Garman, Matter of

• Decision Date: 23 June 1980
• Docket Number: No. 79-1631,79-1631
• Citation: 643 F.2d 1252
• Parties: In the Matter of Ben F. GARMAN, Bankrupt. The NORTHERN TRUST COMPANY, Plaintiff-Appellant, v. Ben F. GARMAN, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1252

643 F.2d 1252

In the Matter of Ben F. GARMAN, Bankrupt.

The NORTHERN TRUST COMPANY, Plaintiff-Appellant, v. Ben F. GARMAN, Defendant-Appellee.

No. 79-1631.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 19, 1980.

Decided April 29, 1980.

Rehearing and Rehearing En Banc Denied June 23, 1980.

Jeffrey N. Cole, Chicago, Ill., for plaintiff-appellant.

Mitchell A. Cohen, Chicago, Ill., for defendant-appellee.

Before CASTLE, Senior Circuit Judge, and PELL and TONE, Circuit Judges.

PELL, Circuit Judge.

Section 17(a)(2) of the Bankruptcy Act of 1938, 11 U.S.C. § 35(a)(2) (1960), provides that an individual's debt shall not be discharged in bankruptcy if that debt or its renewal is the result of money obtained "in reliance (by the creditor) upon a materially false statement in writing respecting (the debtor's) financial condition made or published ... with intent to deceive ...." This appeal calls upon us to decide, inter alia, whether non-dischargeability is appropriate only where the creditor's reliance under § 17(a) (2) is "reasonable."

Ben F. Garman, the bankrupt, a life insurance salesman, had been a customer of the Northern Trust Bank (Northern) in Chicago since 1962. Between December, 1970, and March, 1973, Garman borrowed various sums from the Northern resulting in a total indebtedness on November 1, 1973, of $30,000. On that date, Garman executed a renewal note to the Northern for the entire outstanding amount.

There is direct and unimpeached testimony in the record that the Northern, at least in part, expressly relied upon three financial statements submitted by Garman in making these loans. ¹ It is uncontested by Garman that these statements omitted listing approximately $50,000 in "claims" that Garman later listed in his petition for bankruptcy. ² These claims, however, are recorded as having arisen prior to the time Garman filed the statements with the Northern. Had these amounts been included as potential liabilities in the statements, they would have substantially reduced Garman's net worth, in some instances to less than zero.

Upon Garman's failure to pay the $30,000 when due in April of 1974, the Northern filed suit against him for this amount in state court. On February 6, 1975, prior to judgment in the state court, Garman filed a voluntary petition in bankruptcy listing as unsecured claims to be discharged the $30,000 debt to the Northern as well as the $50,000 in claims not listed on his financial statements. The Northern filed a complaint to prevent the discharge of the $30,000 debt pursuant to § 17(a)(2), and a hearing was held on the issue before a bankruptcy judge on March 28 and 29, 1977. At the hearing, the Northern introduced the testimony of Charles S. Bishop, a Northern vice-president, who had approved most of the loans to Garman, and Carol King, a loan officer who had approved the November 1, 1973 renewal, regarding their reliance on the Garman statements. ³ The Northern also introduced the various notes and statements signed by Garman. Each financial statement provided that it was "a true and complete statement of my financial condition, and details relating thereto.... I agree that if any material change occurs I will immediately notify you, unless you are so notified you may continue to rely upon the statement hereon given." Bishop testified that had he known of the $50,000 in claims omitted from the statements, he would not have made the loans.

Garman, testifying as an adverse witness, conceded that he had failed to list the $50,000 in claims on the financial statement, but maintained that the omissions did not render the statements false. Our examination of his testimony leaves us with the firm conviction that not only was Garman an evasive witness, but that his testimony was inherently incredible. A few illustrations are sufficient to demonstrate our conclusion. One of the creditors listed on Schedule A-3 of the bankruptcy petition was a Dr. Solomon with the claim stated as being approximately $10,800. Garman's attention was directed to the statement at the bottom of the page of Schedule A-3 that "none of the foregoing indebtedness, listed above, are contingent, liquidated or disputed, unless otherwise stated." When asked about the debt to Solomon which has been listed in the schedule without qualification, Garman responded, "(Y)ou keep referring to a debt. We are talking about unsecured claims. I am not talking about any debt." This was followed by an assertion that when he "signed that statement (he) did not acknowledge that was a debt." The record does not indicate whether he was referring here to the bankruptcy schedule or to the financial statement. Either interpretation, however, would fail of verity. If he was referring to the schedule, it clearly refers to "indebtedness." On the other hand, if he was referring to the financial statements, which were signed in the early 1970's, the Solomon claim was not listed although on the schedule he listed it as having been incurred in October, 1968. When asked specifically about listing this item on the financial statements, he said, "It talks about contingent liabilities, sir. I did not have a contingent liability at that time." When the Solomon matter was pursued further, this non-illuminating colloquy followed:

