Court Opinion

ID: 2813863
Source: CourtListenerOpinion
Date Created: 2015-07-01 21:00:44.226975+00
Date Added: 2024-06-11T12:20:44.760309
License: Public Domain

United States Court of Appeals
                        For the First Circuit
 
 

No. 14-2058

                       IN RE: CARRIE D. LAWSON,

                                Debtor

                         --------------------

              SAUER INCORPORATED, d/b/a Sauer Southeast,

                              Appellant,

                                  v.

                          CARRIE D. LAWSON,

                              Appellee.
 

         APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
                FOR THE DISTRICT OF RHODE ISLAND

              [Hon. Diane Finkle, U.S. Bankruptcy Judge]
 

                                Before

                    Lynch, Thompson, and Kayatta,
                           Circuit Judges.
                                    

     Michael J. Jacobs and LaPlante Sowa Goldman, on brief for
appellant.
     Christopher M. Lefebvre, with whom Claude Lefebvre,
Christoper   Lefebvre,  P.C.,   John   Boyajian,  and   Boyajian,
Harrington, Richardson & Furness were on brief, for appellee.
                                    
       

July 1, 2015
       

       

       

       
          LYNCH,   Circuit Judge.     Sauer Incorporated ("Sauer")

filed an adversary proceeding objecting to the discharge of a debt

owed by Carrie Lawson ("Ms. Lawson") that she allegedly obtained

as part of a fraudulent scheme to prevent Sauer from collecting a

previous judgment from her father, James Lawson.     See 11 U.S.C.

§§ 523(a)(2)(A), 523(a)(6).   The bankruptcy court dismissed for

failure to state a claim on the ground that a debt for value

"obtained by . . . actual fraud" under § 523(a)(2)(A) is limited

to debts for value obtained through fraudulent misrepresentations.

The court felt First Circuit precedent in the line of Palmacci v.

Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997), required such a

conclusion.   See Sauer, Inc. v. Lawson (In re Lawson), 505 B.R.
117, 125-26 (Bankr. D.R.I. 2014) (citing McCrory v. Spigel (In re

Spigel), 260 F.3d 27, 32 (1st Cir. 2001); Palmacci, 121 F.3d 781);

see also id. (citing Field v. Mans, 516 U.S. 59 (1995)).

          On direct appeal, we are asked to resolve this narrow

but significant issue of whether a debt that is not dischargeable

in Chapter 13 bankruptcy as a debt for money or property "obtained

by . . . actual fraud" extends beyond debts incurred through

fraudulent misrepresentations to also include debts incurred as a

result of knowingly accepting a fraudulent conveyance that the

transferee knew was intended to hinder the transferor's creditors.

                              - 3 -
See 11 U.S.C. § 523(a)(2)(A).                                                We join the Seventh Circuit in

concluding that it does.                                          See McClellan v. Cantrell, 217 F.3d 890

(7th Cir. 2000).1

                             Having adopted this new standard, we vacate and remand

for further proceedings consistent with this opinion.                                                  We decline

to reach the issue of the adequacy of Sauer's pleadings of actual

fraud              under               Rule              9(b),    and      the   possibility   of    amendment    if

inadequate. Because we have adopted a new standard, the bankruptcy

court should address these issues in the first instance.                                                         Cf.

N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567
F.3d 8, 16-18 (1st Cir. 2009) (Boudin, J.).

                                                                           I.

                             We recount the facts as alleged in Sauer's First Amended

Complaint, accepting them as true and drawing "all reasonable

inferences" in Sauer's favor. See Ruivo v. Wells Fargo Bank, N.A.,

766 F.3d 87, 90 (1st Cir. 2014).                                             In brief, Sauer alleges that Ms.

Lawson                incurred                     the         debt   at    issue   by   knowingly    receiving    a

fraudulent conveyance from her father, James, that was designed to

                                                            
              1
       We are aware the Fifth Circuit, in a post-argument decision,
has disagreed with McClellan and our analysis here.       See Husky
Int'l Elec., Inc. v. Ritz (In re Ritz), -- F.3d --, 2015 WL 3372812
(5th Cir. May 22, 2015).

                                                                        - 4 -
prevent Sauer from collecting a judgment against him.                                                 The details

are as follows.

                             In January 2007, Sauer sued James in Providence Superior

Court based on their previous business dealings.                                                      Three years

later,                on          February                     5,   2010,   the   Superior   Court   found     those

transactions to be fraudulent, and awarded Sauer a judgment against

James in the amount of $168,351.59, including punitive damages.

                             Just before the judgment was entered, Ms. Lawson had

formed                  a         shell                 entity,        Commercial     Construction      M&C,     LLC

("Commercial                            Construction").2                     Upon   entry    of   judgment,    James

transferred $100,150 to Commercial Construction, allegedly to

impede Sauer's collection.                                             Commercial Construction is owned by

Ms. Lawson, but controlled by James.3

                             Ms. Lawson then transferred $80,000 of the $100,150 from

Commercial Construction to herself sometime over the course of the

following year, from February 2010 through early 2011.                                                   In March

2011, James filed for Chapter 13 bankruptcy.

                                                            
              2
       Although the complaint does not allege when Ms. Lawson
formed Commercial Construction, Ms. Lawson's affidavit, which she
appended to her motion to dismiss Sauer's First Amended Complaint,
indicates that she formed the entity in January 2010.
              3
      The present ownership of Commercial Construction is a matter
of some dispute, but it does not affect our analysis.

