Justice Souter, delivered the opinion of the Court.
The Bankruptcy Code's provisions for discharge stop short of certain debts resulting from "false pretenses, a false representation, or actual fraud." 11 U. S. C. § 523(a)(2)(A). In this case we consider the level of a creditor's reliance on a fraudulent misrepresentation necessary to place a debt thus beyond release. While the Court of Appeals followed a rule requiring reasonable reliance on the statement, we hold the standard to be the less demanding one of justifiable reliance and accordingly vacate and remand.
In June 1987, petitioners William and Norinne Field sold real estate for $462,500 to a corporation controlled by respondent Philip W. Mans, who supplied $275,000 toward the purchase price and personally guaranteed a promissory note for $187,500 secured by a second mortgage on the property. The mortgage deed had a clause calling for the Fields' consent
On October 8, 1987, Mans's corporation triggered application of the clause by conveying the property to a newly formed partnership without the Fields' knowledge or consent. The next day, Mans wrote to the Fields asking them not for consent to the conveyance but for a waiver of their rights under the due-on-sale clause, saying that he sought to avoid any claim that the clause might apply to arrangements to add a new principal to his land development organization. The letter failed to mention that Mans had already caused the property to be conveyed. The Fields responded with an offer to waive if Mans paid them $10,500. Mans answered with a lower bid, to pay only $500, and again failed to disclose the conveyance. There were no further written communications.
The ensuing years brought a precipitous drop in real estate prices, and on December 10, 1990, Mans petitioned the United States Bankruptcy Court for the District of New Hampshire for relief under Chapter 11 of the Bankruptcy Code. On the following February 6, the Fields learned of the October 1987 conveyance, which their lawyer had discovered at the registry of deeds. In their subsequent complaint in the bankruptcy proceeding, they argued that some $150,000 had become due upon the 1987 conveyance for which Mans had become liable as guarantor, and that his obligation should be excepted from discharge under § 523(a)(2)(A) of the Bankruptcy Code, 11 U. S. C. § 523(a)(2)(A), as a debt resulting from fraud.
The Bankruptcy Court found that Mans's letters constituted false representations on which petitioners had relied
The District Court affirmed, likewise following Circuit precedent in holding that § 523(a)(2)(A) requires reasonable reliance to exempt a debt from discharge, and finding the Bankruptcy Court's judgment supported by adequate indication in the record that the Fields had relied without sufficient reason. The Court of Appeals for the First Circuit affirmed judgment for the Bankruptcy Court's reasons. Judgt. order reported at 36 F.3d 1089 (1994).
We granted certiorari,514 U.S. 1095 (1995), to resolve a conflict among the Circuits over the level of reliance that § 523(a)(2)(A) requires a creditor to demonstrate.
The provisions for discharge of a bankrupt's debts, 11 U. S. C. §§ 727, 1141, 1228, and 1328(b), are subject to exception under 11 U. S. C. § 523(a), which carries 16 subsections setting out categories of nondischargeable debts. Two of these are debts traceable to falsity or fraud or to a materially false financial statement, as set out in § 523(a)(2):
. . . . .
"(B) use of a statement in writing—
"(i) that is materially false;
These provisions were not innovations in their most recent codification, the Bankruptcy Reform Act of 1978 (Act), Pub. L. 95-598, 92 Stat. 2590, but had obvious antecedents in the Bankruptcy Act of 1898 (1898 Act), as amended, 30 Stat. 544. The precursor to § 523(a)(2)(A) was created when § 17(a)(2) of the 1898 Act was modified by an amendment in 1903, which provided that debts that were "liabilities for obtaining property by false pretenses or false representations" would not be affected by any discharge granted to a bankrupt, who
Section 523(a)(2)(B), however, is the product of more active evolution. The germ of its presently relevant language was also inserted into the 1898 Act by a 1903 amendment, which barred any discharge by a bankrupt who obtained property by use of a materially false statement in writing made for the purpose of obtaining the credit. Act of Feb. 5, 1903, ch. 487, 32 Stat. 797-798. The provision did not explicitly require an intent to deceive or set any level of reliance, but Congress modified its language in 1960 by adding the requirements that the debtor intend to deceive the creditor and that the creditor rely on the false statement, and by limiting its application to false financial statements. Act of July 12, 1960, Pub. L. 86-621, 74 Stat. 409.
