Yellow Creek Logging Corp. v. Dare

• Decision Date: 13 May 1963
• Citation: 216 Cal.App.2d 50,30 Cal.Rptr. 629
• Parties: YELLOW CREEK LOGGING CORPORATION, doing business under the name and style of Yellow Creek Logging Co., Plaintiff and Respondent. v. Benjamin A. DARE, Defendant and Appellant. Civ. 20818.
• Court: California Court of Appeals Court of Appeals

Page 629

30 Cal.Rptr. 629

216 Cal.App.2d 50

YELLOW CREEK LOGGING CORPORATION, doing business under the name and style of Yellow Creek Logging Co., Plaintiff and Respondent. v. Benjamin A. DARE, Defendant and Appellant.

Civ. 20818.

District Court of Appeal, First District, Division 1 California.

May 13, 1963.

Mathews & Traverse, Francis B. Mathews, Eureka, for appellant.

Woodman, Leddy & Sautter, Dureka, for respondent.

SULLIVAN, Justice.

Benjamin A. Dare, defendant below, appeals from an order denying his motion, made pursuant to section 675b of the Code of Civil Procedure and upon the grounds of his subsequent bankruptcy, to discharge the judgment rendered herein against Dare and in favor of respondent Yellow Creek Logging Corporation, hereafter for brevity referred to as Yellow Creek.

Respondent purchased from appellant and the other defendants herein (who are not parties to this appeal) certain real property located in Humboldt County together with timber thereon. On February 5, 1958, respondent commenced the instant action for the cancellation of the deed by which it acquired the above property and for the recovery of the money paid on account of the purchase price with interest thereon. Respondent's complaint was in two counts: the first count based on fraud and the second count on mistake. The answer of the defendants denied all of the material allegations of the complaint. In addition it alleged that any representations were made in good faith and were not matters within the defendants' knowledge. ¹

The findings of the court were mostly of a general nature, stating by reference to specified paragraphs of the pleadings that the allegations of those of the complaint were true and the allegations of those of the answer were untrue. With respect to the first cause of action sounding in fraud, the court found, so far as is here pertinent, that for the purpose of inducing plaintiff (respondent here) to purchase the property, the defendants made to plaintiff false representations concerning the amount of timber on the property; that such false statements and representations were repeated at various times up to the date of delivery of the deed; that the plaintiff justifiably believed and relied upon said false representations; and that in reliance thereon, plaintiff entered into the contract with defendants to purchase the property. However the court made no specific finding that the defendants knew such representations to be false. Although the paragraph of the amendment to the complaint, which was the basis for the first finding mentioned by us above, contained the additional language 'defendants well knowing such representations to be false,' the finding itself which was one of the few specific findings made, did not include the above or any other language of scienter.

With respect to the second cause of action, the court found that all of the allegations thereof were true. It was therefore found that 'defendant * * * mistakenly represented to the plaintiff' (emphasis added) the amount of timber on the land.

However, the court found that the allegations of a number of the paragraphs of the answer were untrue. In this way, it found untrue the defendants' allegation, set forth above, to the effect that their representations were made in good faith. ²

The court concluded that plaintiff was entitled to recover the payment made on the purchase price together with interest, that the deed should be cancelled, and that plaintiff should have a lien on the property to secure the repayment of the purchase price. Judgment accordingly was entered on August 22, 1960.

Appellant was adjudicated a bankrupt on July 5, 1960, and was granted a discharge in bankruptcy on April 25, 1961. Included in the schedule of his debts was the abovementioned judgment in favor of respondent. On March 1, 1962, appellant filed in the above action his motion now under review 'to require discharge from judgment.' ³ Said motion was made on the ground 'that the findings of fact and conclusions of law submitted and signed by the Court do not make any findings whatsoever or at all that the defendant knew that the representation allegedly made was false or that the representation made was recklessly made or that the representation was made without any knowledge of its truth and as a positive assertion, nor that the defendant made the representation with the intention that it should be acted upon by the plaintiff and that all of such allegations are required before an obligation may be failed to be discharged pursuant to U.S.C.A. Title 11, Bankruptcy Section 55 [sic].' The motion was denied. This appeal followed.