                                                                        - 5 -
                             Pursuant to the Rhode Island Uniform Fraudulent Transfer

Act, R.I. Gen. Laws § 6-16-1 et seq. ("UFTA"), Sauer traced

portions of its original judgment against James first to Commercial

Construction, and then to Ms. Lawson.                                               The Providence Superior

Court found these transfers to be fraudulent under the UFTA, and

issued executions against both Commercial Construction and Ms.

Lawson for the full amounts transferred ($100,150 and $80,000,

respectively).                                 The latter judgment entered against Ms. Lawson is

the debt at issue.

                             Ms. Lawson filed for Chapter 13 bankruptcy the same month

that the Providence Superior Court issued the execution against

her, in March 2013.                                            Sauer initiated this adversary proceeding in

June              2013,               objecting                  to   the   discharge   of   this   debt   under

§ 523(a)(2)(A) as being for money "obtained by . . . actual fraud."4

In particular, Sauer alleged that because Ms. Lawson "knowingly

receiv[ed]" the fraudulent transfer and acted in a "willful and

malicious" manner toward Sauer, her acceptance of the fraudulent

conveyance constitutes actual, not merely constructive, fraud.5

                                                            
              4
       Sauer also objected to discharge under § 523(a)(6), but the
bankruptcy court correctly held that this provision does not bar
Chapter 13 discharge. Sauer, 505 B.R. at 119 n.4; see 11 U.S.C.
§ 1328(a)(2).
              5
       We do not address the adequacy of this pleading under the
heightened pleading standard of Rule 9(b), but assume its adequacy

                                                                        - 6 -
                             The             bankruptcy                 court        dismissed    Sauer's      adversary

proceeding.                           The court reasoned that it was constrained by First

Circuit                      and              Supreme              Court        precedent        to    find     that   a

misrepresentation is a required element of "actual fraud" under

§ 523(a)(2)(A).                                  See Sauer, 505 B.R. at 118, 125-26 (citing Field,

516 U.S. 59; Spigel, 260 F.3d at 32).                                                     Because Sauer concededly

could not allege that Ms. Lawson had made a misrepresentation,

Sauer could not establish that § 523(a)(2)(A) barred discharge of

Ms. Lawson's debt.                                        See id. at 126.

                             Sauer appealed to the Bankruptcy Appellate Panel and,

shortly thereafter, petitioned for direct appeal to the First

Circuit.                           See            28           U.S.C.    §    158(d)(2).         The   Panel    granted

certification on the ground that the order "involves a matter of

public importance," 28 U.S.C. § 158(d)(2)(A)(i), and agreeing, we

granted authorization.

                                                                              II.

                             The sole issue on appeal is whether the bankruptcy court

erred in concluding that "a misrepresentation by a debtor to a

creditor is an essential element of establishing a basis for the

nondischarge of a debt under § 523(a)(2)(A)."                                                     Sauer, 505 B.R. at

                                                            
for purposes of resolving the appeal.                                                   Cf. N. Am. Catholic Educ.,
567 F.3d at 16.

                                                                             - 7 -
118.    This is a question of law, which we review de novo.     See

N. Am. Catholic Educ., 567 F.3d at 12; United States v. Nippon

Paper Indus. Co., 109 F.3d 1, 3 (1st Cir. 1997).

A.     The Fraud Exception of § 523(a)(2)(A)

            The Bankruptcy Code aims to strike a balance between

providing debtors with a fresh start by discharging debts upon

plan confirmation, and avoiding abuse of the system.    See Spigel,
260 F.3d at 31-32.    To this end, the Code exempts from discharge

certain types of debt in an attempt to "limit[] th[e] opportunity

[for discharge] to the 'honest but unfortunate debtor.'" Id. at 32

(second and third alteration in original) (quoting Brown v. Felsen,

442 U.S. 127, 128 (1979)). Such exceptions are "narrowly construed

. . . and the claimant must show that its claim comes squarely

within an [enumerated] exception."       Id. (first alteration in

original) (quoting Century 21 Balfour Real Estate v. Menna (In re

Menna), 16 F.3d 7, 9 (1st Cir. 1994)).

            This case concerns an exemption to Chapter 13 discharge.

Although "discharge under Chapter 13 'is broader than the discharge

received in any other chapter,'" Chapter 13 still "restricts or

prohibits entirely the discharge of certain types of debts."

United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 268

(2010) (quoting 8 Collier on Bankruptcy ¶ 1328.01 (rev. 15th ed.

                                - 8 -
2008)).                   As relevant here, Chapter 13 does not discharge any debt

"for money . . . to the extent obtained by . . . false pretenses,

a false representation, or actual fraud . . . ."                                            11 U.S.C.

§        523(a)(2)(A)                             (emphasis    added);   id.   §   1328(a)(2)   (making

§ 523(a)(2)(A) expressly applicable to Chapter 13).

