When will a debt be non-dischargeable in bankruptcy under 11 U.S.C. § 523(a)(2)?

(a) A discharge under section 727, 1141, 1192 1 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-

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(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by-

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

(B) use of a statement in writing-

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; or

(C)

(i) for purposes of subparagraph (A)-

(I) consumer debts owed to a single creditor and aggregating more than $500 2 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

(II) cash advances aggregating more than $750 2 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable; and

(ii) for purposes of this subparagraph-

(I) the terms "consumer", "credit", and "open end credit plan" have the same meanings as in section 103 of the Truth in Lending Act; and

(II) the term "luxury goods or services" does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor;

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

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the substantive terms in §§ 523(a)(2)(A) and (B): the former refer to common-law torts, and the latter do not. The principal phrase in the predecessor of § 523(a)(2)(B) was "obtained property... upon a materially false statement in writing," Act of Feb. 5, 1903, ch. 487, 32 Stat. 797; in the current § 523(a)(2)(B) it is value "obtained by... use of a statement in writing." Neither phrase is apparently traceable to another context where it might have been construed to include elements that need not be set out separately. If other elements are to be added to "statement in writing," the statutory language must add them (and of course it would need to add them to keep this exception to dischargeability from swallowing most of the rule). The operative terms in § 523(a)(2)(A), on the other hand, "false pretenses, a false representation, or actual fraud," carry the acquired meaning of terms of art. They are common-law terms, and, as we will shortly see in the case of "actual fraud," which concerns us here, they imply elements that the common law has defined them to include. See Durland v. United States, 161 U.S. 306, 312, 40 L. Ed. 709, 16 S. Ct. 508 (1896); James-Dickinson Farm Mortgage Co. v. Harry, 273 U.S. 119, 121, 71 L. Ed. 569, 47 S. Ct. 308 (1927). Congress could have enumerated their elements, but Congress's contrary drafting choice did not deprive them of a significance richer than the bare statement of their terms.

This Court has historically construed the terms in § 523(a)(2)(A) to contain the "elements that the common law has defined them to include." Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). "Actual fraud" has two parts: actual and fraud. The word "actual" has a simple meaning in the context of common-law fraud: It denotes any fraud that "involv[es] moral turpitude or intentional wrong." Neal v. Clark, 95 U.S. 704, 709, 24 L.Ed. 586 (1878). "Actual" fraud stands in contrast to "implied" fraud or fraud "in law," which describe acts of deception that "may exist without the imputation of bad faith or immorality." Ibid. Thus, anything that counts as "fraud" and is done with wrongful intent is "actual fraud."

Although "fraud" connotes deception or trickery generally, the term is difficult to define more precisely. See 1 J. Story, Commentaries on Equity Jurisprudence § 189, p. 221 (6th ed. 1853) (Story) ("Fraud ... being so various in its nature, and so extensive in its application to human concerns, it would be difficult to enumerate all the instances in which Courts of

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Equity will grant relief under this head"). There is no need to adopt a definition for all times and all circumstances here because, from the beginning of English bankruptcy practice, courts and legislatures have used the term "fraud" to describe a debtor's transfer of assets that, like Ritz' scheme, impairs a creditor's ability to collect the debt.

Having failed in his effort to obtain a new trier of fact, appellant claims the bankruptcy court erred in finding that he defrauded American Express. Section 523(a)(2)(A) precludes discharge of any debt obtained by "false pretenses, a false representation, or actual fraud." In order to establish a debt's nondischargeability under this section, the creditor must show:

(1) the debtor made ... representations;

(2) that at the time he knew they were false;

(3) that he made them with the intention and purpose of deceiving the creditor;

(4) that the creditor relied on such representations; [and]

(5) that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made.

Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.1991). These requirements mirror the elements of common law fraud, see Citibank v. Eashai (In re Eashai), 87 F.3d 1082, 1087 (9th Cir.1996), and the creditor is required to prove each by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). Appellant contends that American Express failed to establish his intent to defraud, that he made no false representations to American Express, and that if any such representations were made, American Express did not justifiably rely on them.

a. Fraudulent Intent. "[A] court may infer the existence of the debtor's intent not to pay if the facts and circumstances of a particular case present a picture of deceptive conduct by the debtor." In re Eashai, 87 F.3d at 1087. In Citibank South Dakota v. Dougherty (In re Dougherty), 84 B.R. 653 (9th Cir. BAP 1988), our Bankruptcy Appellate Panel enumerated twelve factors relevant to determining a debtor's intent. ² These factors are nonexclusive; none is dispositive, nor must a debtor's conduct satisfy a minimum number in order to prove fraudulent intent. So long as, on balance, the evidence supports a finding of fraudulent intent, the creditor has satisfied this element. See Grogan, 498 U.S. at 291, 111 S.Ct. at 661. We adopted Dougherty 's twelve-factor test

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as the law of the circuit in In re Eashai, 87 F.3d at 1087-88.

