In re Smith

• Decision Date: 21 December 1976
• Docket Number: No. 74-055.,74-055.
• Citation: 424 F. Supp. 858
• Parties: In re Marshall Gaither SMITH, Bankrupt. MOUNT VERNON FIRE INSURANCE COMPANY, Plaintiff, v. Marshall Gaither SMITH, Defendant.
• Court: U.S. District Court — Middle District of Louisiana

424 F. Supp. 858

In re Marshall Gaither SMITH, Bankrupt.

MOUNT VERNON FIRE INSURANCE COMPANY, Plaintiff, v. Marshall Gaither SMITH, Defendant.

No. 74-055.

United States District Court, M. D. Louisiana.

December 21, 1976.

Charles S. McCowan, Jr., John Dale Powers, Sanders, Miller, Downing & Kean, Baton Rouge, La., for Mount Vernon Fire Ins. Co.

Gerard E. Kiefer, Forrest, Kiefer & Bacot, Baton Rouge, La., for Marshall Gaither Smith.

E. GORDON WEST, District Judge:

This case is before the Court on plaintiff's application for review of an order of the Bankruptcy Judge whereby he discharged a $132,970.40 debt owed to plaintiff. The bankrupt, Marshall Gaither Smith, was engaged as an agent or broker in the insurance business. He sought and received a brokerage contract with the plaintiff insurance company. In connection with this contract the bankrupt represented himself as being president and principal owner of the Louisiana Brokers Exchange of Baton Rouge, and as "principal owner" he executed a personal guaranty covering any unremitted premiums that might occur during the term of the contract. The $132,920.40 represents a judgment for unremitted premiums obtained by plaintiff in a State Court suit against the Louisiana Brokers Exchange of Baton Rouge and the bankrupt, Marshall Gaither Smith, jointly and in solido. The bankrupt, Marshall Gaither Smith, listed this judgment as a debt on his petition for bankruptcy, and it was included among the debts discharged by the Bankruptcy Judge.

Plaintiff seeks to have that debt removed from those discharged on the ground that the bankrupt falsely represented his status with the Louisiana Brokers Exchange of Baton Rouge, and also furnished the plaintiff with what it contends are false financial statements. After extended hearings, the Bankruptcy Judge concluded that the plaintiff had failed to produce facts which would constitute grounds for the denial of a discharge of the debt in question. After a careful review of this record, we cannot say that the conclusions of the Bankruptcy Judge were clearly erroneous and we therefore affirm his judgment.

The facts giving rise to this litigation are briefly as follows. In April or May of 1972, the bankrupt came to plaintiff's office in King of Prussia, Pennsylvania, seeking to enter into negotiations for an insurance brokerage contract. There he met with plaintiff's representatives. There is some dispute as to exactly how the bankrupt represented himself at this meeting, but it was the recollection of the plaintiff's witnesses that the bankrupt claimed to be president and principal owner of Louisiana Brokers Exchange of Baton Rouge. It was their testimony that the bankrupt made repeated references to his "Louisiana operation." In the course of these negotiations the bankrupt presented certain financial statements to plaintiff's representatives. These statements, which were introduced at the hearing on plaintiff's objections to discharge, purported to show the financial condition of the three companies purportedly making up the bankrupt's "Louisiana operation."

After concluding these initial negotiations, plaintiff's representatives indicated some interest in entering into a brokerage agreement with Louisiana Brokers Exchange. Toward this end the bankrupt was asked to return in a couple of weeks. At the end of this time, the bankrupt did return and was told that before any contract could be consummated, he would have to sign a personal guaranty assuming any contractual debt incurred by Louisiana Brokers Exchange. The bankrupt agreed, and the brokerage agreement and the personal suretyship contract were prepared by the plaintiff. The bankrupt signed the personal guaranty as principal owner of Louisiana Brokers Exchange on June 8, 1972. He also signed the brokerage contract as president of Louisiana Brokers Exchange on the same date.

Pursuant to the contract, Louisiana Brokers Exchange was granted a sixty (60) day extension of unlimited credit. The company then began to underwrite insurance policies according to the terms of the contract. On August 25, 1972, the bankrupt called the plaintiff's office in King of Prussia and warned plaintiff's representatives that he had become suspicious of his partners' activities. He advised plaintiff to take whatever action they felt necessary to protect their interests. Acting on this warning, plaintiff sent its general counsel to Baton Rouge to investigate. Upon ascertaining that the bankrupt's warning was well founded, plaintiff's counsel removed all policies and supplies which had been furnished to Louisiana Brokers Exchange. Notice was then sent terminating the brokerage agreement.