                             Although many courts have "assume[d] that fraud [under

this provision] equals misrepresentation," McClellan, 217 F.3d at

892-93 (collecting cases), it remains an open question in this

circuit whether "actual fraud" includes fraud effected by means

other than fraudulent misrepresentation, such as through schemes

of fraudulent conveyance, Spigel, 260 F.3d at 32-33 n.7 (expressly

declining to reach the issue).6

                                                            
              6    This surprising gap has an explanation:
     Until 1970, the courts tasked with enforcing a creditor's
claim also determined whether the judgment thereby rendered was
nondischargeable under the fraud exception. See Brown, 442 U.S.
at 129-30 (citing Section 17 of the former Bankruptcy Act)
("Typically, that court was a state court.").        This proved
problematic: creditors were frequently successful in obtaining
nondischargeable default judgments in state courts under the
exception.   Id. at 135-36.   To avoid creditor abuse, Congress
amended the statute to require creditors seeking to bar discharge
under the fraud exception to file directly with the bankruptcy
court. See id. But in the cases since, we did not reach the issue
of whether "actual fraud" is limited to fraud effected by
misrepresentation because misrepresentation was the only type of
fraud charged.   See McClellan, 217 F.3d at 892-93 (collecting
cases); see, e.g., Field, 516 U.S. at 70; Palmacci, 121 F.3d 781;
see also, e.g., Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d
1280, 1285 (9th Cir. 1996) (finding an "implied representation of

                                                                - 9 -
                                                            
an intent" to repay a credit card charge (emphasis added)); Rembert
v. AT&T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277,
281 (6th Cir. 1998) (same); AT&T Universal Card Servs. v. Mercer
(In re Mercer), 246 F.3d 391, 403 (5th Cir. 2001) (en banc) (noting
that implying misrepresentation under the Palmacci test is
"appropriate for determining card-dischargeability because . . .
card-use lends itself to that analysis").
     Even so, Ms. Lawson argues -- and the bankruptcy court found
-- that our inquiry is foreclosed by controlling Supreme Court and
First Circuit precedent in Field v. Mans, 516 U.S. 59 (1995), and
In re Spigel, 260 F.3d 27 (1st Cir. 2001). But these cases are
inapposite.
     Field did not address whether "actual fraud" is limited to
fraud based on fraudulent misrepresentation. Field, 516 U.S. at
61. Rather, the Court there addressed the requirements when the
actual fraud alleged was fraudulent misrepresentation. See id.
(addressing the type of reliance required). At no point does the
Supreme Court state or even consider that "actual fraud" could be
limited to fraudulent misrepresentation.     To the contrary, the
Court directs us to rely upon the Second Restatement of Torts
which, as will be discussed, identifies multiple forms of "fraud."
See Field, 516 U.S. at 70; Restatement (Second) of Torts § 871
cmts., index (1977); cf. In re Mercer, 246 F.3d at 403 (recognizing
that the Restatement "does not define 'fraud'" but discusses
particular forms thereof).
     Spigel, far from foreclosing our inquiry, expressly left it
open.   See Spigel, 260 F.3d at 32-33 n.7.      That case did not
concern whether a misrepresentation was required, but the
relationship between the "fraudulent conduct" and the debt. Id.
at 32-35 (holding that the debt must be a "direct result" of
fraudulent conduct intended to swindle the relevant creditor).
Not only did we decline to reach the question of the scope of
"actual fraud," we expressed doubt that the Palmacci test for debt
obtained through fraudulent misrepresentations was the "exclusive
test" for nondischargeability under § 523(a)(2)(A). Id. at 32-33
n.7 (citing McClellan, 217 F.3d at 892-95); cf. In re Mercer, 246
F.3d at 403 & n.3 (noting disagreement).

                                                               - 10 -
             The Supreme Court has directed us that in construing the

meaning of "actual fraud" under this provision, we are to rely on

the common law "concept of 'actual fraud' as it was understood in

1978 when that language was added to § 523(a)(2)(A)."              Field, 516
U.S. at 70.       "Then, as now, the most widely accepted distillation

of the common law of torts was the Restatement (Second) of Torts

(1976), published shortly before Congress passed the Act."                Id.

Accordingly, we look to the same Restatement as relied upon in

Field.

             That Restatement recognizes several types of "fraud,"

including     both    fraudulent    misrepresentations      and    "fraudulent

interference with [property rights]," a tort that is broader than

misrepresentation itself.           See Restatement (Second) of Torts,

index, "Fraud" (1977); see also id. § 871 ("One who intentionally

deprives another of his legally protected property interest or

causes injury to the interest is subject to liability to the other

if his conduct is generally culpable and not justifiable under the

circumstances.").         The    comments   to   the    relevant   Restatement

provision,    §    871,   make   clear   that    this   includes    fraudulent

conveyance, like that alleged here.          Id. § 871 cmt. a ("[T]he rule

applies when title to land has been obtained by fraud . . . and

has been transferred to one other than a bona fide purchaser, in

                                    - 11 -
which case, until its sale by the transferee, the original owner's

sole redress against the transferee is by an action seeking its

recovery.").        That is, the common law concept of "fraud" as

distilled by the Restatement to which the Court directs us extends

beyond   fraudulent      misrepresentations     to   at   least       include

fraudulent conveyances.        See id.; see also id. § 871 cmt. e.

