# Amicus Curiae Brief — Grogan v. Garner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1991
- **Citation:** 498 U.S. 279

## Text

Coy R. GROGAN, ET AL., PETITION

v. 2 —
FRANK J. GARNER, IR.

ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

BRIEF FOR THE UNITED STATES,
THE SECURITIES AND EXCHANGE COMMISSION,
AND THE
FEDERAL DEPOSIT INSURANCE CORPORATION
AS AMICI CURIAE SUPPORTING PETITIONERS

KENNETH W. STARR
Solicitor General

JOHN G. ROBERTS, JR.

Deputy Solicitor General
JAMEs R. Doty ROBERT A. LONG, JR.
General Counsel Assistant to the Solicitor General
Department of Justice
Fam. Go 2 Washington, D.C. 20530
Solicitor (202) 514-2217
JACOB H. STILLMAN
Associate General Counsel
RICHARD A. KIRBY
Senior Litigation Counsel
JOSEPH O. CLICK
Attorney

Securities and Exchange Commission
Washington, D.C. 20549

ALFRED J.T. BYRNE
General Counsel
Federal Deposit Insurance Corporation
Washington, D.C. 20429

20

QUESTION PRESENTED

Whether a claim that a debt arises from “false pre-
tenses, a false representation, or actual fraud,” and so
is excepted from discharge under Section 523(a) of the
Bankruptcy Code, must be proved by a preponderance of
the evidence or by clear and convincing evidence.

(1)

TABLE OF CONTENTS

Interest of the United States, the Securities and Ex-
change Commission, and the Federal ee et Insur-

ance Corporation

r ̃ —TÆEꝑÿœ“ : —

e
Argument:

I.

II.

r

The preponderance of the evidence standard ap-
plies in actions under Section 523 (a) of the
Bankruptey Code to except from discharge
e q................1.---...-:-.......

A. In a proceeding to except from discharge a
debt incurred by fraud, the balance of inter-
ests of the parties requires application of the
preponderance of the evidence standard

B. A preponderance standard of proof for pro-
ceedings under Section 523 is consistent
with Section 727 of the Bankruptcy Code
and important nonbankruptcy fraud stat-
., (

Application of the clear and convineing evidence
standard to the fraud exception to discharge
was not a well-established pre-Code bankruptcy
.

A. The standard of proof applicable to fraud
exceptions to discharge was not well-
established prior to 197888

B. The courts are divided over the standard of
proof applicable to civil actions for fraud....

C. The reasons for requiring clear and convinc-
ing proof in certain fraud actions are in-
applicable in Section 523 proceedings

(III)

Page

10

14

18

19

22

25
27

IV

TABLE OF AUTHORITIES

Cases: Page
Addington v. Texas, 441 U.S. 418 (1978) 11
Ames v. Moir, 188 U.S. 306 (189177777 20
Arden, In re, 75 Bankr. 707 (Bankr. D. R. I. 1975) 21
Arnett v. Sanderson, 25 Ariz. 433, 218 P. 986

(1923) 25
Aschoff v. Mobil Oil Corp., 261 N.W.2d 120 (S.D.

1977) 23
Atlas Credit Corp. v. Miller, 216 So. 2d 100 (La.

r RE SCR Te 19, 20, 22
Bardill Land & Lumber, Inc. v. Davis, 135 Vt. 81,

370 A.2d 212 (1977) 24
Barrett v. Shanks, 382 Ill. 484, 47 N.E.2d 481

c 23
Basic Inc. v. Levinson, 485 U.S. 224 (1988) 2
Bausch v. Myers, 273 Or. 376, 541 P. 2d 817

ae 24
Beckett v. Department of Social & Health Serv.,

87 Wash. 2d 184, 550 P.2d 529 (1976) 24
Beeck v. Aquaslide ‘N’ Dive Corp., 350 N.W.2d 149

SLRS EE ES aE ce a ra Oa 24
Beneficial Finance Co. v. Machie, 6 Conn. Cir. Ct.

37, 263 A.2d 707 (1969) eee 20
Boddie v. Connecticut, 401 U.S. 371 (19717 11
Brauen, In re, 900 F.2d 621 (3d Cir. 1990) 10
Brown v. Buchanan, 419 F. Supp. 199 (E.D. Va.

Te ain — 21
Brown v. Felsen, 442 U.S. 127 (1979999 9, 10, 13
Budget Finance Plan v. Haner, 92 Idaho 56, 436

r 20
Buehner v. Hoeven, 228 N. W. 2d 893 (N. D. 1975) 24
Butler v. Poulin, 500 A. 2d 257 (Me. 1985) 24
Caledonia, Inc. v. Trainor, 123 N. H. 116, 459 A. 2d

X re 24
Campbell v. Campbell, 146 W. Va. 1002, 124 S. E. 2d

J „ 24
Chaunt v. United States, 364 U.S. 350 (1960) 11
City Dodge, Inc. v. Gardner, 232 Ga. 766, 208

S. E. 2d 794 (1974) — 22

— — äH— ¶(V]5— —

V
Cases—Continued : Page
Clay v. Brand, 236 Ark. 236, 365 S.W.2d 256
. 22
Combs v. Richardson, 838 F.2d 112 (4th Cir.
d 10
Cowan v. Westland Realty Co., 162 Mont. 379, 512
r . a 23
Cruzan v. Director, Missouri Dep’t of Health, No.
SB-1508 (Fume 36, 1900) .....-...--nnccc.-- 8 » ¢. 21
First Nat’l Monetary Corp. v. Weinberger, 819
A OM 16
Fischer v. Pauline Oil & Gas Co., 309 U.S. 294
(1940) 9
Fischetto Paper Mill ‘Supply, Inc. v. “Quigly Co.,
3 N. J. 149, 69 A. 2d 318 (1949) ............................. 23
Garcia, In re, 88 Bankr. 695 (Bankr. E. D. Pa.
117ꝙꝙ AVV 15
General Electric Credit Corp. v. M.D. Aircraft
Sales, Inc., 266 N.W.2d 548 (S.D. 1978) )) 23
Gibson v. Gibson, 207 Va. 821, 153 S.E.2d 189
(1967) 24
Gilbert v. Mid-South Machinery Co., 267 8. C. 211,
r EERE DS ARETE 25
Gonzales v. Aetna Finance Co., 86 Nev. 271, 468
. ses 20

VI
Cases—Continued : Page
Goodfellow v. Kattnig, 583 P.2d 58 (Colo. Ct. App.
. 24
Goodrich v. Waller, 314 Mich. 456, 22 N. W. 2d 862
1 25
Grissom V. Moran, 154 Ind. App. 419, 290 N.E.2d
r Sea ES tle 22
Heiser v. Woodruff, 327 U.S. 726 (19460) 9
Herman & MacLean v. Huddleston, 459 U.S. 375
r 2, 10, 11, 12, 13, 17, 25, 26
Hi- Way Motor Co. v. International Harvester Co.,
398 Mich. 330, 247 N. W. 2d 813 (1976) 24
Hofmann v. Hofmann, 94 III. 2d 205, 446 N. E. 2d
r 23
Household Finance Corp. v. Altenberg, 5 Ohio St.
2d 190, 214 N. E. 2d 667 (1966)) 19, 20, 23
Household Finance Corp. v. Williams, 66 Wash. 2d
r eereeees 21
Houtman, 568 F. 2d 651 (9th Cir. 1978 10
James v. Joseph, 165 Tenn. 417, 1 S. W. 2d 1017
e .. 23
Kelly v. Robinson, 479 U.S. 36 (1986) 9, 18
Kern v. NCD Indus., Inc., 316 A. 2d 576 (Del. Ch.
eee 22
Klingman v. Levinson, 831 F.2d 1292 (7th Cir
1 10
Kopeikin v. Merchants Mortgage & Trust Corp.,
e . ————ðf 24
L & S Enterprises Co. v. Great American Ins. Co.,
„„ %% 23
Lawrence v. CFTC, 759 F.2d 767 (9th Cir. 1985) .. 3

LaCaze v. Louisiana, 541 So. 2d 322 (La. Ct.

App.), cert. denied, 546 So. 2d 1224 (1989) 22
Liodas v. Sahadi, 19 Cal. 3d 278, 562 P.2d 316

r ¢ AAAN 22
Local Loan Co. v. Hunt, 292 U.S. 234 (1934) 12

Lombard, In re, 739 F.2d 499 (10th Cir. 1984) 10
Lovell v. Mixon, 719 F.2d 1373 (8th Cir. 1983) .... 10
Lubbe v. Barba, 91 Nev. 596, 540 P.2d 115 (1975) .. 24
Mac Finance Plan, Inc. v. Stone, 106 N.H. 517,
e _capepnteeialiabalaentiate 20

vn

Cases Continued. Page

Magic Valley Potato Shippers v. Continental Ins.,

112 Idaho 1073, 739 P.2d 372 (1987))77:) 24
Martin v. Guarantee Reserve Life Ins. Co., 279

Minn. 129, 155 N. W. 2d 744 (1968) 22-23
Maynard v. Durham & Southern Ry., 251 N. C. 783,

112 S. E. 2d 249 (1960), rev'd, 365 U.S. 160

c cal 0 gs OEE Se) ps PS A 23
Medivozx Productions, Inc. v. Hoffmann-La Roche,

Inc., 107 N. J. Super. 47, 256 A. 2d 803 (1969) 23
Midlantic Nat’l Bank v. New Jersey Dep’t of En-

vironmental Protection, 474 U.S. 494 (1986) ....15-16, 18
Miles v. Mackle Bros., 73 Wis. 2d 84, 242 N.W.2d

PRP SSE SMEG en SE BPS eS > one BR 24
Miller v. Appleby, 183 Conn. 51, 488 A.2d 811
Ferrer 24
Milligan v. Milligan, 209 Ga. 743, 76 S. E. 2d 18
r ON Oe nL 22
Modern Displays, Inc. v. Hennecke, 350 Mich. 67,
. 24-25
Montana v. United States, 440 U.S. 147 (1979) ....... 9
Morris v. Levin, 302 III. App. 173, 23 N.E.2d 779
(A AIEEE / ! 19
Murphy Fin. Co. v. Fredericks, 177 Neb. 1, 127
/ 23

New York Times v. Sullivan, 376 U.S. 254 (1964) 11
Nickel Plate Cloverleaf Federal Credit Union v.
White, 120 Ill. App. 2d 91, 256 N.E.2d 119

/ Nea Ane eA 20
Nye Odorless Incinerator Corp. v. Felton, 35 Del.

