sauer incorporated v. lawson, 1st cir. (2015)

7/26/2019 Sauer Incorporated v. Lawson, 1st Cir. (2015)

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United States Court of AppealsFor the First Circuit

No. 14- 2058

I N RE: CARRI E D. LAWSON,

Debt or

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

SAUER I NCORPORATED, d/ b/ a Sauer Sout heast ,

Appel l ant ,

v.

CARRI E D. LAWSON,

Appel l ee.

APPEAL FROM THE UNI TED STATES BANKRUPTCY COURTFOR THE DI STRI CT OF RHODE I SLAND

[ Hon. Di ane Fi nkl e, U. S. Bankrupt cy J udge]

Bef ore

Lynch, Thompson, and Kayat t a,Ci r cui t J udges.

Mi chael J . J acobs and LaPl ant e Sowa Gol dman, on br i ef f orappel l ant .

Chr i st opher M. Lef ebvr e, wi t h whom Cl aude Lef ebvr e,Chr i st oper Lef ebvr e, P. C. , J ohn Boyaj i an, and Boyaj i an,Har r i ngt on, Ri char dson & Fur ness wer e on br i ef , f or appel l ee.


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J ul y 1, 2015


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LYNCH, Circuit Judge. Sauer I ncor por at ed ( "Sauer " )

f i l ed an adver sary pr oceedi ng obj ect i ng t o t he di schar ge of a debt

owed by Carr i e Lawson ( "Ms. Lawson") t hat she al l egedl y obt ai ned

as par t of a f r audul ent scheme to pr event Sauer f r om col l ect i ng a

pr evi ous j udgment f r om her f at her , J ames Lawson. See 11 U. S. C.

523( a) ( 2) ( A) , 523( a) ( 6) . The bankrupt cy cour t di smi ssed f or

f ai l ur e t o st at e a cl ai m on t he gr ound t hat a debt f or val ue

"obt ai ned by . . . act ual f r aud" under 523( a) ( 2) ( A) i s l i mi t ed

t o debt s f or val ue obt ai ned t hr ough f r audul ent mi sr epr esent at i ons.

The cour t f el t Fi r st Ci r cui t precedent i n t he l i ne of Pal macci v.

Umpi er r ez, 121 F. 3d 781, 786 ( 1st Ci r . 1997) , r equi r ed such a

concl usi on. See Sauer , I nc. v. Lawson ( I n r e Lawson) , 505 B. R.

117, 125- 26 ( Bankr. D. R. I . 2014) ( ci t i ng McCr or y v. Spi gel ( I n r e

Spi gel ) , 260 F. 3d 27, 32 ( 1st Ci r . 2001) ; Pal macci , 121 F. 3d 781) ;

see al so i d. ( ci t i ng Fi el d v. Mans, 516 U. S. 59 ( 1995) ) .

On di r ect appeal , we ar e asked to resol ve t hi s nar r ow

but si gni f i cant i ssue of whet her a debt t hat i s not di schar geabl e

i n Chapt er 13 bankr upt cy as a debt f or money or pr oper t y "obtai ned

by . . . act ual f r aud" ext ends beyond debt s i ncur r ed t hr ough

f r audul ent mi sr epr esent at i ons t o al so i ncl ude debt s i ncur r ed as a

r esul t of knowi ngl y accept i ng a f r audul ent conveyance t hat t he

t r ansf er ee knew was i nt ended t o hi nder t he t r ansf er or ' s cr edi t or s.


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See 11 U. S. C. 523( a) ( 2) ( A) . We j oi n t he Sevent h Ci r cui t i n

concl udi ng t hat i t does. See McCl el l an v. Cant r el l , 217 F. 3d 890

( 7t h Ci r . 2000) . 1

Havi ng adopt ed t hi s new st andar d, we vacat e and r emand

f or f ur t her proceedi ngs consi st ent wi t h t hi s opi ni on. We decl i ne

t o r each t he i ssue of t he adequacy of Sauer ' s pl eadi ngs of act ual

f r aud under Rul e 9( b) , and t he possi bi l i t y of amendment i f

i nadequat e. Because we have adopt ed a new st andar d, t he bankrupt cy

cour t shoul d addr ess t hese i ssues i n t he f i r st i nst ance. Cf .

N. Am. Cat hol i c Educ. Progr ammi ng Found. , I nc. v. Car di nal e, 567

F. 3d 8, 16- 18 ( 1st Ci r . 2009) ( Boudi n, J . ) .

I .

We r ecount t he f act s as al l eged i n Sauer ' s Fi r st Amended

Compl ai nt , accept i ng t hem as t r ue and dr awi ng "al l r easonabl e

i nf er ences" i n Sauer ' s f avor . See Rui vo v. Wel l s Far go Bank, N. A. ,

766 F. 3d 87, 90 ( 1st Ci r . 2014) . I n br i ef , Sauer al l eges t hat Ms.

Lawson i ncur r ed t he debt at i ssue by knowi ngl y recei vi ng a

f r audul ent conveyance f r om her f at her , J ames, t hat was desi gned t o

1 We ar e awar e t he Fi f t h Ci r cui t , i n a post - ar gument deci si on,has di sagr eed wi t h McCl el l an and our anal ysi s her e. See HuskyI nt ' l El ec. , I nc. v. Ri t z ( I n r e Ri t z) , - - F. 3d - - , 2015 WL 3372812( 5t h Ci r . May 22, 2015) .


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pr event Sauer f r om col l ect i ng a j udgment agai nst hi m. The det ai l s

ar e as f ol l ows.

I n J anuary 2007, Sauer sued J ames i n Provi dence Super i or

Cour t based on t hei r pr evi ous busi ness deal i ngs. Thr ee year s

l at er , on Febr uary 5, 2010, t he Super i or Cour t f ound t hose

t r ansact i ons t o be f r audul ent , and awarded Sauer a j udgment agai nst

J ames i n t he amount of $168, 351. 59, i ncl udi ng puni t i ve damages.

J ust bef or e t he j udgment was enter ed, Ms. Lawson had

f ormed a shel l ent i t y, Commer ci al Const r uct i on M&C, LLC

( "Commer ci al Const r uct i on" ) . 2 Upon ent r y of j udgment , J ames

t r ansf er r ed $100, 150 t o Commer ci al Const r uct i on, al l egedl y t o

i mpede Sauer ' s col l ect i on. Commer ci al Const r uct i on i s owned by

Ms. Lawson, but cont r ol l ed by J ames. 3

Ms. Lawson t hen t r ansf err ed $80, 000 of t he $100, 150 f r om

Commer ci al Const r uct i on t o her sel f somet i me over t he cour se of t he

f ol l owi ng year , f r om Febr uar y 2010 t hr ough ear l y 2011. I n Mar ch

2011, J ames f i l ed f or Chapt er 13 bankrupt cy.

2 Al t hough t he compl ai nt does not al l ege when Ms. Lawson

f or med Commer ci al Const r uct i on, Ms. Lawson' s af f i davi t , whi ch sheappended t o her mot i on t o di smi ss Sauer ' s Fi r st Amended Compl ai nt ,i ndi cat es t hat she f or med t he ent i t y i n J anuar y 2010.

3 The present ownershi p of Commerci al Const r uct i on i s a mat t erof some di sput e, but i t does not af f ect our anal ysi s.


