Opinion ID: 351995
Heading Depth: 1
Heading Rank: 3

Heading: The Meaning of Scienter Under Section 17(a)(2).

Text: 18 There remains but one possible error of law by the bankruptcy judge which we should consider. That is whether the type of fraud on which the judgment debt rests is that described in section 17(a)(2) of the Bankruptcy Act. 4 We have adopted a five-part test for determining when a debt is nondischargeable under this provision. That test is: 19 (1) the debtor made the representations; 20 (2) That at the time he knew they were false; 21 (3) That he made them with the intention and purpose of deceiving the creditor; 22 (4) that the creditor relied on such representations; 23 (5) that the creditor sustained the alleged loss and damage as the proximate result of the representations having been made. (Italics supplied). 24 In re Taylor, 514 F.2d 1370, 1373 (9th Cir. 1975). 25 The bankruptcy judge looked at the jury instructions given in the state court trial as indicative of the specific facts found by the jury. These instructions put all five issues specified in the Taylor test before the jury. However, the instructions given in the state case allowed the jury to convict if the representation was known to be false or recklessly made without knowing whether it is true or false. The bankruptcy judge accepted this as an appropriate formulation of the knowledge element, and, as indicated above, accepted the contention that the obligation is nondischargeable because of the finding of fraud. Therefore, we must decide whether the second element of the Taylor test can be satisfied only by actual knowledge or whether reckless disregard for the truth also satisfies this requirement. 26 We hold that the latter is sufficient. This conclusion is suggested by the very case from which the five-part Taylor test was derived, Sweet v. Ritter Finance Company, 263 F.Supp. 540 (W.D.Va.1967). There the court actually applied a reckless disregard standard. An illiterate bankrupt was accused of making a false representation on the basis of a statement prepared by his wife which he signed. The court found that there was no evidence of recklessness in Sweet's reliance on his wife. Id. at 544. The clear implication is that a showing of recklessness would have been sufficient to make the debt nondischargeable even if the bankrupt had had no actual knowledge of the falsity. 27 The Supreme Court decision in Morimura, Arai & Company v. Taback, 279 U.S. 24, 49 S.Ct. 212, 73 L.Ed. 586 (1929) provides further support for our holding. In that case the Court held that reckless indifference to the actual facts, without examining the available source of knowledge which lay at hand, and with no reasonable ground to believe that it was in fact correct was sufficient to establish the knowledge element under a provision of the Bankruptcy Act then current which completely barred a discharge of all debts if the bankrupt had made a materially false statement in order to obtain property on credit. Id. at 33, 49 S.Ct. at 215. Since the 1960 amendment to the Bankruptcy Act, use of a materially false statement in order to obtain credit is no longer a complete bar to discharge for individual bankrupts, but is included in § 17(a)(2) along with false representations as one of the grounds which will render an individual debt nondischargeable. The close statutory relationship of these two concepts now suggests that a similar definition of knowledge would be appropriate. Further, a strict reading of the knowledge element of the false representation exception would have the incongruous effect of imposing a stricter standard for exempting a single debt from discharge than formerly was required to completely bar discharge of all debts. 28 In addition, the scienter requirement in the tort of misrepresentation generally has been interpreted to include recklessness. See W. Prosser, Torts, § 701 (4th Ed. 1971). The reasons for inclusion, viz. the difficulty in distinguishing knowledge from reckless disregard, and to discourage the shunning of truth to preserve the defense of no scienter, are applicable with equal force in the bankruptcy context. 29 Finally, there are dicta in other decisions of this circuit which suggest that our interpretation is proper. Matter of Nelson, 561 F.2d 1342 (1977) (knew or should have known); Wright v. Lubinko, 515 F.2d 260 (9th Cir. 1975) (fraudulent intent or reckless disregard for the truth tantamount to wilful misrepresentation). 30 We recognize that exceptions to dischargeability are to be strictly construed Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915). A canon of interpretation adjuring strictness is not, however, a justification for abandoning good sense. It makes good sense to hold that either actual knowledge of the falsity of a statement, or reckless disregard for its truth, satisfies the scienter requirement for nondischargeability of a debt under § 17(a)(2). We so hold. 31 AFFIRMED. 32