EE SEE ee ee 22
Oriel v. Russell, 278 U.S. 358 (1929) a 20
Ostalkiewicz v. Guardian Alarm, 520 A. 2d 563

D...... 23
Parklane Hosiery Co. v. Shore, 439 U.S. 322

rr 9
Pennsylvania v. Davenport, 110 S. Ct. 2126

ECE: TILT eee 18
Peurifoy v. Congressional Motors, Inc., 254 Md.

501, 255 A.2d 332 (1969) „ 24

vm x
: P
Cases Continued: — Page 3 yer 8 . — age
iet jens v. General Motor be W.
Piccadilly Square v. Intercontinental Constr. Co., (Mo. 1967) ore a 24

782 S. W. 2d 178 (Tenn. App. 1989) 23 Tobin v. Flynn & Larsen Implement Co., 220 Neb.

Price Waterhouse v. Hopkins, 109 S. Ct. 1775 — 369 N. W. 2d 96 (1985) 0 f a 23

(1989) 10 Transitron Elec. Corp. v. Hughes Aircraft Co., 649
Pyne v. Jamaica Nutrition Holdings, Ltd., 497 * 2d on (1st “Cir. 1981) ud aided 2 * R 24

A. 2d 118 (D. C. 1985) ----------oee-nonneennnnneeenneeens 24 Travelers Indem. Co. v. Armstrong, 442 N. E. 2d
Rhoads v. Harvey Publications, Inc., 145 Ariz. 349 (Ind. 1982) 23

142, 700 P. 2d 840 (1984) —————— 24 ion Bank v. Blum, 460 F.2d 197 (9th Cir.

Rigot v. Bucci, 245 So. 2d 51 (Fla. 1971) 22 2 1
Robinson, In re, 506 F.2d 1184 (2d Cir. 1974) 15 ited tates v. A ae B U Tel. Co., 167 U.S.
SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 “aa — . A al cd 26

4948) 22 United States v. Kras, 409 U.S. 434 (1973) .......... 12, 13
Sanford Constr. Co. v. S & H Contractors, Inc. United States v. Local 560, Int’l Bhd. of Teamsters,

443 S.W.2d 227 (Ky. 1969 24 780 F.2d 267 (8d Cir. 1988) 16
Santosky v. Kramer, 455 U.S. 745 (1982) 11 United States v. Regan, 232 U.S. 37 (1914) ........... 12
Saxton V. Harris, 896 P.2d 71 (Alaska 1964) ........ 22 United States v. Ron Pair Enterprises, Inc., 109
Schneiderman v. United States, 320 U.S. 118 ES a 15, 17

— —— — — — 11-12 United States v. Sotelo, 436 U.S. 268 (1978) 12
Schwartz v. Tanner, 576 P. 2d 878 (Utah 1978) 24 Vanston Bondholders Protective Comm. v. Green,

Scott, In re, 1 Bankr. Ct. Dec. (CRR) 581 (Bankr. e 17

Nee 21 atson Realty Corp. V. Quinn, 452 So. 2d 568
Sellers v. West-Ark Constr. Co., 283 Ark. 341, 676 ae 1984) oe a 22

... ——— 22 Winship, In re, 397 U.S. 858 (197) 11
Shuler, In re, 722 F.2d 1253 (5th Cir.), cert. Wirtz v. Orr, 575 S.W.2d 66 (Tex. Civ. App.

denied, 469 U.S. 817 (1984) 10 een, 23
5 —— 1 442, 377 N. E. 2d 713, 8 | Woodby v. INS, 385 U.S. 276 (1966) 11, 22

„ „ e aes con an no | tt v. Chambers, 182 S.W. 16 (Tex. Civ. App.
Smith v. Rhode Island Co., 39 R.I. 146, 98 A. 1 | a 3 1 Neem 5 . — 23

—— — ˙ 23 Hoo Bottling Co. v. Leibowitz, 432 Pa. 117,

Snell v. Cornehl, 81 N. M. 248, 466 P. 2d 94 (1970) 24 9 ne 409 (1968) 3 0 a . 3 24
Southern Dev. Co. v. Silva, 125 U.S. 247 (1888) 26

Spilman v. Harley, 656 F.2d 224 (6th Cir. 1981) * 10 Constitution, statutes and regulation:

Stauth v. "Brown, 241 Kan. 1, 734 P. 2d 1063 8 11

n ———8—˖v˖ð,˖ĩ8 24 Act of Mar. 2, 1867, ch. 176, § 33, 14 Stat. 533. 13
Steadman v. SEC, 450 U.S. 91 (1981) 10, 12 Act of July 1, 1898, ch. 541, § 17, 30 Stat. 550 13
Sweet v. Ritter Finance Co., 263 F. Supp. (W.D. Act of Feb. 5, 1908, ch. 487, § 5, 32 Stat. 798 13

Va. 1967) .—.—.—u—.— — — 20 Act of June 22, 1938, ch. 575, § 17a, 52 Stat. 840. 13
Tek-Ni-kal Employees Credit Union v. Atkins, 12 Bankruptcy Act, ch. 541, §17, 30 Stat. 550, 11

Mich. App. 1, 162 N.W.2d 299 (1968) — D SES EES 10
Tice v. Tice, 672 P.2d 1168 (Okla. 1983) 24

X xI

Statutes and regulation—Continued: Page Statutes and regulation—Continued : Page

Bankruptcy Code, 11 U.S.C. 101 et seq.: Securities Exchange Act of 1934, §10(b), 15
Ch. 5, 11 U.S.C. 501 et seq.: * 1 “te
8 1 — 42 U.S.C. 1820a-7a ..... g 3
— = pomp sneer — —— La. Civ. Code Ann. art. 1957 (West 19877 22
S.C. 523 (a) (1) (A)-(B) -.000 18 42 C.F.R. 1008.114 (a) 3
6 —ð5 9, 13, 19 eee
11 U.S.C. 523 (a) (2) (o 5 Miscellaneous:
— — — — (a) aa A 37 Am. Jur. 2d Fraud and Deceit (1968) 23
* USC. — (a) a — 1 Annotation, Quantum of Proof in Civil Case on
= (a) — — — Issue Involving Fraudulent, Dishonest, or Crim-
S.C. 523 (a) (9) inal Misappropriation of Property, 62 A. L. R.
Ch. 7, 11 U.S.C. 701 et se.: e . 23
e 7, 14, 15 Ball, The Moment of Truth: Probability Theory
Z 14 and Standards of Proof, 14 Vand. L. Rev. 807
Ch. 11, 11 U.S.C. 1101 et eg 4 5 ———5ðrä —ßꝛ3ß3—ß;ð— —Ü—— 11
D 2 M. Bigelow, The Law of Fraud and the Procedure
Commodity Exchange Act, 7 U.S.C. 1 et seg 2 P ortasneng to the Redress Thereof (1877)... —
False Claims Act, 31 U.S.C. 3729 et seg.: 844400 23, 25
S.C. q.: ;
135 Cong. Rec. (daily ed. Aug. 4, 1989) :

r stiibies 1 H5172 16
e 1, 16 — ah te aa eee eee 10

9 232 3 Act, 13 USC. 1811 2 T. Cooley, Treatise on the Law of Torts (4th
a ; 1 —¶Ü— — 23

8 — 4ü 2, 16 1 D. Cowans, Cowans Bankruptcy Law and Prac-

12 U.S.C. 1821 (k) -() —— —— ——b 2, 16 tice (1989) ene, a en era 12

12 U.S.C. 1833 (e 2, 16 H.R. Rep. No. 1698, 57th Cong., Ist Sess. (1902) — 18

Financial Institutions Reform, Recovery, and En- H.R. Rep. No. 1409, 75th Cong., Ist Sess: (1937) 10
forcement Act of 1989, Pub. L. No. 101-73, H.R. Rep. 1502, 91st Cong., 2d Sess. (1970) 10
8 —K—w»wàA 16 H.R. Rep. No. 595, 95th Cong., Ist Sess. (1977). 10, 15

ho 8 eee 2 H.R. Rep. No. 355, 98th Cong., Ist Sess. (1983) 17

Insider Trading Sanctions Act of 1984, Pub. L. 1A J. Moore, J. Mulder & L. King, Collier on
Ne. 66-70, SB Geet. 1906 ...................................-- 17 Bankruptcy (14th ed. 1978) 3 19, 20

Omnibus Budget Reconciliation Act of 1989, Pub. J. Moore & E. Levi, Gilbert’s Collier on Bank-

L. No. 101-239, § 7721 (a), 103 Stat. 2397 (to be ruptey (4th ed. 19877 ———— 20
codified at 26 U.S.C. 6663(b)) —............... —— 3 Note, Appellate Review in the Federal Courts of

Racketeer Influenced and Corrupt Organizations Findings Requiring More Than a Preponderance
Act, 18 U.S.C. 1964 — — 5 of the Evidence, 60 Harv. L. Rev. 111 (1946) — 26

Securities Act of 1983, § 17, 15 U.S.C. 77q(a)....... ve S. Rep. No. 1916, 75th Cong., 3d Sess. (1938) 10

Miscellaneous—Continued: Page

S. Rep. No. 1173, 91st Cong., 2d Sess. (1970) 10
S. Rep. No. 989, 95th Cong., 2d Sess. (1978) 10, 15
Winter, The Jury and the Risk of Nonpersuasion,

5 Law & Soc. Rev. 335 (1970o)))ʒ;:; 11

In the Supreme Court of the United States

OCTOBER TERM, 1990

No. 89-1149
Coy R. GROGAN, ET AL., PETITIONERS
> U.
FRANK J. GARNER, JR.

ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

BRIEF FOR THE UNITED STATES,
THE SECURITIES AND EXCHANGE COMMISSION,
AND THE
FEDERAL DEPCSIT INSURANCE CORPORATION
AS AMICI CURIAE SUPPORTING PETITIONERS

INTEREST OF THE UNITED STATES, THE
SECURITIES AND EXCHANGE COMMISSION, AND
THE FEDERAL DEPOSIT INSURANCE CORPORATION

The Court’s resolution of the question presented in this
case will affect the civil enforcement of federal antifraud
statutes by the United States, the Securities and Ex-
change Commission (SEC), and the Federal Deposit In-
surance Corporation (FDIC), as well as other federal
agencies. The United States obtains money judgments
under the False Claims Act, 31 U.S.C. 3729-3731, against
persons who defraud the federal government. The False
Claims Act expressly provides that the government need
prove fraud only by a preponderance of the evidence. 31
U.S.C. 3731 (e).

(1)

2

The SEC obtains judgments, under a preponderance
of the evidence standard, for violations of the antifraud
provisions of the federal securities laws. See Herman &
MacLean v. Huddleston, 459 U.S. 375, 389 (1983). The
SEC’s interest in this case arises not only because of the
agency’s role in obtaining monetary relief in its own en-
forcement actions, but also because private actions under
the federal securities laws are a necessary supplement
to the SEC’s enforcement actions, see Basic Inc. v. Lev-
inson, 485 U.S. 224, 230-231 (1988), and because the
SEC acts as advisor to the courts in bankruptcy reor-
ganization cases pursuant to Section 1109(a) of the
Bankruptcy Code, 11 U.S.C. 1109 (a).

The FDIC and the Resolution Trust Corporation
(RTC) obtain money judgments against persons who de-
fraud federally insured financial institutions.“ The FDIC
proceeds under a variety of antifraud laws that require
proof only by a preponderance of the evidence, including
the enforcement provisions of the Federal Deposit Insur-
ance Act (FDIA), 12 U.S.C. 1818(i), the director and
officer liability provisions of the FDIA, 12 U.S.C. 1821
(k)-(1), the civil provisions of the Racketeer Influenced
and Corrupt Organizations Act (RICO), 18 U.S.C. 1964,
and the antifraud provisions of the securities laws and
the Commodity Exchange Act (CEA), 7 U.S.C. 1 et
seq. Moreover, Congress expressly provided in 12 U.S.C.
1833a(e) that the preponderance standard applies to
actions brought by the Attorney General to recover civil
penalties for certain fraudulent conduct involving finan-
cial institutions.’

1 Congress created the RTC “to contain, manage, and resolve
failed savings associations.” Financial Institutions Reform, Re-
covery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-
73, § 101(7), 103 Stat. 183.

2 Other federal agencies also obtain civil fraud remedies under
a preponderance of the evidence standard. For example, a pre-
ponderance standard applies to Medicare and Medicaid fraud

3

If the Court were to hold that proof of fraud under
Section 523 (a) must be by clear and convincing evi-
dence, fraud judgments obtained after a full trial on the
merits under a preponderance of the evidence standard
would not be recognized in bankruptcy courts. Victims
of fraud would therefore be required to prove fraud a
second time, by clear and convincing evidence, in the
bankruptcy proceedings. Such proceedings would be
costly to the victims and burdensome to the bankruptcy
courts. The United States, the SEC, the FDIC, and other
federal agencies have a strong interest in opposing a rule
that imposes such an unwarranted burden on victims of
fraud, and in preventing the bankruptcy courts from be-
coming a haven for wrongdoers.

STATEMENT

1. Petitioners were employees and minority share-
holders of STI-Missouri, a corporation that repaired and
refurbished railroad rolling stock. Respondent was the
president and majority shareholder of the corporation.
Petitioners sued respondent in the United States District
Court for the Western District of Missouri, alleging that
respondent had defrauded them in connection with the
sale of securities of STI-Missouri and another corpora-
tion. Petitioners sought damages for violations or the
antifraud provisions of Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. 78j(b), as well as for

claims. See 42 U.S.C. 1320a-7a; 42 C. F. R. 1003.114(a). In addi-
tion, where the Internal Revenue Service establishes that any
part of a tax underpayment is attributable to fraud, the entire
underpayment is subject to fraud penalties unless the taxpayer
establishes, by a preponderance of the evidence, that the under-
payment is not attributable to fraud. See Omnibus Budget Rec-
onciliation Act of 1989, Pub. L. No. 101-239, § 7721 (a), 103 Stat.
2395 (to be codified at 26 U.S.C. 6663(b)). The Commodity
Futures Trading Commission’s findings of violations of the anti-
fraud provisions of the CEA also are reviewed under a preponder-
ance standard. See Lawrence v. CFTC, 759 F.2d 767, 773 (9th
Cir. 1985).

4

common law fraud and breach of fiduciary duty. The
case was tried before a jury. The district court did not
specifically instruct the jury as to the applicable stand-
ard of proof. Instead, it instructed the jury generally
that “[i]f the evidence in the case does not cause you to
believe a particular proposition submitted, then you can-
not return a verdict requiring belief of the proposition.”
Pet. App. 24a. The jury returned a verdict for petition-
ers, awarding damages on all counts and punitive dam-
ages on the common law fraud count. The Court of Ap-
peals for the Eighth Circuit reduced the amount of dam-
ages, but otherwise affirmed the judgment for petition-
ers. Grogan v. Garner, 806 F.2d 829 (1986). See Pet.
App. 3a-5a, 16a-17a, 30a-31a.

2. In October 1985, while respondent’s appeal of the
fraud judgment was pending in the court of appeals, re-
spondent filed a petition in the United States Bankruptcy
Court for the Western District of Missouri for relief
under Chapter 11 of the Bankruptcy Code, 11 U.S.C.
1101 et seg. The petition listed the fraud judgment as a
dischargeable debt. In May 1986, petitioners filed a com-
plaint in the bankruptcy court for a determination that
their judgment debt should be expected from discharge
pursuant to Section 523 of the Bankruptcy Code, 11
U.S.C. 523.“ At the trial on their complaint, petitioners

Section 523 provides, in part:

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

a * * *

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

(A) false pretenses, a false representation, or ac-
tual fraud, other than a statement respecting
the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

5

submitted copies of relevant pleadings and documents
from the prior fraud action, including the complaint, the
jury instructions, the district court’s judgment, and the
court of appeals’ decision. The bankruptcy court deter-
mined that each of the elements necessary to establish
“actual fraud” under Section 523 had been proved in the
prior action. Applying principles of collateral estoppel,
the court held that the judgment debt was not discharge-
able under Section 523 (a) (2) (A). The bankruptcy court
rejected respondent’s contention that collateral estoppel
did not apply because the jury in the prior fraud action
had not been instructed that fraud must be proved by
clear and convincing evidence. The bankruptcy court
concluded that there was no real distinction between the
preponderance of the evidence standard and the clear
and convincing evidence standard. Pet. App. 3a-4a, 18a-
20a, 31a, 40a. The district court agreed with the rea-
soning of the bankruptcy court and affirmed its judg-
ment. Pet. App. 16a-29a.

3. The Court of Appeals for the Eighth Circuit re-
versed. The court stated that the standard of proof neces-
sary to establish an exception from discharge under Sec-
tion 523 (a) is “far from clear,” recognizing that those
courts of appeals requiring proof by clear and convincing
evidence often have done so without a satisfactory ex-

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s fi-
nancial condition ;

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

(iv) that the debtor caused to be made or pub-
lished with intent to deceive.

In addition, Section 523(a)(4) of the Bankruptcy Code, 11
U.S.C. 523(a)(4), excepts from discharge in bankruptcy any debt
“for fraud or defalcation while acting in a fiduciary capacity, em-
bezzlement, or larceny.”

6

planation. Pet. App. 9a-12a. Moreover, the court recog-
nized, neither the language of Section 523 nor its legis-
lative history addresses the issue. Pet. App. 13a. The
court nevertheless held that the statutory exception to
discharge for fraud must be proved by clear and con-
vineing evidence rather than by a preponderance of the
evidence. The court surmised that Congress was aware
“that the prevailing view at the time of adoption was that
fraud, for both section 523 and state common law pur-
poses, had to be proved by clear and convincing evidence.”
Ibid. The court also stated that a preponderance of the
evidence standard of proof would “effectively read[ ] the
‘fresh start’ policy out of * * the Code.” Ibid. Be-
cause the preponderance standard is a lower standard
than the clear and convincing evidence standard, the
court of appeals held that the bankruptcy court had
erred in giving collateral estoppel effect to the prior fraud
judgment. Pet. App. 9a-10a, 12a, 14a.