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Pur suant t o t he Rhode I sl and Uni f or mFraudul ent Tr ansf er

Act , R. I . Gen. Laws 6- 16- 1 et seq. ( "UFTA") , Sauer t r aced

por t i ons of i t s or i gi nal j udgment agai nst J ames f i r st t o Commer ci al

Const r uct i on, and t hen t o Ms. Lawson. The Provi dence Super i or

Cour t f ound t hese t r ansf er s t o be f r audul ent under t he UFTA, and

i ssued execut i ons agai nst both Commer ci al Const r uct i on and Ms.

Lawson f or t he f ul l amount s t r ansf er r ed ( $100, 150 and $80, 000,

r espect i vel y) . The l at t er j udgment ent er ed agai nst Ms. Lawson i s

t he debt at i ssue.

Ms. Lawson f i l ed f or Chapter 13 bankrupt cy t he same mont h

t hat t he Pr ovi dence Super i or Cour t i ssued t he execut i on agai nst

her , i n March 2013. Sauer i ni t i at ed t hi s adver sar y pr oceedi ng i n

J une 2013, obj ect i ng t o t he di schar ge of t hi s debt under

523( a) ( 2) ( A) as bei ng f or money "obt ai ned by . . . act ual f r aud. "4

I n par t i cul ar , Sauer al l eged t hat because Ms. Lawson "knowi ngl y

r ecei v[ ed] " t he f r audul ent t r ansf er and act ed i n a "wi l l f ul and

mal i ci ous" manner t oward Sauer , her accept ance of t he f r audul ent

conveyance const i t ut es act ual , not mer el y const r uct i ve, f r aud. 5

4 Sauer al so obj ect ed t o di schar ge under 523( a) ( 6) , but t hebankrupt cy cour t cor r ect l y hel d t hat t hi s pr ovi si on does not barChapt er 13 di schar ge. Sauer , 505 B. R. at 119 n. 4; see 11 U. S. C. 1328( a) ( 2) .

5 We do not addr ess t he adequacy of t hi s pl eadi ng under t hehei ght ened pl eadi ng st andard of Rul e 9( b) , but assume i t s adequacy


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The bankr uptcy cour t di smi ssed Sauer ' s adver sar y

pr oceedi ng. The cour t r easoned t hat i t was const r ai ned by Fi r st

Ci r cui t and Supr eme Cour t pr ecedent t o f i nd t hat a

mi sr epr esent at i on i s a r equi r ed el ement of "act ual f r aud" under

523( a) ( 2) ( A) . See Sauer , 505 B. R. at 118, 125- 26 ( ci t i ng Fi el d,

516 U. S. 59; Spi gel , 260 F. 3d at 32) . Because Sauer concededl y

coul d not al l ege t hat Ms. Lawson had made a mi sr epr esent at i on,

Sauer coul d not est abl i sh t hat 523( a) ( 2) ( A) bar r ed di schar ge of

Ms. Lawson' s debt . See i d. at 126.

Sauer appeal ed to t he Bankr upt cy Appel l ate Panel and,

shor t l y t her eaf t er , pet i t i oned f or di r ect appeal t o t he Fi r st

Ci r cui t . See 28 U. S. C. 158( d) ( 2) . The Panel gr ant ed

cer t i f i cat i on on t he gr ound t hat t he or der " i nvol ves a mat t er of

publ i c i mpor t ance, " 28 U. S. C. 158( d) ( 2) ( A) ( i ) , and agr eei ng, we

gr ant ed aut hor i zat i on.

I I .

The sol e i ssue on appeal i s whether t he bankr upt cy cour t

er r ed i n concl udi ng t hat "a mi sr epr esent at i on by a debt or t o a

credi t or i s an essent i al el ement of est abl i shi ng a basi s f or t he

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

f or pur poses of r esol vi ng t he appeal . Cf . N. Am. Cat hol i c Educ. ,567 F. 3d at 16.


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118. Thi s i s a quest i on of l aw, whi ch we r evi ew de novo. See

N. Am. Cat hol i c Educ. , 567 F. 3d at 12; Uni t ed St at es v. Ni ppon

Paper I ndus. Co. , 109 F. 3d 1, 3 ( 1st Ci r . 1997) .

A. The Fraud Except i on of 523( a) ( 2) ( A)

The Bankr upt cy Code ai ms t o st r i ke a bal ance between

pr ovi di ng debt ors wi t h a f r esh st ar t by di schar gi ng debt s upon

pl an conf i r mat i on, and avoi di ng abuse of t he syst em. See Spi gel ,

260 F. 3d at 31- 32. To t hi s end, t he Code exempt s f r om di schar ge

cer t ai n t ypes of debt i n an at t empt t o "l i mi t [ ] t h[ e] oppor t uni t y

[ f or di schar ge] t o t he ' honest but unf or t unat e debt or . ' " I d. at 32

( second and t hi r d al t er at i on i n or i gi nal ) ( quot i ng Br own v. Fel sen,

442 U. S. 127, 128 ( 1979) ) . Such except i ons ar e "narr owl y const r ued

. . . and t he cl ai mant must show t hat i t s cl ai m comes squar el y

wi t hi n an [ enumer at ed] except i on. " I d. ( f i r st al t er at i on i n

or i gi nal ) ( quot i ng Cent ur y 21 Bal f our Real Est at e v. Menna ( I n r e

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

Thi s case concer ns an exempt i on t o Chapt er 13 di schar ge.

Al t hough "di schar ge under Chapt er 13 ' i s broader t han t he di schar ge

r ecei ved i n any ot her chapt er , ' " Chapt er 13 st i l l "r est r i ct s or

pr ohi bi t s ent i r el y t he di schar ge of cer t ai n t ypes of debt s. "

Uni t ed St udent Ai d Funds, I nc. v. Espi nosa, 559 U. S. 260, 268

( 2010) ( quot i ng 8 Col l i er on Bankrupt cy 1328. 01 ( r ev. 15t h ed.


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2008) ) . As r el evant her e, Chapt er 13 does not di schar ge any debt

"f or money . . . t o t he ext ent obt ai ned by . . . f al se pr et enses,

a f al se r epr esent at i on, or actual f r aud . . . . " 11 U. S. C.

523( a) ( 2) ( A) ( emphasi s added) ; i d. 1328( a) ( 2) ( maki ng

523( a) ( 2) ( A) expr essl y appl i cabl e t o Chapt er 13) .

Al t hough many cour t s have "assume[d] t hat f r aud [ under

t hi s pr ovi si on] equal s mi sr epr esent at i on, " McCl el l an, 217 F. 3d at

892- 93 ( col l ect i ng cases) , i t r emai ns an open quest i on i n t hi s

ci r cui t whet her "act ual f r aud" i ncl udes f r aud ef f ect ed by means

other t han f r audul ent mi sr epr esent at i on, such as t hr ough schemes

of f r audul ent conveyance, Spi gel , 260 F. 3d at 32- 33 n. 7 ( expr essl y

decl i ni ng t o r each t he i ssue) . 6

6 Thi s sur pr i si ng gap has an expl anat i on:

Unt i l 1970, t he cour t s t asked wi t h enf or ci ng a credi t or ' scl ai m al so determi ned whether t he j udgment t hereby rendered wasnondi schar geabl e under t he f r aud except i on. See Br own, 442 U. S.at 129- 30 ( ci t i ng Sect i on 17 of t he f or mer Bankr upt cy Act )( "Typi cal l y, t hat cour t was a st at e cour t . ") . Thi s pr ovedpr obl emat i c: credi t or s wer e f r equent l y successf ul i n obt ai ni ngnondi schar geabl e def aul t j udgment s i n st at e cour t s under t heexcept i on. I d. at 135- 36. To avoi d cr edi t or abuse, Congr essamended t he st at ut e t o requi r e cr edi t or s seeki ng t o bar di schar geunder t he f r aud except i on t o f i l e di r ect l y wi t h t he bankrupt cycour t . See i d. But i n t he cases si nce, we di d not r each t he i ssue

of whet her "act ual f r aud" i s l i mi t ed t o f r aud ef f ect ed bymi sr epr esent at i on because mi sr epr esent at i on was t he onl y t ype off r aud char ged. See McCl el l an, 217 F. 3d at 892- 93 ( col l ect i ngcases) ; see, e. g. , Fi el d, 516 U. S. at 70; Pal macci , 121 F. 3d 781;see al so, e. g. , Anast as v. Am. Sav. Bank ( I n r e Anast as) , 94 F. 3d1280, 1285 ( 9t h Ci r . 1996) ( f i ndi ng an " i mpl i ed r epr esent at i on of


