Whittington Law Associates, PLLC

[Note: The case concerned a technical statutory interpretation under the Bankruptcy Code, specifically, what nature of "reliance" on a misleading statement by the debtor must be shown by a creditor in order to avoid what otherwise would be the discharge of the debt under Section 523(a)(2)(A). Mr. Whittington did not participate in the prior proceedings, and was appointed by the Supreme Court to represent the debtor in the Supreme Court. Mr. Whittington argued that to avoid discharge, the reliance had to be either "justifiable" or "reasonable." Mr. Seufert on behalf of the creditors argued that no "reasonableness" or "justifiableness" was required. The Court adopted one of Mr. Whittington's alternative positions, holding that the reliance must be "justifiable," as defined in other bodies of law. The decision is reported at 133 L. Ed. 2d 351 and 116 S. Ct. 437 (1995).

Chief Justice Rehnquist did not sit, and Justice Stevens acted as presiding justice. At the direction of the Supreme Court, the reporting service does not indicate the identity of the questioning justice, but simply indicates "Question." Seven of the eight sitting justices asked questions. The following transcript has been excerpted and re-ordered to place Mr. Whittington's argument first. Mr. Whittington argued after counsel for the Petitioners, and Mr. Whittington's initial argument was responsive to questions asked by Justices O'Connor, Souter and Breyer of his opponent.]

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ORAL ARGUMENT OF W. E. WHITTINGTON, IV
ON BEHALF OF THE RESPONDENT

JUSTICE STEVENS: We'll hear argument in Field v. Mans, Number 94-967.

MR. WHITTINGTON: Justice Stevens, and may it please the Court:

I intend first to address the issues raised by Justice O'Connor and Justice Souter as to the differences between false pretenses and the other two in the threesome in 523(a)(2)(A), and then to deal with the subject of whether in fact in false pretenses reasonableness has been required, and then to deal with Justice Breyer's question concerning difference, if any, between reasonable and justifiable.

If there's more time after those subjects, I will address other aspects of the plain meaning in the legislative history.

We believe that there are actually differences between false pretenses and the second two in the triumvirate. That is, false pretenses is where there never was an intention to pay the debt at all, whereas in false statement, or false representation, or actual fraud, there may have been an intention to pay the debt, but there was a misrepresentation as -- usually to security.

Obviously, false pretenses can be included in the second category, and the typical false pretenses cases are the credit card cases, where, for example, the borrower has already maxed out his credit card, and so the argument is made that at the time you incurred this debt, you had absolutely no intention of repaying it at all, as opposed to the typical actual fraud case, where the argument is, where you intended to pay it, but you fudged a little on what your means were as to whether you were able to.

QUESTION: Mr. Whittington, what is your authority for these distinctions?

MR. WHITTINGTON: I have five cases that make these distinctions.

QUESTION: Okay. It's common law case law, then?

MR. WHITTINGTON: Yes, it is.

QUESTION: These are common law cases, or bankruptcy cases trying to make sense out of this unfathomable statute?

MR. WHITTINGTON: Bankruptcy cases, Your Honor.

* * * * *

QUESTION: May I ask one other sort of basic question? Is it your position that you would have prevailed under pre-1978 law, or that or maybe you argue both -- the change in 1978 by the addition of (B) gives you an argument that you would not previously have had?

MR. WHITTINGTON: We would have prevailed under both, in our view. That is, (A)23(a)(2)(A) in the prior version did, in fact, include actual fraud, actual reasonable reliance, whereas what was then (B), the second part of old 17(a)(2), the cases split, and in order to strengthen the (B) part with respect to written financial statements, Congress added the word, reasonableness, to clarify it. In fact, the Government's brief in footnote 12 at pages 12 and 13 makes this very point, I believe.

Reading from the line that starts on page 12 and goes to 13, "In any event, Congress clearly concluded that any judicial trend toward a proof of reasonable reliance requirement in financial statement cases was not so well established as to obviate the need for express inclusion of the requirement."

I think that shows the congressional intent that they wanted to make what is now (B) just as strong as what now is now (A).

QUESTION: With respect to the pre-'78 common law cases, how do you account for what seems to be a disparity of standards between the cases that you rely on and the Restatement, because I take it the Restatement, in talking about justifiable reliance, really is talking about a less strict standard?

