UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-1767
IN RE
PHILIP G. MENNA
CENTURY 21 BALFOUR REAL ESTATE,
Plaintiff, Appellant,
v.
PHILIP G. MENNA,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
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Before
Torruella, Cyr and Stahl,
Circuit Judges.
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Daniel L. Cummings, with whom Norman, Hanson & DeTroy was on
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brief for appellant.
John E. Geary for appellee.
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February 10, 1994
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CYR, Circuit Judge. Plaintiff-appellant Century 21
CYR, Circuit Judge.
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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
I
BACKGROUND
BACKGROUND
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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.
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 nondis-
chargeable, pursuant to Bankruptcy Code 523(a)(2)(A) (debt
2
"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 discharge-
able, see Century 21 Balfour Real Estate v. Menna (In re Menna),
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152 B.R. 5, 6 (Bankr. D. Me. 1993), and the district court
summarily affirmed.
II
II
DISCUSSION
DISCUSSION
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A. Standard of Review
A. Standard of Review
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We review the grant of summary judgment de novo,
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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.
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Soc'y, 3 F.3d 495, 497 (1st Cir. 1993) (quoting Fed. R. Civ. P.
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56(c)); see also Fed. R. Bankr. P. 7056. Although all reasonable
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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
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Distribs., Inc. v. Rubbermaid, Inc. (In re Ralar Distribs.,
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3
Inc.), 4 F.3d 62, 67 (1st Cir. 1993); see also Milton v. Van Dorn
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Co., 961 F.2d 965, 969 (1st Cir. 1992).
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B. Applicable Law
B. Applicable Law
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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
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Bank & Trust Co. v. Burgess (In re Burgess), 955 F.2d 134, 136-37
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(1st Cir. 1992); see also Werner v. Hofman, 5 F.3d 1170, 1172
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(8th Cir. 1993); LSP Inv. Partnership v. Bennett (In re Bennett),
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970 F.2d 138, 148 (5th Cir. 1992); Stackhouse v. Hudson (In re
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Hudson), 859 F.2d 1418, 1425 (9th Cir. 1988). Section 523(a)(2)-
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(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
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Pawloskis," as evidenced by the Pawloskis' fraud judgment against
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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
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1The claimant in a nondischargeability proceeding under
523(a)(2)(A) must prove fraud by a preponderance of the evi-
dence. See Grogan v. Garner, 498 U.S. 279, 287-90 (1991).
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that Balfour's indemnification claim is "based upon [Menna's]
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malicious conduct toward the Pawloskis," as evidenced by the
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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,
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or intended to defraud, Balfour.2
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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
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the debtor's fraudulent intent or malicious conduct. Therefore,
it argues, since Menna exposed both Balfour (Menna's equitable
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indemnitee) and the Pawloskis to the $128,500 loss, Balfour's
claim for equitable indemnification is one "for money . . .
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obtained by [the debtor's] actual fraud," or "for willful and
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malicious injury by the debtor to another entity." Were it
otherwise, Balfour says, dishonest debtors like Menna who embroil
less culpable third parties like Balfour in their fraudulent
schemes could easily subvert the Code's central strategy of
restricting the "fresh start" discharge to "honest but unfor-
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tunate" debtors. Local Loan Co. v. Hunt, 292 U.S. 234, 244
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(1934) (emphasis added); see also Brown v. Felsen, 442 U.S. 127,
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2We are not persuaded by Balfour's contention that it should
have been given an opportunity to prove that Menna's fraudulent
intent or malicious conduct was directed toward Balfour. The
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district court correctly noted that the complaint made no such
allegation, nor did Balfour assert such an argument before the
bankruptcy court. See Mark Bell Furniture Warehouse, Inc. v.
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D.M. Reid Assocs., Ltd. (In re Mark Bell Furniture Warehouse,
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Inc.), 992 F.2d 7, 9 (1st Cir. 1993) (arguments not raised in
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bankruptcy court cannot be raised for first time on appeal).
