Matter of Lind
| Citation | 6 BR 374 |
| Decision Date | 09 April 1980 |
| Docket Number | Bankruptcy No. 75-HB-142,75-HB-143. |
| Parties | In the Matter of John Arthur LIND and Catherine Franks Lind, Bankrupts. E.J. BUTLER, Jr., Plaintiff, v. John Arthur LIND, Defendant. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas |
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Paul W. Nimmons, Jr., Houston, Tex., for E.J. Butler, Jr.
Lowell T. Cage, Houston, Tex., William Vincent Walker, Houston, Tex., for John A. Lind, M.D.
The matter is before the Court on the complaint of E.J. Butler, Jr., a creditor, objecting to the discharge of John A. Lind, M.D., the bankrupt.1 Mr. Butler alleges that Dr. Lind committed the act set out in § 14(c)(3) of the Bankruptcy Act in that on various occasions while Dr. Lind was engaged in business he obtained for those businesses money or property on credit or an extension or renewal of credit by making or causing to be made or published a materially false statement in writing respecting his financial condition.
At the time of filing and this trial, Dr. Lind was a physician primarily employed in solo practice as a radiologist. For a number of years prior to the bankruptcy filing Dr. Lind had invested and been involved in a number of small ventures unrelated to his medical practice. Some of these undertakings involved capital investments and participation in the formation of certain small business enterprises, such as Houston Mini-Mix Concrete Company and Par-finders, Inc. Other transactions consisted of buying small lots and parcels of supposedly desirable real estate both in this country and Canada.
In order to finance these various ventures, Dr. Lind on numerous occasions approached several banks and lending institutions about procuring loans. To obtain the loans Dr. Lind submitted financial statements, generally prepared by himself, purporting to reflect his overall financial condition and liquidity. Mr. Butler argues the ventures for which the money was obtained constituted "businesses" (although secondary to the practice of medicine) in which Dr. Lind was engaged. In addition he contends the financial statements submitted by Dr. Lind were materially false as they grossly overstated the value of certain assets held by Dr. Lind while omitting liabilities, thus making Dr. Lind appear more financially secure than he actually was. Without such inflated figures, Mr. Butler alleges Dr. Lind would have presented a much less desirable financial picture and consequently would never have received such loans.
Dr. Lind responds to Mr. Butler's allegations by arguing that the financial statements were prepared in good faith with no intent to deceive, that any errors made were the result of mere negligence and not intentionally, knowingly or recklessly done, that his various ventures represented passive investments as opposed to "businesses" and that in many instances it was his substantial income as a physician and not his financial statements upon which the banks relied in extending credit.
A fair determination of Mr. Butler's allegations necessitates a careful consideration of the legislative intent behind generally granting discharges in bankruptcy cases while denying them only in certain specific and well-delineated instances. The policy behind granting discharges is to "relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934), citing Williams v. U.S. Fidelity & G. Co., 236 U.S. 549, 554-555, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915). The denial of a discharge, therefore, is a punitive measure reserved solely for those bankrupts who have committed one of the specific exceptions as described in § 14 of the Bankruptcy Act. Unless one of the statutory grounds for objection to discharge is proved, the discharge must be granted. Bluthenthal v. Jones, 208 U.S. 64, 28 S.Ct. 192, 52 L.Ed. 390 (1908); Matter of Robinson, 266 F. 970 (1st Cir. 1920). Any party in interest may oppose the discharge, even one who was not defrauded by or involved in the transaction in issue. Cunningham v. Elco Distributors, 189 F.2d 87 (6th Cir. 1951). However, in weighing the facts put forward in a contest over a discharge the Court must bear in mind the beneficial policy of allowing honest debtors to receive a fresh start in life and thus construe § 14 strictly against the one objecting to discharge and liberally in favor of the bankrupt. In re Tabibian, 289 F.2d 793, 795 (2nd Cir. 1961). In re Jones, 490 F.2d 452 (5th Cir. 1974); Gross v. Fidelity & Deposit Co. of Maryland, 302 F.2d 338 (8th Cir. 1962).