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an i nt ent " t o repay a credi t card charge ( emphasi s added) ) ; Rember tv. AT&T Uni ver sal Car d Ser vs. , I nc. ( I n r e Rember t ) , 141 F. 3d 277,281 ( 6t h Ci r . 1998) ( same) ; AT&T Uni ver sal Card Ser vs. v. Mer cer( I n r e Mer cer ) , 246 F. 3d 391, 403 ( 5t h Ci r . 2001) ( en banc) ( not i ngt hat i mpl yi ng mi sr epr esent at i on under t he Pal macci t est i s"appr opr i at e f or det er mi ni ng car d- di schar geabi l i t y because . . .car d- use l ends i t sel f t o t hat anal ysi s") .

Even so, Ms. Lawson argues - - and t he bankr upt cy cour t f ound- - t hat our i nqui r y i s f or ecl osed by cont r ol l i ng Supr eme Cour t andFi r st Ci r cui t pr ecedent i n Fi el d v. Mans, 516 U. S. 59 ( 1995) , and

I n r e Spi gel , 260 F. 3d 27 ( 1st Ci r . 2001) . But t hese cases ar ei napposi t e.

Fi el d di d not addr ess whet her "act ual f r aud" i s l i mi t ed t of r aud based on f r audul ent mi sr epr esent at i on. Fi el d, 516 U. S. at61. Rat her , t he Cour t t here addressed t he r equi r ement s when t heact ual f r aud al l eged was f r audul ent mi sr epr esent at i on. See i d.( addr essi ng t he t ype of r el i ance r equi r ed) . At no poi nt does t heSupr eme Cour t st ate or even consi der t hat "actual f r aud" coul d bel i mi t ed t o f r audul ent mi sr epr esent at i on. To t he cont r ar y, t heCour t di r ect s us t o r el y upon t he Second Rest atement of Tor t swhi ch, as wi l l be di scussed, i dent i f i es mul t i pl e f or ms of "f r aud. "

See Fi el d, 516 U. S. at 70; Rest at ement ( Second) of Tor t s 871cmt s. , i ndex ( 1977) ; cf . I n r e Mer cer , 246 F. 3d at 403 ( r ecogni zi ngt hat t he Rest at ement "does not def i ne ' f r aud' " but di scussespar t i cul ar f or ms t her eof ) .

Spi gel , f ar f r om f or ecl osi ng our i nqui r y, expr essl y l ef t i topen. See Spi gel , 260 F. 3d at 32- 33 n. 7. That case di d notconcer n whet her a mi sr epr esent at i on was r equi r ed, but t her el at i onshi p bet ween t he " f r audul ent conduct " and t he debt . I d.at 32- 35 ( hol di ng t hat t he debt must be a "di r ect r esul t " off r audul ent conduct i nt ended t o swi ndl e t he r el evant cr edi t or ) .Not onl y di d we decl i ne to reach t he quest i on of t he scope of"act ual f r aud, " we expr essed doubt t hat t he Pal macci t est f or debtobt ai ned t hr ough f r audul ent mi sr epr esent at i ons was t he "excl usi vet est " f or nondi schar geabi l i t y under 523( a) ( 2) ( A) . I d. at 32- 33n. 7 ( ci t i ng McCl el l an, 217 F. 3d at 892- 95) ; cf . I n r e Mer cer , 246F. 3d at 403 & n. 3 ( not i ng di sagr eement ) .


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The Supreme Cour t has di r ect ed us t hat i n const r ui ng t he

meani ng of "act ual f r aud" under t hi s pr ovi si on, we ar e t o rel y on

t he common l aw "concept of ' act ual f r aud' as i t was under st ood i n

1978 when t hat l anguage was added t o 523( a) ( 2) ( A) . " Fi el d, 516

U. S. at 70. "Then, as now, t he most wi del y accept ed di st i l l at i on

of t he common l aw of t or t s was t he Rest at ement ( Second) of Tor t s

( 1976) , publ i shed shor t l y bef or e Congr ess passed t he Act . " I d.

Accordi ngl y, we l ook t o t he same Rest at ement as r el i ed upon i n

Fi el d.

That Rest at ement r ecogni zes several t ypes of " f r aud, "

i ncl udi ng bot h f r audul ent mi sr epr esent at i ons and " f r audul ent

i nt er f er ence wi t h [ pr oper t y r i ght s] , " a t or t t hat i s br oader t han

mi sr epr esent at i on i t sel f . See Rest at ement ( Second) of Tor t s,

i ndex, "Fraud" ( 1977) ; see al so i d. 871 ( "One who i nt ent i onal l y

depr i ves anot her of hi s l egal l y pr ot ect ed pr oper t y i nt er est or

causes i nj ur y t o t he i nt er est i s subj ect t o l i abi l i t y t o t he ot her

i f hi s conduct i s gener al l y cul pabl e and not j ust i f i abl e under t he

ci r cumst ances. " ) . The comment s t o t he r el evant Rest at ement

pr ovi si on, 871, make cl ear t hat t hi s i ncl udes f r audul ent

conveyance, l i ke t hat al l eged her e. I d. 871 cmt . a ( " [ T] he r ul e

appl i es when t i t l e t o l and has been obt ai ned by f r aud . . . and

has been t r ansf er r ed t o one ot her t han a bona f i de pur chaser , i n


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whi ch case, unt i l i t s sal e by the t r ansf er ee, t he or i gi nal owner ' s

sol e r edr ess agai nst t he t r ansf er ee i s by an act i on seeki ng i t s

r ecover y. " ) . That i s, t he common l aw concept of " f r aud" as

di st i l l ed by t he Rest at ement t o whi ch t he Cour t di r ect s us extends

beyond f r audul ent mi sr epr esent at i ons t o at l east i ncl ude

f r audul ent conveyances. See i d. ; see al so i d. 871 cmt . e.