MR. WHITTINGTON: I don't think that's correct. the distinction between justifiable and reasonable, which is the question that Justice Breyer raised, we believe that it's the same in both. The principal case which has used the term justifiable as opposed to reasonable is the Kirsh case in the Ninth Circuit, which in reality was a 1- 1-1 split. The majority opinion said that justifiable was different, and there were two votes for that. The third position was that reasonableness was all that was required, and then, splitting the other way, two justices said that, whichever word it is, it was either reasonable or justifiable.

The explanation given by the Ninth Circuit was that justifiable includes reasonableness plus other factors, that reasonableness is only "one of the factors in the mix," and our position is, if we look at the various potential factors in the mix, they could include whether the lender is alerted by some fact, as in our situation, and/or whether the creditor had a duty to investigate.

* * * * *

QUESTION: The duty to investigate is always the same on each one.

MR. WHITTINGTON: Well, there may not be a duty to investigate. It may depend --

QUESTION: But if there is, it will be the same whether we're talking justifiable or reasonable.

MR. WHITTINGTON: That's correct, and that's the point of the Mayer case, I believe. The Mayer case says, in the first instance, there's no duty to nose out the truth. Then it goes on to say, but an investor or a lender cannot close his eyes to known risks, to known information.

That, in our view, is, in fact, the reliance balancing which is necessary. It's a factual determination of the fact finder which can be affirmed either direction that it goes on the clearly erroneous standard.

And so in our view it doesn't matter if the Ninth Circuit is correct, in terms of semantics, that they choose justifiable instead of reasonable. Either way, it should be the process of balancing those factors.

* * * * *

QUESTION: Before you -- well, this is the plain language. I would like to know what you think is covered by (B) that wouldn't be covered by (A).

MR. WHITTINGTON: Written. Written financial statements.

* * * * *

MR. WHITTINGTON: In other words, our view is the reason that Congress took the trouble to list out the elements, to give us a laundry list, as you were, in section (B), is because they've changed the common law in two ways: writing, and financial statements.

Other than those two factors, they exactly track the common law, in our view, which is why there was no need to list out the elements in 523(a)(2)(A). Instead, they could simply give us legal shorthand, if you were, a common law definition, which to lawyers with long jurisprudence connotes all those subsidiary elements in it.

QUESTION: Do you agree that (B), the test of satisfying (B) is less strict than the test of satisfying (A), or do I have it backwards?

MR. WHITTINGTON: No. I think that they're equally strict, and in the '70 to '78 case period under the prior law, there was some disagreement as to that.

* * * * *

QUESTION: Do you agree, though, that (B) was specifically directed at finance companies that relied on written statements that they should not reasonably have relied on?

MR. WHITTINGTON: I think the tightening up of the statute was specifically directed at that.

In fact, Judge Berry gave testimony to the House subcommittee that considered this, in which he delivered to them a decision in a case where there was no reasonableness, and he had ruled that therefore there was no fraud, and his view was that that was not appropriate.

* * * * *

QUESTION: Well, if you're right, then this case turns entirely on whether we think reasonable reliance is the same as justifiable reliance.

MR. WHITTINGTON: I don't agree with Your Honor. I think that Mr. Mans should win in either event, because whether the term reasonable is used, or justifiable, on the facts of this case it wasn't possible for Field to be either one.

In fact, the Court will recall that in this case Mr. Field had actual knowledge that a Mr. DeFelice was on the property claiming to be the owner, and that was the alleged implicitness representation. That's the term of the bankruptcy court, was that Mr. Mans had implied that he hadn't transferred it, and our view is, whether you use -- whether the Court would use reasonable or justifiable, it's neither one for Mr. Field to simply do nothing, not even ask Mr. Mans when he sees him on numerous occasions, golly, is it correct that you've transferred the property to Mr. DeFelice.

QUESTION: Your position is, then, that here there was a duty to investigate?

MR. WHITTINGTON: Not initially. That duty to --

QUESTION: Well, at least at the time of the alleged misrepresentation.

MR. WHITTINGTON: That's correct. That would be our position.

* * * * *

QUESTION: We're talking as though the duty to investigate and the unreasonableness of the reliance are two separate things. They're really just one thing, aren't they?

MR. WHITTINGTON: I agree.

* * * * *

QUESTION: It's unreasonable to rely with what you have.

MR. WHITTINGTON: I agree.

QUESTION: Which means you should have done something more.

MR. WHITTINGTON: That's correct.