SUMMARY OF ARGUMENT

1. a. Neither the Bankruptcy Code nor its legislative
history expressly prescribes the standard of proof appli-
cable to a claim that a debt arises from the debtor’s
fraudulent conduct and therefore is excepted from dis-
charge under Section 523 (a) of the Code. In the ab-
sence of any contrary expression, the most natural infer-
ence is that Congress intended such claims to be subject
to the preponderance of the evidence standard generally
applicable in civil proceedings. The debtor’s interest in
obtaining a discharge of debts arising from fraudulent
conduct is not a constitutional or fundamental individual
right that warrants application of a heightened standard
of proof. In any event, Congress has determined that the
“fresh start” provided by a discharge is available only
to honest debtors, and has recognized, in Section 523 (a),
a countervailing and equally important interest of the
victims of fraud in preserving their right to recover from
dishonest debtors. Thus, there is no basis for concluding

7

that a defrauding debtor’s interest in a complete dis-
charge takes precedence over the innocent victim’s in-
terest and, consequently, no basis for favoring the debtor
by creating an exception to the general rule of proof
and applying a clear and convincing evidence standard.
The court below therefore erred when it reasoned that
the preponderance of the evidence standard in this con-
text would “read[ ] the ‘fresh start’ policy out of * * *
the Code.” Pet. App. 13a. Congress wrote that policy
out of the Code with respect to debts arising from fraud
when it enacted Section 523.

b. To the extent that the Bankruptcy Code and its
legislative history shed light on the question, they sup-
port application of the typical preponderance standard.
The legislative history of Section 727 of the Bankruptcy
Code states that the bankruptcy court, in a Chapter 7
proceeding, may deny the debtor a discharge as to all
debts if it is shown, by a preponderance of the evidence,
that the debtor has engaged in certain fraudulent con-
duct in connection with the bankruptcy proceeding. There
is no reason to suppose that Congress would apply a
higher standard of proof to the less important question
whether a particular debt should be excepted from dis-
charge because of fraud. In addition, application of the
clear and convincing standard in this context would de-
part from the standard of proof in important federal
antifraud statutes that require proof only by a prepon-
derance of the evidence. The result would be that some
persons determined to be guilty of fraud under impor-
tant congressional enactments would escape liability by
declaring bankruptcy, either because plaintiffs would
elect not to devote the resources to trying the case a sec-
ond time, or because plaintiffs, who would often be
forced to present stale evidence, could not reprove fraud
by clear and convincing evidence. There is no evidence
that Congress intended such a result. On the contrary,

8

the basic intent of Section 523(a) is that debtors not
escape liability for fraud. This Court should not em-
brace such an outcome, when the more natural applica-
tion of the typical preponderance rule avoids this troub-
ling anomaly.

2. The court below based its decision on a “pre-
sum([ption]” that Congress was aware when it enacted
Section 523 that the “prevailing view” was that fraud
had to be proved by clear and convincing evidence. Pet.
App. 13a. In fact, there was no consistent pre-Code prac-
tice of requiring clear and convincing proof either to es-
tablish fraud or to prove that a debt was incurred by
fraud. State courts were then and are now divided over
the appropriate standard of proof in civil actions for
fraud. At the time Section 523 was enacted, some courts
required that fraud exceptions to discharge be proved by
clear and convincing evidence, while others applied the
preponderance standard. Thus, even if Congress should
be “presumed” to be aware of existing law in the ab-
sence of any evidence that the pertinent body of law was
called to its attention, Congress cannot be assumed to
have understood that fraud had to be proved by clear
and convincing evidence. Moreover, the original reasons
for applying a higher standard of proof in certain equi-
table actions for fraud have little or no application to
modern fraud actions for damages.

9
ARGUMENT

I. THE PREPONDERANCE OF THE EVIDENCE
STANDARD APPLIES IN ACTIONS UNDER SEC-
TION 523(a) OF THE BANKRUPTCY CODE TO
EXCEPT FROM DISCHARGE DEBTS INCURRED
BY FRAUD

Section 523 (a) (2) of the Bankruptcy Code, 11 U.S.C.
523(a) (2), excepts from discharge in bankrupcty any
debt of an individual debtor that arises from that debtor’s
fraudulent conduct.‘ The court of appeals held that a
creditor seeking to except a claim from discharge under
Section 523 (a) (2) must prove fraud by clear and con-
vincing evidence. Under the court of appeals’ decision,
principles of collateral estoppel would not apply where,
as here, a prior fraud judgment was obtained under a
preponderance of the evidence standard. This is an un-
warranted result. A plaintiff who has proved fraud in a
nonbankruptcy court need not, and should not, be re-
quired to retry the case in the bankruptcy court to pre-
serve the prior judgment from discharge.“

1 See note 3, supra.

5 We agree with the courts below that principles of collateral
estoppel apply in bankruptcy proceedings. See Pet. App. 6a-7a,
35a-36a. Although the Court formally reserved this question in
Brown v. Felsen, 442 U.S. 127 n.10 (1979), it subsequently stated
that “[i]n many cases * * principles of issue preclusion would
obviate the need for a bankruptcy court to reexamine factual ques-
tions.” Kelly v. Robinson, 479 U.S. 36, 48 n.8 (1986). Collateral
estoppel, unlike the doctrine of res judicata at issue in Brown v.
Felsen, supra, applies only to those factual issues actually and
necessarily determined in prior litigation between the parties. See
Montana v. United States, 440 U.S. 147, 153 (1979); Parklane
Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979). Consequently,
there is no danger that bankruptcy issues will be determined in
cases where the parties lack an adequate incentive to litigate them.
Where, as here, factual issues are actually litigated in nonbank-
ruptcy courts, application of collateral] estoppel principles is ap-
propriate and fully consistent with the prior decisions of this
Court. See generally Heiser v. Woodruff, 827 U.S. 726 (1946);

10

A. In a Proceeding to Except from Discharge a Debt
Incurred by Fraud, the Balance of Interests of the
Parties Requires Application of the Preponderance
of the Evidence Standard

1. Section 523 does not prescribe the standard of
proof applicable to claims that a debt is excepted from
discharge because of the debtor’s fraudulent conduct.
The legislative history of Section 523 and its predecessor,
Section 17 of the Bankruptcy Act 11 U.S.C. 35 (1976),
also are silent on this issue.“ Where Congress has not
specified a standard of proof, and the Constitution does
not require a particular standard, the courts will fill the
gap. See Herman & MacLean v. Huddleston, 459 U.S.
375, 389 (1983); Steadman v. SEC, 450 U.S. 91, 95

1981).

Fischer v. Pauline Oil & Gas Co., 309 U.S. 294, 302-303 (1940);
Davis v. Friedlander, 104 U.S. 570 (1881). Virtually every court
of appeals to consider the question has held that collateral estop-
pel is applicable in discharge exception proceedings. See In re
Braen, 900 F.2d 621 (3d Cir. 1990); Combs v. Richardson, 838
F.2d 112, 114 (4th Cir. 1988); Klingman v. Levinson, 831 F.2d
1292 (7th Cir. 1987); In re Shuler, 722 F.2d 1253, 1256 (5th
Cir.), cert. denied, 469 U.S. 817 (1984) ; Lovell v. Mixon, 719 F.2d
1373, 1376 (8th Cir. 1983); Spilman v. Harley, 656 F.2d 224, 226
n.2 (6th Cir. 1981). See also In re Lombard, 739 F.2d 499, 503
(10th Cir. 1984) (collateral estoppel applies at least where the
bankruptcy court does not have exclusive jurisdiction). But cf.
In re Houtman, 568 F.2d 651 (9th Cir. 1978) (judgment of a
nonbankruptcy court establishes only prima facie case of non-
dischargeability) .

We also agree with the court of appeals that collateral estoppel
applies in this case only if Section 523(a) requires proof of fraud
by a preponderance of the evidence. See Price Waterhouse v. Hop-
kins, 109 S. Ct. 1775 (1989).

o See S. Rep. No. 989, 95th Cong., 2d Sess. 77-80 (1978); H.R.
Rep. No. 595, 95th Cong., Ist Sess. 129-132, 363-365 (1977); 8.
Rep. No. 1173, 91st Cong., 2d Sess. (1970); H.R. Rep. No. 1502,
91st Cong., 2d Sess. (1970); H.R. Rep. No. 1409, 75th Cong., Ist
Sess. (1937); S. Rep. No. 1916, 75th Cong., 3d Sess. (1938).

7 The determination whether a debt is excepted from discharge
under Section 523(a) is a matter of federal bankruptcy law. See

11

The function of a standard of proof is to “allocate the
risk of error between the litigants and to indicate the
relative importance attached to the ultimate decision.”
Addington v. Teras, 441 U.S. 418, 423 (1979). The
standard of proof performs this function by “ ‘instruct-
[ing] the factfinder concerning the degree of confidence
our so.iety thinks he should have in the corr._tness of
factual conclusions.’” Ibid. (quoting In re Winship, 397
U.S. 358, 370 (1970) (Harlan, J., concurring)). The
preponderance standard is the only standard of proof
that results in a roughly equal allocation of the risk of
error between the parties; [al ny other standard ex-
presses a preference for one side’s interests.” Huddle-
ston, 459 U.S. at 390; Addington v. Texas, 441 U.S. at
423.“ Consequently, the Court has recognized that the
“preponderance-of-the-evidence standard [is] generally
applicable in civil actions,” unless “particularly impor-
tant individual interests or rights are at stake.” Huddle-
ston, 459 U.S. at 389-390. See also Santosky v. Kramer,
455 U.S. 745, 756 (1982); Addington v. Texas, 441 U.S.
at 423.“ Where no constitutional or other very important

Brown v. Felsen, 442 U.S. at 136. Accordingly, the standard of
— in a Section 523(a) proceeding is also a matter of federal
aw.

A heightened standard of proof not only increases the prob-
ability that an error will favor the debtor, but also increases the
overall probability of an erroneous decision. See Winter, The
Jury and the Risk of Nonpersuasion, 5 Law & Soc. Rev. 335, 337
(1970); Ball, The Moment of Truth: Probability Theory and
Standards of Proof, 14 Vand. L. Rev. 807, 816-817 (1961).

