McDowell v. John Deere Industrial Equipment Co., 71-2074.

• Decision Date: 26 May 1972
• Docket Number: No. 71-2074.,71-2074.
• Citation: 461 F.2d 48
• Parties: Glen McDOWELL, Appellee, v. JOHN DEERE INDUSTRIAL EQUIPMENT CO. and John Deere Company of Lansing, Inc., Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

461 F.2d 48 (1972)

Glen McDOWELL, Appellee, v. JOHN DEERE INDUSTRIAL EQUIPMENT CO. and John Deere Company of Lansing, Inc., Appellants.

No. 71-2074.

United States Court of Appeals, Sixth Circuit.

May 26, 1972.

Thomas R. Roberts, Lansing, Mich., for appellants; Foster, Lindemer, Swift & Collins by Philip T. Carter, Lansing, Mich., on brief.

Edward H. Dembowski, Marquette, Mich., for appellee.

Before PHILLIPS, Chief Judge, KENT, Circuit Judge, and FEIKENS, District Judge.^*

FEIKENS, District Judge.

Glen McDowell, doing business as McDowell Implement Company, represented the John Deere Company of Lansing, Inc., and the John Deere Industrial Equipment Company (referred to herein simply as "John Deere") as its dealer in the Rudyard, Michigan, area for some sixteen years.

On November 10, 1969, he filed a voluntary petition in bankruptcy. John Deere, the principal creditor, objected to discharge, and the Referee in Bankruptcy, following hearing, sustained five objections and denied discharge under Section 14(c)(3)¹ of the Bankruptcy Act (11 U.S.C. § 32).

McDowell then filed a petition for review of that ruling under 11 U.S.C. § 67.² The United States District Court for the Western District of Michigan reviewed the Referee's findings, took additional testimony from McDowell, reversed the Referee, and denied John Deere's objections to discharge. From that ruling John Deere appeals. We affirm.

During the many years of their business relationship, John Deere shipped farm and related equipment to McDowell and, pending sale, retained security interests therein. When a sale occurred where financing was necessary this, too, would be handled by John Deere. It would likewise arrange floor planning on used farm machinery received by McDowell as trade-ins. Credit to McDowell was effectuated by the execution of "floor plan notes" which gave John Deere a security interest in the used machinery. Such credits, if made, reduced the monthly cash settlement required of McDowell by John Deere.

John Deere's objections to discharge concerned these floor plan notes. In its ruling, the District Court adopted the Referee's detailed findings that McDowell's statements in the documents evidencing these transactions contained untrue factual assertions.³

An essential element necessary to deny discharge under Section 14(c)(3) is a showing that the creditor has relied on the untrue statements. This was resolved against John Deere. The District Court stated: "A substantial question arises, however, as to whether or not the bankrupt really intended to fool anybody at John Deere regarding his financial condition."⁴ In applying Section 14(c)(3), the Referee found that McDowell's statements in the floor plan documents were false, and he devoted an extensive portion of his opinion to specific findings. Nonetheless, he simply made a two-sentence finding as to the matter of reliance:

"I find that John Deere made reliance upon the written representations that were made by Mr. McDowell to obtain credit and that credit was given in reliance thereon,"

and

". . . I find no evidence that John Deere knew of these deceptions until on or about November 1969." (Appendix, pp. 151, 152).

Unless these findings are clearly erroneous, the findings of the Referee must be upheld.

"Unless otherwise directed in the order of reference the report of a referee or of a special master shall set forth his findings of fact and conclusions of law, and the judge shall accept his findings of fact unless clearly erroneous . . ." No. 47, General Orders in Bankruptcy.

"A finding is `clearly erroneous\' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1947).