* * * * *

QUESTION: Mr. Whittington, what about the argument that you made last in your brief that I asked your adversary about. You say that this, in any event all of this is academic, because the credit here was not obtained by the fraud, so whether there's a requirement of reasonable reliance or justifiable reliance is beside the point if the credit wasn't obtained by the fraud.

MR. WHITTINGTON: I welcome that question. This was an issue that absolutely slipped through, perhaps because Mr. Mans was unrepresented below, but under the clear language of the statute, there has to be an extension of credit in connection with the fraud. It has to be obtained by the fraud, and we have a 4-month gap here. The money is out, all of the money, $187,000 --

* * * * *

Finally, I'd like to address a subject that was mentioned, I believe by Justice Scalia, which is the role that the reliance element really plays, and I think the answer to that question is that it is the principal tool of the factfinder in determining whether there's actual causation, a link between the misrepresentation on the one side and the action taken by the creditor on the other.

That language is expressly picked up by the Kirsh case, quoting Prosser, and that's the reason that it's important for this Court, in our judgment, to maintain the reliance requirement so that in fact judicial factfinders have this important tool to determine that in fact there is a causal link, which is a real one.

Thank you very much, and unless there are questions -- I thank you.

JUSTICE STEVENS: Thank you, Mr. Whittington.

ORAL ARGUMENT OF CHRISTOPHER J. SEUFERT ON BEHALF OF THE PETITIONERS

Mr. Seufert, you may proceed.

MR. SEUFERT: Justice Stevens, may it please the Court:

* * * * *

QUESTION [Justice Breyer]: ["Justifiable" is] the word [the common law fraud cases] use, and I never heard in this whole case, anywhere, anybody until now, making a distinction between reasonable and justifiable. As I read the First Circuit opinion and the bankruptcy judge and everything, they were all using the term reasonable to mean the same thing.

In other words, do you lose, then, if I think it's the same? If I think all they meant was it had to be justifiable reliance, then you lose the case? I mean, I thought there was this: you know, I go out and I say, hey, will you lend me a million dollars? You say, have you any security? I say, sure. I'll give you the Isle of Elba. I'm Napoleon --

(Laughter.)

QUESTION: Okay? Now, if you're so stupid as to rely on that, totally unreasonable, unjustifiable, I'm very sorry, you lose. I mean, that's what I thought the law was. Whether they called it unjustifiable, unreasonable, it didn't make that much difference.

MR. SEUFERT: The Fosco case, Your Honor --

QUESTION: There may be some cases that say it's different. I'm just saying, as I've read these cases, I think that the other side won't mind if we were to say, okay, what is necessary here is that the -- to be dischargeable you have to show that it was unjustified reliance -- do you see what I mean? -- where they use the word unjustified instead of reasonable.

QUESTION [Justice Scalia]: I'm not following. Is this because Napoleon did not own the Isle of Elba?

(Laughter.)

QUESTION [Justice Breyer]: That's right. Very few people know he didn't.

MR. SEUFERT: Justice Breyer, there must be a material nexus between --

QUESTION: Mr. Seufert, stay in front of the microphone so we can all hear you.

* * * * *

QUESTION [Justice Scalia]: Okay. In the Island of Elba example, I suppose there would be neither justifiable nor reasonable reliance.

MR. SEUFERT: I'm not good on answering --

QUESTION [Justice Breyer]: Everybody knows that he doesn't look like Napoleon, at least I think he doesn't look like Napoleon --

(Laughter.)

QUESTION [Justice Scalia]: -- but -- and Napoleon is dead, and Justice Breyer is very lively, but once you get out of such an obvious example, then your distinction between the duty to investigate and no duty to investigate would -- could make a crucial difference and I suppose you -- of course you would argue that it does here.

MR. SEUFERT: Well, there is no duty to investigate if you prove evil intent, the evil empire, on the perpetrator of the fraud.

QUESTION: Well, we're talking about evil. I'd like you to tell me why this obligation was obtained by fraud, because your answer to the question, if he has the debt, the creditor-debtor relationship is established, the debtor says nothing and just sells the property -- dischargeable.

* * * * *

QUESTION: Mr. Seufert, your time has expired.

MR. SEUFERT: Thank you, Your Honor.

JUSTICE STEVENS: The case is submitted.
(Whereupon, at 1:51 p.m., the case in the above entitled matter was submitted.)