Shainman v. Shear's of Affton, Inc.

• Decision Date: 17 November 1967
• Docket Number: No. 18749.,18749.
• Citation: 387 F.2d 33
• Parties: Jerome SHAINMAN, Appellant, v. SHEAR'S OF AFFTON, INC., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

387 F.2d 33 (1967)

Jerome SHAINMAN, Appellant, v. SHEAR'S OF AFFTON, INC., Appellee.

No. 18749.

United States Court of Appeals Eighth Circuit.

November 17, 1967.

Richard Marx, of Blumenfeld, Kalishman, Marx & Tureen, St. Louis, Mo., for appellant and filed brief.

J. Leonard Schermer, of Shifrin, Treiman, Schermer & Susman, St. Louis, Mo., for appellee; Thadeus F. Niemira, St. Louis, Mo., of the same firm was with him on the brief.

Before VAN OOSTERHOUT, GIBSON and HEANEY, Circuit Judges.

HEANEY, Circuit Judge.

This is an appeal from an order of the United States District Court affirming, without opinion, a Referee's order in bankruptcy denying a discharge of Jerome Shainman, the bankrupt. The Referee found that Jerome Shainman, "While engaged in business * * * as an executive of a corporation Shainman & Company, Inc., obtained for such business money or property on credit * * * by making or publishing or causing to be made or published * * * a materially false statement in writing respecting * * * the financial condition of such * * * corporation." Bankruptcy Act § 14c(3), Ch. 541, 30 Stat. 565 (1898), (amended by 79 Stat. 646 (1965) as amended, 11 U.S.C. § 32c(3) (1966)). We affirm.

The undisputed facts as found by the Referee were substantially as follows:

Shainman & Company, Inc., a wholesale toy distributor, entered into a three-year factoring agreement with Receivables Finance Corporation on February 1, 1962. It provided that R.F.C. would make loans to Shainman & Company up to sixty percent of the cost of inventory assigned or pledged out not to exceed a total of $550,000. Jerome Shainman, president, chief executive officer, treasurer and a major stockholder of Shainman & Company negotiated the agreement. He and his wife, vice president and treasurer of the company, personally guaranteed the loans.

Pursuant to an understanding between the parties, Shainman & Company furnished monthly inventory reports to R.F. C. The January 31, 1963, report showed an inventory of $751,981. On March 31, 1963, Shainman & Company gave R.F.C. an adjustment report indicating that in accordance with a physical inventory taken on January 31st of that year, the inventory should be increased by $189,975. It also furnished R.F.C. with an eighty-two page detailed list of the items comprising the inventory as of that date. It showed the correct value of the inventory to be $941,757.¹

Certified public accountants hired by R.F.C. spot-checked the January 31, 1963, inventory count and prices. There is no indication in the record that this check uncovered the shortage later found to exist.²

The monthly inventory reports were made on two sheets. A white one contained the additions to inventory and the balance after such additions. The dollar amount of additions was determined by reporting new purchases at cost. It contained the following affirmation:

"The undersigned does hereby certify that the representations set out in the foregoing schedule are true and correct, that Receivables Finance Corporation in connection with monies which it is either advancing or lending to the Dealer is to rely upon the truthfulness of the foregoing representations, and that in connection with its written contract with the Dealer, Receivables Finance Corporation will, on the basis of the representations made herein, advance or lend monies to the Dealer; and the undersigned also represents that the above-described items of property deposited with the named warehouses as described in this shedule and the balances reflected therein are free and clear of any and all liens or claims whatsoever, that the Dealer has absolute and complete title to the same and the right to transfer good title of the same."

The pink sheet contained a schedule of inventory withdrawals. The dollar amount of withdrawals was computed by Shainman & Company by taking eighty-five percent of sales.³ The following affirmation appeared on it:

"The undersigned does hereby certify that the foregoing schedule represents a true schedule of the withdrawal therein described and of the balances remaining in said premises; that the withdrawals therein described are made only for the purpose of sale in Dealer\'s normal course of business * * *."

On October 9, 1963, Shear's of Affton, Inc., the objecting creditor, lent Shainman & Company $10,000. The president, Harry Shear, who negotiated the loan, was given a copy of the January 31, 1963, inventory. Shear's of Affton was apparently secured, at least in part, by inventory.⁴

Based on the monthly inventory reports received by R.F.C. from Shainman & Company, the inventory as of January 31, 1964, had a value of $800,559. A physical inventory, however, as of that date, established its actual value at $172,276.79, a fraction of the value shown in the monthly inventory reports.

On March 4, 1964, an involuntary petition in bankruptcy was filed against Shainman & Company, and it was adjudicated a bankrupt on March 20, 1964. On November 27, 1964, Jerome Shainman was adjudicated a bankrupt upon the filing of a voluntary petition. The schedule of debts in his petition listed $166,683.37 of unsecured claims,⁵ consisting primarily of obligations resulting from his personal guarantee of Shainman & Company's debts.