When it became evident that Louisiana Brokers Exchange would be unable to remit the premiums owed under the agreement due to that company's insolvency, plaintiff filed suit against the bankrupt in the Nineteenth Judicial District Court for the Parish of East Baton Rouge, Louisiana. The basis of this suit was the personal guaranty which the bankrupt had signed on June 8, 1972. After trial, judgment was rendered against the bankrupt on October 31, 1973.

On February 25, 1974, the bankrupt filed a voluntary petition for bankruptcy and the plaintiff's debt was duly listed in the schedule of claims. Plaintiff timely filed its objections to the discharge in bankruptcy, and after hearing they were denied by the Bankruptcy Judge on June 30, 1976. This appeal followed.

Plaintiff objected to the bankrupt's general discharge under § 14(c)(3) of the Bankruptcy Act, Title 11, U.S.C. § 32(c)(3). This section provides in pertinent part:

"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."

To deny a discharge under the provisions of this statute, it has been held that there must be a written statement which is both materially false in fact and is also ". . . made and acquiesced in either with actual knowledge that it was incorrect or with reckless indifference to the actual facts, without examining the available source of knowledge which lay at hand, and with no reasonable ground to believe that it was in fact correct." Morimura, Arai & Co. v. Taback, 279 U.S. 24, 49 S.Ct. 212, 73 L.Ed. 586 (1929); O'Rieley v. Endicott-Johnson Corp., 297 F.2d 1 (C.A. 8 — 1961). In this case, it is the written financial statements that the bankrupt gave plaintiff's representatives on his first visit to King of Prussia which are alleged to be false.

Hearing was held on this objection on June 18, 1974. At the close of plaintiff's evidence the bankrupt's counsel moved for an involuntary dismissal under Bankruptcy Rule 741. The basis for this motion was that the plaintiff had failed to prove that the financial statements presented in King of Prussia were in fact incorrect. A continuance was granted to consider the motion and on June 23, 1974 the Bankruptcy Judge declined any ruling on the motion until all the evidence had been presented in the case. At the close of all the evidence, the Bankruptcy Judge reserved judgment until a later date, and on June 30, 1976, ordered that this objection to the bankrupt's discharge be dismissed. His reasons for judgment note that the plaintiff failed to sustain the burden of proof required by Bankruptcy Rule 407. It was his opinion that plaintiff had ". . . failed to produce evidence establishing that a materially false financial statement had been made (and if so, in what particulars)." We agree.

We have reviewed the entire record on the plaintiff's objections. On June 18, 1974, the financial statements here in question were introduced into evidence. The only reference to the truth or falsity of these documents were when plaintiff's secretary and general counsel made the statement that the financial reports contained "gross inaccuracies" and when the bankrupt commented that if Gene McFerrin, his partner in this insurance enterprise, had anything to do with the reports' preparation then they were "probably false." There is no other reference in the record concerning whether these documents are in fact false or, if false, in what respect. No particular inaccuracies are referred to by the witnesses for either party.

Rule 407 of the General Rules of Bankruptcy provides that:

"At the trial on a complaint objecting to a discharge, the plaintiff has the burden of proving the facts essential to his objection." See also Minnick v. Lafayette Loan & Trust Co., 392 F.2d 973 (C.A. 7 — 1968), Rice v. Matthews, 342 F.2d 301 (C.A. 5 — 1965), Moffett v. Union Bank, 378 F.2d 10 (C.A. 9 — 1967).

It is essential to plaintiff's objection under § 14(c)(3) of the Bankruptcy Act that it be proved that the bankrupt made or published or caused to be made or published ". . . a materially false statement in writing." The Referee determined that the plaintiff failed to carry the burden placed upon him by Rule 407. After reading the record in this case, the Court agrees with this determination. However, even if this Court were to disagree with the Bankruptcy Judge's decision in this case, that standing alone would not justify a reversal. It is well established that in reviewing bankruptcy appeals ". . . that the Referee's findings of fact are to be accepted unless clearly erroneous." Solari Furs v. United States, 436 F.2d 683 (C.A. 8 — 1971); Monroe v. Cussen, 454 F.2d 1151 (C.A. 9 — 1972); Mazer v. United States, 298 F.2d 579 (C.A. 7 — 1962); In re Sewell, 361 F.Supp. 516 (S.D.Ga.1973); In re Hippler, 278 F.Supp. 753 (W.D.La.1973). "A finding is `clearly erroneous' when although there is...