The sum of all this history is two close statutory companions barring discharge. One applies expressly when the debt follows a transfer of value or extension of credit induced by falsity or fraud (not going to financial condition), the other when the debt follows a transfer or extension induced by a materially false and intentionally deceptive written statement of financial condition upon which the creditor reasonably relied.
The question here is what, if any, level of justification a creditor needs to show above mere reliance in fact in order to exempt the debt from discharge under § 523(a)(2)(A). The text that we have just reviewed does not say in so many words. While § 523(a)(2)(A) speaks of debt for value "obtained by . . . false pretenses, a false representation, or actual fraud," it does not define those terms or so much as mention the creditor's reliance as such, let alone the level of reliance required. No one, of course, doubts that some degree of reliance is required to satisfy the element of causation inherent in the phrase "obtained by," but the Government, as amicus curiae (like petitioners in a portion of their brief), submits that the minimum level will do. It argues that when § 523(a)(2)(A) is understood in its statutory context, it requires mere reliance in fact, not reliance that is reasonable under the circumstances. Both petitioners and the Government note that § 523(a)(2)(B) expressly requires reasonable reliance, while § 523(a)(2)(A) does not. They emphasize that the precursors to §§ 523(a)(2)(A) and (B) lacked any reasonableness requirement, and that Congress added an element of reasonable reliance to § 523(a)(2)(B) in 1978, but not to § 523(a)(2)(A). They contend that the addition to § 523(a)
The argument relies on the apparent negative pregnant, under the rule of construction that an express statutory requirement here, contrasted with statutory silence there, shows an intent to confine the requirement to the specified instance. See Gozlon-Peretz v. United States, 498 U.S. 395, 404 (1991) ("`[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion' ") (quoting Russello v. United States, 464 U.S. 16, 23 (1983)). Thus the failure of § 523(a)(2)(A) to require the reasonableness of reliance demanded by § 523(a)(2)(B) shows that (A) lacks such a requirement. Without more, the inference might be a helpful one. But there is more here, showing why the negative pregnant argument should not be elevated to the level of interpretive trump card.
First, assuming the argument to be sound, the most it would prove is that the reasonableness standard was not intended. But our job does not end with rejecting reasonableness as the standard. We have to discover the correct standard, and where there are multiple contenders remaining (as there are here), the inference from the negative pregnant does not finish the job.
There is, however, a more fundamental objection to depending on a negative pregnant argument here, for in the present circumstances there is reason to reject its soundness even as far as it goes. Quite simply, if it proves anything here, it proves too much. If the negative pregnant is the reason that § 523(a)(2)(A) has no reasonableness requirement, then the same reasoning will strip paragraph (A) of any requirement to establish a causal connection between the misrepresentation and the transfer of value or extension of credit, and it will eliminate scienter from the very notion
The attempt to draw an inference from the inclusion of reasonable reliance in § 523(a)(2)(B), moreover, ignores the significance of a historically persistent textual difference between
"It is . . . well established that `[w]here Congress uses terms that have accumulated settled meaning under . . . the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.' " Community for Creative NonViolence v. Reid, 490 U.S. 730, 739 (1989) (quoting NLRB v. Amax Coal Co., 453 U.S. 322, 329 (1981)); see also Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322 (1992). In this case, neither the structure of § 523(a)(2) nor any explicit statement in § 523(a)(2)(A) reveals, let alone dictates, the
Since the District Court treated Mans's conduct as amounting to fraud, we will look to the concept of "actual fraud" as it was understood in 1978 when that language was added to § 523(a)(2)(A).
A missing eye in a "sound" horse is one thing; long teeth in a "young" one, perhaps, another.
Similarly, the edition of Prosser's Law of Torts available in 1978 (as well as its current successor) states that justifiable reliance is the standard applicable to a victim's conduct in cases of alleged misrepresentation and that "[i]t is only where, under the circumstances, the facts should be apparent to one of his knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation of his own." W. Prosser, Law of
These authoritative syntheses surely spoke (and speak today) for the prevailing view of the American commonlaw courts. Of the 46 States that, as of November 6, 1978 (the day the Act became law), had articulated the required level of reliance in a common-law fraud action, 5 required reasonable reliance,
It should go without saying that our analysis does not relegate all reasoning from a negative pregnant to the rubbish heap, or render the reasonableness of reliance wholly irrelevant under § 523(a)(2)(A). As for the rule of construction, of course it is not illegitimate, but merely limited. The more apparently deliberate the contrast, the stronger the inference, as applied, for example, to contrasting statutory sections originally enacted simultaneously in relevant respects, see Gozlon-Peretz v. United States, 498 U. S., at 404 (noting that a single enactment created provisions with language that differed). Even then, of course, it may go no further than ruling out one of several possible readings as the wrong one. The rule is weakest when it suggests results strangely at odds with other textual pointers, like the common-law language
As for the reasonableness of reliance, our reading of the Act does not leave reasonableness irrelevant, for the greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact. Naifs may recover, at common law and in bankruptcy, but lots of creditors are not at all naive. The subjectiveness of justifiability cuts both ways, and reasonableness goes to the probability of actual reliance.
