Opinion
No. 74-B-1781
January 8, 1980
Former Bankruptcy Act — Discharge of Debts — False Statement — Intent to Defraud
A bankrupt's failure to separately identify accounts receivable on a financial statement submitted to the creditor, was not a material misrepresentation of the bankrupt's true financial position, so as to bar discharge of the debt under Section 14(c)(3) of the Bankruptcy Act. See Sec. 14(c)(3) at ¶ 2131.
[Digest of Opinion]
On remand of the factual issues before the court, evidence revealed that the bankrupt, who had dealt with the creditor for thirteen years, obtained a line of credit from the creditor-bank in the amount of $250,000. In October, 1973 an officer of bankrupt corporation delivered a May, 1973 financial statement which reflected an outstanding account receivable from a corporation, wholly owned by bankrupts, in the amount of $77,115.32. However, the note was renewed and subsequently renewed in January and April of 1974. In May 1974, the financial statement, as usual, was prepared by bankrupt's accountant. The financial statement totaled bankrupt's accounts receivable at $233,405.57, a figure which included but did not segregate the intercompany receivable figure from the bankrupt's wholly owned corporation. If these figures had been accurately described by bankrupt's accountant, bankrupt's working capital position would have been reduced by 80%.
The trustee alleged that in failing to segregate the receivables, the bankrupt had made a material misrepresentation in its financial statement, upon which the creditor had been wrongly caused to rely in extending credit for the note. Therefore, the trustee asserted that the debt should not be discharged under Sec. 14(a)(3) of the Bankruptcy Act.
The court found, however, that the bankrupts did not prepare this statement with actual knowledge that it was incorrect or with reckless indifference tot the actual facts, and therefore, there was no intent to deceive. Rather, the court found the bankrupt's testimony credible that the February and April loan had been automatically, renewed and that bankrupt believed the statement was a mere formality. Further, although bankrupt's accountant had violated the rules of his profession in not segregating the receivables, the bankrupts had accepted their accountant's work product as "any reasonable businessman" would, and hence there was no fraudulent intent on their part to deceive.
Furthermore, the court found that the creditor did not rely on the May 31, 1974 financial statement, but did, in fact rely on prior dealings with the bankrupt and its own characterization of the loan renewal as being an automatic affair.
Therefore, the court concluded that the creditor chose not to rely on the financial statement, and that the statement was a mechanical prerequisite to what was in actuality an automatic renewal. Consequently, the debt was discharged.