Mercantile statement no bar to discharge.

tion has the same effect as the granting of a general discharge to bankrupt from his debts.

§ 68. Distinction between mercantile agency statements and debtor's direct written financial

statement.

Financial statements may be issued directly to a creditor. Statements may also be issued through a mercantile agency. The former may be used for the purpose of barring the bankrupt's discharge. The latter, as a general rule, may not be used for that purpose, not having been issued by the creditor "to any person or his representative for the purpose of obtaining credit from such person." We shall first discuss those false statements in writing which are made by the debtor through a mercantile agency.

§ 69. Generally, statements to mercantile agency may not be used to bar a discharge.

If a financial statement is obtained by a mercantile agency, but such statement is not obtained specifically for a particular creditor at the instance and

the bank

shall confirm a composition if satisfied. rupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to his discharge."

Section 14-c provides: "The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge."

Thus a false financial statement may be used to defeat the confirmation of a composition, if the elements are present which would bar a discharge.

Mercantile statement no bar to discharge.

request of such creditor, such a statement is not one upon which specifications against the bankrupt's discharge may be based. Financial statements obtained by credit-reporting agencies for their own business or for publication among their subscribers, cannot be used as a basis for barring a bankrupt's discharge. The Bankruptcy Act was

2

2. In re Zoffer, 33 Am. B. R. 652, 655 (C. C. A. 2nd Circuit), 211 Fed. 936, Circuit Judge Lacombe considered and overruled In re Augspurger (D. C., Ohio), 25 Am. B. R. 83, 181 Fed. 174, In re Pinsker (D. C., N. Y.) 25 Am. B. R. 494, and reaffirmed the rule laid down by the U. S. Circuit Court of Appeals for the 2nd Circuit In re Dresser, 16 Am. B. R. 561, 76 C. C. A. 655, 146 Fed. 383. The court likewise reaffirmed its decision In re Russell, 23 Am. B. R. 850, 100 C. C. A. 77, 176 Fed. 253. The court considered the House Judiciary Report (61st Congress 1909-1910, first and second sessions, House Reports V. 1, Miscellaneous) and commented at length on the action of Congress requiring that the debtor must have obtained the goods from the party to whom the representations were made, in order to constitute such a false financial statement as will bar the bankrupt's discharge.

The Circuit Court of Appeals for the 4th Circuit, in Ould & Co. vs. Davis, 40 Am. B. R. 185, 246 Fed. 228, commented upon the decision In re Zoffer, supra, saying, after discussing the legislative history pertaining to Sec. 14-b (3): "In the light of this legislative history, it seems clear, as the Second Circuit Court of Appeals held in the Zoffer case, 33 Am. B. R. 652, 211 Fed. 936, that the amendment of 1910 would not be construed to cover 'general statements to mercantile agencies, not specifically asked for by prospective creditors.'"'

The rule stated In re Zoffer was likewise laid down In re William Napier (U. S. Dis. Ct. of Ky.), 23 Am. B. R. 562-3, in the following language: "I find and repeat the specification. that the bankrupt made a false credit statement to Dun & Co.,

Mercantile statement no bar to discharge.

not intended to be so drastic as to bar a debtor's discharge in bankruptcy for having furnished incorrect information to a credit-reporting agency for rating purposes.

a credit-reporting corporation, for the purpose of obtaining credit from various other persons and firms, insufficient as a matter of law, in that under the Bankruptcy Act, the statement must have been made to the person from whom the credit was obtained."

There are many other cases which hold the same rule applies. (In re Russell, 2nd Cir., 23 Am. B. R. 850-6, 176 Fed. 253-8, 100 C. C. A. 77-82.)