Applying the test set out in Dougherty and Eashai, as did the bankruptcy court, there is ample evidence to support the finding that appellant intended to defraud American Express. Appellant made nearly 170 charges totaling more than $60,000 during a six-week trip with his family to France. These charges exceeded appellant's annual income and, even before the trip, appellant already owed more than $300,000 in unsecured credit card debt. Appellant did have one major asset when he made the charges--a one-half ownership interest in an eight-unit condominium project. He claims the purpose of his trip was to borrow money from his mother-in-law to support this real estate venture. This does not explain why appellant stayed in France for six weeks, took his wife and two children with him, took a side-trip to the French Riviera, purchased cosmetics, expensive meals and other luxury items, and ultimately charged almost as much on his credit cards as he claims he planned to borrow. Moreover, while appellant was away, the holder of the second mortgage on his condominium project initiated foreclosure proceedings. ³ This should have alerted appellant that he would not be able to repay his debt by selling his interest in the property. Given these facts, the bankruptcy court could reasonably infer that appellant tried to have a last hurrah at American Express's expense.

b. False Representations. Appellant also complains that he never made any fraudulent misrepresentations to American Express because American Express extended him an unlimited line of credit. We rejected the identical argument in Anastas v. American Savings Bank (In re Anastas), 94 F.3d 1280 (9th Cir.1996). Each time a "card holder uses his credit card, he makes a representation that he intends to repay the debt.... When the card holder uses the card without an intent to repay, he has made a fraudulent representation to the card issuer." Id. at 1285. Because the bankruptcy court found that appellant had no intention of repaying his debt, each time he used his cards he made a fraudulent representation to American Express.

c. Justifiable Reliance. "[T]he credit card issuer justifiably relies on a representation of intent to repay as long as the account is not in default and any initial investigations into a credit report do not raise red flags that would make reliance unjustifiable." Id. at 1286. At the time appellant began his spending spree, his account was not in default. In fact, he owed American Express only $227. Moreover, appellant himself testified that he had repaid American Express balances of up to $60,000 "numerous times" before. American Express therefore had no reason to question the good faith of appellant's promise to repay. Because American Express provided ample evidence of each element of common law fraud, the bankruptcy court was fully justified in declaring appellant's debt nondischargeable.

A. The Fraud Exception to Dischargeability

Section 523(a)(2)(A) of the Bankruptcy Code prohibits the discharge of any enforceable obligation for money, property, services, or credit, to the extent that the money, property, services, or credit were obtained by fraud, false pretenses, or false representations. 11 U.S.C. § 523(a)(2)(A); Cohen, 523 U.S. at 218, 118 S.Ct. 1212. The creditor bears the burden of proving the applicability of § 523(a)(2)(A) by a preponderance of the evidence. Slyman, 234 F.3d at 1085. We have consistently held that making out a claim of non-dischargeability under § 523(a)(2)(A) requires the creditor to demonstrate five elements:

(1) the debtor made ... representations;

(2) that at the time he knew they were false;

(3) that he made them with the intention and purpose of deceiving the creditor;

(4) that the creditor relied on such representations; and

(5) that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made.

Am. Express Travel Related Servs. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125 (9th Cir.1996) (quoting Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.1991)).

On June 8, 1990, Candland filed a bankruptcy petition under Chapter 11, and on July 26, 1990, INA filed a proof of claim for $317,430.93. On September 11, INA filed a complaint to deny Candland a discharge and to declare nondischargeable the debt owed to INA on the ground that Candland knowingly provided false information on his financial statement. After trial, the bankruptcy court refused discharge under 11 U.S.C. § 727(a)(4)(A) and held that the debt owed to INA was nondischargeable under 11 U.S.C. § 523(a)(2)(B). The bankruptcy court also awarded attorneys' fees to INA. Candland appealed to the BAP, which affirmed all of the bankruptcy court's rulings, except attorneys' fees. Before us, Candland appeals only the bankruptcy court's ruling that his INA debts were nondischargeable under 11 U.S.C. § 523(a)(2)(B).

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Candland challenges the bankruptcy court's determination that his debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B), which prevents the discharge in bankruptcy of debts obtained through false representation. The statute reads:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--

...

* * *

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--

...

* * *

(B) use of a statement in writing--

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive....

