Opinion
No. BK-78-52
August 29, 1978
Debts Not Affected By Discharge — False Financial Statement — Intentional Omission of Debts
The "fresh cash" portion of the renewal of a loan is nondischargeable, since the bankrupt, in applying for the second loan, failed by means of recklessness, to indicate the bulk of his indebtedness. These reckless omissions can be inferred to be intentional omissions for the purposes of Section 17a(2) of the Bankruptcy Act.
In explaining the discrepancies between the false financial statements filed and his actual indebtedness, the bankrupt stated that he was taking medication for a nervous condition and for this reason cannot recall events clearly. He did testify, however, that he had no intention of deceiving the plaintiff lender.
The loan manager testified that the first financial statement was relied upon, but that no credit check was made on the defendant. He stated that in the personal interview that the defendant did not appear to be on medication, and that the defendant's demeanor, along with the financial statement, was the major factor in granting the loan. However, in order to prove a case of reliance under Section 17a(2), the reliance must be reasonable. It is not reasonable to fail to check the credit application of a stranger. Thus, the plaintiff has not proven his case of non-dischargeability with respect to the initial indebtedness.
The fresh cash portion of the loan is another matter.
Here, the defendant could place reasonable reliance upon the good payment record of the bankrupt. Hence, it was not unreasonable to rely upon the fresh cash financial statement, as there were other valid factors influencing the decision to grant the second loan. Since reliance is reasonable as to the refinancing, the burden of proof shifts to the bankrupt to explain the discrepancies in the statement as opposed to the actual state of affairs. No adequate information from the bankrupt was adduced. At the very least, the omissions were due to recklessness on the defendant's part, and the intent to deceive can be inferred from such recklessness. Hence, the fresh cash portion of the loan is nondischargeable. See Sec. 17a(2) [§ 523(a)(2)] at ¶ 9228.