The Court has required proof by clear and convincing evidence
only where constitutional or other highly important individual in-
terests are at stake. See, e.g., Santosky v. Kramer, supra (proceed-
ing to terminate parental rights); Addington v. Texas, supra (in-
voluntary civil commitment proceedings); Boddie v. Connecticut,
401 U.S. 371 (1971) (right to sue for divorce); Woodby v. INS,
385 U.S. 276 (1966) (determination of alien’s deportability) ; New
York Times v. Sullivan, 376 U.S. 254 (1964) (First Amendment
rights); Chaunt v. United States, 364 U.S. 350 (1960) (proceed-
ing to revoke United States citizenship) ; Schneiderman v. United

12

individual right is implicated, the Court has applied the
preponderance standard, even where severe civil sanc-
tions may be imposed. See, e.g., Huddleston, 459 U.S. at
389-390; Steadman v. SEC, supra (proceeding to perma-
nently bar individual, on grounds of fraud, from securi-
ties industry); United States v. Regan, 232 U.S. 37, 48-
49 (1914) (civil suit that may expose defendant to crim-
inal prosecution). In this case, as in Huddleston, “the
balance of interests * * * warrants use of the preponder-
ance standard.” 459 U.S. at 390. :

2. A discharge in bankruptcy affords the debtor “a
new opportunity in life and a clear field for future ef-
fort, unhampered by the pressure and discouragement of
preexisting debt.” Local Loan Co. v. Hunt, 292 U.S.
234, 244 (1934). But Congress has made this fresh
start available only to “the honest debtor.” Jbid. In
enacting Section 523(a), Congress determined that the
fresh start policy should not override an innocent vic-
tim’s interest in obtaining redress for fraud. As the
Court observed in the context of another exception to dis-
charge, the fresh start policy “cannot override the spe-
cific policy judgments made by Congress in enacting the
[exceptions to discharge].” United States v. Sotelo, 436
U.S. 268, 279 (1978); see also 1 D. Cowans, Cowans
Bankruptcy Law and Practice § 6.2, at 691-692 (1989)
(the fresh start policy “is not so important * * * as to
negate other important policies which the law feels a
responsibility to foster and abet“).

This Court has held that the debtor’s interest in ob-
taining a discharge is not a constitutional right or a
fundamental interest. In United States v. Kras, 409 U.S.
434, 446 (1973), the Court held that “[t]here is no con-
stitutional right to obtain a discharge of one’s debts in

States, 320 U.S. 118, 125, 159 (1943) (denaturalization proceed-
ings). See also Cruzan v. Director, Missouri Dep’t of Health, No.
88-1503 (June 25, 1990) slip op. 17-19 (State may require clear
and convincing proof of patient’s choice to discontinue life-sustain-
ing treatment).

13

bankruptcy.” Because the Court saw “no fundamental
interest that is gained or lost depending on the avail-
ability of a discharge in bankruptcy,” id. at 445, it held
that a debtor who fails to pay bankruptcy court fees may
be denied a discharge of all debts. The more limited
question whether a particular debt is subject to discharge
can hardly rise above the level of importance of the com-
plete denial of a discharge in bankruptcy at issue in
Kras.

On the other hand, the innocent victim’s interest in
obtaining compensation for fraud is at least as important
as the defrauding debtor’s interest in obtaining a fresh
start. The policy against discharging debts incurred by
fraud is deeply embedded in the bankruptcy law, and has
been recognized in every bankruptcy statute since the
Act of March 2, 1867.” In this case, moreover, petition-
ers are “among the very individuals Congress sought to
protect in the securities laws.” Huddleston, 459 U.S.
at 390.

In short, Section 523(a) (2) represents a congressional
judgment ihat certain wrongful conduct by a debtor
should not be forgiven in bankruptcy. In deciding
whether such wrongful conduct has been shown, there
is no indication that Congress intended to tip the scales
in favor of the debtor and against the victim of fraud.
Judicial implication of a standard of proof favoring the

10 See Act of Mar. 2, 1867, ch. 176, §33, 14 Stat. 517; Act of
July 1, 1898, ch. 541, § 17, 30 Stat. 550; Act of June 22, 1938, ch.
575, § 17a, 52 Stat. 840. In the 1898 statute, Congress provided
that “judgments” sounding in fraud were excepted from discharge.
In 1903, Congress substituted the term “liabilities” for “judg-
ments.” Act of Feb. 5, 1903, ch. 487, §5, 32 Stat. 798. As the
Court has noted, the 1903 amendment was intended to broaden
the category of claims excepted from discharge. Brown v. Fel-
sen, 442 U.S. at 138 (quoting H.R. Rep. No. 1698, 57th Cong., Ist
Sess. 3, 6 (1902)). In this case, the court of appeals’ decision in
effect permits some fraud claims to be discharged even if they
have been reduced to judgment, a result inconsistent even with
the narrow fraud exception of the 1898 statute,

12

individual right is implicated, the Court has applied the
preponderance standard, even where severe civil sanc-
tions may be imposed. See, e.g., Huddleston, 459 U.S. at
389-390; Steadman v. SEC, supra (proceeding to perma-
nently bar individual, on grounds of fraud, from securi-
ties industry); United States v. Regan, 232 U.S. 37, 48-
49 (1914) (civil suit that may expose defendant to crim-
inal prosecution). In this case, as in Huddleston, “the
balance of interests * * * warrants use of the preponder-
ance standard.” 459 U.S. at 390.

2. A discharge in bankruptcy affords the debtor “a
new opportunity in life and a clear field for future ef-
fort, unhampered by the pressure and discouragement of
preexisting debt.” Local Loan Co. v. Hunt, 292 U.S.
234, 244 (1934). But Congress has made this fresh
start available only to “the honest debtor.” Jbid. In
enacting Section 523(a), Congress determined that the
fresh start policy should not override an innocent vic-
tim’s interest in obtaining redress for fraud. As the
Court observed in the context of another exception to dis-
charge, the fresh start policy “cannot override the spe-
cific policy judgments made by Congress in enacting the
[exceptions to discharge].” United States v. Sotelo, 436
U.S. 268, 279 (1978); see also 1 D. Cowans, Cowans
Bankruptcy Law and Practice § 6.2, at 691-692 (1989)
(the fresh start policy “is not so important * * * as to
negate other important policies which the law feels a
responsibility to foster and abet”).

This Court has held that the debtor’s interest in ob-
taining a discharge is not a constitutional right or a
fundamental interest. In United States v. Kras, 409 U.S.
434, 446 (1973), the Court held that t] here is no con-
stitutional right to obtain a discharge of one's debts in

States, 320 U.S. 118, 125, 159 (1943) (denaturalization proceed-
ings). See also Cruzan v. Director, Missouri Dep’t of Health, No.
88-1503 (June 25, 1990) slip op. 17-19 (State may require clear
and convincing proof of patient’s choice to discontinue life-sustain-
ing treatment).

“a.

2 a ED melt

13

bankruptcy.” Because the Court saw “no fundamental
interest that is gained or lost depending on the avail-
ability of a discharge in bankruptcy,” id. at 445, it held
that a debtor who fails to pay bankruptcy court fees may
be denied a discharge of all debts. The more limited
question whether a particular debt is subject to discharge
can hardly rise above the level of importance of the com-
plete denial of a discharge in bankruptcy at issue in
Kras.

On the other hand, the innocent victim’s interest in
obtaining compensation for fraud is at least as important
as the defrauding debtor’s interest in obtaining a fresh
start. The policy against discharging debts incurred by
fraud is deeply embedded in the bankruptcy law, and has
been recognized in every bankruptcy statute since the
Act of March 2, 1867." In this case, moreover, petition-
ers are “among the very individuals Congress sought to
protect in the securities laws.” Huddleston, 459 U.S.
at 390.

In short, Section 523(a) (2) represents a congressional
judgment that certain wrongful conduct by a debtor
should not be forgiven in vankruptey. In deciding
whether such wrongful conduct has been shown, there
is no indication that Congress intended to tip the scales
in favor of the debtor and against the victim of fraud.
Judicial implication of a standard of proof favoring the

10 See Act of Mar. 2, 1867, ch. 176, §33, 14 Stat. 517; Act of
July 1, 1898, ch. 541, § 17, 30 Stat. 550; Act of June 22, 1938, ch.
575, § 17a, 52 Stat. 840. In the 1898 statute, Congress provided
that “judgments” sounding in fraud were excepted from discharge.
In 1903, Congress substituted the term “liabilities” for “judg-
ments.” Act of Feb. 5, 1903, ch. 487, § 5, 32 Stat. 798. As the
Court has noted, the 1903 amendment was intended to broaden
the category of claims excepted from discharge. Brown v. Fel-
sen, 442 U.S. at 138 (quoting H.R. Rep. No. 1698, 57th Cong., Ist
Sess. 3, 6 (1902)). In this case, the court of appeals’ decision in
effect permits some fraud claims to be discharged even if they
have been reduced to judgment, a result inconsistent even with
the narrow fraud exception of the 1898 statute,

14

defrauding debtor would undermine Congress’s express
policy judgment that the victims of the debtor’s fraud
should be protected from discharge of the debt owed them
by the bankrupt.

B. A Preponderance Standard of Proof for Proceed-
ings Under Section 523 Is Consistent with Section
727 of the Bankruptcy Code and Important Non-
bankruptcy Fraud Statutes

1. Although the Bankruptcy Code and its legislative
history are silent as to the standard of proof in a Sec-
tion 523 (a) proceeding based on fraud, the legislative
history of Section 727 of the Code, 11 U.S.C. 727, sug-
gests that Congress intended a preponderance standard
to apply under Section 523(a). Section 727 authorizes
the bankruptcy court to grant a discharge in a Chapter
7 liquidation proceeding except in certain circumstances.
One exceptional circumstance arises where the debtor has
engaged in conduct that would operate as a fraud on the
bankruptcy court. 11 U.S.C. 727(a)(4)." Both the
House and the Senate Reports state that this] ground
for denial of discharge is the commission of a bank-
ruptcy crime, though the standard of proof is preponder-
ance of the evidence rather than proof beyond a reason-

11 Specifically, Section 727 (a) (4) denies the debtor a discharge
if:
the debtor knowingly and fraudulently, in or in connection
with the case—

(A) made a false oath or account;

(B) presented or used a false claim;

(C) gave, offered, received, or attempted to obtain
money, property, or advantage, or a promise of money,
property, or advantage, for acting or forbearing to act;

(D) withheld from an officer of the estate entitled to
possession under this title, any recorded information, in-
cluding books, documents, records, and papers, relating to
the debtor’s property or financial affairs.