Thi s compor t s wi t h ot her exampl es of t he common

under st andi ng of " f r aud. " See McCl el l an, 217 F. 3d at 893 ( "No

l ear ned i nqui r y i nt o t he hi st or y of f r aud i s necessar y t o est abl i sh

t hat [ f r aud] i s not l i mi t ed t o mi sr epr esent at i ons and mi sl eadi ng

omi ssi ons. ") . As t he l eadi ng t r eat i se on bankrupt cy expl ai ns,

"[ a] ct ual f r aud, by def i ni t i on, consi sts of any decei t , ar t i f i ce,

t r i ck, or desi gn i nvol vi ng di r ect and act i ve oper at i on of t he mi nd,

used t o ci r cumvent and cheat anot her . . . . " 4 Col l i er on

Bankr upt cy 523. 08[ 1] [ e] ( A. N. Resni ck & H. J . Sommer , eds. , 16t h

ed. 2015) . Thi s "gener i c t er m" has f r equent l y been used t o

"embr ace[ ] al l t he mul t i f ar i ous means whi ch human i ngenui t y can

devi se and whi ch ar e resor t ed to by one i ndi vi dual t o gai n an

advant age over another by f al se suggest i ons or by t he suppr essi on

of t r ut h. " McCl el l an, 217 F. 3d at 893 ( quot i ng St apl et on v. Hol t ,

250 P. 2d 451, 453- 54 ( Okl a. 1952) ) . And, as r el evant her e, "when

a debt or t r ansf er s proper t y t o a t hi r d par t y wi t hout adequat e


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consi der at i on" t o hi nder her cr edi t or s, t hi s "i s deemed f r aud on

[ her ] credi t or s. " I d. at 894 ( col l ect i ng cases); see al so, e. g. ,

R. I . UFTA, R. I . Gen. Laws 6- 16- 1 et seq. ( pr ovi di ng r emedi es f or

f r audul ent conveyances) ; Spazi ano v. Spazi ano, 410 A. 2d 113, 114-

15 ( R. I . 1980) ; J or den v. Bal l , 258 N. E. 2d 736, 737 ( Mass. 1970) . 7

We adopt t hi s common l aw under st andi ng and hol d that

"act ual f r aud" under 523( a) ( 2) ( A) i s not l i mi t ed t o f r aud

ef f ect ed by mi sr epr esent at i on. See Fi el d, 516 U. S. at 73- 74

( appl yi ng t he "est abl i shed pr act i ce of f i ndi ng Congr ess' s meani ng

i n t he gener al l y shar ed common l aw" t o 523( a) ( 2) ( A) ) . Rat her ,

we hol d t hat "act ual f r aud" i ncl udes f r audul ent conveyances t hat

ar e "i nt ended . . . t o hi nder [ t he r el evant ] credi t or s. "

McCl el l an, 217 F. 3d at 894. Consi st ent wi t h our precedent s, our

hol di ng i s l i mi t ed t o cases of act ual , as opposed t o mer el y

const r uct i ve, f r aud. See Spi gel , 260 F. 3d at 32 ( " [ W] e have sai d

7 Even t he ear l y Bankr upt cy Act s char act er i zed " f r audul entconveyances" as a f or m of " f r aud. " See, e. g. , Bankrupt cy Act of1867, ch. 176, 35, 14 St at . 517, 534 ( "[ I ] f such sal e,assi gnment , t r ansf er , or conveyance [made t o evade at t achment i nbankr upt cy] i s not made i n t he usual and ordi nary cour se ofbusi ness of t he debt or , t he f act shal l be pr i ma f aci e evi dence off r aud. " ( emphasi s added) ) ; Bankrupt cy Act of 1898, ch. 541, 29( b) , 30 St at . 544, 554 ( "A per son shal l be puni shed . . . uponconvi ct i on of t he of f ense of havi ng knowi ngl y and f r audul ent l y. . . r ecei ved any mat er i al amount of pr oper t y f r om a bankruptaf t er t he f i l i ng of t he pet i t i on, wi t h t he i nt ent t o def eat t hi sAct . . . . " ( emphasi s added) ) .


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t hat t he st at ut or y l anguage does not ' r emot el y suggest t hat

nondi schar geabi l i t y at t aches t o any cl ai m ot her t han one whi ch

ar i ses as a di r ect r esul t of t he debt or ' s [ f r audul ent conduct ] . ' "

( quot i ng Cent ur y 21, 16 F. 3d at 10) ) ; Pal macci , 121 F. 3d at 788

( emphasi zi ng t hat 523( a) ( 2) ( A) " r equi r es a showi ng of act ual or

posi t i ve f r aud, not mer el y f r aud i mpl i ed by l aw" ( quot i ng Anast as

v. Am. Sav. Bank ( I n re Anast as) , 94 F. 3d 1280, 1286 & n. 3 ( 9t h

Ci r . 1996) ) ) . That i s, t he debt or - t r ansf er ee must her sel f be

"gui l t y of i nt ent t o def r aud" and not mer el y be the passi ve

r eci pi ent of a f r audul ent conveyance. See McCl el l an, 217 F. 3d at

894 ( not i ng t hat f r aud i s " const r uct i ve i f t he onl y evi dence of i t

i s t he i nadequacy of t he consi der at i on" ) . Such i nt ent may be

i nf er r ed f r om her accept ance of a t r ansf er t hat she knew was made

wi t h t he pur pose of hi nder i ng t he t r ansf er or ' s cr edi t or ( s) , but i t

may not be i mpl i ed as a mat t er of l aw. See Neal v. Cl ark, 95 U. S.

704, 707- 09 ( 1877) ( di st i ngui shi ng "act ual f r aud" f r om

"const r uct i ve f r aud" whi ch "may exi st wi t hout t he i mput at i on of

bad f ai t h or i mmor al i t y") .

Our r eadi ng i s conf i r med by t he st r uct ur e of t he t ext

and t he l egi sl at i ve hi st or y. "' [ A] ct ual f r aud' [ was] added as a

gr ound f or except i on f r omdi schar ge" under 523( a) ( 2) ( A) i n 1978.

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


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( 1977) . That pr ovi si on now "expl i ci t l y l i st s bot h ' actual f r aud'

and ' f al se r epr esent at i ons' as gr ounds f or denyi ng a di schar ge. "

Spi gel , 260 F. 3d at 33 n. 7. We agr ee wi t h t he Sevent h Ci r cui t

t hat t hi s di st i nct i on must have meani ng, and t hat t he most obvi ous

meani ng i s t he one t hat compor t s wi t h common l aw under st andi ng:

"act ual f r aud i s br oader t han mi sr epr esent at i on. " McCl el l an, 217

F. 3d at 893.

I ndeed, t hi s i s conf i r med by the Legi sl at i ve St at ement s

concer ni ng t he change, whi ch r eveal t hat t he dr af t er s speci f i cal l y

cont empl ated not onl y a br oader r eadi ng of "act ual f r aud, " but

t hat debt i ncur r ed t hr ough ( act ual l y) f r audul ent conveyances woul d

be bar r ed f r om di schar ge under 523( a) ( 2) ( A) . The Legi sl at i ve

St at ement concer ni ng 523( a) ( 2) ( A) i s expr ess t hat t he addi t i on

"i s i nt ended t o codi f y cur r ent case l aw, [ l i ke] Neal v. Cl ar k, 95

U. S. 704 ( 18[ 7] 7) . " See 11 U. S. C. 523, Legi sl at i ve St at ement s

( expl ai ni ng t hat 523( a) ( 2) ( A) i s l i mi t ed t o "actual or posi t i ve

f r aud r at her t han f r aud i mpl i ed by l aw") . That case, Neal v.

