In re Hanson
| Citation | 309 F. Supp. 810 |
| Decision Date | 02 February 1970 |
| Docket Number | No. 3-68-1177(D).,3-68-1177(D). |
| Parties | In the Matter of Donald E. HANSON, formerly d/b/a Scott County Grain & Feed Co., a partnership, Bankrupt. |
| Court | U.S. District Court — District of Minnesota |
Oppenheimer, Hodgson, Brown, Wolff & Leach, by Craig Gagnon, St. Paul, Minn., for Frederick W. Winker.
Lindquist & Vennum, by Jerrold F. Bergfalk, Minneapolis, Minn., for Donald E. Hanson.
Before the court and raising an issue on which there is a paucity of authority is a petition to review an order of the Referee in Bankruptcy discharging a bankrupt under 11 U.S.C. § 32 (Sec. 14 of the Bankruptcy Act) over objections duly lodged by a substantial creditor. Petitioner maintains the discharge should be denied under paragraph (c) (3) of Section 32 which, as an exception to the general rule, permits a denial of discharge if the bankrupt while engaged in business has obtained for the business money or property on credit by making or causing to be made a materially false statement in writing respecting his or its financial condition.
The Referee found that the instant case on its facts would fall squarely within and be governed by the above exception were it not that the objecting creditor, formerly a partner of the bankrupt, was "equally at fault and equally responsible" for the false financial statement the utterance of which was the basis for the objection. The Referee held that since the objector was "in pari delicto" with the bankrupt, he should not profit thereby and the bankrupt's discharge should be allowed. The court is asked to review the soundness of that conclusion.
Since the issue involved here is purely a question of law the court is not required to use the "clearly erroneous" standard. Rather the court is simply to determine whether given the facts as found by the Referee his conclusion is warranted as a matter of law. See Eastmount Construction Co. v. Transport Mfg. & Equipment Co., 301 F.2d 34 (8th Cir. 1962); Smith v. United States, 336 F.2d 165 (4th Cir. 1964).
It would appear from the Referee's findings of fact that the objector was a partner of the bankrupt at or shortly before the time of his adjudication in bankruptcy. The fraud in question occurred on or about July 29, 1966, when armed with a financial statement dated June 30, 1966 which an accountant for the partnership had prepared under the direction of the bankrupt, the bankrupt and the objector met with representatives of a grain company to discuss the granting of a loan to the partnership. At the meeting the false financial statement was presented. The objector had seen it for the first time on the way to the meeting. The grain company at least in part relying on the financial statement, subsequently loaned the partnership $5,000. The financial statement was false and known to be so by both the bankrupt and the objector in that it overstated accounts receivable, understated the value of the equipment, and showed no "notes payable" even though objector who was himself sitting in the meeting and had by that time a copy of the financial statement held a promissory note or notes in a substantial amount due from the partnership. The Referee concluded that by his silence and failure to point out the false statements of which he had knowledge, particularly the notes due him from the partnership, the objector acquiesced in the loan and ratified the false financial statement prepared by or under the direction of the bankrupt.
The lender, the grain company, did not file a claim against the bankrupt during the bankruptcy proceedings and of those creditors who did file claims, the objector's claims are in the largest amount. He is the sole objector to the bankrupt's discharge.
The question thus presented is whether an objection to discharge should be sustained where one of two partners becomes a bankrupt and the other partner, having filed a claim as a creditor for a substantial amount in the bankruptcy proceedings, becomes the sole objector to the bankrupt's discharge based upon a financial statement known by both partners to have been false at the time it was given to secure a loan from a company where the lending company itself did not file a claim and thus is not an objector to the discharge. Stated another way, is the equitable doctrine of pari delicto or equal fault applicable in such a situation.
Neither counsel have been able to cite nor has the court found any directly controlling authority nor applicable decisions, other than some dicta.
It is well settled that the objecting creditor need not be the one who was defrauded by the 32(c) (3) violation. In the Matter of Lepley, Bankrupt, 227 F.Supp. 983 (D.Wis.1964); Becker v. Shields, 237 F.2d 622 (8th Cir. 1956). Any creditor may object on the ground of that indiscretion, and once there is an objection it inures to the benefit of all the creditors. Shainman v. Shear's of Affton, Inc., 387 F.2d 33 (8th Cir. 1967). That is, the false financial statement will bar discharge as to all the creditors, not just the objector or some few creditors. The fact that the defrauded creditor has been paid before the adjudication in bankruptcy so that it is not and cannot be an objecting creditor is not material. In Re Ernst, 107 F.2d 760 (2nd Cir. 1939); In Re Haggerty, 165 F.2d 977 (2nd Cir. 1948).
Section 32 states inter alia that if the objector makes a showing that there is reasonable grounds to believe the bankrupt committed an act which would prevent discharge, the burden of proving himself innocent thereof then rests on the bankrupt. The sole explicit considerations set forth in the statute to determine whether an objection to discharge should be upheld are first the status of the objector as a party in interest, i. e., a creditor and second the guilt or innocence of the bankrupt concerning the alleged offensive act. After an objector has established himself as a creditor, the focus turns toward the bankrupt and his actions, not the character or prior activities of the objector. There is no provision in the Bankruptcy Act to qualify or otherwise modify what the bankrupt must show as a defense to avoid the consequences of a denial of discharge, other than that he did not commit the offense if it has prima facie been established.
Here there is no question but what the objector was a creditor of the bankrupt and according to the Referee's findings that the latter committed the acts alleged. An interpretation of the statute sustaining the objection to discharge is consistent with the idea that a discharge in bankruptcy is a privilege and should be granted only if the bankrupt has conducted his business activities according to certain high standards and good faith. In the Matter of Zidoff (Shaw Brothers) 309 F.2d 417 (7th Cir. 1962). Conversely where one has been dishonest in the pursuit of his business dealings discharge should be withheld.
As stated in Pugh v. ADCO, Inc., 329 F.2d 362 (5th Cir. 1964):
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Matter of Silverman
...such conduct, his objecting creditor lacks clean hands or proper motives in bringing to light his objectionable activities. In re Hanson, 309 F.Supp. 810 D.C.Minn.1970. See also Cunningham v. Elco Distributors, 189 F.2d 87 6 Cir. In any event, this court has found that Talcott, the objectin......