WASHINGTON - The government urged the Supreme Court on Monday to make it easier for lenders to collect debts from bankrupt borrowers who lie about their business plans.
"If someone is particularly gullible, Congress intended that person to be protected," said Assistant Solicitor General Alan Jenkins during oral arguments Monday.
The argument in Field v. Mans revolves around a two-part section of the Bankruptcy Code added by Congress in 1978 that prevents borrowers from using bankruptcy proceedings to avoid repaying loans.
Part one exempts loans to borrowers who either misrepresent the deal orally or submit false business plans, while part two exempts credit extended to individuals who present fraudulent financial records.
Congress added a special provision to the latter option, requiring that any loan decision based on false financial statements had to appear "reasonable" at the time.
The provision was added in reaction to a practice by some creditors of asking borrowers to understate their actual debts on a loan application. The creditors then could assert fraud if the borrower declared bankruptcy.
However, Congress did not add a similar "reasonable" requirement for oral statements or written comments about a business plan, and the lower courts are split on whether creditors have any obligation to verify these statements.
Mr. Jenkins and lawyer Christopher J. Seufert, who represented the creditor, argued that the Bankruptcy Code is clear - lawmakers never intended to require lenders to verify anything except financial statements. If they had, they would not have created two parts to the law, they said.
W.E. Whittington 4th, who represented borrower Philip W. Mans, took a different view. He said the courts have previously ruled that a creditor's reliance on a false statement must be "reasonable." He also argued that lawmakers intended to add a "reasonable" provision for false business plans and oral statements.
The justices appeared uncertain, often poking fun at each side's position. At one point, Justice Stephen Breyer said he couldn't believe lawmakers intended to protect a company that would lend money to someone who said he was Napoleon and pledged the island of Elba as collateral.
"If you are so stupid as to rely on that, then I am sorry but you lose," Justice Breyer said.
The dispute began in June 1987 when Mr. Mans signed a promissory note for $187,500 to help his company purchase the Mescoma Lake Lodge in Enfield, N.H., from William and Norine Field. He guaranteed the note with a second mortgage on the property, which prohibited Mr. Mans from selling the land without notifying the Fields. Once notified, the Fields could demand complete repayment of the note.
Mr. Mans, however, told the Fields in October 1987 that he planned to sell the property. The Fields responded that they would consent if Mr. Mans paid $10,000 of the note immediately.
Mr. Mans refused, but sold the property anyhow. He continued to repay his debt through November 1990, when he declared bankruptcy. As part of his bankruptcy filing, he asked to discharge his debt to the Fields.
They objected, saying Mr. Mans deceived them by selling the property without telling them. The court agreed that the Fields were "duped," but it refused their request.
It said the Fields should have known what was happening because a business associate previously informed them that someone else now owned the lot. It also said that the Fields never asked their attorney to check the country recorder's office, nor did they ever ask Mr. Mans if he sold the land.