Section 152, 18 U.S.C., imposes criminal liability on a debtor who
engages in the above conduct.

— —ũ— l —E——ĩ—

15

able doubt.” H.R. Rep. No. 595, 95th Cong., Ist Sess.
384 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 99
(1978). Congress thus instructed the bankruptcy court
to deny a discharge as to all debts if it determines, by
a preponderance of the evidence, that the debtor has
committed certain fraudulent acts.“ Section 523 (a)
merely excepts from discharge particular debts based on
fraudulent conduct. Given that Congress instructed the
courts to apply a preponderance standard for fraud un-
der Section 727—when the consequence is total ineli-
gibility for discharge—it is unlikely that Congress would
have applied a higher standard of proof under Section
523—-when the consequence is simply to except from dis-
charge a particular debt.”

2. In the absence of clear congressional direction, this
Court has declined to construe the Bankruptcy Code so
as to create “an extraordinary exemption from non-
bankruptcy law.” United States v. Ron Pair Enter-
prises, Inc., 109 S. Ct. 1026, 1032 (1989) (quoting Mid-

12Prior to enactment of the Bankruptcy Code, the courts of
appeals held that the preponderance standard applied in this con-
text. See, e.g., In re Robinson, 506 F.2d 1184, 1187 (2d Cir. 1974);
Union Bank v. Blum, 460 F.2d 197, 200-201 (9th Cir. 1972). The
Code codified this understanding. Remarkably, some bankruptcy
courts have refused to give effect to the plain statements in the
legislative history or the pre-Code decisions of the courts of ap-
peals. See, e.g., In re Garcia, 88 Bankr. 695, 699 (Bankr. E.D. Pa.
1988) (citing cases). These decisions are plainly wrong.

1 The preponderance standard in Section 727 also belies the
notion underlying the decision below that Congress must have
legislated against the backdrop of a “prevailing view” that fraud
had to be proved by clear and convincing evidence. Section 727—
like Section 523—is silent as to the standard of proof, yet Congress
plainly intended the preponderance of the evidence standard to
apply. See H.R. Rep. No. 595, supra, at 384; S. Rep. No. 989, supra,
at 99. It seems likely that the only reason Congress expressly stated
its intent in the legislative history of Section 727 was that the
fraud covered by that section is also subject to criminal sanctions
under 18 U.S.C. 152, a concern not presented in the same manner
with respect to Section 523.

16

lantic Nat’l Bank v. New Jersey Dep’t of Environmental
Protection, 474 U.S. 494, 501 (1986)). Application of
the clear and convincing evidence standard in Section
523 proceedings based on fraud would in effect exempt
debtors in bankruptcy from important federal non-
bankruptcy laws that require proof of fraud only by a
preponderance of the evidence. For example, Congress
has provided expressly that the preponderance standard
shall apply in fraud actions brought by the United States
under the False Claims Act. See 31 U.S.C. 3731(c).
Similarly, Congress enacted FIRREA in 1989, Pub. L.
No. 101-73, 103 Stat. 183, in part “[t]o strengthen the
* * * penalties for defrauding or otherwise damaging
[financial] institutions and their depositors.” Joint Ex-
planatory Statement of the Committee of Conference,
135 Cong. Rec. H5172, H5174 (daily ed. Aug. 4, 1989) ;
see 12 U.S.C. 1818(i) (expanding civil penalties for
bank fraud); 12 U.S.C. 1833a (e) (expressly providing
that preponderance standard applies to civil actions
brought by the Attorney General to recover civil penal-
ties for certain fraudulent conduct involving financial in-
stitutions). The FDIC obtains judgments for civil fraud
against persons who defraud banks or thrift institutions
under a variety of provisions; including the money pen-
alty provisions of the FDIA, 12 U.S. C. 1818 (i),
1821(k)-(l), the securities laws, the civil provisions of
the RICO statute, and the antifraud provisions of the
Commodity Exchange Act (CEA). Claims under each
of these provisions generally are subject to proof by a
preponderance of the evidence.“ In addition, this Court
has held that the preponderance standard applies in cases,
such as the prior litigation at issue here, brought under
Section 10(b) of the Securities Exchange Act and Com-

14 See United States v. Local 560, Int'l! Bhd. of Teamsters, 780
F.2d 267, 279 n.12 (3d Cir. 1986) (RICO); First Nat'l Monetary
Corp. v. Weinberger, 819 F.2d 1334, 1340 (6th Cir. 1987) (CEA).
In addition, the FDIC pursues state law remedies for fraud in
states that require proof of common law fraud only by a prepon-
derance of the evidence.

17

mission Rule 10b-5, Herman & MacLean v. Huddleston,
supra.

The clear and convincing evidence standard, if adopted
by this Court, would require fraud victims who have suc-
cessfully litigated fraud claims under the preponderance
standard prescribed for various important antifraud
statutes to litigate their claims anew, under a higher
standard of proof, in the bankruptcy court. The Court
should decline to adopt a standard of proof in discharge
exception proceedings that is “in clear conflict with * * *
federal laws of great importance.” United States v. Ron
Pair Enterprises, Inc., 109 S. Ct. at 1033.“

15 Congress has enacted significant additional securities antifraud
legislation without disturbing the Huddleston holding. See H.R.
Rep. No. 355, 98th Cong., Ist Sess. 15-16 (1983) (report accompany-
ing the Insider Trading Sanctions Act of 1984, Pub. L. No. 98-379,
98 Stat. 1264).

16 Such wasteful relitigation would be minimized by applying a
preponderance standard in Section 523 (a) proceedings. If the
creditor has obtained a judgment for fraud in a prior proceeding,
under either the preponderance standard or the clear and convincing
standard, relitigation in the bankruptcy court will be barred by
principles of collateral estoppel so long as the identical issues were
actually and necessarily determined in the prior litigation. If the
plaintiff has litigated and lost a fraud claim in a prior proceeding,
under either standard of proof, relitigation would not be permitted
in the bankruptcy court. This is so because Section 523 does not
provide a substantive cause of action for fraud. The fraud victim’s
claim must arise out of federal securities law, state common law, or
some other nonbankruptcy source of law with its own standard of
proof. If the plaintiff has failed to establish a right to recover in
the prior litigation, there is no debt to be excepted from discharge.
See Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156,
161 (1946) (whether “claims of creditors are valid and subsisting
obligations against the bankrupt” is generally determined by refer-
ence to state law).

18

II. APPLICATION OF THE CLEAR AND CONVINC-
ING EVIDENCE STANDARD TO THE FRAUD
EXCEPTION TO DISCHARGE WAS NOT A WELI-
ESTABLISHED PRE-CODE BANKRUPTCY PRAC-

TICE

In construing the Bankruptcy Code, this Court has
said that, absent clear direction from Congress, it will
look to well-established judicial interpretations under
prior bankruptcy law. See Pennsylvania v. Davenport,
110 S. Ct. 2126, 2133 (1990); Kelly v. Robinson, 479
U.S. 36, 47 (1986) ; Midlantic Nat’l Bank v. New Jersey
Dep’t of Environmental Protection, 474 U.S. 494 (1986).
In this case, the court of appeals presumed that Con-
gress was aware at the time of enacting Section 523 that
the “prevailing view” was that fraud had to be proved
by clear and convincing evidence in both discharge excep-
tion proceedings and common law actions for damages.
Pet. App. 13a. The fundamental difficulty with the
court’s analysis is that there was no established judicial
practice of requiring that fraud exceptions to discharge
be proved by clear and convincing evidence. In fact, the
courts were and are divided over the standard of proof
applicable in civil fraud actions generally, and in bank-
ruptey exception proceedings in particular. What is
more, there is no indication that Congress was made
aware of judicial decisions articulating the pertinent
standard of proof, or focused on this issue at all.“

17 In addition, a clear and convincing standard for fraud could
lead to application of different standards of proof to the various
exceptions to discharge enumerated in Section 523(a). Several of
the ten categories of excepted debts set out in Section 523 (a) are
unrelated to fraud. See, e. g., 11 U.S.C. 523 (a) (1) (A)-(B) (certain
tax liabilities), 523 (a) (5) (alimony and child support), 523 (a) (6)
(certain educational loans), 52304) (9) (judgment or consent decree
for driving while intoxicated). There is no indication that Congress
intended some excepted debts to be treated less favorably than
others. Consequently, the Court should hesitate to require that some

19

A. The Standard of Proof Applicable to Fraud Excep-

tions to Discharge Was Not Well-Established Prior
to 1978

1. Prior to 1970, the bankruptcy courts shared with
the state courts concurrent jurisdiction to determine
whether a debt was excepted from discharge because it
arose from the debtor’s fraudulent conduct. As a mat-
ter of practice, however, the bankruptcy courts generally
did not decide whether particular debts were excepted
from discharge. See 1A J. Moore, J. Mulder & L. King,
Collier on Bankruptcy J 17.28, at 1726-1727 (14th ed.
1978). Instead, the dischargeability question typically
was litigated in the state courts, in one of two situations.
First, a creditor who had obtained a fraud judgment
prior to the bankruptcy proceeding might seek to enforce
the judgment in state court after the debtor received a
discharge. The debtor would then invoke the discharge
as a defense to the enforcement action. See, e. g., First-
Citizens Bank & Trust Co. v. Parker, 232 N.C. 512, 61
S.E.2d 441 (1950); Morris v. Levin, 302 III. App. 173,
23 N.E.2d 779 (1939). Second, the creditor might wait
until after the debtor emerged from bankruptcy to sue
for fraud. Again, the debtor would invoke his discharge
as a defense to that action. See, e. g., Atlas Credit Corp.
v. Miller, 216 So. 2d 100 (La. Ct. App. 1968); House-
hold Finance Corp. v. Altenberg, 5 Ohio St. 2d 190, 214
N.E.2d 667 (1966). In both situations, a significant

exceptions be proved by clear and convincing evidence while others
require proof only by a preponderance of the evidence.

