In re Tomeo
| Decision Date | 18 December 1979 |
| Docket Number | 631 and 632.,Bankruptcy No. 77-630 TT |
| Parties | In re William TOMEO and Mary M. Tomeo, husband and wife, Individually and jointly, Bankrupts. HCC CONSUMER DISCOUNT COMPANY, Plaintiff, v. William TOMEO and Mary M. Tomeo, Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Lawrence J. Hracho, Reading, Pa., for bankrupts.
Ellis Brodstein, Trustee, Reading, Pa.
Stephen J. Gring, Reading, Pa., for HCC Consumer Discount Co.
The present proceedings concern the dischargeability of a certain debt founded on a loan allegedly made in reliance upon a false financial statement.1
In December, 1976, William and Mary Tomeo, the bankrupts, applied for and obtained a loan from the plaintiff, HCC Consumer Discount Company ("HCC"), in the gross amount of $3,024, to be repaid in 36 monthly installments of $84 each.2 At the same time, the bankrupts gave HCC a security interest in their household goods (primarily furniture) which were valued by Mr. Tomeo at $5,000. HCC duly perfected its security interest by filing a financing statement in the appropriate place on January 14, 1977.
The bankrupts made only one payment on the loan before filing voluntary petitions in bankruptcy on April 15, 1977. In the bankrupts' Schedule B-2 (personal property), the value of the same household items which are the subject of HCC's security interest was listed as $600. N.T. at 4. On August 31, 1977, HCC filed a complaint objecting to the discharge of the debt owed it by the bankrupts. The complaint alleges that in filling out the schedule of property in connection with the loan application, the bankrupt falsely stated the value of his household goods and that therefore the debt is nondischargeable by virtue of § 17a(2) of the Bankruptcy Act (11 U.S.C. § 35(a)(2), which provides, in pertinent part:
a. A discharge in bankruptcy shall release a bankrupt from all of his provable debts, . . . except such as . . . (2) are liabilities . . . 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. . . .
In order to succeed on a § 17a(2) objection, the plaintiff must prove (1) that the bankrupt made the representations; (2) that the representations, when made, were materially false; (3) that he made them with the intention and purpose of deceiving the creditor; (4) that the creditor relied on such representations; and (5) that the creditor sustained the damage alleged as the proximate result of the representations having been made. Cf. In re McMillan, 579 F.2d 289, 292 n. 5 (3d Cir. 1978); In re Houtman, 568 F.2d 651, 655 (9th Cir. 1978); In re Taylor, 515 F.2d 1370, 1373 (9th Cir. 1975); Sweet v. Ritter Finance, 263 F.Supp. 540, 543 (W.D.Va.1967).
Of those elements listed above, not all are in dispute. The bankrupts admit that they made the representations and that the plaintiff relied on them.3
This standard has been used regularly by the courts which have decided cases on complaints to obtain a determination of the dischargeability of a debt, with one exception: courts seem uniformly to interpret the "materially false" language in § 17a(2) to mean more than "materially untrue" or "materially inaccurate" or "materially incorrect." Instead, courts have read into the meaning of "materially false" in § 17a(2), a requirement that the bankrupt actually knew of the falsity of the representations when he made them, see, e.g., In re McMillan, supra at 292, or that "the materially inaccurate financial statement . . . be . . . intentionally false, or made `carelessly and with reckless indifference to the actual facts.'" In re Weinroth, 439 F.2d 787, 788 (3d Cir. 1971) citing In re Barbato, 398 F.2d 572, 573 (3d Cir. 1968).
The apparent reason for this particular interpretation of the falsity element of § 17a(2) is that the courts which have dealt with this type of § 17a(2) case have wanted to make clear that a debt will be held nondischargeable under § 17a(2) only if the falsity involved is not merely an untrue statement, but a lie, or a statement so carelessly made as to be blameworthy. This would be an adequate interpretation of the falsity element of § 17a(2) if the section did not also require a finding of "intent to deceive" to bar discharge of the debt. Therefore, any additional meaning given to the word "false" in § 17a(2) other than "untrue," "incorrect," or "inaccurate," is nothing but surplusage, since the "intent to deceive" requirement is the element which takes into consideration whether the debtor made the untrue statement, knowing it to be false and with the purpose of deceiving the creditor.
