IN RE MENNA, 16 F.3d 7 (1st Cir. 1994)

IN RE PHILIP G. MENNA. CENTURY 21 BALFOUR REAL ESTATE, PLAINTIFF, APPELLANT, v. PHILIP G. MENNA, DEFENDANT, APPELLEE.

No. 93-1767.United States Court of Appeals, First Circuit.Heard December 8, 1993.
Decided February 10, 1994.

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Daniel L. Cummings, with whom Norman, Hanson DeTroy, Portland, ME, was on brief for appellant.

John E. Geary, Portland, ME, for appellee.

Appeal from the United States Bankruptcy Court for the District of Maine.

Before TORRUELLA, CYR and STAHL, Circuit Judges.

CYR, Circuit Judge.

[1] Plaintiff-appellant Century 21 Balfour Real Estate (“Balfour”) commenced an adversary proceeding to determine whether its claim against defendant-appellee Philip G. Menna is dischargeable in bankruptcy. The bankruptcy court ruled against Balfour, the district court upheld the ruling, and we now affirm.

I [2] BACKGROUND
[3] Menna retained Balfour to sell his business. Following the sale, the buyers, Robert and Brenda Pawloski, brought a state court action against Menna and Balfour for fraud and negligent misrepresentation, respectively, and Balfour cross-claimed against Menna for equitable indemnification. The jury found Menna and Balfour jointly and severally liable and awarded the Pawloskis $128,500 in compensatory damages. The state court entered judgment for Balfour on its cross-claim for indemnification against Menna because Balfour’s mere negligence made it less culpable than Menna, whose conduct had been found fraudulent. The Pawloskis thereafter recovered $110,000 from Balfour on their judgment.

[4] After Menna filed a voluntary chapter 7 petition, Balfour commenced an adversary proceeding against Menna to have its $110,000 indemnification claim against Menna declared nondischargeable, pursuant to Bankruptcy Code §§ 523(a)(2)(A) (debt “for money . . . to the extent obtained by . . . actual fraud”) and 523(a)(6) (debt “for willful and malicious injury by the debtor to another entity”), 11 U.S.C. §§ 523(a)(2)(A), (a)(6) (1993). On the cross-motions for summary judgment the bankruptcy court ruled that Balfour’s indemnification claim is dischargeable,

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see Century 21 Balfour Real Estate v. Menna (In re Menna), 152 B.R. 5, 6 (Bankr.D.Me. 1993), and the district court summarily affirmed.

II [5] DISCUSSION[6] A. Standard of Review
[7] We review the grant of summary judgment de novo, employing the same standards incumbent on the bankruptcy court, in order to 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.'” Gaskell v. The Harvard Coop. Soc’y, 3 F.3d 495, 497 (1st Cir. 1993) (quoting Fed.R.Civ.P. 56(c)); see also Fed.R.Bankr.P. 7056. Although all reasonable inferences are to be drawn in favor of the nonmoving party, “[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 trialworthy issue warrants summary judgment to the moving party.” Ralar Distribs., Inc. v. Rubbermaid, Inc. (In re Ralar Distribs., Inc.), 4 F.3d 62, 67 (1st Cir. 1993); see also Milton v. Van Dorn Co., 961 F.2d 965, 969 (1st Cir. 1992).

[8] B. Applicable Law
[9] Exceptions to discharge are narrowly construed in furtherance of the Bankruptcy Code’s “fresh start” policy and the claimant must show that its claim comes squarely within an exception enumerated in Bankruptcy Code § 523(a). See Commerce Bank Trust Co. v. Burgess (In re Burgess), 955 F.2d 134, 136-37 (1st Cir. 1992); see also Werner v. Hofman, 5 F.3d 1170, 1172 (8th Cir. 1993); LSP Inv. Partnership v. Bennett (In re Bennett), 970 F.2d 138, 148 (5th Cir. 1992); Stackhouse v. Hudson (In re Hudson), 859 F.2d 1418, 1425 (9th Cir. 1988). Section 523(a)(2)(A) excepts from discharge “any debt . . . for money, property, [or] services . . . to the extent obtained by false pretenses, a false representation, or actual fraud.” Bankruptcy Code § 523(a)(2)(A), 11 U.S.C. § 523(a)(2)(A).[1] The complaint alleges that Balfour’s claim against Menna is “based on indemnification,” and “thus based upon [Menna’s] fraudulent conduct toward the Pawloskis,” as evidenced by the Pawloskis’ fraud judgment against Menna. (Emphasis added.) Section 523(a)(6) further excepts from discharge “any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.” Id. § 523(a)(6), 11 U.S.C. § 523(a)(6). The complaint alleges that Balfour’s indemnification claim is “based upon [Menna’s] malicious conduct toward the Pawloskis,” as evidenced by the Pawloskis’ $25,000 punitive damages verdict against Menna. (Emphasis added.) Balfour concedes, however, that it presented no competent evidence that Menna either acted with malice toward, or intended to defraud Balfour.[2]

[10] Balfour principally complains that the bankruptcy court failed to recognize that section 523(a) does not require a showing that the claimant was the direct or immediate target of the debtor’s fraudulent intent or malicious conduct. Therefore, it argues, since Menna exposed both Balfour (Menna’s equitable indemnitee) and the Pawloskis to the $128,500 loss, Balfour’s claim for equitable indemnification is one “for money . . . obtained by [the debtor’s] actual fraud,” or “for willful and malicious injury by the debtor to another entity.” Were it otherwise, Balfour says, dishonest debtors like Menna who embroil less culpable third parties like

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Balfour in their fraudulent schemes could easily subvert the Code’s central strategy of restricting the “fresh start” discharge to “honest but unfortunate” debtors. Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230
(1934) (emphasis added); see also Brown v. Felsen, 442 U.S. 127, 128, 99 S.Ct. 2205, 2207, 60 L.Ed.2d 767 (1979) (same); H.R. Rep. No. 595, 95th Cong., 1st Sess. 125, reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6086 (same).