There remains a fair question that ought to be faced. It makes sense to protect a creditor even if he was not quite reasonable in relying on a fraudulent representation; fraudulence weakens the debtor's claim to consideration. And yet, why should the rule be different when fraud is carried to the point of a written financial statement? Does it not count against our reading of the statute that a debtor who makes a misrepresentation with the formality of a written financial statement may have less to bear than the debtor who commits his fraud by a statement, perhaps oral, about something other than his bank balance? One could answer that the question does have its force, but counter it by returning to the statutory history and asking why Congress failed to place a requirement of reasonable reliance in § 523(a)(2)(A) if it meant all debtors to be in the same boat. But there may be a better answer, tied to the peculiar potential of financial statements to be misused not just by debtors, but by creditors who know their bankruptcy law. The House Report on the Act suggests that Congress wanted to moderate the burden on individuals who submitted false financial statements, not because lies about financial condition are less blameworthy than others, but because the relative equities might be affected by practices of consumer finance companies, which sometimes have encouraged such falsity by their borrowers
In this case, the Bankruptcy Court applied a reasonable person test entailing a duty to investigate. The court stated that
Because the Bankruptcy Court's requirement of reasonableness clearly exceeds the demand of justifiable reliance that we hold to apply under § 523(a)(2)(A), we vacate the judgment and remand the case for proceedings consistent with this opinion.
It is so ordered.
I concur in the Court's opinion and write separately to highlight a causation issue still open for determination on remand: Was the debt in question, as the statute expressly requires, "obtained by" the alleged fraud? See 11 U. S. C. § 523(a)(2)(A); ante, at 63, n. 3. Mans ultimately urges that the promissory note to the Fields is, in any event, a dischargeable debt because it was not "obtained by" the allegedly fraudulent letters Mans's attorney wrote to the Fields' attorney months after the debt was incurred. The Fields maintain that they relied on the letters to their detriment, in effect according Mans an extension of credit instead of invoking the due-on-sale clause.
Mans prevailed on the reliance issue before the bankruptcy, district, and appellate courts on the basis of thengoverning Circuit precedent. See In re Burgess, 955 F.2d 134, 140 (CA1 1992) (creditor required to prove that its reliance was reasonable). With the Circuit law on reliance solidly in his favor, Mans understandably did not advance in the lower courts the argument that the debt was not "obtained by" fraud. When the "reliance must be reasonable" rule solid in the Circuit was challenged in this Court, however, Mans raised the causation point as an alternate justification for the judgment in his favor. See Brief for Respondent 32-33 (argument heading V. reads: "Since the credit here was not `obtained by' the alleged fraud, petitioners have failed to meet the [causation] requirement of 523(a)(2)(A)"); Tr. of Oral Arg. 43 ("[U]nder the clear language of the statute, there
At oral argument, the following exchange between the Court and the Fields' attorney occurred:
It bears consideration whether a debt that would have been dischargeable had the debtor simply transferred the property, in violation of the due-on-sale clause with never a word to the creditor, nonetheless should survive bankruptcy because the debtor wrote to the creditor of the prospect, albeit not the actuality, of the transfer. Because this Court is not positioned to provide a first view on questions of this order, I express no opinion on the appropriate resolution of the unsettled causation ("obtained by") issue.
Justice Breyer, with whom Justice Scalia joins, dissenting.
