
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                                                                      ____________________        No. 93-1767                                        IN RE                                   PHILIP G. MENNA                           CENTURY 21 BALFOUR REAL ESTATE,                                Plaintiff, Appellant,                                          v.                                   PHILIP G. MENNA,                                 Defendant, Appellee.                                                                                      ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                              FOR THE DISTRICT OF MAINE                     [Hon. D. Brock Hornby, U.S. District Judge]                                            ___________________                                                                                      ____________________                                        Before                              Torruella, Cyr and Stahl,                                   Circuit Judges.                                   ______________                                                                                      ____________________             Daniel  L. Cummings,  with whom  Norman, Hanson  & DeTroy  was on             ___________________              ________________________        brief for appellant.             John E. Geary for appellee.             _____________                                                                                      ____________________                                  February 10, 1994                                                                                      ____________________                    CYR,  Circuit Judge.    Plaintiff-appellant Century  21                    CYR,  Circuit Judge.                          _____________          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                                      __________                    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),                ___ ______________________________    _____  ____________          152  B.R.  5, 6  (Bankr. D.  Me.  1993), and  the  district court          summarily affirmed.                                          II                                          II                                      DISCUSSION                                      DISCUSSION                                      __________          A.   Standard of Review          A.   Standard of Review               __________________                    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.,          ________________      ________________   ________________________                                          3          Inc.), 4 F.3d 62, 67 (1st Cir. 1993); see also Milton v. Van Dorn          ____                                  ___ ____ ______    ________          Co., 961 F.2d 965, 969 (1st Cir. 1992).          ___          B.   Applicable Law          B.   Applicable Law               ______________                    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          ___                                        ____________________               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).                  ___ ______    ______                                          4          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                                    _______                    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  Balfour  in their  fraudulent          schemes  could  easily  subvert the  Code's  central  strategy of          restricting the  "fresh start"  discharge to  "honest but  unfor-                                                         ______          tunate" debtors.   Local  Loan Co.  v.  Hunt, 292  U.S. 234,  244                             _______________      ____          (1934) (emphasis added); see also  Brown v. Felsen, 442 U.S. 127,                                   ___ ____  _____    ______                                        ____________________               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                                            ________  ______ _______          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.                              ___  ____________________________________          D.M. Reid  Assocs., Ltd.  (In re  Mark Bell Furniture  Warehouse,          ________________________   ______________________________________          Inc.), 992  F.2d 7,  9 (1st Cir.  1993) (arguments not  raised in          ____          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).          _________ __                    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.                                                 _______________________          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"     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-                                        ____________________               3The parties  devote considerable attention  to whether both          the   Balfour  and the  Pawloski  "claims" derive  from the  same                                                                       ____          "debt,"  or  from two  distinct  "debts."   However,  neither the                                 ________          Bankruptcy  Code's  austere  definitions,  see  Bankruptcy   Code                                                     ___            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  &                                       ___  _______________________________          Auburn v. Murphy, 512 A.2d 344 (Me. 1986), afford helpful insight          ______    ______          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                                                ___ _____________          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                  ___ _____________          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,                                __________           ___          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 trans-          mitted 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.                                            ___ __________                    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                                     ______                                        ____________________               4Balfour asserts  neither subrogation rights  nor assignment          of  the Pawloskis' nondischargeable claim.  See, e.g., Bankruptcy                                                      ___  ____          Code   509(a),  11 U.S.C.   509(a); McCain Foods, Inc. v. Gerard,                                              __________________    ______          489 A.2d  503, 504  (Me. 1985) (state  law doctrine  of equitable          subrogation).   Compare, e.g.,  In re Fields,  926 F.2d  501, 504                          _______  ____   ____________          (5th Cir.)  (creditor who pays  debtor's taxes  is subrogated  to          IRS's  nondischargeable claim  under   523(a)(1)),  cert. denied,                                                              _____ ______          112 S. Ct.  371 (1991), with National Collection  Agency, Inc. v.                                  ____ _________________________________          Trahan,  624 F.2d  906, 907  (9th Cir.  1980) (reaching  opposite          ______          result under Bankruptcy Act).                       __________ ___                                          7          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) (reli-          _______  ______________          ance  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 partic-                                ____________ __ ___ ______ ____ ___ _______          ular  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          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 nonethe-          less must make  the "reasonable reliance" showing  required under          section     523(a)(2)     that  it  reasonably  and detrimentally                                          __          relied on Menna's misrepresentations.6                                        ____________________               5The legislative  history of  the Bankruptcy  Reform Act  of          1978 confirms that   523(a)(2)(A) deliberately abandoned a purely                                                                     ______          retributive  purpose.  Bankruptcy  Act   17a.(2), as  amended, 11                                                            __  _______          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                          ___ __________________________    _______   _____          Ledford), 970 F.2d 1556, 1559  (6th Cir. 1992), cert. denied, 113          _______                                         _____ ______          S. Ct.  1272  (1993).    Moreover, under  former  Bankruptcy  Act            14c.(3), as amended,  11 U.S.C.   32(c)(3), obtaining  money or                     __ _______          credit  on a materially  false financial statement  constituted a          ground for denial  of the debtor's general  discharge, not merely                                             _______          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,          ___                   __________________________________________          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.,                                                                      ____          malice),  must require  that  an  indemnitee  make  some  minimal                                          8                     C.   Summary Judgment          C.   Summary Judgment               ________________                    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, 113  S.                                                     _____  ______          Ct. 1272 (1993).                    Moreover,  Balfour  may  well  have  been  collaterally          estopped  from litigating the "reasonableness" of any reliance on                                        ____________________          evidentiary showing that its injury was not proximately caused by                                                  ___          its own intervening conduct.  See In re La Flamme, 14 B.R. 21, 25                  ___________ _______   ___ _______________          (Bankr. 1st Cir. 1981) (the  meaning of a particular Code section          must be  discerned from an  examination of the  overall structure                                                          _______          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                          ___ _____          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).                                          9          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 (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 Pawloskis justifiably relied on the informa-                                         ___________ ______          tion;  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) (citing Chapman  v. Rideout, 568 A.2d 829 (Me.                                     _______     _______          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                                        ____________________               7Balfour's  judgment for  indemnification against  Menna did          not necessarily depend on whether Balfour's reliance was "reason-              ___________          able" but on whether Balfour was  less culpable than Menna.   See                                            ____                        ___          Northeast Bank, 512 A.2d at 350-51.          ______________                                          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                                                   ___          estoppel barred Balfour's present contention as a  matter of law.          See Ralar, 4 F.3d at 67.          ___ _____                    Affirmed.                    Affirmed.                    ________                                          11