[11] We conduct plenary review of the bankruptcy court’s construction of the legislative language — “debt for” — employed in Bankruptcy Code § 523(a). The Travelers Ins. Co. v. Cambridge Meridian Group, Inc. (In re Erin Food Servs., Inc.), 980 F.2d 792, 799 (1st Cir. 1992). First, we underscore that section 523(a) does not employ the terms adopted in Balfour’s paraphrase — “debt based upon” — not does the statutory language remotely suggest that nondischargeability attaches to any claim other than one which arises as a direct result of the debtor’s misrepresentation or malice.[3] Moreover, Balfour cites no case in which it has been argued, let alone decided, that the nonfraud-based indemnification claim of an entity whose negligence has combined with the fraud of its joint tortfeasor to cause injury to a third party is nondischargeable in the bankruptcy of the fraudulent tortfeasor.[4] Given the strict construction afforded all dischargeability exceptions under section 523(a), see In re Burgess, 955 F.2d at 137, we have been provided with neither authority nor reason to extend the statutory language as urged by Balfour.

[12] Second, Balfour wrongly presumes that exceptions to discharge serve only to penalize the debtor. Rather, as a function of its essentially equitable nature, a nondischargeability determination under section 523(a) is designed concomitantly to protect th inculpable creditor, cf. H.R. Rep. No. 595, supra, at 130 reprinted in 1978 U.S.C.C.A.N. at 6091 (“The premise of [ § 523(a)(2)(B)] is that a creditor that extended credit based on misinformation or fraudulent information transmitted by the debtor should be protected.“) (emphasis added). Thus, the legislative purposes served by sections 523(a)(2) and 523(a)(6) are at once retributive and protective.

[13] Section 523(a)(2) requires showings by the claimant that (1) the debtor knowingly or recklessly made a material misrepresentation with intent to deceive the creditor; and (2) the creditor “reasonably” relied on the misrepresentation to its detriment. In re Burgess, 955 F.2d at 140; see also Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir. 1993) (reliance must be the “proximate cause” of claimant’s loss). If section 523(a)(2) had been intended simply to deter all bad faith conduct by the debtor irrespective of its effect upon the particular creditor, as Balfour’s argument impliedly assumes, there would have been no need to condition the creditor’s right to a nondischargeability ruling on a showing of reasonable reliance.[5]

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Even assuming arguendo that an equitable indemnitee’s vicarious injury might satisfy the first constituent element of the “fraud” test under section 523(a)(2), thereby generally establishing bad faith or misconduct on the part of the debtor, Balfour nonetheless must make the “reasonable reliance” showing required under section § 523(a)(2) — that it reasonably and deterimentally relied on Menna’s misrepresentations.[6]

[14] C. Summary Judgment
[15] Reasonable reliance is an issue of fact, see Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 260-61 (5th Cir. 1993) ( § 523(a)(2)), on which Balfour would have borne the burden of proof at trial. Yet it presented no evidence whatever from which the bankruptcy court could have determined whether Balfour actually or reasonably relied on Menna’s misrepresentations when it communicated the unspecified misinformation about the pending sale to the Pawloskis. Indeed, the record is even devoid of evidence of the circumstances surrounding the November 1987 sale transaction, the nature, duration or history of the Menna-Balfour business relationship, or whether Balfour might have detected or thwarted Menna’s misrepresentations by “minimal investigation.”See BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d 1556, 1560 (6th Cir. 1992) (summarizing various indicia of “reasonable” reliance under § 523(a)(2)), cert. denied,
___ U.S. ___, 113 S.Ct. 1272, 122 L.Ed.2d 667 (1993).

[16] Moreover, Balfour may well have been collaterally estopped from litigating the “reasonableness” of any reliance on Menna’s misrepresentations. See 1B James W. Moore, Jo D. Lucas, Thomas S. Currier, Moore’s Federal Practice ¶ 0.419 [3-4], at 649-50 (2d ed. 1992); Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 660, 112 L.Ed.2d 755 (1991) (collateral estoppel applies in § 523(a) proceeding where prior judgment required same or greater burden of proof). Under Maine law, the Pawloskis’ negligent misrepresentation claim against Balfour required proof that inter alia: (1) Balfour supplied information to the Pawloskis as “guidance” in their business transaction, (2) the Pawloski justifiably relied on the information; and (3) Balfour failed to exercise reasonable care or competence in obtaining or communicating the information.” Jordan-Milton Mach., Inc. v. F/V Teresa Marie, II, 978 F.2d 32, 36 (1st Cir. 1992) (citin Chapman v. Rideout, 568 A.2d 829 (Me. 1990) (adopting Restatement (Second) of Torts § 552(1))).

[17] Balfour argues, nonetheless, that collateral estoppel does not bar its claim because the requisite “reasonable care” showing for negligent misrepresentation under Maine law, and the “reasonable reliance” showing required under section 523(a)(2)(A), are not necessarily coextensive; that is, the former concerns Balfour’s duty to the Pawloskis, not its duty to Menna. Even so, Balfour gains nothing. If the two legal standards do diverge, as Balfour argues, the two state court judgments simply are not probative of Balfour’s

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“reasonable reliance,”[7] and Balfour had the burden of producing some competent evidence from which the bankruptcy court could find reasonable reliance. On the other hand, if the standards do not diverge, collateral estoppel barred Balfour’s present contention as a matter of law. See Ralar, 4 F.3d at 67.

[18] Affirmed.