It has long been the rule in this Circuit that the District Judge should not disturb the findings of fact of a Referee in Bankruptcy unless there is most cogent evidence of mistake or miscarriage of justice. In Kowalsky v. American Employers Ins. Co. of Boston, Mass., 90 F.2d 476, 479 (6th Cir. 1937), we said:

"In Ohio Valley Bank Co. v. Mack, 6 Cir., 163 F. 155, 158, 24 L.R.A. (N.S.) 184, . . . `No arbitrary rule can be laid down for determining the weight which should be attached to a finding of fact by a bankrupt referee. His position and duties are analogous, however, to those of a special master directed to take evidence and report his conclusions, and the rule applicable . . . must be substantially that applicable to a master\'s report . .\'"

See also, In Re Newman, 126 F.2d 336 (6th Cir. 1942).

However, the relationship between a District Judge and a Referee in the administration of the law is closer than the relationship between a Court of Appeals and a District Court. The Referee is an arm of the District Court. Although the clearly erroneous standard applies to the findings of the Referee, General Order 47⁵ also directs the court when appropriate to accept, reject, or modify the Referee's finding. See Rait v. Federal Land Bank of St. Paul, 135 F.2d 447 (8th Cir. 1943).

Thus, the question before us is whether or not there is substantial evidence to support the Referee's conclusion that John Deere relied upon McDowell's written representations to obtain credit. The Referee's findings must be upheld if supported by substantial evidence. This means more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Universal Camera Corp. v. National Labor Relations Board, 340 U.S. 474, 477, 71 S.Ct. 456, 95 L.Ed. 456 (1951).

A close examination of both the joint appendix and the transcript reveals that the testimony is overwhelming in showing that John Deere not only did not rely on these written statements but also knew of the facts underlying the floor plan notes. There is little evidence as to reliance.

In Kentile Floors, Inc. v. Winham, 440 F.2d 1128 (9th Cir. 1971), the Court of Appeals upheld the District Court's reversal of a Referee's finding denying discharge. The court held that due to the close relationship of the parties and extensive supervision, the creditor was not justified in relying upon the representations of the bankrupt.

An analysis of the circumstances of the relationship between McDowell and John Deere demonstrates that there was no reliance in the instant case. It is significant that John Deere provided the entire bookkeeping system for McDowell, that the bookkeeper worked under John Deere's direction, that John Deere's personnel directed McDowell's bookkeeper in general bookkeeping problems, and told "her where accounts should be applied and how," that John Deere's field accountant and territorial manager would come monthly or more often to McDowell's place of business. John Deere's bookkeeping service was not free; it charged McDowell initially $100 a year (later $300). The scope of supervision even included other aspects of McDowell's business in which John Deere had no interest (for example, the sale of hay).

The territorial manager played a key role in the managment of McDowell's business. He would write up the floor plan notes and authorize extension of credit. Allen, a territorial manager, said that McDowell actually signed some of these floor plan notes, without reading them, taking Allen's "word for it." During his frequent visits to the dealership, he would verify the inventory and make monthly settlements. This verification was accomplished by actually walking around the premises and preparing a list and comparing it to the previous month's list. McDowell would then be required to account for all units of equipment including the trade-ins. Territorial Manager Dennis Gearhard testified that shortages in equipment were not infrequently found and would simply be marked as out to a customer. Territorial Manager Dowd testified that worksheets would be prepared on all units of equipment to determine their actual worth. Finally, the monthly statements would be drawn up to determine how much money McDowell owed John Deere. In addition to these monthly statements, independent audits were made in August of each year; John Deere would audit more frequently. Furthermore, on renewal of his yearly contract (November 1) a detailed financial statement was required of McDowell.

Of significance in illuminating the knowledge that the territorial manager had concerning the floor planning notes is the further testimony of Harold Allen, who was employed by John Deere from December 1964 to April 1968.⁶ There had been times when McDowell had difficulty in paying for equipment and shortages would occur. "Special arrangements" would then be made by the territorial manager for extension of additional credit. The shortage would then be covered by the territorial manager reporting that the equipment was either out on demonstration or out on loan.⁷

It is also significant that the Referee misconceived the nature and purpose of all this testimony. The Referee regarded the testimony regarding bookkeeping as "generalizations." He regarded testimony as to the role that the credit manager for John Deere played as being "irrelevant." He regarded the appearance of John Deere personnel and their field men at McDowell's place of business as ...