5
128 (1979) (same); H.R. Rep. No. 595, 95th Cong., 1st Sess. 125,
reprinted in 1978 U.S.C.C.A.N. 5963, 6086 (same).
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We conduct plenary review of the bankruptcy court's
construction of the legislative language "debt for" em-
ployed in Bankruptcy Code 523(a). The Travelers Ins. Co. v.
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Cambridge Meridian Group, Inc. (In re Erin Food Servs., Inc.),
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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" nor does the statutory lan-
guage 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 negli-
gence has combined with the fraud of its joint tortfeasor to
cause injury to a third party is nondischargeable in the bank-
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3The parties devote considerable attention to whether both
the Balfour and the Pawloski "claims" derive from the same
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"debt," or from two distinct "debts." However, neither the
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Bankruptcy Code's austere definitions, see Bankruptcy Code
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101(11), 11 U.S.C. 101(11) ("debt" is "liability on a
claim"), 101(4)(A), 11 U.S.C. 101(4)(A) ("claim" is "a right
to payment, whether or not such right is reduced to judgment"),
nor the broad pronouncements on the common law principles of
equitable indemnification, see Northeast Bank of Lewiston &
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Auburn v. Murphy, 512 A.2d 344 (Me. 1986), afford helpful insight
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into the substantive concerns presently at issue. We will not
reverse a bankruptcy court's grant of discharge relief except for
reasons both "real and substantial." See In re Burgess, 955 F.2d
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at 137.
6
ruptcy of the fraudulent tortfeasor.4 Given the strict con-
struction afforded all dischargeability exceptions under section
523(a), see In re Burgess, 955 F.2d at 137, we have been provided
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with neither authority nor reason to extend the statutory lan-
guage as urged by Balfour.
Second, Balfour wrongly presumes that exceptions to
discharge serve only to penalize the debtor. Rather, as a
function of its essentially equitable nature, a nondischarge-
ability determination under section 523(a) is designed concomi-
tantly to protect the inculpable creditor, cf. H.R. Rep. No. 595,
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supra, at 130, reprinted in 1978 U.S.C.C.A.N. at 6091 ("The
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premise of [ 523(a) (2)(B)] is that a creditor that extended
credit based on misinformation or fraudulent information trans-
mitted by the debtor should be protected.") (emphasis added).
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Thus, the legislative purposes served by sections 523(a)(2) and
523(a)(6) are at once retributive and protective.
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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
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4Balfour asserts neither subrogation rights nor assignment
of the Pawloskis' nondischargeable claim. See, e.g., Bankruptcy
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Code 509(a), 11 U.S.C. 509(a); McCain Foods, Inc. v. Gerard,
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489 A.2d 503, 504 (Me. 1985) (state law doctrine of equitable
subrogation). Compare, e.g., In re Fields, 926 F.2d 501, 504
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(5th Cir.) (creditor who pays debtor's taxes is subrogated to
IRS's nondischargeable claim under 523(a)(1)), cert. denied,
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112 S. Ct. 371 (1991), with National Collection Agency, Inc. v.
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Trahan, 624 F.2d 906, 907 (9th Cir. 1980) (reaching opposite
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result under Bankruptcy Act).
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7
detriment. In re Burgess, 955 F.2d at 140; see also Longo v.