Cl ark, pr esumed t hat t he Bankr upt cy Code exempt ed f r om di scharge

as a "debt cr eat ed by . . . f r aud" at l east some debt s i ncur r ed

t hr ough r ecei pt of a f r audul ent conveyance. See Neal , 95 U. S. at

706- 09 ( hol di ng t hat debt cr eat ed t hr ough r ecei pt of a f r audul ent

conveyance must be act ual f r aud, not mer el y const r uct i ve f r aud, t o


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bar f r omdi schar ge i n bankrupt cy) ; Bankrupt cy Act of 1867, ch. 176,

33, 14 St at . 517, 533; cf . i d. ch. 176, 35, 14 St at . at 534. 8

"The hi st or y of t he f r aud except i on r ei nf or ces our

r eadi ng of 523( a) ( 2) ( A) . " Cohen v. de l a Cr uz, 523 U. S. 213,

221 ( 1998) . The bankr upt cy pr act i ces at i ssue i n Neal and codi f i ed

by 523( a) ( 2) ( A) concer ned Sect i on 33 of t he Bankr upt cy Act of

1867, whi ch bar r ed debt s "cr eat ed by . . . f r aud. " Bankrupt cy Act

of 1867, ch. 176, 33, 14 St at . at 533. The Bankr upt cy Act of

1898 si mi l ar l y pr ohi bi t ed di schar ge of debt s t hat "ar e j udgment s

i n act i ons f or f r auds, or obt ai ni ng pr oper t y by f al se pr et enses or

f al se r epr esent at i ons, or f or wi l l f ul and mal i ci ous i nj ur i es t o

t he per son or pr oper t y of anot her " under Sect i on 17( a) ( 2) . 9

8 The Supr eme Cour t i n Neal was const r ui ng t he t er m "f r aud"as i t appear ed i n Sect i on 33 of t he Bankrupt cy Act of 1867, ch. 176, 33, 14 St at . at 533. That pr ovi si on pr ovi ded i n r el evant par t :

[ N] o debt cr eat ed by t he f r aud or embezzl ement of t hebankr upt , or by hi s def al cat i on as a publ i c of f i cer , orwhi l e act i ng i n any f i duci ar y char act er , shal l bedi schar ged under t hi s act . . . .

I d. These var i ous bars t o di schar ge have been expanded upon andnow appear as enumerat ed except i ons.

9 Sect i on 17( a) ( 4) of t he Bankrupt cy Act of 1898 al so

pr ohi bi t ed di schar ge of debt s " creat ed by [ debt or ' s] f r aud,embezzl ement , mi sappr opr i at i on, or def al cat i on whi l e act i ng as anof f i cer or i n any f i duci ar y capaci t y. " 30 St at . at 550- 51. Thi sappears t o be t he pr ecur sor t o 523( a) ( 4) of t he moder n Bankr upt cyCode, whi ch pr ohi bi t s di schar ge ( i ncl udi ng Chapt er 13 di schar ge)of debt s "f or f r aud or def al cat i on whi l e act i ng i n a f i duci ar y


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Bankrupt cy Act of 1898, ch. 541, 17( a) ( 2) , 30 St at . 544, 550;

Cohen, 523 U. S. at 221. Subsequent amendment s r et ai ned t he

"wi l l f ul and mal i ci ous i nj ur i es" l anguage unt i l 1970, when

"wi l l f ul and mal i ci ous conver si on of t he pr oper t y of anot her " was

subst i t ut ed. 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 St at .

990, 992. Thi s subst i t ut ed l anguage pr eserved t he br eadt h of t he

f r aud except i on ar t i cul at ed i n Sect i on 17( a) ( 2) , t he pr edecessor

of 523( a) ( 2) ( A) . 10 Cf . Bl ack' s Law Di ct i onar y 406 ( 10t h ed.

2014) ( def i ni ng "conver si on" as " an act or ser i es of act s of

wi l l f ul i nt er f er ence, wi t hout l awf ul j ust i f i cat i on, wi t h an i t em

of pr oper t y i n a manner i nconsi st ent wi t h anot her ' s r i ght , wher eby

t hat ot her per son i s depr i ved of t he use and possessi on of t he

pr oper t y") .

capaci t y, embezzl ement , or l arceny. " See 11 U. S. C. 523( a) ( 4) ,1328( a) ( 2) .

10 Thi s "wi l l f ul and mal i ci ous conver si on" i s di st i nct f r omt he except i on t o di schar ge now codi f i ed at 523( a) ( 6) f or "wi l l f uland mal i ci ous i nj ur y by t he debt or t o anot her ent i t y or t o t hepr oper t y of anot her ent i t y. " See 11 U. S. C. 35( a) ( 8) ( 1976)( bar r i ng di schar ge of debt s t hat "ar e l i abi l i t i es f or wi l l f ul andmal i ci ous i nj ur i es t o t he per son or pr oper t y of anot her ot her t hanconver si on as except ed under cl ause ( 2) of t hi s subdi vi si on"( emphasi s added) ) .


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We "wi l l not r ead t he Bankr upt cy Code t o er ode past

bankrupt cy pr act i ce absent a cl ear i ndi cat i on t hat Congr ess

i nt ended such a depar t ur e. " Cohen, 523 U. S. at 221 ( i nt er nal

quot at i on mar ks and ci t at i on omi t t ed) . The al t er at i on of t hi s

l anguage i n 1978 " i n no way si gnal s an i nt ent i on t o nar r ow t he

est abl i shed scope of t he f r aud except i on al ong t he l i nes suggest ed

by" Ms. Lawson, nor have t he par t i es i dent i f i ed anythi ng i n t he

l egi sl at i ve hi st or y t hat woul d suggest such a change. See i d. at

221- 22. Rat her , " [ ] 523( a) ( 2) ( A) cont i nues t he t r adi t i on" of

"af f or di ng r el i ef onl y t o an ' honest but unf or t unat e debt or ' " by

except i ng f r om di schar ge any debt obt ai ned by "' f al se pr et enses,

a f al se r epr esent at i on, or act ual f r aud. ' " See i d. at 217- 18

( quot i ng Gr ogan v. Garner , 498 U. S. 279, 287 ( 1991) ; 11 U. S. C.

523( a) ( 2) ( A) ) . We hol d t hat t he f r aud except i on t o di schar ge

codi f i ed at 523( a) ( 2) ( A) cont i nues t o bar f r om di schar ge debt s

i ncur r ed t hr ough knowi ng and i nt ent i onal r ecei pt of f r audul ent

conveyances as i t has si nce 1867. Cf . 43 R. E. Wi l l i ams, Am. J ur .

Pr oof of Fact s 13 ( 3d ed. 2015) ( " [ T] her e i s a gr eat deal of

cont i nui t y between t he f ormer Bankr upt cy Act and t he 1978

Bankr upt cy Code, and bet ween common- l aw f r aud and


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nondi schargeabi l i t y under Code 523( a) ( 2) . Even t he l anguage of

t he st at ut e i s cont i nuous. ") . 11

B. Decl i ni ng t o "Shoehorn" Fr audul ent Conveyance i nt o 523( a) ( 6)

Ms. Lawson next ar gues t hat because her bankrupt cy case

ar i ses under t he mor e f orgi vi ng pr ovi si ons of Chapt er 13, not

Chapt er 7, we shoul d avoi d const r ui ng 523( a) ( 2) ( A) t o "ext end"

beyond f r aud ef f ect ed by mi sr epr esent at i on.

Her ar gument , char i t abl y r ead, begi ns wi t h t he asser t i on

t hat Ms. Lawson' s al l eged conduct mor e r eadi l y f al l s wi t hi n t he

nondi schar geabi l i t y pr ovi si on of 11 U. S. C. 523( a) ( 6) . 12 Cf .