(Footnote omitted.) These elements must be proven by a preponderance of the evidence in order to render a debt nondischargeable. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). We have reworded these requirements as follows:

(1) a representation of fact by the debtor,

(2) that was material,

(3) that the debtor knew at the time to be false,

(4) that the debtor made with the intention of deceiving the creditor,

(5) upon which the creditor relied,

(6) that the creditor's reliance was reasonable,

(7) that damage proximately resulted from the representation.

In re Siriani, 967 F.2d 302, 304 (9th Cir.1992) (Siriani).

After affirming the bankruptcy court's determination that there were knowing misrepresentations of facts (the 1984 income projections, the undiscounted valuation of Candland's annuity, and the incomplete listing of liabilities), we must now consider the bankruptcy court's finding that these statements were material. Siriani, 967 F.2d at 304.

INA contends, and the bankruptcy court agreed, that any intentional misstatement would have resulted in rejection of Candland's application; therefore, virtually any misrepresentation would be material. Candland argues that the bankruptcy court confused the falsity and materiality determination: that any falsity would be material. In addition, Candland maintained at oral argument that even if he had provided truthful information in his financial statement, INA would have issued the bonds. Thus, the untruthful statements could not be material as they had no determinative effect upon the lender's decision. Analysis of this materiality issue is difficult, because we have yet to adopt an explicit standard of materiality for section 523(a)(2)(B).

The bankruptcy court relied on a Seventh Circuit case which focused on "whether the lender would have made the loan had he known of the debtor's true financial condition." See Matter of Bogstad, 779 F.2d 370, 375 (7th Cir.1985). The bankruptcy court also found materiality under a less stringent materiality definition suggested by the BAP:

A statement can be materially false if it includes information which is "substantially inaccurate" and is of the type that would affect the creditor's decision making process. To except a debt from discharge, the creditor must show not only that the statements are inaccurate, but also that they contain important and substantial untruths.

In re Greene, 96 B.R. 279, 283 (9th Cir. BAP 1989) (citations and quotations omitted).

Our previous decisions have, in general, adopted a knowing or intentional misstatement requirement for section 523(a)(2)(B). See Siriani, 967 F.2d at 304. Therefore, INA's argument that any intentional misstatement constitutes a material misstatement renders the materiality requirement surplusage.

At least for the purposes of section 523(a)(2)(B), where precedent has already included reliance and causation requirements, we adopt the above quoted formulation stated by In re Greene for a materiality standard. Material misrepresentations for this statutory section are substantial inaccuracies of the type which would generally affect a lender's or guarantor's decision. This definition builds upon Lansford, which concluded that a "finding of materiality is supported by the multiple misrepresentations contained in the financial statement as to assets and their value." Lansford, 822 F.2d at 904. Certainly, in this case, significant misrepresentations of financial condition--of the order of several hundred thousand dollars--are of the type which would generally affect a lender's or guarantor's decision. The misrepresentations are, therefore, material.

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We now turn to the proximate cause requirement under section 523(a)(2)(B). In Siriani, we reversed a bankruptcy court which found that a fraud did not proximately cause the creditor's losses because the creditor did not demonstrate that it would have exercised its collection rights. We reasoned that although it was certainly possible that the creditor would not have exercised its collection rights, this possibility was not enough to prevent a finding of proximate cause. We declined "to require bankruptcy courts to divine what might have happened." Siriani, 967 F.2d at 306. Siriani concluded that proximate cause is something more than "speculation as to what the creditor might have done in hypothetical circumstances" and that proximate cause inevitably "turn[s] upon conclusions in terms of legal policy." Id., quoting In re Britton, 950 F.2d 602, 604 (9th Cir.1991), quoting Prosser & Keeton, § 42 at 273.

Candland's proximate causation argument is less than clear. He apparently contends that there is some evidence which supports his contention. INA responds that the issue is foreclosed by the bankruptcy court's finding that any material misrepresentation would have resulted in INA's refusal to issue bonds.

Considering that the falsehoods were material and involved significant amounts of money, the bankruptcy court's finding is not clearly erroneous and the requirement of proximate cause is thereby satisfied. If we were to rule that there was no proximate causation because the bonds would have been issued even with the true information, we would indulge in the type of speculation which Siriani specifically forbids.

VI

The bankruptcy court found the requisite intent. Candland's argument opposing this finding does not explain his failure to list certain liabilities or to calculate his expected income reasonably. The bankruptcy court's finding was not clearly erroneous. The intent requirement under section 523(a)(2)(B) was met.

VII

Candland knowingly and intentionally submitted falsehoods on his financial disclosure statement upon which INA reasonably relied and which proximately caused INA's losses.

