In re Knight

• Decision Date: 05 November 1976
• Docket Number: 75-481.,No. 75-480,75-480
• Parties: In re Carl Lynn KNIGHT and Linda Wilson Knight, Bankrupts. CITY NATIONAL BANK OF BATON ROUGE, Plaintiff, v. Carl Lynn KNIGHT and Linda Wilson Knight, Defendants.
• Court: U.S. District Court — Middle District of Louisiana

421 F. Supp. 1387

In re Carl Lynn KNIGHT and Linda Wilson Knight, Bankrupts.

CITY NATIONAL BANK OF BATON ROUGE, Plaintiff, v. Carl Lynn KNIGHT and Linda Wilson Knight, Defendants.

Nos. 75-480, 75-481.

United States District Court, M. D. Louisiana.

November 5, 1976.

Judith Atkinson Chevalier, Dale, Owen, Richardson, Taylor & Mathews, Baton Rouge, La., for plaintiff-appellant.

William H. Brown, Baton Rouge, La., for defendants-appellees.

E. GORDON WEST, District Judge:

Carl Knight and Linda Knight were adjudicated bankrupt in a voluntary petition filed on October 7, 1975. Subsequently City National Bank of Baton Rouge filed a creditor's objection to the discharge, alleging that Carl Knight had obtained credit from them by means of a fraudulent financial statement, and urged that this debt be declared by the referee to be nondischargeable under § 17(a)(2) of the Bankruptcy Act, 11 U.S.C. § 35(a)(2). That statute provides, in pertinent part:

"(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as . . . (2) are liabilities for obtaining money or property by false pretenses or false representations, or for obtaining money or property on credit or obtaining an extension or renewal of credit in reliance upon a materially false statement in writing respecting his financial condition made or published or caused to be made or published in any manner whatsoever with intent to deceive, or for willful and malicious conversion of the property of another; . . ."

After a hearing on the matter, the referee denied the complaint and decreed the debt dischargeable. This appeal resulted.

It appears from the record that on February 25, 1975, Mr. Knight obtained a loan of $1,300.00 from City National Bank of Baton Rouge. In order to qualify for the loan, Knight was required to fill out a financial statement which, among other things, called for a listing of assets and debts of the applicant. The applicant is instructed to "List ALL DEBTS whether or not they are to be paid from proceeds of loan." Knight admits that he neglected to list several debts, including one owed to Mrs. Ann Miller Powell for $10,000.00. This was a personal loan not evidenced by any writing. Additionally, in the space provided on the statement for disclosure of "Applicant's Monthly Take-Home Pay," Knight entered the sum of $1,100.00. At the hearing on the objection, he admitted, and his paycheck stubs confirmed, that his monthly take-home pay normally amount to approximately $700.00, and that his gross pay was usually in the area of $1,000.00. City National bases its exception to the discharge primarily on these facts, contending that Knight obtained the loan by means of fraudulent misrepresentations made with intent to deceive, which were relied upon by the creditor in granting the loan, all within the meaning of § 17(a)(2) of the Bankruptcy Act. Knight testified that he did not intend to deceive the bank, but that the error in reporting his take-home pay was an inadvertent one. Likewise, he testified that Robert Mathis, the bank's loan officer, told him that any four creditors would be a sufficient number to include on the statement, and further, that the debt of $10,000.00 owed to Mrs. Powell was not listed because he thought that "only binding contracts" were contemplated by the instructions, which to him meant only those contracts which were "written."

The evidence adduced casts serious doubt on Knight's explanation in several respects. First, it appears that Mr. Knight is a high school graduate, and the transcript bears out that he is both intelligent and articulate. As such, it is difficult to believe that he did not understand the instructions on the loan application's financial statement. He admits, too, that he realized that the loan owed to Mrs. Powell was a "debt." Secondly, it was shown at the hearing that Mr. Knight keeps meticulous bi-weekly records of his expenditures and obligations; his financial condition is carefully monitored and kept current. He testified, however, that in filling in the financial statement, he listed his debts from memory. Thirdly, Mr. Knight acknowledges that he knew that the payments on the Powell loan, at $200.00 per month, and later at $150.00 per month, constituted a "substantial amount" for a person in his financial condition to be paying. Finally, Knight testified that he reported the purpose of the bank loan to be that of paying other debts, when it may be that he used part of the proceeds to aid his son in purchasing a car.

Mr. Mathis, who approved the loan, testified that he relied on the financial statement and would not have extended credit had he known of Knight's other debts. He also testified that he specifically tells all applicants for credit to list all of their debts. He further stated that Knight's avowed intended use for the proceeds was the purchase of an automobile for his son.

While much of the evidence tends to conflict with, and, as a result, detract from appellee's case, there are also several favorable factors. City National Bank's records show the following:

1. Neither the list of assets nor the list of liabilities on Mr. Knight's financial statement were ever totalled, there being a space provided for that purpose. Mr. Mathis testified that Knight had had five previous loans with the bank and that all had been satisfactorily handled. In the words of Mr. Mathis, Mr. Knight had "a good track record" with the bank. It was shown that the bank had extended a $1,500.00 line of credit on a Master Charge account to Knight due to his good credit rating, and was at that time considering him for an "R-1" account. Although this was never specifically explained, from the context of the testimony it appears to refer to a preferred customer status account. The Court agrees with the Referee that these facts provide a basis for finding that the bank might not have relied solely or substantially on the strength of the financial statement in approving the loan.

2. At the time the petition in bankruptcy was filed, Knight had already made five monthly payments, out of a total of twenty-four on this loan, which tends to establish that Knight initially intended to pay the debt. This fact taken by itself raises a significant question to the Bank's theory of deceitful intention on the part of Knight, a question which the Referee apparently concluded was left unanswered by the bank's proof.

The Referee held that it was reasonable to believe that appellee had made an honest mistake in not precisely listing his gross pay. The Referee also found that Mr. Knight had omitted a substantial amount, "virtually one-half of his indebtedness," from the statement. However, the Referee also found that the bank had probably relied as much, if not more, on the bankrupt's "good track record" than on his financial statement in deciding to extend credit. The bank was found to have failed in its burden of proving the fraud and deceit required, and the bankrupt's discharge was upheld.

Bankruptcy Rule 810 provides in pertinent part: "The court shall accept the referee's findings of fact unless they are clearly erroneous, and shall give due regard to the opportunity of the referee to judge of (sic) the credibility of the witnesses." The burden of showing the Referee's findings to be clearly erroneous is a stringent one; to be convinced, the Court must be left with a definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1947); Becker v. Seaboard Finance Co., 436 F.2d 778 (CA 9-1970). This means that before the Referee's judgment may be reversed, the Court must find that no testimony exists for the support of his order, or that he has acted arbitrarily and capriciously. Wright v. Lubinko, 515 F.2d 260 (CA 9-1975); In re Dolnick, 374 F.Supp. 84 (N.D. Ill.-1974). A review of the record and...