In Novick vs. Reed & Co., 27 Am. B. R. 521, 192 Fed. 20 (C. C. A., 3d Cir.), a financial statement was submitted by Novick "in strict confidence for commercial use only." The court stated in its opinion: "If the 'commercial use' was intended to be more than the use of the statement by the agency in fixing a rating for the bankrupt, it is difficult to understand how it could have been regarded as a statement sent 'in strict confidence.' On the proofs before us, it is impossible to find that the case comes within the language of Section 14-b, sub. 4, as it stood in 1908." (In Novick vs. Reed, the financial statement was made through the Shoe & Leather Agency and communicated by that agency to the creditor who extended the credit.)

3. Report No. 691 of Senate Judiciary Committee, 61st Congress: "The third change made by the House bill, that which in effect would make the obtaining of property on false written statements to mercantile agencies ground of opposition to discharge, without the creditor whose property has thus been obtained first asking such mercantile agencies to procure him the written statement, is not concurred in by your committee. Any tendency to make the Bankruptcy Act unduly harsh is to be avoided. It is sufficient ground of opposition to discharge, that the bankrupt has obtained property from a creditor by a

Mercantile statement no bar to discharge.

§ 70. Effect of statement to mercantile agency on bankrupt's right to a discharge.

In Haimowitch vs. Mandell, C. C. A. 3rd Circuit, 39 Am. B. R. 513, it was held that "when the bankrupt addressed the statement to the trade generally through the agency, he gave it to the agency as the 'representative' of any subscriber thereof, seeking information concerning his financial standing." The court held that the financial statement issued to the agency was a false financial statement communicated to the creditor and that the agency was in fact the agent of the creditor. This is in conflict with the great weight of authority and is not based upon the best reasoning. A creditor may have his agent secure debtor's financial statement and such agent may be a reporting agency. In all such cases, viz: where specific request is made by a creditor

materially false statement in writing where that statement was specifically asked for by the creditor or by creditor's representative. General statements to mercantile agencies, not specifically asked for by prospective creditors, ought not to be ground for opposition to the discharge; it makes the provision too harsh, in the estimation of your committee. Merchants are likely to make careless general statements where they would be very careful were they making statements to creditors from whom they were at the time asking credit. Your committee propose a substitute for the House amendment of this ground of opposition to discharge, which is thought to go as far as is proper."

This part of the Senate Judiciary's report was referred to in re Zoffer, 33 Am. B. R. 652, 655, 211 Fed. 936 (C. C. A., 2d Cir.).

4. This rule is also laid down in, In re Cloutier Bros., 36 Am. B. R. 319, 228 Fed. 569.

Mercantile statement no bar to discharge.

through a credit-reporting agency for debtor's financial statement, and such financial statement is then obtained from the debtor, such financial statement, if false, may be used as a basis to bar the bankrupt's discharge." In such a case, the mercantile agency would be considered the direct agent of the creditor receiving such financial statement. A creditor at a remote point could, in the extension of a particular credit, use a mercantile agency, as its agent to obtain the necessary financial statement from the

5. In Ould & Co. vs. Davis, 40 Am. B. R. 185, 246 Fed. 228, (C. C. A., 4th Cir.), the court said: "When and under what circumstances may a creditor claim the benefit of information obtained by a third party? What relationship must there be to make such third party the agent of the creditor? If a mercantile agency, acting on its own initiative and not at the request or even with the knowledge of any subscriber, obtains from a trader a written statement of his financial condition which is materially false, and afterwards furnishes such statement to a dealer who extends credit on the faith of it, is that agency 'representative' of the creditor within the meaning of the amendment? And can it be said ordinarily that a statement so obtained, not at the instance of the person who gives the credit or with his knowledge, is nevertheless made 'for the purpose of obtaining credit from such person'?

"These and other questions which at once arise under the facts here considered are quite sufficient, in our judgment, to show a degree of ambiguity in the amendment of 1910 which justifies resort for its interpretation to the official proceedings above recited. From these proceedings, to which we are amply warranted in referring, it is evident that the Congress did not intend to make 'general statements to mercantile agencies not specifically asked for by prospective creditors' available grounds for opposing a bankrupt's discharge."