Opinion
No.
October 4, 1979
Discharge of Debts — Undischargeable Torts — False Representations — Extension of Credit
The rights of a creditor, as assignee, are limited by any defenses which may arise out of the contract between the bankrupt and the assignor. Therefore, since the assignor knew of the falsity of certain statements on the bankrupt's retail installment contract and financing statement, the creditor-assignee cannot claim that it had been defrauded and that the debt is nondischargeable by virtue of Section 17a(2) of the Bankruptcy Act. See Sec. 17a(2) at ¶ 2146 and Sec. 523 at ¶ 9228.
[Digest of Opinion]
Subsequent to the bankrupt's purchase of certain equipment, a retail installment contract and financing statement were executed by the bankrupt at the request of the seller to secure the unpaid balance of the bankrupt's account. Items of property purchased by the bankrupt approximately one year prior to the date of the documents and subject to other creditors' security interests were listed on the retail installment contract and financing statement. Additionally, two of the items contained on the documents had actually been purchased through other vendors, although they were represented to be part of the original sales transaction between the bankrupt and the seller.
The creditor, as assignee of the secured party seller, asserted that the bankrupt knowingly and fraudulently misrepresented the character of the property collateralized under the financing statement by concealing the existence of the prior liens. The creditor further alleged that the retail installment contract was a "completely spurious document" in that certain items listed on the contract were never purchased from the seller, and that none of the items listed listed were purchased on or about the date of the contract.
To bar discharge of a debt in bankruptcy under Section 17a(2), the creditor must show its reliance on the false representations of the bankrupt. The rights of the creditor, as an assignee, are limited by any defenses arising out of the contract between the seller and the bankrupt. It was found that the circumstances surrounding the execution of the retail installment contract indicated that the seller intended to treat the document "as a perfunctory device with which to bind the defendant to a payment schedule, and not as a statement of ownership or sales." Further, the document at no time was regarded as a current sales agreement, but rather was designed to secure payment on the bankrupt's account. Since the seller prepared the contract for the bankrupt's signature, and during the course of preparation presumably consulted its records such that it knew the property for which the debt was owed, no showing of reliance on the part of the seller had been shown. Therefore, the creditor, as assignee of the seller, has not sustained the burden of proof required to prevent discharge of a debt under Section 17a(2).