carry, to have established affirmatively that acceleration would not have been a feasible choice--because of the absence of any remaining value in the real estate and of available funds from which the Fields could reasonably have expected to recover what was owing to them, or for some other reason rendering exercise of the acceleration remedy futile at the time of the fraud. 51 Our holding should in no way be read to weaken the requirement that (1) plaintiffs such as the Fields prove actual fraud; and (2) the fraud relate to one of the statutorily listed debt categories in § 523(a)(2)(A), reasonably construed. We hold merely that, on these facts, both elements were established. We recognize the danger that creditors, in order to defeat bankruptcy protection, may improperly seek to twist mere breaches of contract or negligent errors into actual frauds. Nothing herein should be read to support such endeavors.