McCl el l an, 217 F. 3d at 896 ( Ri ppl e, J . , concur r i ng) . Because t hat

pr ovi si on bar s di schar ge of any debt "f or wi l l f ul and mal i ci ous

11 Thi s t r eat i se i s anot her exampl e of one t hat appear s t oassume, as many cases do, t hat 523( a) ( 2) ( A) r equi r es ami sr epr esent at i on. I t does not di r ect l y addr ess t he di st i nct i onbet ween " f al se pr et enses, [ and] f al se r epr esent at i on[ s] " and"act ual f r aud, " or di scuss t he McCl el l an st andar d except i npassi ng. See, e. g. , i d. 13; but see i d. ( col l ecti ng casesf ol l owi ng McCl el l an wi t hout expr essl y i dent i f yi ng t he i ssue) .

12 To t he ext ent Ms. Lawson argues t hat we shoul d r ead t hesame pr ovi si on di f f er ent l y dependi ng on t he t ype of bankrupt cypr oceedi ng, her ar gument i s a nonst art er . Chapt er 13 pr ovi des abroader di schar ge t han Chapter 7 because f ewer exempt i ons havebeen made appl i cabl e, not because t hose t hat are shoul d beconst r ued more nar r owl y. See 11 U. S. C. 1328( a) ( 2) ( maki ng 523( a) ( 2) expr essl y appl i cabl e as a r eason t o bar di schar ge ofcer t ai n debt s i n a Chapt er 13 pr oceedi ng whi l e r ender i ngi nappl i cabl e ot her r easons f or denyi ng di schar ge under 523( a) ) .


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i nj ur y by t he debt or t o anot her ent i t y, " 11 U. S. C. 523( a) ( 6) ,

Ms. Lawson ar gues t hat i t "pr ovi des a f ar mor e di r ect avenue f or

deal i ng wi t h a si t uat i on such as [ t hi s] " wher e t he debt or al l egedl y

accept ed a f r audul ent conveyance speci f i cal l y t o i mpede t he

i nj ur ed par t y' s at t empt t o col l ect f r om anot her . McCl el l an, 217

F. 3d at 896 ( Ri ppl e, J . , concur r i ng) . As J udge Ri ppl e obser ved,

523( a) ( 6) has been used t o pr event di schar ge of exact l y thi s

sor t . See i d. at 898 ( di scussi ng Mur r ay v. Bammer ( I n r e Bammer ) ,

131 F. 3d 788 ( 9t h Ci r . 1997) ( en banc) ) ; but see i d. at 899 n. 1

( concedi ng t hat t he Ni nt h Ci r cui t l at er l i mi t ed i t s hol di ng wher e

t he f r audul ent t r ansf er ee f i l ed f or bankrupt cy bef or e t he

pl ai nt i f f , who di d not have a secur i t y i nt er est , obt ai ned a

j udgment agai nst t he t r ansf er ee f or t he t r ansf er ) .

Agai nst t hi s backdr op, Ms. Lawson argues t hat t he

di st i nct i on bet ween Chapt er 13 and Chapt er 7 di schar ge pr ovi des a

r eason t o f ol l ow J udge Ri ppl e' s suggest ed const r uct i on, and t o

f i nd t he al l eged conduct t o be cover ed under 523( a) ( 6) , not

523( a) ( 2) . Thi s i s because Chapt er 13, whi ch pr ovi des f or a

br oader di schar ge t han Chapt er 7, does not bar t he di schar ge of

debt s speci f i ed i n 523( a) ( 6) , except i n l i mi t ed ci r cumst ances


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not r el evant her e. 13 See 11 U. S. C. 1328( a) ( 2) ; Uni t ed St udent

Ai d Funds, 559 U. S. at 268 ( " [ D] i schar ge under Chapt er 13 ' i s

br oader t han t he di schar ge r ecei ved i n any ot her chapt er . ' "

( quot i ng 8 Col l i er on Bankrupt cy 1328. 01 ( r ev. 15t h ed. 2008) ) ) .

Thi s ar gument i s f or ecl osed by t he st at ut or y hi st or y of

523( a) ( 6) , "t he hi st or i cal pedi gr ee of t he f r aud except i on [ i n

523( a) ( 2) ( A) ] , and t he gener al pol i cy under l yi ng t he except i ons

t o di scharge. " See Cohen, 523 U. S. at 223. We begi n wi t h t he

hi st or y of t he pr oposed al t er nat i ve, 523( a) ( 6) .

The di schar ge of debt s f or "wi l l f ul and mal i ci ous

i nj ur i es t o t he per son or pr oper t y of anot her " was or i gi nal l y

i ncl uded i n t he f r aud except i on of Sect i on 17( a) ( 2) . That changed

i n 1970, when t he pr ovi si on t hat i s now codi f i ed i n 523( a) ( 6)

was added t o t he st at ut e as Sect i on 17( a) ( 8) . See Act of Oct . 19,

1970, sec. 5- 6, 17( a) ( 2) , 17( a) ( 8) , 84 St at . at 992 ( f or mer l y

codi f i ed at 11 U. S. C. 35( a) ( 8) ( 1976) ) .

However , t hat amendment di d not compl et el y r emove al l

"wi l l f ul and mal i ci ous i nj ur i es" t o a credi t or ' s pr oper t y f r omt he

scope of t he f r aud except i on i n Sect i on 17( a) ( 2) . Rat her , Sect i on

17( a) ( 2) cont i nued t o bar di schar ge of l i abi l i t i es "f or wi l l f ul

13 See 11 U. S. C. 1328( b) , ( c) ( pr ovi di ng f or a har dshi pdi schar ge except f or "any debt " speci f i ed i n 523( a) ) .


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and mal i ci ous conver si on of t he pr oper t y of anot her , " l i ke wi l l f ul

and mal i ci ous r ecei pt of a f r audul ent conveyance. See Bl ack' s Law

Di ct i onar y 406 ( "[ C] onver si on . . . . i ncl ude[ s] such act s as

t aki ng possessi on, r ef usi ng t o gi ve up on demand, di sposi ng of t he

goods t o a t hi r d per son, or dest r oyi ng t hem. " ( quot i ng W. Gel dar t ,

I nt r oduct i on t o Engl i sh Law 143 ( D. C. M. Yar dl ey ed. , 9t h ed.

1984) ) ) ; cf . Neal , 95 U. S. 704. By cont r ast , t he new pr ovi si on

t hat pr eceded 523( a) ( 6) bar r ed di schar ge of debt s t hat "ar e

l i abi l i t i es f or wi l l f ul and mal i ci ous i nj ur i es to t he per son or

pr oper t y of another other t han conver si on as except ed under cl ause

( 2) of t hi s subdi vi si on. " See 11 U. S. C. 35( a) ( 8) ( 1976)

( emphasi s added) .

The not es t o t he r e- codi f i cat i on of t hese provi si ons

under t he Bankrupt cy Ref or m Act of 1978 do not cl ear l y i ndi cat e an

i nt ent i on t o al t er t hei r r el at i ve scope wi t h r espect t o the means

by whi ch f r aud may be per pet r ated. " [ A] ct ual f r aud" was added t o

523( a) ( 2) ( A) expr essl y f or t he pur pose, as di scussed, of

"codi f y[ i ng] cur r ent case l aw" concer ni ng f r aud. See 11 U. S. C.

523, Legi sl at i ve St at ement s ( ci t i ng Neal , 95 U. S. 704 ( hol di ng

t hat r ecei pt of a f r audul ent conveyance must "i nvol v[ e] . . .

i nt ent i onal wr ong" t o be nondi schar geabl e) ) . Al t hough t her e i s

some ambi gui t y about whi ch "wi l l f ul and mal i ci ous conver si on[ s] "


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are subsumed under 523( a) ( 6) r ather t han 523( a) ( 2) , 14 t her e i s

not "a cl ear i ndi cat i on t hat Congr ess i nt ended . . . a depar t ur e"

t hat woul d l i mi t t he means by whi ch f r aud mi ght be per pet r ated f or

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

Accor di ngl y, we decl i ne t o f i nd one. See i d. ( not i ng t hat absent

such an i ndi cat i on, we shoul d not " r ead t he Bankr upt cy Code to

er ode past bankrupt cy pr act i ce" ) .