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McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir. 1993) (reli-
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ance must be the "proximate cause" of claimant's loss). If
section 523(a)(2) had been intended simply to deter all bad faith
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conduct by the debtor irrespective of its effect upon the partic-
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ular creditor, as Balfour's argument impliedly assumes, there
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would have been no need to condition the creditor's right to a
nondischargeability ruling on a showing of reasonable reliance.5
Even assuming arguendo that an equitable indemnitee's vicarious
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injury might satisfy the first constituent element of the "fraud"
test under section 523(a)(2), thereby generally establishing bad
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faith or misconduct on the part of the debtor, Balfour nonethe-
less must make the "reasonable reliance" showing required under
section 523(a)(2) that it reasonably and detrimentally
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relied on Menna's misrepresentations.6
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5The legislative history of the Bankruptcy Reform Act of
1978 confirms that 523(a)(2)(A) deliberately abandoned a purely
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retributive purpose. Bankruptcy Act 17a.(2), as amended, 11
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U.S.C. 35(a)(2) (1964), the predecessor to 523(a)(2), con-
tained no explicit requirement that the creditor's reliance be
"reasonable." See BancBoston Mortgage Corp. v. Ledford (In re
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Ledford), 970 F.2d 1556, 1559 (6th Cir. 1992), cert. denied, 113
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S. Ct. 1272 (1993). Moreover, under former Bankruptcy Act
14c.(3), as amended, 11 U.S.C. 32(c)(3), obtaining money or
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credit on a materially false financial statement constituted a
ground for denial of the debtor's general discharge, not merely
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for establishing the nondischargeability of the particular debt
or debts incurred as a consequence of the fraudulent conduct.
See Philip Shuchman, The Fraud Exception in Consumer Bankruptcy,
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23 Stan. L. Rev. 735, 739 (1971).
6Just as 523(a)(2) requires that the debtor's fraud be
assessed in light of its effect upon the creditor, section
523(a)(6), which simultaneously uses the phrase "debt for" in
reference to an analogous form of debtor "misconduct" (i.e.,
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malice), must require that an indemnitee make some minimal
8
C. Summary Judgment
C. Summary Judgment
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Reasonable reliance is an issue of fact, see Coston v.
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Bank of Malvern (In re Coston), 991 F.2d 257, 260-61 (5th Cir.
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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
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F.2d 1556, 1560 (6th Cir. 1992) (summarizing various indicia of
"reasonable" reliance under 523(a)(2)), cert. denied, 113 S.
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Ct. 1272 (1993).
Moreover, Balfour may well have been collaterally
estopped from litigating the "reasonableness" of any reliance on
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evidentiary showing that its injury was not proximately caused by
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its own intervening conduct. See In re La Flamme, 14 B.R. 21, 25
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(Bankr. 1st Cir. 1981) (the meaning of a particular Code section
must be discerned from an examination of the overall structure
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and policy of the statutory provision).
Since Balfour produced no evidence which would permit an
assessment of the contribution its own intervening conduct made
to its injury, see infra Section II.C, we need not define with
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precision the level of creditor "inculpability" required under
section 523(a)(6), nor distinguish that standard from the "rea-
sonable reliance" showing required under section 523(a)(2).
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Menna's misrepresentations. See 1B James W. Moore, Jo D. Lucas,
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Thomas S. Currier, Moore's Federal Practice 0.419 [3.-4], at
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649-50 (2d ed. 1992); Grogan v. Garner, 498 U.S. 279, 287 (1991)
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(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
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information to the Pawloskis as "guidance" in their business
transaction, (2) the Pawloskis justifiably relied on the informa-
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tion; and (3) Balfour failed to exercise reasonable care or
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competence in obtaining or communicating the information."
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Jordan-Milton Mach., Inc. v. F/V Teresa Marie, II, 978 F.2d 32,
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36 (1st Cir. 1992) (citing Chapman v. Rideout, 568 A.2d 829 (Me.
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1990) (adopting Restatement (Second) of Torts 552(1))).
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 con-
cerns 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 "reasonable reliance,"7 and
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7Balfour's judgment for indemnification against Menna did
not necessarily depend on whether Balfour's reliance was "reason-
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able" but on whether Balfour was less culpable than Menna. See
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Northeast Bank, 512 A.2d at 350-51.
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10
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
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estoppel barred Balfour's present contention as a matter of law.
See Ralar, 4 F.3d at 67.
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Affirmed.
Affirmed.
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11