Frank v. Michigan Paper Co., No. 966

No. 966 | 4th Cir. | Jul 12, 1910

KELLER, District Judge

(after stating the facts as above). Section 14b of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 550 [U. S. Comp. St. 1901, p. 3427]), as amended in 1903 (Act Feb. 5, 1903, c. 487, § 4, 32 Stat. 797 [U. S. Comp. St. Supp. 1909, p. 1310]), provides that upon the bankrupt’s application for a discharge the judge shall “investigate the merits of the application and discharge the applicant unless he has * * * (3) obtained property on credit from any person upon a materially false statement in writing made to such person for the purpose of obtaining such property on credit. * . * * ”

Section 17, as amended in 1903, provides that a discharge in bankruptcy “shall release a bankrupt from all of his provable debts except such as * * * (2) are liabilities for obtaining property by false pretences or false representations. * * * ”

The only question to be decided here is whether the action of McDonald in making the statement of September 30, 1907, can be successfully urged to prevent the granting of a discharge to Frank upon proceedings growing out óf his individual voluntary petition in bankruptcy. In this connection it becomes important to distinguish between the right to a discharge and the effect oí a discharge in bankruptcy. With regard to the latter, we think it clear from the language quoted from section 17 of the present bankruptcy act as amended in 1903 that a false representation by one partner, by means of which property was obtained by the partnership, will in law be imputed to the other partners to the extent of holding them civilly liable for the debt, and their discharge in bankruptcy will not discharge their liability as to such debt. Strang v. Bradner, 114 U.S. 555" court="SCOTUS" date_filed="1885-05-04" href="https://app.midpage.ai/document/strang-v-bradner-91404?utm_source=webapp" opinion_id="91404">114 U. S. 555, 5 Sup. Ct. 1038, 29 L. Ed. 248" court="SCOTUS" date_filed="1885-05-04" href="https://app.midpage.ai/document/strang-v-bradner-91404?utm_source=webapp" opinion_id="91404">29 L. Ed. 248; Schroeder v. Frey, 60 Hun (N. Y.) 58, 14 N.Y.S. 71" court="N.Y. Sup. Ct." date_filed="1891-04-17" href="https://app.midpage.ai/document/schroeder-v-frey-5500536?utm_source=webapp" opinion_id="5500536">14 N. Y. Supp. 71; Collier on Bankruptcy (6th Ed.) page 225. As applied to partnership debts these questions ought to be considered in connection with the fact that under the present bankruptcy act a partnership is a “legal entity”; consequently a materially false statement made in writing by one of the partners (without the knowledge of the others) for the-purpose of obtaining credit on behalf of the partnership, and by means of which such credit is obtained, is (1) the act of the individual partner making it, and (2) the act of the legal entity called ■ the “partnership,” and hence both the partner making such statement and the legal entity called the “partnership” are chargeable with having done one of the acts, the doing of which will, upon objection being properly made, prevent the granting of a discharge under section 14b, Bankr. Act 1898, as amended in 1903; and it follows that any “party in interest” can successfully oppose the discharge of the acting partner and of the “partnership.”

Under the existing statute the question of what will bar a discharge has now been passed upon by at least three different Circuit Courts of Appeals, and all of these decisions are in substantial harmony in holding that the bar to a discharge by reason of a false statement in writing is confined to such person or persons as actually made such statement with the intention to deceive, and to the partnership entity of which such person was a member.

In Hardie v. Swafford Bros. Dry Goods Co., 165 F. 588" court="5th Cir." date_filed="1908-12-01" href="https://app.midpage.ai/document/hardie-v-swafford-bros-dry-goods-co-8769145?utm_source=webapp" opinion_id="8769145">165 Fed. 588, 91 C. C. A. 426, 20 L. R. A. (N. S.) 785, the Circuit Court of Appeals for the Fifth Circuit (Shelby, Circuit Judge, dissenting), reversing the District Court for the Western District of Texas (143 F. 607" court="W.D. Tex." date_filed="1906-02-23" href="https://app.midpage.ai/document/in-re-a-f-hardie--co-8759851?utm_source=webapp" opinion_id="8759851">143 Fed. 607), in a case in every way similar to the one at bar, held that a materially false statement in writing made by a partner in the ordinary course of business of the partnership for the purpose of obtaining goods on credit, and by means of which they were so obtained by the firm, is not ground for refusing a discharge in bankruptcy under Bankr. Act July 1, 1898, c. 541, § 14b, c. 3, 30 Stat. 550 (U. S. Comp. St. 4901, p. 3427), as amended by Act Feb. 5, 1903, c. 487, 32 Stat. 797 (Ú. S. Comp. St. Supp. 1907, p. 1026), to another partner who did not participate in the wrongful act and had no knowledge of it.