The cont i nued i ncl usi on of ( act ual ) f r audul ent

conveyance wi t hi n 523( a) ( 2) i s consi st ent wi t h Congr ess' s

"concl u[ si on] t hat pr event i ng f r aud i s mor e i mpor t ant t han l et t i ng

def r auder s st ar t over wi t h a cl ean sl at e. " McCl el l an, 217 F. 3d at

893 ( quot i ng Mayer v. Spanel I nt ' l , Lt d. ( I n r e Mayer ) , 51 F. 3d

670, 674 ( 7t h Ci r . 1995) ) ; see al so Gr ogan, 498 U. S. at 286- 87.

Thi s i s because i t prevent s Chapt er 13, as wel l as Chapt er 7, f r om

becomi ng "an engi ne f or f r aud" by bar r i ng f r om bot h t ypes of

14 The Legi sl at i ve St at ement s t o 523( a) ( 6) st at e t hat " [ t ] hephr ase ' wi l l f ul and mal i ci ous i nj ur y' cover s a wi l l f ul andmal i ci ous conver si on. " But t he Legi sl at i ve St at ement s do notaddr ess t he di st i nct i on suggest ed i n t he pr evi ous ver si on of t hest at ut e bet ween t hose "wi l l f ul and mal i ci ous conver si on[ s] "except ed under t he f r aud except i on of Sect i on 17( a) ( 2) and t hoseexcept ed under Sect i on 17( a) ( 8) . Compare 11 U. S. C. 35( a) ( 8)( 1976) ( qual i f yi ng t he conver si ons excl uded f r om Sect i on 17( a) ( 8)as bei ng those conver si ons cover ed by t he f r aud except i on) , wi t h11 U. S. C. 523, Legi sl at i ve St at ement s ( not i ng t hat "' wi l l f ul andmal i ci ous i nj ur y' cover s a wi l l f ul and mal i ci ous conver si on") .


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di schar ge debt s obt ai ned by f r audul ent conveyance. See 11 U. S. C.

1328; cf . McCl el l an, 217 F. 3d at 893. Wer e we t o hol d other wi se,

and accept Ms. Lawson' s ar gument t hat such conduct i s cover ed by

523( a) ( 6) i nst ead of 523( a) ( 2) , t hen t he per pet r at or s of t he

" t wo- st ep rout i ne" al l eged coul d make "as bl at ant an abuse of t he

Bankr upt cy Code as we can i magi ne" si mpl y by havi ng t he second

debt or f i l e f or Chapt er 13, r at her t han Chapt er 7, bankrupt cy.

Cf . McCl el l an, 217 F. 3d at 893.

Chapt er 13, i t i s t r ue, pr ovi des a br oader "f r esh st ar t "

t han Chapt er 7 because t he debt or at t empt s t o make good on some of

her obl i gat i ons. But , as t he Supr eme Cour t has r epeatedl y observed

i n "addr essi ng di f f er ent i ssues sur r oundi ng t he scope of [ t hi s]

except i on, " we t hi nk i t "unl i kel y t hat Congr ess . . . woul d have

f avor ed t he i nt er est i n gi vi ng per pet r at or s of f r aud a f r esh st ar t

over t he i nt er est i n pr ot ect i ng vi ct i ms of f r aud" pr ovi ded such

per pet r at or s ar e especi al l y cl ever , avoi d al l mi sr epr esent at i ons,

and f i l e under Chapt er 13. See Cohen, 523 U. S. at 223 ( al t er at i on

i n or i gi nal ) ( quot i ng Gr ogan, 498 U. S. at 287) . Far f r om

suppor t i ng Ms. Lawson' s argument t hat we shoul d r ead f r audul ent

conveyances t o be pr oscr i bed by 523( a) ( 6) , and not

523( a) ( 2) ( A) , t he di st i nct i on bet ween Chapt er 13 and Chapt er 7

di schar ge conf i r ms our const r uct i on.


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C. Nar r owness

Fi nal l y, t her e may be some concer n t hat f i ndi ng t hat t he

Pal macci t est i s not t he excl usi ve t est f or "act ual f r aud" under

523( a) ( 2) ( A) unt et her s t he "act ual f r aud" r equi r ement f r om a

nar r ow, pr i nci pl ed appr oach t o i t s const r uct i on. Cf . Bl acksmi t h

I nvs. , LLC v. Woodf ord ( I n r e Woodf ord) , 403 B. R. 177, 188- 89

( Bankr . D. Mass. 2009) ; 43 R. E. Wi l l i ams Am. J ur . Pr oof of Fact s

21 ( 3d ed. 2015) ( di scussi ng t he di f f i cul t i es i n appl yi ng

523( a) ( 2) ( A) t o debt s cr eat ed by cr edi t car d f r aud) . The

Pal macci t est pr ovi des a nar r ow const r uct i on wi t h cl ear el ement s. 15

I f , as t he Sevent h Ci r cui t suggest s, "[ n] o def i ni t e and i nvar i abl e

r ul e can be l ai d down as a gener al pr oposi t i on def i ni ng f r aud, and

i t i ncl udes al l sur pr i se, t r i ck, cunni ng, di ssembl i ng, and any

unf ai r way by whi ch another i s cheated, " t hen how i s t he f r aud

except i on t o be nar r owl y const r ued? Cf . McCl el l an, 217 F. 3d at

893 ( quot i ng St apl et on, 250 P. 2d at 453- 54) .

15 The Pal macci t est appl i es t he " t r adi t i onal common l aw r ul e"f or f r audul ent mi sr epr esent at i on. See Pal macci , 121 F. 3d at 786.Under i t , a credi t or obj ect i ng t o a debt "obt ai ned by . . . act ualf r aud" ef f ect ed t hr ough a mi sr epr esent at i on must show t hat :

1) t he debt or made a knowi ngl y f al se repr esent at i on orone made i n r eckl ess di sr egar d of t he t r ut h, 2) t hedebt or i nt ended t o decei ve, 3) t he debt or i nt ended t oi nduce t he cr edi t or t o r el y upon t he f al se st at ement , 4)t he credi t or act ual l y r el i ed upon t he mi sr epr esent at i on,


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We need not and do not deci de t hat quest i on t oday. We

hol d onl y t hat t he "act ual f r aud" except i on t o di schar ge under

523( a) ( 2) ( A) i ncl udes knowi ng r ecei pt of a f r audul ent conveyance

wher e such r ecei pt const i t ut es act ual ( as opposed t o const r uct i ve)

f r aud. Cf . McCl el l an, 217 F. 3d at 894 ( emphasi zi ng t he r equi r ement

t hat t he t r ansf er ee have i nt ended t o t hwar t t he t r ansf er or ' s

cr edi t or ) ; Neal , 95 U. S. at 707 ( di st i ngui shi ng bet ween t hose cases

wher e recei pt of f r audul ent conveyance const i t ut es " act ual f r aud"

owi ng t o reci pi ent ' s i nt ent and t hose wher e r ecei pt i s mer el y

"const r uct i ve f r aud" as i mpl i ed by l aw) . But we make t wo

obser vat i ons.