             This   comports    with   other   examples   of    the   common

understanding of "fraud."         See McClellan, 217 F.3d at 893 ("No

learned inquiry into the history of fraud is necessary to establish

that [fraud] is not limited to misrepresentations and misleading

omissions.").        As the leading treatise on bankruptcy explains,

"[a]ctual fraud, by definition, consists of any deceit, artifice,

trick, or design involving direct and active operation of the mind,

used to circumvent and cheat another . . . ."                  4 Collier on

Bankruptcy ¶ 523.08[1][e] (A.N. Resnick & H.J. Sommer, eds., 16th

ed. 2015).      This "generic term" has frequently been used to

"embrace[] all the multifarious means which human ingenuity can

devise and which are resorted to by one individual to gain an

advantage over another by false suggestions or by the suppression

of truth."    McClellan, 217 F.3d at 893 (quoting Stapleton v. Holt,

250 P.2d 451, 453-54 (Okla. 1952)).         And, as relevant here, "when

a debtor transfers property to a third party without adequate

                                   - 12 -
consideration" to hinder her creditors, this "is deemed fraud on

[her] creditors."                                       Id. at 894 (collecting cases); see also, e.g.,

R.I. UFTA, R.I. Gen. Laws § 6-16-1 et seq. (providing remedies for

fraudulent conveyances); Spaziano v. Spaziano, 410 A.2d 113, 114-

15 (R.I. 1980); Jorden v. Ball, 258 N.E.2d 736, 737 (Mass. 1970).7

                             We adopt this common law understanding and hold that

"actual fraud" under § 523(a)(2)(A) is not limited to fraud

effected by misrepresentation.                                               See Field, 516 U.S. at 73-74

(applying the "established practice of finding Congress's meaning

in the generally shared common law" to § 523(a)(2)(A)).                                                Rather,

we hold that "actual fraud" includes fraudulent conveyances that

are           "intended                        .        .      .   to   hinder   [the   relevant]   creditors."

McClellan, 217 F.3d at 894.                                             Consistent with our precedents, our

holding is limited to cases of actual, as opposed to merely

constructive, fraud.                                           See Spigel, 260 F.3d at 32 ("[W]e have said

                                                            
              7
       Even the early Bankruptcy Acts characterized "fraudulent
conveyances" as a form of "fraud." See, e.g., Bankruptcy Act of
1867, ch. 176, § 35, 14 Stat. 517, 534 ("[I]f such sale,
assignment, transfer, or conveyance [made to evade attachment in
bankruptcy] is not made in the usual and ordinary course of
business of the debtor, the fact shall be prima facie evidence of
fraud." (emphasis added)); Bankruptcy Act of 1898, ch. 541,
§ 29(b), 30 Stat. 544, 554 ("A person shall be punished . . . upon
conviction of the offense of having knowingly and fraudulently
. . . received any material amount of property from a bankrupt
after the filing of the petition, with the intent to defeat this
Act . . . ." (emphasis added)).

                                                                        - 13 -
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 [fraudulent conduct].'"

(quoting Century 21, 16 F.3d at 10)); Palmacci, 121 F.3d at 788

(emphasizing that § 523(a)(2)(A) "requires a showing of actual or

positive fraud, not merely fraud implied by law" (quoting Anastas

v. Am. Sav. Bank (In re Anastas), 94 F.3d 1280, 1286 & n.3 (9th

Cir. 1996))).      That is, the debtor-transferee must herself be

"guilty of intent to defraud" and not merely be the passive

recipient of a fraudulent conveyance.          See McClellan, 217 F.3d at

894 (noting that fraud is "constructive if the only evidence of it

is the inadequacy of the consideration").              Such intent may be

inferred from her acceptance of a transfer that she knew was made

with the purpose of hindering the transferor's creditor(s), but it

may not be implied as a matter of law.         See Neal v. Clark, 95 U.S.
704,    707-09    (1877)    (distinguishing        "actual     fraud"    from

"constructive fraud" which "may exist without the imputation of

bad faith or immorality").

             Our reading is confirmed by the structure of the text

and the legislative history.        "'[A]ctual fraud' [was] added as a

ground for exception from discharge" under § 523(a)(2)(A) in 1978.

S. Rep. No. 95-989, at 78 (1978); H.R. Rep. No. 95-595, at 364

                                    - 14 -
(1977).   That provision now "explicitly lists both 'actual fraud'

and 'false representations' as grounds for denying a discharge."

Spigel, 260 F.3d at 33 n.7.    We agree with the Seventh Circuit

that this distinction must have meaning, and that the most obvious

meaning is the one that comports with common law understanding:

"actual fraud is broader than misrepresentation."    McClellan, 217
F.3d at 893.

           Indeed, this is confirmed by the Legislative Statements

concerning the change, which reveal that the drafters specifically

contemplated not only a broader reading of "actual fraud," but

that debt incurred through (actually) fraudulent conveyances would

be barred from discharge under § 523(a)(2)(A).      The Legislative

Statement concerning § 523(a)(2)(A) is express that the addition

"is intended to codify current case law, [like] Neal v. Clark, 95
U.S. 704 (18[7]7)."   See 11 U.S.C. § 523, Legislative Statements

(explaining that § 523(a)(2)(A) is limited to "actual or positive

fraud rather than fraud implied by law").     That case, Neal v.