Appellant claims that (1) the judgment was not based on obtaining money by false representations but on mistake; and (2) the liability in question remained a dischargeable one since all elements of actionable fraud were not present.

Section 17 of the Bankruptcy Act provides that '[a] discharge in bankruptcy shall release a bankrupt from all of the probable debts, whether allowable in full or in part, except such as * * * (2) are liabilities for obtaining money or property by false pretenses or false representations * * * .' (11 U.S.C.A. § 35.) Although the granting of a discharge is the function of the bankruptcy court, the effect of a discharge is properly for the determination of any court in which it is duly pleaded or otherwise submitted for judgment. (In re Setzler (D.C.S.D.Cal.1947) 73 F.Supp. 314, 316.)

Not all frauds come within the above statutory provision excluding certain liabilities from a discharge in bankruptcy. Before a liability can fall within the exception, the false representations in question must have been knowingly and fraudulently made and must involve moral turpitude or intentional wrong. (Forsyth v. Vehmeyer (1900) 177 U.S. 177, 181, 20 S.Ct. 623, 44 L.Ed. 723; In re Noble (D.C.Colo.1941) 42 F.Supp. 684, 687 ⁴; Hisey v. Lewis-Gale Hospital, Inc. (D.C.Va.1939) 27 F.Supp. 20, 23; 8 B C.J.S. Bankruptcy § 573, pp. 55-58; 6 Am.Jur., Bankruptcy, § 780, pp. 1005-1007. For California cases holding the exception applicable see: Wilson v. Walters (1941) 19 Cal.2d 111, 121-122, 119 P.2d 340; O'Brien v. Appling (1955) 133 Cal.App.2d 40, 283 P.2d 289; Crespi & Co. v. Giffen (1933) 132 Cal.App. 526, 530-531, 23 P.2d 47.) Thus the above exception of the Bankruptcy Act applies only to actual fraud, knowingly and intentionally committed (In re Noble, supra) and not to constructive fraud or fraud which may exist in the eyes of the law without imputation of bad faith or moral turpitude. (Accounts Supervision Company v. Atley (La.App.1956) 89 So.2d 508, 511.) However false representations made recklessly and without regard for their truth in order to induce action by another are the equivalent of misrepresentations knowingly and intentionally uttered. (Katzenstein v. Reid, Murdock & Co. (1905), 41 Tex.Civ.App. 106, 91 S.W. 360, 362; Zerega Distributing Company v. Gough (1958), 52 Wash.2d 443, 325 P.2d 894, 896.)

In 8 Remington on Bankruptcy (1955 ed.), section 3320, pages 178-179, the rule is stated as follows: 'Generally speaking, the element of intent to defraud must have been present or at least presumable from the circumstances * * *. Reckless disregard of the truth in making statements can be tantamount to wilful misrepresentation. All the elements of actionable fraud must be present before a claim can fall within the exception, and it must accordingly appear (1) that defendant made a material representation; (2) that it was false; (3) that he made it when he knew it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury.'

Applying the above principles to the instant case, we think it is clear from the trial court's findings summarized by us above that the defendants made false statements and representations to the plaintiff concerning the property, that they did so to induce plaintiff to buy it, and that the plaintiff, believing and relying on such statements, thereafter purchased the property and paid over part of the purchase price. While no specific finding was made that the defendants knew that the statements were false, the trial court did find that the defendants' allegations that their representations were made in good faith and were not matters within their knowledge (see footnote 1, ante) were not true. Commenting on this last finding, the judge who heard appellant's motion to require discharge of judgment, ⁵ the Honorable D. H. Wilkinson, well points out in his ruling thereon: 'It would appear therefore that the court found that the representations were not made in good faith; that they were not believed by the defendant to be true and that they were matters represented to be within the knowledge of the defendant. It would...