Q. I will rephrase the question.

Mr. Garman, in examining the financial statements marked as Plaintiff's Exhibit Nos. 2, 4, and 7, could you tell me if, reflected on any one of those financial statements, is this claim of Dr. Solomon that is reflected on the bankruptcy petition, is it reflected on any one of those three financial statements?

A. I'm sorry, I can't answer the question.

I find the discrepancy between claim and liability. This is talking about a liability and this is talking about a claim.

Q. You are not answering my question.

A. I can't answer your question.

THE COURT: That is an answer.

The statement that he could not answer the question was repeated with regard to another item of indebtedness listed on the bankruptcy schedule as having been incurred in February, 1972, even though he was being shown a subsequent-in-time financial statement which clearly did not include the debt. On subsequent references to the financial statements, Garman admitted that items were not listed there but did appear on the bankruptcy schedule, including $4,000 indebtedness to another bank resulting from various loans extended over the past five years, and a promissory note to an estate for $5,000 which related back to January, 1968.

Professing that he was "a student of semantics," Garman periodically stated that he could not answer questions, stating on one occasion, "(Y)ou ask me about debts, on the other hand, you are talking about claims." When examined by his own counsel, Garman, in significant candor, related that it had been made clear to him when he was filing in bankruptcy that possible claims should be listed because once he had filed he could not go back and claim that he had forgotten them. His concern about not having possible claims discharged in bankruptcy did not extend to an equal disclosure when he was borrowing money from Northern. Garman further testified that the unlisted items on the financial statements were not legal documents, they were just informal agreements, and that he did not feel that the word "debt" did "justice to what was involved here as the listing of a claim." The gist of his testimony with regard to a substantial amount of the unlisted items was that Garman would purchase, or would recommend purchase, of certain investments which would be bought with money from friends, and he would share in 50% of the gains but would be responsible for 100% of the losses. He testified he did not consider these as "debts" although he did concede that the $5,000 promissory note, which was also unlisted on the financial statements, was an exception. In sum, while he considered that he had to list all possible claims on the bankruptcy schedule, he felt no similar compulsion on the financial statements even though an answer was required on "other contingent liabilities." Subsequent statements listed no contingent liabilities.

At the conclusion of the hearing, the bankruptcy judge issued no written findings and made no oral findings regarding the materiality of the omissions in the statements or Garman's intent when he filed the statements. Rather, the bankruptcy judge held that the Northern had failed to establish its entitlement to non-discharge of Garman's debt to it because it had not proved it had "reasonably relied" upon the statements. Although the bankruptcy judge's statements do not make clear whether he was basing his decision on a finding of no actual reliance or of no reasonable reliance, the district court on appeal held, correctly we believe, that "it is clear that the bankruptcy judge's dismissal was predicated upon his findings of no reasonable reliance." ⁴ The district judge then affirmed the bankruptcy court, stating: "In addition to the requirement that the creditor actually relied, it is clear that § 35(a) (2) requires that the creditor's reliance must have been reasonable." Viewing what it held to be a finding of fact by the bankruptcy judge, the district court held that the finding that the Northern could not have reasonably relied upon these statements was not "clearly erroneous."

Initially, we note that § 17(a)(2), unlike its successor, ⁵ does not by its terms require a showing of "reasonable reliance" and requires only a showing of reliance in fact. ⁶ Nevertheless, Garman relies upon a number of decisions ostensibly requiring a showing of reasonableness. Carini v. Matera, 592 F.2d 378 (7th Cir. 1979); Kentile Floors, Inc. v. Winham, 440 F.2d 1128 (9th Cir. 1971); In re: Smith, 424 F.Supp. 858 (M.D.La.1976); In re: Adams, 368 F.Supp. 80 (D.S.D.1973); Sweet v. Ritter Finance Co., 263 F.Supp. 540 (W.D.Va.1967); In re: Disbrow, 20 Colliers Bankr. Case...