Clark, presumed that the Bankruptcy Code exempted from discharge

as a "debt created by . . . fraud" at least some debts incurred

through receipt of a fraudulent conveyance.   See Neal, 95 U.S. at

706-09 (holding that debt created through receipt of a fraudulent

conveyance must be actual fraud, not merely constructive fraud, to

                              - 15 -
bar from discharge in bankruptcy); Bankruptcy Act of 1867, ch. 176,

§ 33, 14 Stat. 517, 533; cf. id. ch. 176, § 35, 14 Stat. at 534.8

                             "The             history          of   the   fraud   exception   reinforces   our

reading of § 523(a)(2)(A)."                                          Cohen v. de la Cruz, 523 U.S. 213,

221 (1998). The bankruptcy practices at issue in Neal and codified

by § 523(a)(2)(A) concerned Section 33 of the Bankruptcy Act of

1867, which barred debts "created by . . . fraud."                                            Bankruptcy Act

of 1867, ch. 176, § 33, 14 Stat. at 533.                                             The Bankruptcy Act of

1898 similarly prohibited discharge of debts that "are judgments

in actions for frauds, or obtaining property by false pretenses or

false representations, or for willful and malicious injuries to

the           person                 or         property        of   another"     under   Section   17(a)(2).9

                                                            
              8
       The Supreme Court in Neal was construing the term "fraud"
as it appeared in Section 33 of the Bankruptcy Act of 1867, ch. 176,
§ 33, 14 Stat. at 533. That provision provided in relevant part:
              [N]o debt created by the fraud or embezzlement of the
              bankrupt, or by his defalcation as a public officer, or
              while acting in any fiduciary character, shall be
              discharged under this act . . . .
Id. These various bars to discharge have been expanded upon and
now appear as enumerated exceptions.
              9
        Section 17(a)(4) of the Bankruptcy Act of 1898 also
prohibited discharge of debts "created by [debtor's] fraud,
embezzlement, misappropriation, or defalcation while acting as an
officer or in any fiduciary capacity." 30 Stat. at 550-51. This
appears to be the precursor to § 523(a)(4) of the modern Bankruptcy
Code, which prohibits discharge (including Chapter 13 discharge)
of debts "for fraud or defalcation while acting in a fiduciary

                                                                     - 16 -
Bankruptcy Act of 1898, ch. 541, § 17(a)(2), 30 Stat. 544, 550;

Cohen, 523 U.S. at 221.                                              Subsequent amendments retained the

"willful                     and            malicious             injuries"   language   until   1970,   when

"willful and malicious conversion of the property of another" was

substituted.                              See 11 U.S.C. § 35(a)(2) (1976); Act of Oct. 19,

1970, Pub. L. No. 91-467, sec. 5-6, §§ 17(a)(2), 17(a)(8), 84 Stat.

990, 992.                       This substituted language preserved the breadth of the

fraud exception articulated in Section 17(a)(2), the predecessor

of § 523(a)(2)(A).10                                           Cf. Black's Law Dictionary 406 (10th ed.

2014) (defining "conversion" as "an act or series of acts of

willful interference, without lawful justification, with an item

of property in a manner inconsistent with another's right, whereby

that other person is deprived of the use and possession of the

property").

                                                            
capacity, embezzlement, or larceny."                                          See 11 U.S.C. §§ 523(a)(4),
1328(a)(2).
              10
        This "willful and malicious conversion" is distinct from
the exception to discharge now codified at § 523(a)(6) for "willful
and malicious injury by the debtor to another entity or to the
property of another entity."     See 11 U.S.C. § 35(a)(8) (1976)
(barring discharge of debts that "are liabilities for willful and
malicious injuries to the person or property of another other than
conversion as excepted under clause (2) of this subdivision"
(emphasis added)).

                                                                     - 17 -
             We "will not read the Bankruptcy Code to erode past

bankruptcy    practice   absent    a     clear   indication   that    Congress

intended such a departure."            Cohen, 523 U.S. at 221 (internal

quotation marks and citation omitted).             The alteration of this

language in 1978 "in no way signals an intention to narrow the

established scope of the fraud exception along the lines suggested

by" Ms. Lawson, nor have the parties identified anything in the

legislative history that would suggest such a change.               See id. at

221-22.   Rather, "[§] 523(a)(2)(A) continues the tradition" of

"affording relief only to an 'honest but unfortunate debtor'" by

excepting from discharge any debt obtained by "'false pretenses,

a false representation, or actual fraud.'"              See id. at 217-18

(quoting Grogan v. Garner, 498 U.S. 279, 287 (1991); 11 U.S.C.

§ 523(a)(2)(A)).    We hold that the fraud exception to discharge

codified at § 523(a)(2)(A) continues to bar from discharge debts

incurred through knowing and intentional receipt of fraudulent

conveyances as it has since 1867.          Cf. 43 R.E. Williams, Am. Jur.

Proof of Facts § 13 (3d ed. 2015) ("[T]here is a great deal of

continuity    between    the    former    Bankruptcy   Act    and    the   1978

Bankruptcy      Code,     and      between       common-law     fraud       and

                                   - 18 -
nondischargeability under Code § 523(a)(2).                                          Even the language of

the statute is continuous.").11

B.            Declining   to                                   "Shoehorn"   Fraudulent   Conveyance   into
              § 523(a)(6)

                             Ms. Lawson next argues that because her bankruptcy case

arises under the more forgiving provisions of Chapter 13, not

Chapter 7, we should avoid construing § 523(a)(2)(A) to "extend"

beyond fraud effected by misrepresentation.