Indeed, a clear and convincing standard for fraud might lead
to application of different standards of proof under Section 523
(a)(2). That provision excepts from discharge not only debts
incurred through fraud, but debts incurred as a result of “false
pretenses, a false representation, or actual fraud.” (Emphasis sup-
plied). The most natural interpretation of this disjunctive language
is that Section 523(a)(2) excepts certain debts in addition to those
incurred as a result of “actual fraud.” Thus, cases considering the
standard of proof applicable to allegations of actual fraud may not
apply to all excepted debts under Section 523(a) (2).

20

number of courts—often simply applying the standard of
proof applicable in the underlying state cause of action
to the defense of discharge—required the creditor to
prove fraud only by a preponderance of the evidence.
See, e. g., Sweet v. Ritter Finance Co., 263 F. Supp. 540,
543 (W.D. Va. 1967); Nickel Plate Cloverleaf Federal
Credit Union v. White, 120 Ill. App. 2d 91, 92-94, 256
N.E.2d 119, 120-121 (1970); Gonzales v. Aetna Finance
Co., 86 Nev. 271, 468 P.2d 15 (1970) ; Beneficial Finance
Co. v. Machie, 6 Conn. Cir. Ct. 37, 40-41, 263 A.2d 707,
710 (1969) ; Budget Finance Plan v. Haner, 92 Idaho 56,
59, 436 P.2d 722, 725 (1968); Mac Finance Plan, Inc.
v. Stone, 106 N.H. 517, 521-522, 214 A.2d 878, 882
(1965); Atlas Credit Corp. v. Miller, supra; Household
Finance Corp. v. Altenberg, supra.“ See also Ames v.
Moir, 138 U.S. 306, 312 (1891) (affirming determina-
tion that a debt was excepted from discharge under the
1867 Bankruptcy Act where jury was instructed that it
could find fraud by a preponderance of the evidence un-
der state law). “ Those courts that applied a clear and

18 Applying the standard of proof applicable to the underlying
cause of action for fraud was consistent with the theory that a
discharge did not extinguish the debt, but merely provided a de-
fense to the enforcement of the debt. See 1A J. Moore, J. Mulder
& L. King, Collier on Bankruptcy { 17.27, at 1719 (14th ed. 1978);
see also J. Moore & E. Levi, Gilbert’s Collier on Bankruptcy { 572,
at 382-383 (4th ed. 1987) (discussing pleading requirements for
asserting discharge as a defense).

10 In Oriel v. Russell, 278 U.S. 358, 362-364 (1929), the Court
held that a bankruptcy trustee’s right to a “turnover” order must
be established by clear and convincing evidence. The Court observed
that a charge of failure to turn over property was “equivalent to
one of fraud” (id. at 362), but the Court’s decision rested primarily
on the fact that “the [turnover] proceeding is one in which coercive
methods by imprisonment [for civil contempt] are probable and are
foreshadowed.” Id. at 363. The Court observed that, in the context
of a turnover order, a heightened standard of proof would prevent
delays caused by “efforts on the part of bankrupts to retry the
issue presented on the motion to turn over.” Ibid. In the context

21

convincing standard of proof often did so because the
heightened standard applied in that state to proof of
fraud in the first instance. See, e. g., Tek-Ni-Kal Fri-
ployees Credit Union v. Atkins, 12 Mich. App. 1, 4, 162
N.W.2d 299, 300 (1968); Household Finance Corp. v.
Williams, 66 Wash. 2d 183, 185, 401 P.2d 876, 877
(1965) ; First Nat’l Bank v. Scieszinski, 25 Wis. 2d 569,
572, 131 N.W.2d 308, 810 (1964).

2. In 1970, Congress amended the Bankruptcy Act to
give the bankruptcy courts exclusive jurisdiction over the
dischargeability of certain debts, including debts arising
from fraud. Following the 1970 amendments, some fed-
eral courts applied the preponderance standard to such
claims, see, e. g., Fierman v. Lazarus, 361 F. Supp. 477,
480 (E.D. Pa. 1973); In re Scott, 1 Bankr. Ct. Dec.
(CRR) 581, 583 (Bankr. W.D. Mich. 1975), while others
applied the clear and convincing evidence standard of
proof, see, e.g., Brown v. Buchanan, 419 F. Supp. 199
(E.D. Va. 1975); In re Arden, 75 Bankr. 707, 710-711
(Bankr. D.R.I. 1975). Thus, there was no established
and consistent practice among courts regarding the stand-
ard of proof applied in discharge exception proceedings
that Congress could be said to have ratified sub silentio
in enacting Section 523 in 1978.

Here, no evidence exists that Cungress was made aware
of any judicial decisions discussing what standard of
proof to apply in discharge exception proceedings, let
alone decisions applying a clear and convincing standard.
And, as set out above, the law as to what standard ap-
plied was far from clear. Thus, the court of appeals’
“presum[ption]”—based on congressional silence, Pet.
App. 13a—was wholly unwarranted.

of Section 523, however, the typical preponderance standard will
avoid such delays.

B. The Courts Are Divided Over the Standard of Proof
Applicable to Civil Actions for Fraud

Although this Court has referred to the heightened
standard of proof “traditionally” imposed in civil fraud
cases, see Cruzan v. Director, Missouri Dep’t of Health,
No. 88-1503 (June 25, 1990) slip op. 18 (quoting Woodby
v. INS, 385 U.S. at 285 n.18), close examination of the
cases reveals that, both before and after the enactment
of the Bankruptcy Code in 1978, the courts were deeply
divided over the appropriate standard of proof in civil
actions for fraud. As early as 1943, this Court applied
the preponderance of the evidence standard in a civil
fraud action under the securities laws. SEC v. C.M.
Joiner Leasing Corp., 320 U.S. 344, 355 (1943) (15
U.S.C. 77q(a)). In addition, both before and after 1978,
a significant number of state courts have held that the
preponderance standard applies in civil actions for
fraud.“ Moreover, several pre-Code treatises state that

20 See Saxton v. Harris, 395 P.2d 71, 72 (Alaska 1964); Sellers
v. West-Ark Constr. Co., 283 Ark. 341, 343-344, 676 S.W.2d 726,
728 (1984) (preponderance standard in cases tried to a jury; clear
and convincing proof needed to cancel or reform a writing in
equity); Clay v. Brand, 236 Ark. 236, 242-243, 365 S.W.2d 256,
259-260 (1963); Liodas v. Sahadi, 19 Cal. 3d 278, 289-290, 562
P.2d 316, 320-324, 137 Cal. Rept. 635, 641-642 (1977); Kern v.
NCD Indus., Inc., 316 A.2d 576, 582 (Del. Ch. 1973); Nye
_Odorless Incinerator Corp. v. Felton, 35 Del. 236, 162 A. 504

(1932); Watson Realty Corp .v. Quinn, 452 So. 2d 568, 569 (Fla.
1984); Rigot v. Bucci, 245 So. 2d 51, 53 (Fla. 1971); City Dodge,
Inc. v. Gardner, 232 Ga. 766, 770, 208 S.E. 2d 794, 798 (1974);
Milligan v. Milligan, 209 Ga. 743, 744, 76 S.E.2d 18, 19 (1953)
(fraud “being in itself subtle, slight circumstances may be sufficient
to carry conviction of its existence”); Grissom v. Moran, 154 Ind.
App. 419, 427, 290 N.E.2d 119, 123 (1972); LaCaze v. Louisiana,
541 So. 2d 322, 328 (La. Ct. App. 1989); Atlas Credit Corp. v.
Miller, 216 So. 2d 100, 101 (La. Ct. App. 1968); La. Civ. Code
Ann. art. 1957 (West 1987); Martin v. Guarantee Reserve Life
Ins. Co., 279 Minn. 129, 137-138, 155 N.W.2d 744, 749 (1968);
Cowan v. Westland Realty Co., 162 Mont. 379, 382-383, 512
P. 2d 714, 716 (1973); Tobin v. Flynn & Larsen Implement Co.,

the preponderance standard applies to many or most
civil proceedings involving allegations of fraud.“ It is

220 Neb. 259, 262-263, 369 N. W. 2d 96, 99 (1985) (preponderance
standard applies in actions at law for damages); Murphy Fin.
Co. v. Fredericks, 177 Neb. 1, 4-5, 127 N. W. 2d 924, 926 (1964)
(same); Fischetto Paper Mill Supply, Inc. v. Quigly Co., 3 N.J.
149, 155, 69 A.2d 318, 321 (1949) (approving “greater weight of the
evidence” instruction); Medivor Productions, Inc. v. Hoffman-
LaRoche, Inc., 107 N.J. Super. 47, 69, 256 A.2d 803, 814-815 (1969)
(preponderance standard applies in legal actions; clear and convinc-
ing standard applies in equitable actions); Maynard v. Durham &
Southern Ry., 251 N.C. 783, 787-788, 112 S.E.2d 249, 252 (1960),
(preponderance of the evidence sufficient to set aside instrument
procured by fraud; clear and convincing proof required to reform
instrument) rev’d on other grounds, 365 U.S. 160 (1961) ; Household
Fin. Corp. v. Altenberg, 5 Ohio St. 2d at 192-194, 34 Ohio Op. 2d
at 348-349, 214 N.E.2d at 669-670 (preponderance standard applies
to legal actions for fraud; clear and convincing standard applies to
equitable actions); Ostalkiewicz v. Guardian Alarm, 520 A.2d 563,
569 (R.I. 1987); Smith v. Rhode Island Co., 39 R.I. 146, 153-154,
98 A. 1, 4 (1916); General Electric Credit Corp. v. M.D. Aircraft
Sales, Inc., 266 N.W.2d 548, 550 (S.D. 1978); Aschoff v. Mobil Oil
Corp., 261 N.W.2d 120, 125 (S.D. 1977); Piccadilly Square v.
Intercontinental Constr. Co., 782 S.W.2d 178, 184 (Tenn. App.
1989) ; James v. Joseph, 156 Tenn. 417, 424, 1 S.W. 2d 1017 (1928);
Wirtz v. Orr, 575 S.W.2d 66, 70-71 (Tex. Civ. App. 1978); Wyatt
v. Chambers, 182 S.W. 6, 18 (Tex. Civ. App. 1915). Cf. Travelers
Indem. Co. v. Armstrong, 442 N.E.2d 349, 361 (Ind. 1982) (clear
and convincing evidence required to obtain punitive damages for
fraud).