The specific act alleged here falls under § 14(c)(3) of the Bankruptcy Act, which reads:
Thus to prevail under this section a party must prove all of the following elements: the bankrupt (1) obtained money or property on credit or an extension or renewal of credit (2) in reliance upon (3) a financial statement which contained information which was not in fact correct. Such false statement must have been (4) material and (5) made either intentionally or knowingly or with reckless disregard for the truth. The financial statement itself must be (6) in writing and must have been (7) made or published or caused to be made or published by the bankrupt or someone duly authorized by him. Finally, (8) the bankrupt must have been engaged in business and the money must have been obtained for such business. 1A Collier on Bankruptcy ¶ 14.36 at 1381-82.1 (14th ed. 1978). If even one of these elements is missing, the objection will not be sustained and the discharge granted.
The evidence adduced at trial indicates certain of these elements are not in dispute. It is clear Dr. Lind did in fact obtain money or property on credit or an extension or renewal of credit and he did so after submitting written financial statements respecting his financial condition which later proved to have overstated substantially his net worth. Dr. Lind admits in all instances he either made or published the financial statements or caused them to be made or published.
Dr. Lind disputes, however, Mr. Butler's allegations that any errors in the financial statements were made with the specific intent to defraud Dr. Lind's creditors, that the money obtained was for a business in which Dr. Lind was engaged and that in all instances the banks relied on the financial statements in extending credit to Dr. Lind.
Before turning to the actual transactions, we review in greater depth several of the disputed elements. A discharge will be granted if there is no showing that the party making the loan relied upon the false financial statement. In re Little, 65 F.2d 777 (2nd Cir. 1933); In re Day, 11 F.Supp. 400 (D.Mass.1935). However, even partial reliance on the false financial statement is sufficient to deny the discharge and there may be sufficient reliance to sustain the objection to discharge even though the creditor has made an independent investigation of the debtor's financial status or has required security for the loan. Banks v. Siegel, 181 F.2d 309 (4th Cir. 1950); see, e.g., In re Philpott, 37 F.Supp. 43 (S.D.W.Va.1940); In re Hochberg, 17 F.Supp. 916 (W.D.Pa.1936); In re Muscara, 18 F.2d 606 (W.D.Pa.1927); In re Applebaum, 11 F.2d 685 (2nd Cir. 1926); In re Slohm, 10 F.Supp. 351 (W.D.N.Y.1935).
Turning to the question of what constitutes a "business,"2 case law proves to be less helpful on this point. After reviewing the cases relating to § 14(c)(3) we can find no more clearcut definition of what is meant by the term "engaged in business" other than "whether the type of enterprise is one where the borrower is a person who is `more likely to be aware of the severe consequences' of issuing a false financial statement because of his `business records and experience.'" In re McCallister, 3 C.B.C. 693, 703 (S.D.Iowa 1975) citing In re Simms, 202 F.Supp. 911, 913 (E.D.Va.1962). Operations that require large amounts of borrowed capital create a presumption that the bankrupt was a person fully aware of the necessity of honesty in financial statements. In re McCallister, supra, at 694.
Finally, looking to the issue of intent, for an erroneous financial statement to be considered "false" for the purpose of denying a discharge in bankruptcy, not only must it in fact be one that is incorrect, but it must also have been executed with actual intent to defraud. Such specific intent to deceive one's creditors can be demonstrated in one of two ways: either the false statements are intentionally or knowingly made, Clancy v. First Nat. Bank of Colorado Springs, 408 F.2d 899 (10th Cir. 1969), cert. den. 396 U.S. 958, 90 S.Ct. 430, 24 L.Ed.2d 422, or the statements are made with such reckless indifference to the actual facts that there are no reasonable grounds to believe they are in fact correct. Morimura, Avai & Co. v. Taback, 279 U.S. 24, 49 S.Ct. 212, 73 L.Ed. 586 (1929). Where the bankrupt's financial statement, although erroneous, is not published with any intent to deceive creditors either by intentionally or knowingly stating untruths or recklessly disregarding actual facts, then the bankrupt will not be barred from discharge; on the other hand, however, "the bankrupt's unsupported assertions of an honest intent will not overcome the natural inferences...
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