I agree with the Court's holding that "actual fraud" under 11 U. S. C. § 523(a)(2)(A) incorporates the common-law elements of intentional misrepresentation. I also agree that to recover under a common-law fraud theory, plaintiffs must do more than show that they actually relied upon the defendant's misrepresentation—they must show that the reliance was "justifiable" in the circumstances, but they need not go so far as to show that a "reasonably prudent" person would
First, the Bankruptcy Court, while using the wrong words, did the right thing. That court essentially found that in mid-1987, Mr. Field and his wife sold their inn for about $500,000 to Mr. Mans, a developer. To secure the $187,000 that Mans still owed them, the Fields kept a mortgage, which had a term that accelerated the debt should Mans transfer the property to anyone else without their permission. A few months later, Mans wrote to the Fields saying that he wanted to transfer the inn to a development partnership which Mans had formed with a new partner, Mr. De Felice. Mans observed that because the Fields had transferred the inn to a corporation, the stock of which was wholly owned by Mans, Mans could effectively accomplish the transfer to the new partnership by simply conveying the stock of the holding company to the partnership, thereby avoiding the "debt acceleration" clause. But, Mans said, he would prefer to transfer the inn outright, and therefore was seeking their permission to do so without accelerating the debt. The Fields did not give permission. Mans transferred the inn anyway. Nothing more was heard of the matter until 1991, when real estate values fell, Mans went bankrupt, and the Fields brought this lawsuit in an effort to prevent the $150,000 they were then owed from disappearing in the bankruptcy.
The Bankruptcy Judge found that Mans' mid-1987 letters implied that he had not yet transferred the inn to the partnership as of the time he wrote the letters. But this implication
To hold this is, in my view, to apply the commentators' "justifiable reliance" standard. The court focused upon the individual circumstances and capacity of the plaintiff, Mr. Field. See Prosser & Keeton § 108, at 751. The court found that Mr. Field should have looked into the matter, not because of any general "duty to investigate," but because, in the particular circumstances, he "discovered something which should serve as a warning that he [was] being deceived." Id. , § 108, at 752. That is, the court did not use the "objective" test as an improper search for "contributory negligence"—i. e., to deny recovery to one also at fault for failing to exercise "the care of a reasonably prudent person for his own protection." Id., § 108, at 750. Rather, the court viewed the failure to investigate, in light of the clear warnings of deception, as a means of testing whether there was "some objective corroboration to plaintiff's claim that
Second, the Bankruptcy Court's use of what turned out to be the wrong words ("reasonable" and "prudent man" rather than "justifiable") is not grounds for reversal, for no one brought the "correct" terminology to the lower courts' attention. The Fields did not argue in the Bankruptcy Court, or in their briefs to the District Court or the Court of Appeals, or in their petition for certiorari, that there was any difference between "reasonable reliance" and "justifiable reliance." To the contrary, the Fields took the view (which the Court now unanimously rejects) that actual reliance alone— whether or not it meets any objective standard—is sufficient for recovery. Indeed, it appears that the Fields did not even mention the word "justifiable" below, but, rather, used the term "reasonable" throughout to refer to any kind of objective standard. The first time the word "justifiable" appears in this case seems to be in the Fields' brief on the merits in this Court where they point to the Restatement's use of the term "justifiable," Restatement (Second) of Torts § 540 (1976), and argue that "[j]ustifiable reliance does not require that the recipient of misrepresentation investigate the underlying assertion." Brief for Petitioners 20 (emphasis in original). But see Prosser & Keeton § 108, at 752.
Third, the "correct" terminology would not have appeared obvious to a judge, certainly not to a judge who was not a special expert in the common law of misrepresentation. Prior case law was not neat in its use of the terminology. The commentaries do not refer to the old prudent person standard as a "reasonable reliance" standard, but, instead, distinguish between the "justifiable reliance" standard as it has been understood in cases now disapproved, and the "justifiable reliance" standard as it is applied in most modern cases. See id., § 108; 2 F. Harper, F. James, & O. Gray, Law of Torts § 7.12, pp. 455-464 (2d ed. 1986). Indeed, the majority's footnotes distinguish between cases in which a court (1)
Fourth, while I understand that sometimes this Court might appropriately announce a legal standard and remand the case to the lower courts for application of the chosen standard, I do not agree that it should do so here. The record below is brief (87 pages of transcript plus exhibits). The Bankruptcy Judge's findings are reasonably clear. And, further litigation is expensive. Mr. Mans is bankrupt, representing himself until this Court appointed a lawyer for him; the Fields are not wealthy and should not be encouraged to pursue what is, in my view, the impossible dream of eventually recovering the $150,000 (minus legal fees). And, the example this Court sets by not looking more closely into the details of the case is not a happy one—particularly if it suggests
For these reasons, I dissent.