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We hold Candland's debts nondischargeable pursuant to section 523(a)(2)(B).

AFFIRMED.

The scienter requirement for a fraudulent misrepresentation is established by showing "either actual knowledge of the falsity of a statement, or reckless disregard for its truth. . . ." In re Houtman, 568 F.2d 651, 656 (9th Cir.1978). Although Houtman was a case under § 17(a)(2) of the Bankruptcy Act of 1898², its statement of the law is here applicable, as the Act's intent elements were essentially identical to elements (3) and (4) of § 523(a)(2)(B), quoted above from Candland: "(2) That at the time debtor made the representations he knew they were false; (3) That he made them with the intention and purpose of deceiving the creditor. . . ." Houtman, 568 F.2d at 655.

Other circuits are in accord, holding that intent to deceive can be inferred from the totality of circumstances, including reckless

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disregard for the truth. National Union Fire Ins. Co., Pa. v. Bonnanzio (In re Bonnanzio), 91 F.3d 296, 301 (2d Cir. 1996); Norris v. First Nat'l Bank (In re Norris), 70 F.3d 27, 30 (5th Cir.1995); Insurance Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1119 (3d Cir.1995); In re Miller, 39 F.3d 301, 305 (11th Cir. 1994); Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1167 (6th Cir. 1985). See also Aubrey, 111 B.R. at 268, 274 ("Fraudulent intent may be determined by circumstantial evidence.")

Further, "It is well established that where 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." Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Under the Restatement, "the most widely accepted distillation of the common law of torts," Field, 516 U.S. at 70, 116 S.Ct. 437,

a misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he represents it to be, (b) does not have the confidence in the accuracy of his representation that he states or implies, or (c) knows that he does not have the basis for his representation that he states or implies.

Restatement (Second) of Torts § 526 (1977). A representation may be fraudulent, without knowledge of its falsity, if the person making it "is conscious that he has merely a belief in its existence and recognizes that there is a chance, more or less great, that the fact may not be as it is represented." Id. at § 526, cmt. e (1977).

The Ninth Circuit has not been more specific than the statute in defining reasonable reliance under § 523(a)(2)(B), noting that "reasonable reliance is a term courts can apply without additional help." Candland, 90 F.3d at 1471. The Third Circuit has defined reasonable reliance as "that degree of care which would be exercised by a reasonably cautious person in the same business transaction under similar circumstances," Cohn, 54 F.3d at 1117, and the Seventh that reasonableness depends on the circumstances. In re Harasymiw, 895 F.2d 1170, 1173 (7th Cir.1990). See also Martin, 761 F.2d at 1166; In re Figge, 94 B.R. 654, 665 (Bankr.S.D.Cal. 1988), aff'd, 928 F.2d 1136, 1991 WL 37803 (9th Cir.1991) (table).

"Lenders do not have to hire detectives before relying on borrowers' financial statements. . . . `Although a creditor is not entitled to rely upon an obviously false representation of the debtor, this does not require him or her to view each representation with incredulity requiring verification.'" Figge, 94 B.R. at 666 (quoting In re Garman, 643 F.2d 1252, 1260 (7th Cir.1980)).

In that same vein we have noted that, when there is evidence of materially fraudulent statements, little investigation is required for a creditor to have reasonably relied on the representations. See In re Gosney, 205 B.R. 418, 421 (9th Cir. BAP 1996) (citing Candland, 90 F.3d 1466, and In re Lansford, 822 F.2d 902, 904 (9th Cir.1987)). See also Bonnanzio, 91 F.3d at 305 ("Once it has been established that a debtor has furnished a lender a materially false financial statement, the reasonableness requirement of § 523(a)(2)(B) . . . is a low hurdle for the creditor to meet, and is intended as an obstacle only for creditors acting in bad faith.")

Our conviction that Congress intended the preponderance standard to apply to the discharge exceptions is reinforced by the structure of § 523(a),¹³ which groups together in the same subsection a variety of exceptions without any indication that any particular exception is subject to a special standard of proof. The omission of any suggestion that different exemptions have different burdens of proof implies that the legislators intended the same standard to govern the nondischargeability under § 523(a)(2) of fraud claims and, for example, the nondischargeability under § 523(a)(5) of claims for child support and alimony. Because it seems clear that a preponder-

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ance of the evidence is sufficient to establish the nondischargeability of some of the types of claims covered by § 523(a),¹⁴ it is fair to infer that Congress intended the ordinary preponderance standard to govern the applicability of all the discharge exceptions.

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For these reasons, we hold that the standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard.