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SUPREME COURT OF THE UNITED STATES

No. 94–967

WILLIAM FIELD and NORINNE FIELD, PETITIONERS v. PHILIP W. MANS

on writ of certiorari to the united states court of appeals for the first circuit

[November 28, 1995]

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 to any conveyance of the encumbered real estate during the term of the secured indebtedness, failing which the entire unpaid balance on the note would become payable upon a sale unauthorized.

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 to their detriment in extending credit. The court followed Circuit precedent, however, see In re Burgess, 955 F. 2d 134 (CA1 1992), in requiring the Fields to make a further showing of reasonable reliance, defined as "what would be reasonable for a prudent man to do under those circumstances." App. 43–44. The court held that a reasonable person would have checked for any conveyance after the exchange of letters, and that the Fields had unreasonably ignored further reason to investigate in 1988, when Mr. Field's boss told him of a third party claiming to be the owner of the property. Having found the Fields unreasonable in relying without further enquiry on Mans's implicit misrepresentation about the state of the title, the court held Mans's debt dischargeable.

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. ___ (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):

"(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—

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

"(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."

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 would still be required to pay them. Act of Feb. 5, 1903, ch. 487, 32 Stat. 798. This language inserted in §17(a)(2) was changed only slightly between 1903 and 1978, at which time the section was recodified as §523(a)(2)(A) and amended to read as quoted above. Thus, since 1903 the statutory language at issue here merely progressed from "false pretenses or false representations" to "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition."

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. In 1978, Congress rewrote the provision as set out above and recodified it as §523(a)(2)(B). Though the forms of the 1960 and 1978 provisions are quite different, the only distinction relevant here is that the 1978 version added a new element of reasonable reliance.

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)(2)(B) alone supports an inference that, in §523(a)(2)(A), Congress did not intend to require reasonable reliance, over and above actual reliance. But this argument is unsound.

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 (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 of fraud. Section 523(a)(2)(B) expressly requires not only reasonable reliance but also reliance itself; and not only a representation but also one that is material; and not only one that is material but also one that is meant to deceive. Section 523(a)(2)(A) speaks in the language neither of reliance nor of materiality nor of intentionality. If the contrast is enough to preclude a reasonableness requirement, it will do as well to show that the debtor need not have misrepresented intentionally, the statement need not have been material, and the creditor need not have relied. But common sense would balk. If Congress really had wished to bar discharge to a debtor who made unintentional and wholly immaterial misrepresentations having no effect on a creditor's decision, it could have provided that. It would, however, take a very clear provision to convince anyone of anything so odd, and nothing so odd has ever been apparent to the courts that have previously construed this statute, routinely requiring intent, reliance, and materiality before applying §523(a)(2)(A). See, e.g., In re Phillips, 804 F. 2d 930 (CA6 1986); In re Martin, 963 F. 2d 809 (CA5 1992); In re Menna, 16 F. 3d 7 (CA1 1994).

The attempt to draw an inference from the inclusion of reasonable reliance in §523(a)(2)(B), moreover, ignores the significance of a different and historically persistent textual difference between 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 (1896); James-Dickinson Farm Mortgage Co. v. Harry, 273 U. S. 119, 121 (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.

"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 Non-Violence 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 particular level of reliance required by §523(a)(2)(A), and there is no reason to doubt Congress's intent to adopt a common-law understanding of the terms it used.

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). Then, as now, the most widely accepted distillation of the common law of torts was the Restatement (Second) of Torts (1976), published shortly before Congress passed the Act. The section on point dealing with fraudulent misrepresentation states that both actual and "justifiable" reliance are required. Id., §537. The Restatement expounds upon justifiable reliance by explaining that a person is justified in relying on a representation of fact "although he might have ascertained the falsity of the representation had he made an investigation." Id., §540. Significantly for our purposes, the illustration is given of a seller of land who says it is free of encumbrances; according to the Restatement, a buyer's reliance on this factual representation is justifiable, even if he could have "walk[ed] across the street to the office of the register of deeds in the courthouse" and easily have learned of an unsatisfied mortgage. Id., §540, Illustration 1. The point is otherwise made in a later section noting that contributory negligence is no bar to recovery because fraudulent misrepresentation is an intentional tort. Here a contrast between a justifiable and reasonable reliance is clear: "Although the plaintiff's reliance on the misrepresentation must be justifiable . . . this does not mean that his conduct must conform to the standard of the reasonable man. Justification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases." Id., §545A, Comment b. Justifiability is not without some limits, however. As a comment to §541 explains, a person is

"required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation. Thus, if one induces another to buy a horse by representing it to be sound, the pur-chaser cannot recover even though the horse has but one eye, if the horse is shown to the purchaser before he buys it and the slightest inspection would have disclosed the defect. On the other hand, the rule stated in this Section applies only when the recipient of the misrepresentation is capable of appreciating its falsity at the time by the use of his senses. Thus a defect that any experienced horseman would at once recognize at first glance may not be patent to a person who has had no experience with horses." Id., §541, Comment 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 Torts §108, p. 718 (4th ed. 1971); accord, W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts §108, p. 752 (5th ed. 1984) (Prosser & Keeton). Prosser represents common-law authority as rejecting the reasonable person standard here, stating that "the matter seems to turn upon an individual standard of the plaintiff's own capacity and the knowledge which he has, or which may fairly be charged against him from the facts within his observation in the light of his individual case." Prosser, supra, §108, at 717; accord, Prosser & Keeton, supra, §108, at 751; see also 1 F. Harper & F. James, Law of Torts §7.12, pp. 581–583 (1956) (rejecting reasonableness standard in misrepresentation cases in favor of justifiability and stating that "by the distinct tendency of modern cases, the plaintiff is entitled to rely upon representations of fact of such a character as to require some kind of investigation or examination on his part to discover their falsity, and a defendant who has been guilty of conscious misrepresentation can not offer as a defense the plaintiff's failure to make the investigation or examination to verify the same") (footnote omitted); accord, 2 F. Harper, F. James, & O. Gray, Law of Torts §7.12, pp. 455–458 (2d ed. 1986).

These authoritative syntheses surely spoke (and speak today) for the prevailing view of the American common-law 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, 5 required mere reliance in fact, and 36 required an intermediate level of reliance, most frequently referred to as justifiable reliance. Following our established practice of finding Congress's meaning in the generally shared common law when common-law terms are used without further specification, we hold that §523(a)(2)(A) requires justifiable, but not reasonable, reliance. See In re Vann, 67 F. 3d 277 (CA11 1995); In re Kirsh, 973 F. 2d 1454 (CA9 1992).

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 at work in the statute here. See Alaska Airlines, Inc. v. Brock, 480 U. S. 678, 690–691 (1987).

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 this 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 for the very purpose of insulating their own claims from discharge. The answer softens the ostensible anomaly.

In this case, the Bankruptcy Court applied a reasonable person test entailing a duty to investigate. The court stated that

"the case law establishes an objective test, and that is what would be reasonable for a prudent man to do under those circumstances. At a minimum, a prudent man, I think, would have asked his attorney, could he transfer it without my consent? And the answer would have to be yes, and then the next question would be, well, let's see if he's done it? And those questions simply were not asked, and I don't think on balance that was reasonable reliance." App. 43–44.

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.