                             Her argument, charitably read, begins with the assertion

that Ms. Lawson's alleged conduct more readily falls within the

nondischargeability provision of 11 U.S.C. § 523(a)(6).12                                              Cf.

McClellan, 217 F.3d at 896 (Ripple, J., concurring).                                          Because that

provision bars discharge of any debt "for willful and malicious

                                                            
              11
        This treatise is another example of one that appears to
assume, as many cases do, that § 523(a)(2)(A) requires a
misrepresentation. It does not directly address the distinction
between "false pretenses, [and] false representation[s]" and
"actual fraud," or discuss the McClellan standard except in
passing.   See, e.g., id. § 13; but see id. (collecting cases
following McClellan without expressly identifying the issue).
              12
        To the extent Ms. Lawson argues that we should read the
same provision differently depending on the type of bankruptcy
proceeding, her argument is a nonstarter. Chapter 13 provides a
broader discharge than Chapter 7 because fewer exemptions have
been made applicable, not because those that are should be
construed more narrowly.    See 11 U.S.C. § 1328(a)(2) (making
§ 523(a)(2) expressly applicable as a reason to bar discharge of
certain debts in a Chapter 13 proceeding while rendering
inapplicable other reasons for denying discharge under § 523(a)).

                                                                      - 19 -
injury by the debtor to another entity," 11 U.S.C. § 523(a)(6),

Ms. Lawson argues that it "provides a far more direct avenue for

dealing with a situation such as [this]" where the debtor allegedly

accepted    a   fraudulent    conveyance    specifically    to   impede    the

injured party's attempt to collect from another.             McClellan, 217
F.3d at 896 (Ripple, J., concurring).             As Judge Ripple observed,

§ 523(a)(6) has been used to prevent discharge of exactly this

sort.    See id. at 898 (discussing Murray v. Bammer (In re Bammer),

131 F.3d 788 (9th Cir. 1997) (en banc)); but see id. at 899 n.1

(conceding that the Ninth Circuit later limited its holding where

the     fraudulent    transferee   filed    for    bankruptcy    before    the

plaintiff, who did not have a security interest, obtained a

judgment against the transferee for the transfer).

            Against    this   backdrop,     Ms.   Lawson   argues   that   the

distinction between Chapter 13 and Chapter 7 discharge provides a

reason to follow Judge Ripple's suggested construction, and to

find the alleged conduct to be covered under § 523(a)(6), not

§ 523(a)(2).      This is because Chapter 13, which provides for a

broader discharge than Chapter 7, does not bar the discharge of

debts specified in § 523(a)(6), except in limited circumstances

                                   - 20 -
not relevant here.13                                           See 11 U.S.C. § 1328(a)(2); United Student

Aid Funds, 559 U.S. at 268 ("[D]ischarge under Chapter 13 'is

broader                  than             the           discharge      received       in   any   other    chapter.'"

(quoting 8 Collier on Bankruptcy ¶ 1328.01 (rev. 15th ed. 2008))).

                             This argument is foreclosed by the statutory history of

§ 523(a)(6), "the historical pedigree of the fraud exception [in

§ 523(a)(2)(A)], and the general policy underlying the exceptions

to discharge."                                   See Cohen, 523 U.S. at 223.                     We begin with the

history of the proposed alternative, § 523(a)(6).

                             The           discharge              of   debts    for    "willful     and    malicious

injuries to the person or property of another" was originally

included in the fraud exception of Section 17(a)(2).                                                  That changed

in 1970, when the provision that is now codified in § 523(a)(6)

was added to the statute as Section 17(a)(8).                                                See Act of Oct. 19,

1970, sec. 5-6, §§ 17(a)(2), 17(a)(8), 84 Stat. at 992 (formerly

codified at 11 U.S.C. § 35(a)(8) (1976)).

                             However, that amendment did not completely remove all

"willful and malicious injuries" to a creditor's property from the

scope of the fraud exception in Section 17(a)(2).                                                  Rather, Section

17(a)(2) continued to bar discharge of liabilities "for willful

                                                            
              13
        See 11 U.S.C. § 1328(b), (c) (providing for a hardship
discharge except for "any debt" specified in § 523(a)).

                                                                       - 21 -
and malicious conversion of the property of another," like willful

and malicious receipt of a fraudulent conveyance.              See Black's Law

Dictionary 406 ("[C]onversion . . . . include[s] such acts as

taking possession, refusing to give up on demand, disposing of the

goods to a third person, or destroying them." (quoting W. Geldart,

Introduction to English Law 143 (D.C.M. Yardley ed., 9th ed.

1984))); cf. Neal, 95 U.S. 704.           By contrast, the new provision

that preceded § 523(a)(6) barred discharge of debts that "are

liabilities for willful and malicious injuries to the person or

property of another other than conversion as excepted under clause

(2)   of   this   subdivision."     See   11    U.S.C.    §    35(a)(8)   (1976)

(emphasis added).

            The notes to the re-codification of these provisions

under the Bankruptcy Reform Act of 1978 do not clearly indicate an

intention to alter their relative scope with respect to the means

by which fraud may be perpetrated.            "[A]ctual fraud" was added to

§   523(a)(2)(A)    expressly     for   the    purpose,   as    discussed,   of

"codify[ing] current case law" concerning fraud.                 See 11 U.S.C.

