Opinion ID: 199555
Heading Depth: 2
Heading Rank: 1

Heading: The scope of the exception to discharge.

Text: 10 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 11 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. 12