In re Bell

• Decision Date: 20 December 1962
• Docket Number: No. 20699.,20699.
• Citation: 212 F. Supp. 300
• Parties: In the Matter of Richardson Carter BELL, Bankrupt.
• Court: U.S. District Court — Eastern District of Virginia

212 F. Supp. 300

In the Matter of Richardson Carter BELL, Bankrupt.

No. 20699.

United States District Court E. D. Virginia, Norfolk Division.

December 20, 1962.

James C. Page, Richmond, Va., for bankrupt.

Richard H. Catlett, Jr., Richmond, Va., for trustee.

PREYER, District Judge (on assignment).

Petition for Review of a decision by the Referee in Bankruptcy. Petitioner alleges that the bankrupt obtained a loan of money through the medium of a false financial statement, and alleges that this indebtedness was not dischargeable in bankruptcy. The Referee held that the petitioning creditor has a complete and adequate remedy in the state court and therefore declined to assume jurisdiction of the matter. The objections filed by the petitioning creditor consequently were denied.

The petitioner contends that the bankruptcy court has exclusive jurisdiction of the matter and cannot shift its determination to the state court. We think petitioner's contention must be denied and the referee affirmed.

By the Act of July 12, 1960, 74 Stat. 408, Congress amended § 14, sub. c(3) of the Bankruptcy Act, 11 U.S.C.A. § 32, sub. c(3), to eliminate as a ground for the denial of a discharge, insofar as the non-business bankrupt is concerned, the obtaining of money or credit through false financial statements. The same Act amends § 17, sub. a(2), 11 U.S.C.A. § 35, sub. a(2), to make clear that, although the obtaining of money or property through the issuance of a false financial statement is no longer to be a ground for denial of a discharge to a non-business bankrupt, the particular obligation incurred as a result of such a statement is to remain non-dischargeable.

For a period of some three years, the Referee in the Bankruptcy Court in the Eastern District of Virginia, Norfolk Division, has undertaken to act and declare the debt non-dischargeable in bankruptcy in cases involving the giving of a false financial statement by a non-business bankrupt to small loan corporations under § 17. The Referee assumed this jurisdiction "reluctantly" and only because a complete and adequate remedy to small loan corporations was not available under Virginia law. Virginia law, as it existed prior to July 1, 1962, prohibited the use of any financial statement in any state court by any lender under the Small Loan Act. Code of Virginia, 1950, § 6314. The creditor to whom a false financial statement was given by a non-business bankrupt was therefore without remedy in the courts of Virginia. The Referee therefore exercised his ancillary jurisdiction, under the authority of Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230, (1934), to determine the issue of dischargeability of such claims since the bankrupt's remedy in the non-bankruptcy forum was deemed inadequate.

Section 6-134 of the Code of Virginia was amended as of July 1, 1962,¹ to eliminate the inhibiting proviso concerning the use of the financial statements in state courts. The reason for his assumption of jurisdiction having ceased, the Referee announced in the instant case that he would not undertake to act and declare such debts' non-dischargeability in this case or in similar cases in the future.

It seems clear that under normal circumstances the bankruptcy court would not specifically declare a debt non-dischargeable under § 17 of the Bankruptcy Act, 11 U.S.C.A. § 35. In the absence of exceptional circumstances, the remedy of the creditor seeking to hold a debt non-dischargeable in bankruptcy lies in another tribunal as there is a clear distinction between the right to a discharge in bankruptcy and the effect of such discharge. In re Lowe, 36 F.Supp. 772 (W.D.Kan.1941); Csatari v. General Finance Corporation, 6 Cir., 173 F.2d 798 (1948); In re Hadden, 6 Cir., 142 F.2d 896 (1944). Not only does the bankruptcy court not have "exclusive jurisdiction" in the instant case as petitioner contends, but there is a policy, absent unusual...