§ 523, Legislative Statements (citing Neal, 95 U.S. 704 (holding

that receipt of a fraudulent conveyance must "involv[e] . . .

intentional wrong" to be nondischargeable)).              Although there is

some ambiguity about which "willful and malicious conversion[s]"

                                   - 22 -
are subsumed under § 523(a)(6) rather than § 523(a)(2),14 there is

not "a clear indication that Congress intended . . . a departure"

that would limit the means by which fraud might be perpetrated for

purposes of § 523(a)(2)(A).                                                See Cohen, 523 U.S. at 221-22.

Accordingly, we decline to find one.                                             See id. (noting that absent

such an indication, we should not "read the Bankruptcy Code to

erode past bankruptcy practice").

                             The              continued             inclusion      of   (actual)     fraudulent

conveyance                        within                  §    523(a)(2)    is   consistent   with   Congress's

"conclu[sion] that preventing fraud is more important than letting

defrauders start over with a clean slate."                                              McClellan, 217 F.3d at

893 (quoting Mayer v. Spanel Int'l, Ltd. (In re Mayer), 51 F.3d
670, 674 (7th Cir. 1995)); see also Grogan, 498 U.S. at 286-87.

This is because it prevents Chapter 13, as well as Chapter 7, from

becoming "an engine for fraud" by barring from both types of

                                                            
              14
       The Legislative Statements to § 523(a)(6) state that "[t]he
phrase 'willful and malicious injury' covers a willful and
malicious conversion."    But the Legislative Statements do not
address the distinction suggested in the previous version of the
statute between those "willful and malicious conversion[s]"
excepted under the fraud exception of Section 17(a)(2) and those
excepted under Section 17(a)(8).    Compare 11 U.S.C. § 35(a)(8)
(1976) (qualifying the conversions excluded from Section 17(a)(8)
as being those conversions covered by the fraud exception), with
11 U.S.C. § 523, Legislative Statements (noting that "'willful and
malicious injury' covers a willful and malicious conversion").

                                                                     - 23 -
discharge debts obtained by fraudulent conveyance.              See 11 U.S.C.

§ 1328; cf. McClellan, 217 F.3d at 893.          Were we to hold otherwise,

and accept Ms. Lawson's argument that such conduct is covered by

§ 523(a)(6) instead of § 523(a)(2), then the perpetrators of the

"two-step routine" alleged could make "as blatant an abuse of the

Bankruptcy Code as we can imagine" simply by having the second

debtor file for Chapter 13, rather than Chapter 7, bankruptcy.

Cf. McClellan, 217 F.3d at 893.

           Chapter 13, it is true, provides a broader "fresh start"

than Chapter 7 because the debtor attempts to make good on some of

her obligations. But, as the Supreme Court has repeatedly observed

in "addressing different issues surrounding the scope of [this]

exception," we think it "unlikely that Congress . . . would have

favored the interest in giving perpetrators of fraud a fresh start

over the interest in protecting victims of fraud" provided such

perpetrators are especially clever, avoid all misrepresentations,

and file under Chapter 13.      See Cohen, 523 U.S. at 223 (alteration

in   original)   (quoting    Grogan, 498 U.S.   at   287).   Far   from

supporting Ms. Lawson's argument that we should read fraudulent

conveyances      to   be    proscribed     by     §    523(a)(6),   and    not

§ 523(a)(2)(A), the distinction between Chapter 13 and Chapter 7

discharge confirms our construction.

                                  - 24 -
C.            Narrowness

                             Finally, there may be some concern that finding that the

Palmacci test is not the exclusive test for "actual fraud" under

§ 523(a)(2)(A) untethers the "actual fraud" requirement from a

narrow, principled approach to its construction.                                    Cf. Blacksmith

Invs., LLC v. Woodford (In re Woodford), 403 B.R. 177, 188-89

(Bankr. D. Mass. 2009); 43 R.E. Williams Am. Jur. Proof of Facts

§ 21 (3d ed. 2015) (discussing the difficulties in applying

§ 523(a)(2)(A) to debts created by credit card fraud).                                         The

Palmacci test provides a narrow construction with clear elements.15

If, as the Seventh Circuit suggests, "[n]o definite and invariable

rule can be laid down as a general proposition defining fraud, and

it includes all surprise, trick, cunning, dissembling, and any

unfair way by which another is cheated," then how is the fraud

exception to be narrowly construed?                                     Cf. McClellan, 217 F.3d at

893 (quoting Stapleton, 250 P.2d at 453-54).

                                                            
              15
       The Palmacci test applies the "traditional common law rule"
for fraudulent misrepresentation. See Palmacci, 121 F.3d at 786.
Under it, a creditor objecting to a debt "obtained by . . . actual
fraud" effected through a misrepresentation 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,

                                                               - 25 -
                             We need not and do not decide that question today.                               We

hold only that the "actual fraud" exception to discharge under

§ 523(a)(2)(A) includes knowing receipt of a fraudulent conveyance

where such receipt constitutes actual (as opposed to constructive)

fraud. Cf. McClellan, 217 F.3d at 894 (emphasizing the requirement

that the transferee have intended to thwart the transferor's

creditor); Neal, 95 U.S. at 707 (distinguishing between those cases

where receipt of fraudulent conveyance constitutes "actual fraud"

owing to recipient's intent and those where receipt is merely

"constructive                              fraud"              as   implied   by   law).   But   we   make   two

observations.

