Opinion
No. 78 B 764
December 19, 1978
Bankrupts — Objection to Discharge — Willful Conversion
Money erroneously deposited into bankrupt's account and subsequently dissipated by bankrupt's corporation was not money willfully and maliciously converted which would make the debt dischargeable under Section 17a(2) of the Bankruptcy Act.
Bankrupt's corporation opened an account and obtained loans at a bank branch to which had been transferred an officer of the bank with whom bankrupt had previously become friendly. A bookkeeping error was made mistakenly crediting the corporation's account with $67,885.09 which was thereafter spent by the corporation before the bank discovered its error. Bankrupt learned of the error four months later at which time, according to a letter written by bankrupt's then attorney, bankrupt believed it to be an additional line of credit. Eleven months after the error was made, the bank contacted bankrupt about an overdraft resulting from the bank's reversing the erroneous deposit. By this time the entire $67,885.09 had disappeared. The bankrupt executed a corporate note for the amount then due, $116,684.63, and also executed and delivered to the bank his personal guaranty with respect to his corporation's indebtedness to the bank.
The bank contended that the bankrupt intentionally and maliciously converted the $67,885.09 and that therefore the amount of that debt could not be discharged in bankruptcy pursuant to Section 17a(2). The court found there to be no evidence that the erroneous deposit occurred as a result of any fraud or wrongful conduct on the part of the bankrupt and that the bank failed to establish by a preponderance of the credible evidence that the bankrupt was aware of the erroneous deposit until four months later at which time it was conceivable that if the bankrupt received the benefit of any portion or all of these monies, he did so prior to his becoming aware of the error. Therefore the bank's cause of action in its complaint for intentional and malicious conversion under Section 17a(2) was dismissed. See Sec. 17a(2) [§ 523(a)(2)] at ¶ 9228.
Bankrupts — Discharges, When Granted — Inadequate Records
Where the bulk of bankrupt's obligations arose out of business activties of the corporation in which he was president and one-third shareholder, and that corporation failed to keep adequate books and records such that bankrupt's creditors and trustee were precluded from ascertaining his true financial condition, bankrupt was denied a discharge under Section 14c(2) of the Bankruptcy Act.
No shares of stock in the corporation were ever issued to the three shareholders, no corporate income tax returns were produced, and the corporation kept no records other than check stubs and cancelled checks, and monthly commission statements received from various companies with which it did business. The corporation, aside from the $67,885.09 mistakenly deposited in its account borowed in excess of $128,0000.00 in its two years of existence while bankrupt testified that in that time the gross income of the corporation was approximately $35,000.00. The three shareholders received no salaries. Instead they drew upon corporate funds as their needs required and the availability of funds permitted. Bankrupt used corporate checks directly to pay numerous personal obligations and also wrote corporate checks to his wife.
The creditor bank objected to bankrupt's discharge under Section 14c(2) contending that the books of account and records of the corporation should be considered to be those of the bankrupt persnally and, as such, were inadequate to ascertain the financial condition and business transactions of the bankrupt.
In denying the bankrupt's discharge, the court first noted that Section 14c(2) is not confined solely to the "books of account or records" of the bankrupt. Where the corporate books and records are necessary to determine the bankrupt's pesonal financial condition and they are not produced, his discharge may be denied without resorting to establishing an alter ego relationship between bankrupt and corporation. In this instance, "the proof did establish the paucity of books of account or records from which the bankrupt's financial condition could be ascertained." such that the bankrupt failed to meet the conditions for obtaining a discharge, as required under Section 14c(2). See Sec. 14c(2) [§ 727(a)(3)] at ¶ 10,118.