Illinois appears to have required proof of fraud only by a pre-
ponderance of the evidence until 1983, although thereafter it has
required clear and convincing proof. See L & S Enterprises Co. v.
Great American Ins. Co., 454 F.2d 457, 460 (7th Cir. 1971) (pre-
ponderance) ; Barrett v. Shanks, 382 III. 434, 47 N.E.2d 481 (1943)
(same); Hofmann v. Hofmann, 94 III. 2d 205, 222, 446 N. E. 2d
499, 506 (1983) (clear and convincing).

21 See, e.g., 37 Am. Jur. 2d Fraud and Deceit § 468 (1968); 37
C.J.S. Fraud § 94, 113 (1943); Annotation, Quantum of Proof in
Civil Case on Issue Involving Fraudulent, Dishonest, or Criminal
Misappropriation of Property, 62 A.L.R. 1449 (1929); 2 T. Cooley,
Treatise on the Law of Torts § 349, at 552-554 (4th ed. 1932); M.
Bigelow, The Law of Fraud and the Procedure Pertaining to the
Redress Thereof 474 (1877).

24

true that a majority of the States require that fraud be
proved by more than a preponderance of the evidence,
but the majority is far from overwhelming.” Even in
these States, moreover, courts sometimes apply a prepon-
derance standard.“ In other cases, the court’s formula-

22 See D.H. Holmes Dep't Store v. Feil, 472 So. 2d 1001 (Ala.
1985); Rhoads v. Harvey Publications, Inc., 145 Ariz. 142, 700
P.2d 840 (1984) ; Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo. 1982) ;
Miller v. Appleby, 183 Conn. 51, 55, 438 A.2d 811, 813 (1981)
(“clear and satisfactory evidence”); Pyne v. Jamaica Nutrition
Holdings, Ltd., 497 A.2d 118 (D.C. 1985); Dobison v. Bank
of Hawaii, 60 Haw. 225, 587 P.2d 1234 (1978); Magic Valley
Potato Shippers v. Continental Ins., 112 idaho 1073, 739 P.2d 372
(1987); Beeck v. Aquaslide ‘N’ Dive Corp., 350 N.W.2d 149, 155
(Iowa 1984) (“preponderance of clear, satisfactory, and convincing
evidence”); Stauth v. Brown, 241 Kan. 1, 734 P.2d 1063 (1987);
Sanford Constr. Co. v. S & H Contractors, Inc., 443 S.W.2d 227
(Ky. 1969) ; Butler v. Poulin, 500 A.2d 257 (Me. 1985); Peurifoy v.
Congressional Motors, Inc., 254 Md. 501, 255 A.2d 332 (1969);
Transitron Elec. Corp. v. Hughes Aircraft Co., 649 F.2d 871 (Ist
Cir. 1981) (Massachusetts law); Hi-Way Motor Co. v. Interna-
tional Harvester Co., 398 Mich. 330, 247 N.W.2d 813 (1976);
Tietjens v. General Motors Corp., 418 S.W.2d 75 (Mo. 1967); Lubbe
v. Barba, 91 Nev. 596, 540 P.2d 115 (1975); Caledonia, Inc. v.
Trainor, 123 N.H. 116, 459 A.2d 613 (1983); Snell v. Cornehl, 81
N. M. 248, 466 P.2d 94 (1970); Simcuski v. Saeli, 44 N.Y.2d 442,
377 N.E. 713, 406 N.Y.S. 2d 259 (1978); Buehner v. Hoeven, 228
N.W.2d 893 (N.D. 1975); Tice v. Tice, 672 P.2d 1168, 1171 (Okla.
1983) ; Bausch v. Myers, 273 Or. 376, 541 P.2d 817 (1975); Yoo Hoo
Bottling Co. v. Leibowitz, 432 Pa. 117, 247 A.2d 469 (1965); Davis
v. Upton, 250 S.C. 288, 157 S.E.2d 567 (1967) ; Schwartz v. Tanner,
576 P.2d 873 (Utah 1978); Bardill Land & Lumber, Inc. v. Davis,
135 Vt. 81, 370 A.2d 212 (1977); Gibson v. Gibson, 207 Va. 821,
153 S.E.2d 189 (1967); Beckett v. Department of Social & Health
Serv., 87 Wash. 2d 184, 550 P.2d 529, 531 (1976); Campbell v.
Campbell, 146 W. Va. 1002, 124 S.E.2d 345, 353 (1962) (“clear and
distinct proof“); Miles v. Mackle Bros., 73 Wis. 2d 84, 242 N.W.2d
247 (1976); Duffy v. Brown, 708 P.2d 433 (Wyo. 1985).

28 See, e.g., Kopeikin v. Merchants Mortgage & Trust Corp., 679
P.2d 599, 601 (Colo. 1984) (en banc) (fraudulent concealment) ;
Goodfellow v. Kattnig, 533 P.2d 58, 60 (Colo. Ct. App. 1975);
Modern Displays, Inc. v. Hennecke, 350 Mich. 67, 85 N.W.2d 80

25

tion of the standard of proof is so confusing that it is
difficult to know what standard it applied.

In short, both the state courts and the bankruptcy
courts were divided over the appropriate standard of
proof in fraud exception proceedings, as well as in civil
actions for fraud. Accordingly, there is no reason to
conclude on the basis of Congress’s silence that it was
implicitly ratifying a well-established practice of requir-
ing proof of fraud in discharge exception proceedings by
clear and convincing evidence. There simply was no such
well-established practice.

C. The Reasons for Requiring Clear and Convincing
Proof in Certain Fraud Actions are Inapplicable in
Section 523 Proceedings

As this Court has recognized, the practice of requiring
a heightened standard of proof in certain civil proceed-
ings involving fraud appears to have arisen in actions in
which a court of equity was requested to grant relief on
claims that were unenforceable at law for failure to com-
ply with the Statute of Frauds, the Statute of Wills, or
the parol evidence rule. See Herman & MacLean v.
Huddleston, 459 U.S. at 388 n.27. A higher standard of
proof subsequently was applied in actions seeking to set
aside or alter the terms of written instruments. The
heightened proof requirement was employed in such

(1957); Goodrich v. Waller, 314 Mich. 456, 22 N.W.2d 862 (1946) ;
In re Delligan’s Estate, 111 Vt. 227, 234-235, 13 A.2d 282, 287
(1940).

24 See, e.g., Arnett v. Sanderson, 25 Ariz. 433, 444, 218 P. 986,
990 (1923) (“It is true that proof of fraud should be clear and
convincing, but this does not mean that the clear and convincing
proof is not to be by a preponderance of the evidence; in fact,
fraud is determined by a preponderance of the evidence.“); Gilbert
v. Mid-South Machinery Co., 267 S.C. 211, 222-223, 227 S.E.2d 189,
194 (1976) (“Fraud must be established by a preponderance of the
evidence * * * and, while the evidence must be clear and convincing,
such clear and convincing proof may be met by a preponderance of
the evidence.”) (quoting 37 C.J.S. Fraud g 1l4a (1943)).

cases because they were believed to involve special dan-
gers that claims might be fabricated. Ibid. (citing Note,
Appellate Review in the Federal Courts of Findings Re-
quiring More than a Preponderance of the Evidence, 60
Harv. L. Rev. 111, 112 (1946)). In these cases, the
courts were concerned to protect the validity of written
instruments and the reliance placed upon such docu-
ments.”

The reasons for requiring proof by clear and convinc-
ing evidence have little relevance in proceedings to ex-
cept a debt from discharge under the Bankruptcy Code.
In many cases, ‘ncluding this one, the validity of a written
instrument is not at issue. In addition, many important
federal antifraud provisions “are not coextensive with
common-law doctrines of fraud.” Huddleston, 459 U.S.
at 388-389. In fact, as the Court observed in Huddleston,
statutory remedies for fraud were enacted precisely be-
cause of the shortcomings of common law fraud remedies.
Id. at 389. Accordingly, arguments based on the common
law of fraud have little application in the context of a
bankruptcy proceeding under Section 523(a).

25 The Court noted this history in Cruzan v. Director, Missouri
Dep’t of Health, No. 88-1503 (June 25, 1990), slip op. 18, and has
applied a heightened standard of proof to protect the integrity of
forma] documents in earlier cases. See United States v. American
Bell Tel. Co., 167 U.S. 224 (1897) (suit to set aside a patent);
Southern Dev. Co. v. Silva, 125 U.S. 247 (1888) (suit to rescind a
land purchase contract).

27

CONCLUSION

The judgment of the court of appeals should be re-
versed.

Respectfully submitted.

KENNETH W. STARR

Solicitor General
JOHN G. ROBERTS, JR.
Deputy Solicitor General
ROBERT A. LONG, JR.
Assistant to the Solicitor General
JAMES R. DOTY
General Counsel
PAUL GONSON
Solicitor
JACOB H. STILLMAN
Associate General Counsel
RICHARD A. KIRBY
Senior Litigation Counsel
JOSEPH O. CLICK
Attorney

Securities and Exchange Commission
Washington, D.C. 20549

ALFRED J.T. BYRNE
General Counsel
Federal Deposit Insurance Corporation
Washington, D.C. 20429

JULY 1990

„. &. coveenmant paimtine orrice; 1990 262203 961

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0702%3A6. Public record. Not legal advice.