In Lentz v. Spadoni (In re Spadoni), 271 B.R. 703, 2002 Bankr. LEXIS 26,XXXXX Dec. (LRP) 248 (B.A.P. 1st Cir. 2002), vacated by Lentz v. Spadoni (In re Spadoni), 316 F.3d 56, 2003 U.S. App. LEXIS 465,XXXXX Dec. (LRP) 191, Bankr. L. Rep. (CCH) P78782 (1st Cir. 2003), on other grounds, the Bankruptcy Appellate Panel for the 1st Federal District writes:
- In order to establish that a debt is nondischargeable because obtained by "false pretenses, a false representation, or actual fraud," [the First Circuit Court of Appeals has] held that a creditor must show that 1) the debtor made a knowingly false representation or one made in reckless disregard of the truth, 2) the debtor intended to deceive, 3) the debtor intended to induce the creditor to rely upon the false statement, 4) the creditor actually relied upon the misrepresentation, 5) the creditor's reliance was justifiable, and 6) the reliance upon the false statement caused damage. Spigel, 260 F.3d at 32 (citing Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997)).
In Middlesex Sav. Bank v. Flaherty (In re Flaherty), 335 B.R. 481, 2005 Bankr. LEXIS 2614 (Bankr. D. Mass. 2005), the Mass. District Bankruptcy Court writes:
- To fall within the exception to discharge under § 523(a)(2)(A), the misrepresentation must have been knowingly and fraudulently made and must have related to a material fact. Moreover, the creditor must have relied on the misrepresentation. There are two aspects to reliance: actual reliance and justifiable reliance. The creditor must have actually relied on the misrepresentation, and that reliance must have been justifiable under the circumstances. See Lentz v. Spadoni (In re Spadoni), 316 F.3d 56 (1st Cir. 2003). In Spadoni, the First Circuit discussed the requirement of reliance: "'Reasonable reliance' -- measured by an objective standard -- is a requirement under various doctrines. See, e.g., Restatement (Second) of Contracts § 139 (1981)(reliance must be reasonable in a  contract action). However, the Supreme Court has held that a less demanding 'intermediate' standard, which it calls 'justifiable reliance,' applies under section 523(a)(2)(A). Field v. Mans, 516 U.S. 59, 73-74, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). In particular, the Court said that the circumstances of the reliance claim must be taken into account and that the individual is not obliged to investigate statements made to him (although he cannot shut his eyes to an obvious falsehood). See id. at 71, 116 S.Ct. 437.
Finally, in Lentz v. Spadoni (In re Spadoni)
, 316 F.3d 56, 2003 U.S. App. LEXIS 465,XXXXX Dec. (LRP) 191, Bankr. L. Rep. (CCH) P78782 (1st Cir. 2003), the 1st Circuit Court of Appeals writes:
- In general, the "fresh start" objective of the Bankruptcy Code has led courts to construe strictly non-dischargeability claims. See, e.g., In re Rembert 141 F.3d 277, 281 (6th Cir.), cert. denied, 525 U.S. 978, 142 L. Ed. 2d 357,XXXXX 438 (1998). If the Supreme Court's decision in Field appears to be in some tension with this tradition, it reflects another over-generalization, namely, that the fresh start is for the "honest but unfortunate debtor." Grogan v. Garner, 498 U.S. 279, 286-87, 112 L. Ed. 2d 755,XXXXX 654 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 78 L. Ed. 1230,XXXXX 695 (1934)). In all events, in light of Field, the natural tendency of judges to insist on reasonable-man prudence from the creditor must be somewhat tempered and, on de novo review, we think Lentz's forbearance was "justifiable."
In plain english, the above case law stands for the proposition that proving a fraud in bankruptcy court is something slightly less demanding that that of an ordinary court, because reasonable reliance test is replaced with a justifiable reliance test. However, in practice, the bankruptcy courts are required to consider the importance of the "fresh start" purpose of bankruptcy, so, in fact, the elements of a fraud in bankruptcy are really pretty much identical to those outside of bankruptcy.
Hope this helps.
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