In W. S. Peck & Company v. Lowenbein, decided February 21, 1910, by this court (178 F. 178" court="4th Cir." date_filed="1910-02-21" href="https://app.midpage.ai/document/w-s-peck-co-v-lowenbein-8774961?utm_source=webapp" opinion_id="8774961">178 Fed. 178), it appeared that on September 14, 4907, Lowenbein, a member of the firm of Owens & Lowenbein, addressed a letter to W. S. Peck & Co., Baltimore, Md., which letter contained a statement of the financial condition of the firm of Owens & Lowenbein ;■ that said statement was based almost entirely upon information derived by Lowenbein from Owens in the preparation of it; that .matters -in the statement other than those furnished by Owens were not misleading, being, in the main, true. The court affirmed the judgment of the court below, refusing a discharge to Owens and granting that to Lowenbein, saying:

“It is tlie evident purpose of the bankruptcy act to protect that unfortunate class of debtors who are unable to pay their debts, by giving them a discharge, thus affording them an opportunity to engage in business again, while, on the other hand, it is manifestly intended to deny a discharge to those whose conduct has been' such as to .show that they obtained credit by false statements calculated and intended to deceive and thereby defraud their creditors. Construing the act with these ends in view, it would be manifestly unjust to deny a discharge to a debtor when it appears, as it does in this instance, that the statement which he made was not actuated by any fraudulent purpose. This finding of fact has been approved by the learned judge who heard the case below, and is within itself conclusive in so far as the question involved in this controversy is concerned.”

In Gilpin v. Merchants’ National Bank, 165 F. 607" court="3rd Cir." date_filed="1908-11-21" href="https://app.midpage.ai/document/gilpin-v-merchants-nat-bank-8769151?utm_source=webapp" opinion_id="8769151">165 Fed. 607, 91 C. C. A. 445, 20 L. R. A. (N. S.) 1023, the bankrupt, upon the request of a bank from which he had asked accommodation, for a financial statement, signed a statement form in blank, and delivered the same to his bookkeeper, requesting him to make an exact statement of his condition, for the bank, to which the bookkeeper replied that he could not (the postiñg'of his books being in arrear), but that he would make an approximate statement and send it to the bank. The statement was made by the bookkeeper, marked- “approximate,” and sent to the bank, and upon the faith of this-statement the bank extended credit. The referee found that, although the falsity of the statement sent to the bank was proved, the fact that the bankrupt knew it to be false or did not know it to be true;-was not proved, and said in his report:

“There is no evidence to support the contention that the bankrupt knew or had any reason to believe that the statement sent to the bank by- the bookkeeper was false, or that the bankrupt intended in any way to deceive the bank.”

Upon these facts- the Circuit Court of Appeals for the Third Circuit, in an opinion by Gray, Circuit Judge, held that the word “false” as used in section 14b of the bankruptcy act, as amended by Act Feb. 5, 1903, which makes it a ground for denying a discharge to a bankrupt that he has obtained property on credit from any person upon a materially false statement in writing made to such person for the purpose óf obtaining such property on credit, means more than merely erroneous or untrue, being used in its primary legal sense as importing an intention to deceive, and such a statement, in order to constitute a bar to a discharge, must have been knowingly and intentionally untrue.

It must be manifest that the intent to deceive can never be imputed to one who not only takes no part in making the written statement, but, as in the case at bar, knows nothing of it. We believe that the view taken by the Circuit Court of Appeals for the Third Circuit of the meaning of the word “false,” as used in this section, is the correct one, and the decision above referred to is in entire harmony with the Low«nbein Case decided by this court.

Taking the view that the right to a discharge is determined by the good faith of the bankrupt, and that the effect of such discharge is to be determined in accordance with a proper recognition of his civil liability for the acts of partners and other agents, we come to the conclusion that the court below erred in refusing to grant a discharge to the bankrupt.

The order of the District Court for the district of Maryland, made and entered on the 22d day of January, 1910, sustaining the specifications of objection to the discharge of the appellant, and refusing to grant him a discharge is therefore reversed, with costs, and the cause is remanded to the District Court for further pro'ceedings herein not inconsistent with this opinion.

Reversed.