In re Noble

• Decision Date: 18 December 1941
• Docket Number: No. 10968.,10968.
• Citation: 42 F. Supp. 684
• Parties: In re NOBLE.
• Court: U.S. District Court — District of Colorado

42 F. Supp. 684

In re NOBLE.

No. 10968.

District Court, D. Colorado.

December 18, 1941.

Shuteran & Robinson, of Denver, Colo., for creditor.

John W. Shireman, and Thomas K. Hudson, both of Denver, Colo., for bankrupt.

SYMES, District Judge.

Ralph Royce Noble was adjudicated a bankrupt on March 7, 1941, on his voluntary petition. The first meeting of creditors was held on May 7, 1941. There being no assets, no trustee was appointed. He was granted permission to file in forma pauperis.

At the first meeting of creditors he was examined by the attorney for the Beneficial Loan Company, which thereafter, on May 10th, filed its claim for $71.21, balance claimed to be due on his promissory note dated July 3, 1940, asserting that said sum was obtained by the bankrupt on materially false statements made at the time the loan was consummated, on which the creditor relied. The referee allowed the claim as a general unsecured claim on May 23, 1941.

Thereafter the creditor filed a suit in the state court against the bankrupt, and obtained a judgment by default for $100 and costs and garnished his wages. The bankrupt reported this garnishment to the bankruptcy court on August 27, 1941, and the referee made an order enjoining and restraining the said loan company from prosecuting the garnishment in the state court, and directing it to release the garnishment, or show cause why it should not do so, on August 28, 1941.

On said day the company filed its answer to the order to show cause, alleging that neither the referee nor the court in bankruptcy had jurisdiction to restrain it to cease prosecution of the said levy or garnishment, or to require it to release the aforesaid garnishment, for the reason that the bankrupt had published to the Beneficial Loan Company, plaintiff in the state court, a materially false statement in writing respecting his financial condition, and that his liability owed to the said company was not dischargeable in bankruptcy, because it was a liability for obtaining money by false pretenses. That the bankrupt had been duly served in the state court suit, the judgment entered, no appeals taken therefrom, and execution duly issued.

Upon due hearing the referee found no fraud was practiced by the bankrupt in the procurement of its loans from the said, the Beneficial Loan Company, by the furnishing of said financial statement, or otherwise. Further the referee found said company did not rely upon the so-called financial statement furnished by the bankrupt, and the said financial statement was procured under such circumstances that the said loan company was not justified in relying thereon, and the facts stated in the complaint filed in the state court action were not true, and the debt evidenced by the note attached to the claim filed in the bankruptcy proceedings by the said, the Beneficial Loan Company, is dischargeable in bankruptcy, and the said, the Beneficial Loan Company, could be permanently restrained and enjoined from enforcing, or attempting to enforce, the judgment rendered in the state court action. It was therefore ordered that the said loan company be permanently enjoined from enforcing, or attempting to enforce, the judgment rendered in its suit in the state court suit.

The said loan company brought the matter here on petition to review said order restraining it from enforcing its judgment obtained in the state court.

Rule 47 of General Orders, 11 U. S.C.A. following section 53, provides that the judge shall accept the findings of fact of a referee, unless clearly erroneous. We therefore accept and consider this court bound by the findings of the referee that no fraud was practiced by the bankrupt in the procurement of the loan involved, and that the creditor did not rely upon the so-called financial statement furnished by the bankrupt, and the further finding that the loan company was not justified in relying thereon, especially as there was no evidence to the contrary. In fact the testimony of the bankrupt as to his conversation with the creditor's attorney as he left the courtroom in the Federal Building after the first meeting of creditors, smacks of intimidation and threats on the part of the attorney.

The record discloses that the complaint in the state court did not ask for a body judgment — a remedy granted in cases of fraud or misrepresentation.

The question presented on this petition for review is: Can a creditor whose claim is listed in the bankrupt schedules ignore the bankruptcy court and sue in the state court, when he believes his claim is not dischargeable under § 17 of the Bankruptcy Act, 11 U.S.C.A. § 35; particularly whether the existence of such belief on the part of the creditor is all that is necessary to deprive the bankruptcy court of jurisdiction and power to enjoin prosecution of the state court suit commenced by such creditor when, after a hearing, the referee has decided the debt is one dischargeable in bankruptcy?

The bankrupt made a financial statement to petitioner's manager, which the latter knew did not show all his debts, he being told to list only debts incurred since the date of a former statement which the company already had in its files. Therefore, it was possible to frame a fraud complaint in the state court, which had the appearance of regularity. So doing, and the bankrupt not having an attorney, a default judgment followed.

The whole theory of bankruptcy and the validity and priority of claims and the powers of bankruptcy courts to exercise equity powers has been declared in a late case, Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281. It states that in the exercise of its equitable jurisdiction the bankruptcy court has the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not done in the administration of the bankrupt estate, and directs bankruptcy courts to disallow or subordinate claims, if equity and fairness so require. The case further holds that the merger of a claim into a judgment does not change its nature so far as its provability in bankruptcy is concerned, and that the bankruptcy court may look behind the judgment to the essence of the liability.

In Seaboard Small Loan Corporation v. Ottinger, 50 F.2d 856, at page 859, 77 A.L.R. 956, the Circuit Court of Appeals of the Fourth Circuit, speaking through Judge Parker said: "In view of this purpose of the act and of the express provision that the bankrupt shall be released from all provable debts, it would be indeed a strange situation if the court vested with jurisdiction to enforce the act were without power to stay the hand of a creditor whose debt has been discharged by bankruptcy, but who nevertheless persists in harassing the bankrupt with efforts to collect it. It will not do to say that the bankrupt has an adequate remedy at law by pleading the discharge in case of suit, or by suing an employer if the latter withholds wages under an order such as that here. Such remedy is not adequate, because its assertion involves trouble, embarassment, expense, and possible loss of employment. A laboring man who had availed himself of the benefits of the act would in many cases prefer to pay a debt discharged by bankruptcy rather than hazard his employment by bringing suit for wages withheld under notice like that with which we are dealing. And an employer in many cases would prefer to discharge an employee against whom a claim had been filed rather than engage in litigation with the claimant. The demand under an assignment order, in an effort to collect a debt, discharged by bankruptcy, is nothing less than an attempt to circumvent the order discharging same and to deprive the bankrupt of the benefit of that order. It was to meet situations such as this that the bankruptcy court was vested with the general power under section 2, subsection 15 of the Bankruptcy Act (11 U.S.C.A. § 11(15) to `make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this title.' As said by Judge Van Valkenburgh in the Swofford Bros. Dry Goods Co. Case (D. C.) 180 F. 549, 553: `* * * This section may be...