International Shoe Co. v. Kahn

• Decision Date: 18 October 1927
• Docket Number: No. 2611.,2611.
• Citation: 22 F.2d 131
• Parties: INTERNATIONAL SHOE CO. v. KAHN. In re KAHN.
• Court: U.S. Court of Appeals — Fourth Circuit

22 F.2d 131 (1927)

INTERNATIONAL SHOE CO. v. KAHN In re KAHN.

No. 2611.

Circuit Court of Appeals, Fourth Circuit.

October 18, 1927.

Zeb F. Curtis, of Asheville, N. C. (J. D. Williamson, of St. Louis, Mo., on the brief), for appellant.

R. R. Williams, of Asheville, N. C., for appellee.

Before NORTHCOTT, Circuit Judge, and SOPER and ERNEST F. COCHRAN, District Judges.

SOPER, District Judge.

T. L. Kahn, having been duly adjudicated a bankrupt in the District Court on January 5, 1926, filed a petition for discharge from his debts under the Bankruptcy Act (11 USCA). The International Shoe Company, a creditor of the bankrupt, referred to herein as the company, filed specifications in opposition to the discharge on the ground that the bankrupt had obtained certain goods, wares, and merchandise from it upon a materially false statement in writing made by him for the purpose of obtaining credit from the company. The statement in question was made by him on April 19, 1922, upon a printed form furnished by the company. It showed that the bankrupt was then possessed of assets in the amount of $31,000, including Liberty Bonds in the amount of $4,000, and owed liabilities to the amount of $6,000, so that his net worth was $25,000. The form contained the following words in print, over the signature of the bankrupt:

"The above statement is made for the purpose of obtaining credit from * * * International Shoe Company, now or hereafter, and the same shall stand good as to any subsequent purchases unless there should be a material change, in which case I will notify them before making further purchases from them."

It also contained the following printed statement over the signature of the company:

"Please fill out the following blank and return the same to us. This statement will be used by us only for our confidential information. It is a well-established business principle that financial statements should be made at least once a year. The largest and strongest finance companies do this, because they recognize that character, capital, and ability are the basis of all credits. * * * In business it is necessary to take careful inventory at least once a year; to keep an accurate set of books, showing all purchases and sales, both cash and credit."

When the statement was made, it was a correct account of the bankrupt's financial condition. Thereafter from time to time the company sold goods to the bankrupt on credit. During 1922 there were sales on credit to the amount of $3,852; in 1923, $4,738.19; in 1924, $4,673.57. All of these bills were paid when they matured. Between May 15, 1925, and October 31, 1925, the company sold to the bankrupt merchandise to the amount of $2,635.30, of which $1,623.04 remained unpaid at the time of bankruptcy. Thus it appears that the bankrupt paid for nearly 90 per cent. of the goods purchased by him in the four-year period, and greatly reduced the amount of his purchases during the last year, when, it is said, the fraud occurred. These facts, taken alone, do not tend to prove an intent to defraud on his part. But a material change had taken place in the financial condition of the bankrupt when purchases were made in the early part of 1925. He then owed the sum of $12,000, instead of $5,000, and his net worth was not $25,000, as shown by the written statement. He had also disposed of the Liberty Bonds. But he did not notify the company, as he had agreed to do. The company, on its part, sold the goods during 1925, relying on the statement of April 19, 1922, and believing that the financial condition of the bankrupt remained unchanged. Had it known of the change, it would not have accepted the orders and extended the credit. The case was tried on an agreed statement of facts, and the bankrupt did not testify.

On this statement of facts, the District Court decided that the discharge should be granted. The court was of the opinion that there was no evidence that the bankrupt designedly, and with corrupt intent, undertook to deceive the company for the purpose of obtaining the goods in 1925. The company did not at any time in the three preceding years remind the bankrupt of his earlier financial statement, and the court thought that it was reasonable to assume that the bankrupt forgot (if he ever read the finely printed words) his promise to notify the company of a change in his financial condition. The court, moreover, held that a broken promise of the buyer, contained in a true statement of his resources, whereby he agreed to notify the seller of a change in financial condition, did not bring him within the terms of section 14b of the Bankruptcy Act (11 USCA § 32), so as to require the denial of the discharge.

There can be no doubt that a false financial staetment may have a continuing effect, so as to bind one who corruptly issues it with the intention of obtaining credit. The Supreme Court in Gerdes v. Lustgarten, 266 U. S. 321, 45 S. Ct. 107, 69 L. Ed. 309, has expressly approved the rule laid down in Ragan v. Cotton (C. C. A. 5th Circuit) ...