In re Sellers, 66-H-58.

• Decision Date: 11 April 1968
• Docket Number: No. 66-H-58.,66-H-58.
• Parties: In the Matter of D. R. SELLERS, Bankrupt.
• Court: U.S. District Court — Southern District of Texas

295 F. Supp. 1354

In the Matter of D. R. SELLERS, Bankrupt.

No. 66-H-58.

United States District Court S. D. Texas, Houston Division.

April 11, 1968.

H. A. Phillips, Houston, Tex., Trustee.

O. Joseph Damiani, Houston, Tex., for bankrupt.

MEMORANDUM:

CONNALLY, Chief Judge.

This is a proceeding to review a ruling by the Referee in Bankruptcy denying petitioner a discharge. Upon the filing of specifications of objections to the discharge by the United States on behalf of the Small Business Administration, a full hearing was held on the matter, after which the Referee entered his decision denying discharge. Petitioner sought, and was granted a rehearing, whereupon the Referee reaffirmed the denial.

The government's objection to discharge was bottomed on the provisions of Section 32(c) (3) of Title 11 U.S.C., which reads as follows:

"The court shall grant the discharge unless satisfied that the bankrupt has * * * (3) while engaged in business as a sole proprietor, partnership, or as an executive of a corporation, obtained for such business money or property on credit or as an extension or renewal of credit by making or publishing or causing to be made or published in any manner whatsoever a materially false statement in writing respecting his financial condition or the financial condition of such partnership or corporation; * * *."

In particular, it is alleged that the bankrupt obtained a loan from the First National Bank of Baytown, Texas, 50% of which was guaranteed by the S.B.A., by furnishing a false financial statement to the government agency. The proceeds of the loan were to be used in furtherance of the business of The Yum Yum Tree, a retail gift shop owned by the bankrupt and his wife.

Petitioner's original application to the S.B.A. for a $30,000 loan was accompanied by a financial statement dated December 1, 1964. This application was turned down by the agency because the statement indicated that Dr. Sellers was in a position to obtain the loan from regular commercial sources. In seeking to have the S.B.A. reconsider its decision, the bankrupt submitted a new financial statement, dated March 31, 1965. This latter statement differed substantially from the previous one in only one respect—a small mineral interest valued at $25,000 in the December 1964 statement was assigned no value.¹ On the basis of the second application, the loan of $30,000 was approved.

The bone of the government's contention is found in the failure of Dr. Sellers to reveal in either of his financial statements the existence of two outstanding debts owed by him to Mrs. J. N. McLeod and Gulf Electric Company, respectively. The debt to Mrs. McLeod was evidenced by a promissory note dated June 4, 1958, in the original principal amount of $5,700. Suit was filed on the note in February of 1964, and, while the evidence reveals that an agreement was reached to settle the suit, at the time the second financial statement was submitted to the S.B.A. at least $4,000 was still unpaid under that agreement. Subsequently, on October 25, 1965, judgment was entered in the case against the petitioner for $9,510.36, plus attorney's fees.

The debt owed to Gulf Electric was also evidenced by a promissory note; this one, dated November 20, 1964, was for $1,647.71. Suit was filed on the note on January 14, 1965, and judgment was entered by default for $1,147.71 plus interest, costs and attorney's fees on April 13, 1965.

Petitioner contests neither the existence of the debts nor their omission from the financial statements. He argues, however, (1) that the Referee improperly placed the burden upon him to prove that he had not committed the acts charged in the government's specifications of objections, (2) that the S.B.A. did not rely on the statements in approving the loan, (3) that the financial statements were not materially false, and (4) that the Referee failed...