Fi r st , we obser ve t hat , whi l e t her e ar e ot her ways t o

gi ve meani ng t o t he di st i nct i on bet ween "act ual f r aud" and " f al se

r epr esent at i ons" under 523( a) ( 2) ( A) , t hey ar e not t he most nar r ow

avai l abl e, nor ar e t hey consi st ent wi t h t he f r aud except i on' s

hi st or y. Cf . , e. g. , Fi el d, 516 U. S. at 70 n. 8 ( decl i ni ng t o deci de

i f a di f f er ent t ype of r el i ance i s r equi r ed under "f al se pr et ense"

or "f al se r epr esent at i on") ; Mayer v. Spanel I nt ' l , Ltd. ( I n r e

5) t he credi t or ' s r el i ance was j ust i f i abl e, and 6) t her el i ance upon t he f al se st at ement caused damage.

Spi gel , 260 F. 3d at 32 & n. 6 ( ci t i ng Pal macci , 121 F. 3d at 786;Fi el d, 516 U. S. at 70- 71) .


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Mayer ) , 51 F. 3d 670, 674 ( 7t h Ci r . 1995) ( East er br ook, J . )

( suggest i ng wi t hout deci di ng t hat "f al se pr et ense" or "f al se

r epr esent at i on" may car r y a di f f er ent sci ent er r equi r ement ) ;

Rest atement ( Second) of Tor t s 525 et seq. , 550 et seq. ( 1977)

( di scussi ng r el at ed t or t s of f r audul ent mi sr epr esent at i on,

nondi scl osur e, negl i gent mi sr epr esent at i on, and i nnocent

mi sr epr esent at i on) . Rat her , readi ng "f al se pr et enses, f al se

r epr esent at i ons, and act ual f r aud" t o be l i mi t ed, r oughl y, t o mean

" f r audul ent mi sr epr esent at i on and ot her act ual f r auds" woul d

pr ovi de the most consi st ent and nar r ow r eadi ng of 523( a) ( 2) ( A)

by bar r i ng f r om di schar ge onl y t hose debt s t hat "' ar i se[ ] as a

di r ect r esul t of t he debt or ' s [ f r audul ent conduct ] . ' " Spi gel , 260

F. 3d at 32 ( quot i ng Cent ur y 21, 16 F. 3d at 10) ; cf . Mayer , 51 F. 3d

at 674 ( l ament i ng t hat cour t s have consi st ent l y read a cul pabl e

i nt ent r equi r ement i nt o t he " f al se pr et enses" and " f al se

r epr esent at i on[ s] " l anguage of t he f r aud except i on) . We need not

deci de t oday whet her t o adopt such a r eadi ng. Our poi nt i s onl y

t hat our const r uct i on, f ar f r om br oadeni ng t he f r aud except i on,

per mi t s t he most nar r ow const r uct i on possi bl e.

Second, we obser ve t hat t he dangers t o nar r owness of

r eadi ng "act ual f r aud" somewhat expansi vel y - - and t he abuse by

cr edi t or s i t mi ght engender - - i s pr ot ect ed agai nst by t he


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pr ovi si on of f ees and cost s t o the debt or wher e "a cr edi t or

r equest s a det er mi nat i on of di schar geabi l i t y" under 523( a) ( 2)

t hat i s ul t i mat el y di schar ged and "t he cour t f i nds t hat t he

posi t i on of t he credi t or was not subst ant i al l y j ust i f i ed. " 11

U. S. C. 523( d) . I ndeed, t hi s i s t he onl y except i on t o di schar ge

under 523 f or whi ch such debt or pr ot ect i on i s af f or ded, and i t

i s af f or ded speci f i cal l y t o di scour age credi t or s f r om such abuse.

See S. Rep. No. 95- 989, at 80 ( not i ng t hat f ees ar e avai l abl e " i f

t he cour t f i nds t hat t he pr oceedi ng was f r i vol ous or not br ought

by i t s cr edi t or i n good f ai t h") .

I I I .

Fi nal l y, Ms. Lawson ar gues i n t he al t er nat i ve t hat

Sauer ' s compl ai nt f ai l s under our newl y adopt ed st andard because

Sauer has al l eged onl y const r uct i ve f r aud. See McCl el l an, 217

F. 3d at 894. But whi l e our hol di ng i s emphat i cal l y l i mi t ed t o

cases of act ual , as opposed t o mer el y const r uct i ve, f r aud, and t he

hei ght ened pl eadi ng requi r ement s f or f r aud remai n appl i cabl e, we

decl i ne t o r each t he i ssue. See Fed. R. Ci v. P. 9( b) ; Fed. R.

Bankr . P. 7009. Compare McCl el l an, 217 F. 3d at 894 ( not i ng t hat

f r aud i s "const r uct i ve i f t he onl y evi dence of i t i s t he i nadequacy

of t he consi der at i on") , wi t h Bel l At l . Cor p. v. Twombl y, 550 U. S.

544, 556 ( 2007) ( r equi r i ng under not i ce pl eadi ng st andar ds f act ual


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al l egat i ons " suggest i ve enough" t o make a cl ai m f or "conspi r acy

pl ausi bl e") . Cf . N. Am. Cat hol i c Educ. , 567 F. 3d at 16 ( r ef usi ng

" t o assume t hat no amendment coul d r escue cer t ai n of t he cl ai ms" ) .

The bankr upt cy cour t and t he par t i es proceeded on t he

appar ent under st andi ng t hat t he pr i nci pal obst acl e t o Sauer ' s sui t

was Sauer ' s i nabi l i t y t o pl ead mi sr epr esent at i on. 16 Accor di ngl y,

we l eave t he i ssues of t he adequacy of Sauer ' s pl eadi ng, and t he

possi bi l i t y of amendment , t o t he bankrupt cy cour t i n t he f i r st

i nst ance. See N. Am. Cat hol i c Educ. , 567 F. 3d at 16 ( "For

def i ci enci es under Rul e 9( b) , l eave t o amend i s of t en gi ven, at

l east f or pl ausi bl e cl ai ms. ") ; see al so New Eng. Dat a Ser vs. , I nc.

v. Becher , 829 F. 2d 286, 292 ( 1st Ci r . 1987) ( not i ng t hat t he

pol i cy behi nd Rul e 9( b) - - avoi di ng gr oundl ess cl ai ms, damage t o

a def endant ' s r eput at i on, and ensur i ng not i ce - - must be bal anced

agai nst " t he pol i cy i n f avor of al l owi ng amendment s and t r yi ng

cases on t hei r mer i t s, and agai nst di smi ssal s whi ch woul d deny

pl ai nt i f f s t hei r day i n cour t ") ; cf . 11 U. S. C. 523( d) ( awar di ng

cost s and at t or neys' f ees f or unsuccessf ul adver sary pr oceedi ngs

under 523( a) ( 2) ( A) t hat ar e f r i vol ous or br ought i n bad f ai t h) .

16 Ms. Lawson does not appear t o have pr essed t he adequacyargument bef ore t he bankr upt cy cour t , f ocusi ng her ener gi esi nst ead on t he f ai l ur e t o al l ege a mi sr epr esent at i on under t hePal macci st andar d.


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Accor di ngl y, we vacat e t he bankr upt cy cour t ' s gr ant of

Ms. Lawson' s mot i on t o di smi ss, and r emand f or f ur t her pr oceedi ngs

consi st ent wi t h t hi s opi ni on. No cost s ar e awar ded.

sauer incorporated v. lawson, 1st cir. (2015)

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