We conclude that when § 17a(2) sets forth the "materially false" requirement, the statutory language should be taken to mean a "substantial or important untruth." See Black's Law Dictionary 540, 880, 1280 (5th ed. 1979). By operation of the remaining language of § 17a(2), the bankrupt is culpable for the substantial untruth only if it was made with intent to deceive the creditor.4
In interpreting the meaning of "materially false" in cases involving § 14c(3) objections to discharge, courts have concluded that "false," within the meaning of § 14c(3), means knowingly or intentionally false or made carelessly and with reckless indifference to the actual facts. In re Weinroth, 439 F.2d 787 (3d Cir. 1971); In re Butler, 407 F.2d 1059, 1061 (3d Cir. 1969), aff'd, 425 F.2d 47 (3d Cir. 1970); In re Barbato, 398 F.2d 572, 574 (3d Cir. 1968), aff'd, 421 F.2d 1324 (3d Cir. 1970); In re Perlman, 407 F.2d 861 (3d Cir. 1961).
This interpretation may have been given to the word "false" in § 14c(3) cases, because § 14c(3) contains no requirement that the materially false statement have been made "with intent to deceive." By using such an interpretation, debtors avoid having a discharge denied as the result of an "honest mistake."5
Because § 17a(2) also uses the "materially false" language, the § 14c(3) interpretation of the same phrase may have been automatically and unnecessarily carried over to an analysis of § 17a(2). The reason that "false" need not and should not be given, in § 17a(2) cases involving a determination of the dischargeability of a debt, the same meaning given to it in § 14c(3) objections to discharge, is that Congress specifically added, in § 17a(2), the "intent to deceive" element, which it omitted from § 14c(3), thereby making it both unnecessary and redundant to give "false" a meaning other than "untrue" in § 17a(2) cases.6
The disputed issues in this case center around two questions: (1) Was the bankrupt's statement at the time of the loan application that the value of the furniture was $5,000, "materially false?"; and, (2) If the statement of value was materially false, was it made by the bankrupts with the requisite "intent to deceive?"
The question of dischargeability of debts in bankruptcy is a federal question, In re Meyers, 1 BCD 1651, 1652 n. 4 (E.D.Mich. 1975). The degree of proof which the plaintiff must offer in order to succeed is that degree of evidence which is "clear and convincing." In re Barlick, 1 BCD 412, 418 (D.R.I.1974); In re Brown, 6 Collier Bankruptcy cases 679, 683 (E.D.Va.1975).
Therefore, to reiterate, the plaintiff-creditor must show, by clear and convincing evidence, the following: (1) That the bankrupt made the representations; (2) that at the time the representations were made they were materially false (i.e., substantially untrue); (3) that the debtor made the representations with the intention and purpose of deceiving the creditor (or that they were made carelessly or with reckless indifference to the actual facts); (4) that the creditor relied on such representations; and (5) that the creditor sustained the damage alleged as the proximate result of the representations having been made.
The creditor must carry the burden of persuasion on all five of the above-listed elements. However, once the creditor has made a prima facie showing that the debtor made a materially false representation in writing and that the creditor relied upon such representation to its detriment, the burden of production, viz., the burden of going forward with evidence to show that the debtor had no intent to deceive the creditors, shifts to the debtor.7See In re Matera, 592 F.2d 378 (7th Cir. 1979). See also In re Taylor, 514 F.2d 1370, 1373 (9th Cir. 1975).
What happens mechanically, then, is this: Once the creditor has made its prima facie case, a presumption arises that the debtor made the representations with "intent to deceive." At that point, the burden of going forward with evidence to the contrary (not the burden of persuasion) shifts to the debtor.
The treatment to be accorded that presumption is governed by Rule 301 of the Federal Rules of Evidence, made applicable to bankruptcy proceedings and cases by Rule 1101 of the Federal Rules of Evidence.8 The effect of the presumption in a § 17a(2) case causes the debtor to be charged with a duty to come forward with some evidence that he had no intention of deceiving the creditor. At this juncture, the credibility of any such evidence introduced by the debtor is not legally relevant: "the mere introduction of evidence rebutting the presumed...
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