                             First, we observe that, while there are other ways to

give meaning to the distinction between "actual fraud" and "false

representations" under § 523(a)(2)(A), they are not the most narrow

available, nor are they consistent with the fraud exception's

history. Cf., e.g., Field, 516 U.S. at 70 n.8 (declining to decide

if a different type of reliance is required under "false pretense"

or "false representation"); Mayer v. Spanel Int'l, Ltd. (In re

                                                            
              5) the creditor's reliance was justifiable, and 6) the
              reliance upon the false statement caused damage.
Spigel, 260 F.3d at 32 & n.6 (citing Palmacci, 121 F.3d at 786;
Field, 516 U.S. at 70-71).

                                                                       - 26 -
Mayer),   51 F.3d 670,    674     (7th       Cir.    1995)    (Easterbrook,        J.)

(suggesting     without       deciding        that    "false    pretense"       or   "false

representation"        may    carry     a     different       scienter     requirement);

Restatement (Second) of Torts §§ 525 et seq., 550 et seq. (1977)

(discussing         related     torts       of      fraudulent       misrepresentation,

nondisclosure,          negligent           misrepresentation,           and      innocent

misrepresentation).             Rather,       reading       "false     pretenses,     false

representations, and actual fraud" to be limited, roughly, to mean

"fraudulent         misrepresentation         and     other    actual     frauds"     would

provide the most consistent and narrow reading of § 523(a)(2)(A)

by barring from discharge only those debts that "'arise[] as a

direct result of the debtor's [fraudulent conduct].'"                          Spigel, 260
F.3d at 32 (quoting Century 21, 16 F.3d at 10); cf. Mayer, 51 F.3d

at 674 (lamenting that courts have consistently read a culpable

intent    requirement         into      the        "false    pretenses"     and      "false

representation[s]" language of the fraud exception).                           We need not

decide today whether to adopt such a reading.                          Our point is only

that our construction, far from broadening the fraud exception,

permits the most narrow construction possible.

            Second, we observe that the dangers to narrowness of

reading "actual fraud" somewhat expansively -- and the abuse by

creditors      it    might    engender        --    is     protected    against      by   the

                                            - 27 -
provision of fees and costs to the debtor where "a creditor

requests a determination of dischargeability" under § 523(a)(2)

that is ultimately discharged and "the court finds that the

position of the creditor was not substantially justified."               11

U.S.C. § 523(d).     Indeed, this is the only exception to discharge

under § 523 for which such debtor protection is afforded, and it

is afforded specifically to discourage creditors from such abuse.

See S. Rep. No. 95-989, at 80 (noting that fees are available "if

the court finds that the proceeding was frivolous or not brought

by its creditor in good faith").

                                     III.

          Finally,    Ms.   Lawson    argues   in   the   alternative   that

Sauer's complaint fails under our newly adopted standard because

Sauer has alleged only constructive fraud.            See McClellan, 217
F.3d at 894.   But while our holding is emphatically limited to

cases of actual, as opposed to merely constructive, fraud, and the

heightened pleading requirements for fraud remain applicable, we

decline to reach the issue.      See Fed. R. Civ. P. 9(b); Fed. R.

Bankr. P. 7009.    Compare McClellan, 217 F.3d at 894 (noting that

fraud is "constructive if the only evidence of it is the inadequacy

of the consideration"), with Bell Atl. Corp. v. Twombly, 550 U.S.
544, 556 (2007) (requiring under notice pleading standards factual

                                 - 28 -
allegations "suggestive enough" to make a claim for "conspiracy

plausible").                             Cf. N. Am. Catholic Educ., 567 F.3d at 16 (refusing

"to assume that no amendment could rescue certain of the claims").

                             The bankruptcy court and the parties proceeded on the

apparent understanding that the principal obstacle to Sauer's suit

was Sauer's inability to plead misrepresentation.16                            Accordingly,

we leave the issues of the adequacy of Sauer's pleading, and the

possibility of amendment, to the bankruptcy court in the first

instance.                           See N. Am. Catholic Educ., 567 F.3d at 16 ("For

deficiencies under Rule 9(b), leave to amend is often given, at

least for plausible claims."); see also New Eng. Data Servs., Inc.

v. Becher, 829 F.2d 286, 292 (1st Cir. 1987) (noting that the

policy behind Rule 9(b) -- avoiding groundless claims, damage to

a defendant's reputation, and ensuring notice -- must be balanced

against "the policy in favor of allowing amendments and trying

cases on their merits, and against dismissals which would deny

plaintiffs their day in court"); cf. 11 U.S.C. § 523(d) (awarding

costs and attorneys' fees for unsuccessful adversary proceedings

under § 523(a)(2)(A) that are frivolous or brought in bad faith).

                                                            
              16
        Ms. Lawson does not appear to have pressed the adequacy
argument before the bankruptcy court, focusing her energies
instead on the failure to allege a misrepresentation under the
Palmacci standard.

                                                               - 29 -
          Accordingly, we vacate the bankruptcy court's grant of

Ms. Lawson's motion to dismiss, and remand for further proceedings

consistent with this opinion.    No costs are awarded.

                                - 30 -