Matter of Walker
| Citation | 53 BR 174 |
| Decision Date | 28 June 1985 |
| Docket Number | Bankruptcy No. 82-02442-SJ,Adv. A. No. 82-1762-SJ. |
| Parties | In the Matter of Laymon Berman WALKER, Debtor. CITIZENS STATE BANK OF MARYVILLE, Plaintiff, v. Laymon Berman WALKER, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri |
Frank H. Strong, Maryville, Mo., for plaintiff.
Jack N. Bohm, Buck, Bohm & Stein, Kansas City, Mo., for defendant.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND FINAL DECREE OF NONDISCHARGEABILITY OF DEFENDANT'S INDEBTEDNESS TO PLAINTIFF IN THE SUM OF $43,463.91
Now before the court on remand from the court of appeals and the district court is the plaintiff's complaint for a decree of nondischargeability of an indebtedness to it of $43,463.91 on the grounds that it was created by the fraud of the defendant's agent, his wife, in misrepresenting levels of sales and inventory to the plaintiff in order to gain extensions of credit. See § 523(a)(2) of the Bankruptcy Code.
After a full evidentiary hearing in which the material portions of the evidence demonstrated that the fraudulent misrepresentations which clearly resulted in a loss of $43,463.91 to the plaintiff bank were committed by the debtor's wife; that she was his agent for the purpose of making representations to the bank concerning business income and the level of inventory; and that, therefore under the standard legal principles which at that time governed the question, the agent's fraud had to be imputed to her principal with the result that the indebtedness was not dischargeable in bankruptcy, this court entered its final decree of nondischargeability of that indebtedness.1
The debtor thereupon appealed the nondischargeability decree to the district court. The district court cited cases which stood for the proposition that a non-bankrupt's agent's fraud could not, absent fraudulent participation and intent of the principal, warrant denial of a discharge but could provide a ground for a decree of nondischargeability.2 Nevertheless, although these authorities would seem to have supported the decision rendered by the bankruptcy court, the district court reversed the judgment of the bankruptcy court.3
The plaintiff bank then appealed from the judgment of the district court to the United States Court of Appeals for the Eighth Circuit. That court in Matter of Walker, 726 F.2d 452 (8th Cir.1983), as is well within its power and responsibility, seemed to develop yet another possibly governing rule of law — that the debtor in bankruptcy can be held liable in respect to his discharge for the fraud of his agent only if he knew or should have known of the misrepresentation.4 The action was remanded to this court5 for findings on that issue.
Because of the possible change in the law effected by the court of appeals, this court conducted a supplemental hearing after remand in order to ensure that the parties were granted a sufficient opportunity to offer evidence on the material factual issue of whether the debtor knew or should have known of his wife's fraudulent misrepresentations to the plaintiff bank.6 Considering the evidence which was then adduced together with the relevant evidence formerly submitted in the initial hearing in which this court's former judgment was based warrants the following findings of fact: At the time the material misrepresentations were made by the debtor's wife, the debtor had been briefly hospitalized with a nervous disorder which would perhaps be considered by objective standards to be of a minor character.7 But the subjective and emotional effects in both the debtor and his wife were seemingly profound. According to their uncontradicted testimony it resulted in the debtor's turning over complete charge of his business activities to his wife and his refusal thereafter to discuss any business matters with her. She fully cooperated in this effort to keep business affairs out of the mind of the debtor. To this end, she affirmatively states, she actively concealed her fraudulent activities from the debtor in order to aid and benefit his peace of mind. He, in fact, according to their testimony did not know of her fraudulent misrepresentations until sometime after he had consulted his current attorney for the purpose of filing the within bankruptcy proceedings. And, upon the discovery of the fraud, an appropriate report of it was made.8 The evidence also shows, on the other hand, as the plaintiff points out in its pretrial brief, that the defendant had access to the books and records of the business and that his examination of these books and records would and should have resulted in his discovery of the fraud.9
It is perhaps crucial to note that, when the complaint was filed by the plaintiff in this action, it mentioned the section on denial of discharge as well as the statute on the dischargeability of individual debts. "Defendant," it was said in the complaint, "has not yet been discharged under section 727 of the Bankruptcy Code, but the order of this court dated August 16, 1982 in the bankruptcy proceedings concerning him provides that the last date for filing objections to the discharge is October 9, 1982." The complaint was filed on October 8, 1982. This court, however, because the bankruptcy case of Laymon Berman Walker had been filed subsequent to October 1, 1979, the effective date of the Bankruptcy Reform Act of 1978, which dropped the false financial statement as grounds for denial of discharge, ignored the potential claim for denial of discharge. "In enacting the new Code, Congress chose to remove the use of a false financial statement as a ground for denying discharge but to retain it as a ground for determining that a particular debt is not dischargeable." Matter of Gray, 22 B.R. 676, 679 (Bkrtcy.W.D.Wis. 1982). Consequently, no findings or conclusions were made on this potential issue. The court believed that there could be virtually no syntactical analysis of the above-quoted reference to § 727 which would result in an interpretation that the issue of the debtor's entitlement to a general discharge had been raised.10 But the court made no findings in this regard; it simply pretermitted them. The concatenation of events to which this pretermission has given rise perhaps demonstrates how blameworthy trial courts can be — especially specialized trial courts like those which sit in bankruptcy cases — for omitting seemingly inconsequential details such as were omitted in this court's opinion in this case. For, after this court — without explaining why it did not expound on the general discharge issue — issued its decree of nondischargeability, the parties, on appeal, briefed the issue of the defendant's entitlement to discharge. Case authority was cited to the district court which applied exclusively to the subject of denial of discharge under the pre-1979 bankruptcy law and which expressly excluded application to the subject of nondischargeability. Consequently, in a brief written opinion, the district court reversed the judgment of this court, relying exclusively on those cases. The pertinent portion of the district court opinion was to the following effect:
This court, however, as noted above, had not purported to deny the debtor's discharge, but only to hold the individual indebtedness to plaintiff to be nondischargeable. This was a result which was supported, not only by the legal authorities cited by this court in its findings of fact and conclusions of law, but by each and every one of the authorities which are relied upon by the district court in the above-quoted passage. See In re Lovich, supra, at 614, to the following effect:
(Emphasis added.)
The cases following and commenting on the Lovich decision, supra, and relied on in it have all in like manner observed that an agent's fraud may be imputed on the dischargeability issue, but not when the question is entitlement to the general discharge.11 See also In re Brown, supra, at 1070-71, to the following effect:
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