Shear's of Affton objected to the discharge of Jerome Shainman on three specifications; only two of which are material here:⁶ (1) that Shear's of Affton loaned Shainman & Company $10,000 in reliance on the January 31, 1963, financial statement of Shainman & Company, which was false and published by Jerome Shainman while an officer of Shainman & Company, and (2) that R.F.C. extended credit in reliance on false monthly inventory statements also published by Jerome Shainman.

The Referee found for the objector on each of the two specifications. His order denying discharge was affirmed by the District Court without written opinion.

The bankrupt on appeal asserts error in regard to both specifications. Since we conclude there is no question that the denial of discharge must be upheld in regard to the specification regarding R.F.C., we need not consider the many questions relating to the Shear's of Affton loan. A finding that the bankrupt obtained credit based on a materially false statement meeting all other requirements under § 14c(3) of the Bankruptcy Act will bar discharge of all debts, not just the debts of the creditor who has been defrauded. Compare, § 14c(3) with § 17a(2), Bankruptcy Act, supra. Furthermore, it need not be shown that the objecting creditor (in this case, Shear's of Affton) relied on the statement; and a creditor can object to discharge on the grounds that another creditor was defrauded. E.g., In re Haggerty, 165 F.2d 977 (2d Cir. 1948); In re Ernst, 107 F.2d 760 (2d Cir. 1939); Sadler v. Hirshberg Bros., 23 F.2d 245 (6th Cir. 1928); In re Mayer, 139 F.Supp. 372 (E.D.Wis.1956); In re Johnson, 114 F.Supp. 396 (N.D.Tex.1953); Matter of Pine, 40 F.Supp. 287 (E.D.N.Y.1941); In re Weinstein, 34 F.2d 964 (D.C.S.D. Cal.1929), Collier, Bankruptcy §§ 14.35, 14.42.

In this appeal, the bankrupt alleges that the objector failed to prove: (1) that the monthly inventory reports were "financial statements" within the meaning of § 14c(3) of the Bankruptcy Act, (2) that the bankrupt published these written statements, (3) that the respective statements were false, (4) that the bankrupt's intent was fraudulent, and (5) that either R.F.C. or Shear's relied on the respective written statements.

With respect to the fact questions raised in (2) (3), (4) and (5), we apply the established rule that the Referee's findings are to be accepted unless clearly erroneous. American National Bank and Trust Co. of Chicago v. Bone, 333 F.2d 984 (8th Cir. 1964); Teasdale v. Prosperity Co., 290 F.2d 345 (8th Cir. 1961); Boyce v. Chemical Plastics, 175 F.2d 839 (8th Cir. 1949); In re Slocum, 22 F.2d 282 (2d Cir. 1927); Rule 52(a), Fed.R.Civ.P., 28 U.S.C.A.; General Orders in Bankruptcy No. 47, 11 U.S.C.A. following § 53.⁷

Section 14c of the Bankruptcy Act requires that a bankrupt be given a discharge unless the court is satisfied that the bankrupt committed an act which bars discharge. Gross v. Fidelity & Deposit Co. of Maryland, 302 F.2d 338 (8th Cir. 1962); Becker v. Shields, 237 F.2d 622 (8th Cir. 1956); Farmers' Sav. Bank of Grimes, Iowa v. Allen, 41 F.2d 208 (8th Cir. 1930). In making a determination as to whether the bankrupt has committed an act barring discharge, effect must be given to the last proviso in § 14c of the Bankruptcy Act which provides:

"* * * if, upon the hearing of an objection to a discharge, the objector shall show to the satisfaction of the court that there are reasonable grounds for believing that the bankrupt has committed any of the acts which * * would prevent his discharge in bankruptcy, then the burden of proving that he has not committed any of such acts shall be upon the bankrupt."

The implications of this amendment are pointed out in Collier on Bankruptcy, § 14.12:

"* * * The burden which shifts now upon a showing of reasonable grounds is not a burden of going forward with the evidence requiring the bankrupt to explain away natural inferences, but a burden of proving that he has not committed the objectionable acts with which he has been charged; the bankrupt now has the risk of ultimately persuading the court that the allegations in the specifications are untrue once the objector has shown that there are reasonable grounds for believing that the bankrupt has committed one or more of the acts enumerated in § 14c. If the evidence is in a state of substantial equilibrium, the discharge must be denied since the bankrupt has failed to carry his burden of proof."

We turn to a consideration of the specific issues raised by the petitioner:

I. The inventory reports were financial statements within the meaning of § 14c(3) of the Bankruptcy Act. The bankrupt argues that the monthly inventory reports of Shainman & Company,...