Mercantile statement supports fraud action.

debtor. Such a direct agency would have to be proved in order to bar debtor's discharge in bankruptcy. The financial statement given must not be such that it constitutes merely a basis for a credit rating. The transaction must represent what the Bankruptcy Act contemplates, viz: the obtaining by the bankrupt of goods on credit from a particular creditor, to whom the bankrupt has furnished a materially false financial statement in writing for the purpose of obtaining credit.

§ 71. Statements published through mercantile agency may be used as basis of fraud action. The fact that a false financial statement issued through a credit-reporting agency, may not be used to bar a bankrupt's discharge in bankruptcy, does not prevent any creditor who extends credit on such statement, from entering his individual suit for fraud in the usual way and prosecuting it to judgment, regardless of the discharge proceedings in the bankruptcy court." A false financial statement given

6. "Representations made to a commercial agency, communicated to a third party concerning the financial condition of an individual or a corporation, may constitute actionable fraud, the legal effect being the same as though such misrepresentation had been communicated directly to the creditor." Hinchman vs. Weeks, 85 Mich. 535, 48 N. W. 790; Cortland Mfg. Co. vs. Platt, 83 Mich. 419, 47 N. W. 330; Mooney vs. Davis, 75 Mich. 188, 42 N. W. 802; Genesee County Sav. Bank vs. Mich. Barge Co., 52 Mich. 164, 17 N. W. 790. This is still the law except as to a bankrupt's general discharge which is governed by the bankruptcy law, discussed in Sec. 69.

Proofs required in barring discharge.

to a mercantile agency creates a cause of action against the debtor, in favor of those creditors extending credit in reliance thereon, even though such a statement will not bar the bankrupt's discharge in bankruptcy.

§ 72. Elements to be proved in barring a discharge upon specifications based on a false financial statement.

As provided in the Bankruptcy Act, a creditor who objects to the granting of a discharge to the bankrupt on the ground that the bankrupt obtained property on a false financial statement, must allege in his specifications, and prove the following elements:

1. That the debtor obtained money or other property on credit.

2. That such money or property was obtained on the strength of a statement of the financial condition of the debtor, which statement was relied on by the creditor.

3. That the statement was in writing.

4. That the statement was materially false.

5. That the statement was made to the creditor or to the creditor's representative.

6. That the statement was made for the purpose of obtaining credit from the creditor to whom it was made.

7. That the bankrupt or some one duly authorized by him, made the statement.

Intent to deceive must be shown.

§ 73. Discharge denied only to partnership and to partner who signed false financial state

ment.

Only the partnership and the partners issuing a false financial statement are affected in discharge proceedings. Those partners who participated in the issuance of the false financial statement may be barred of their individual discharge.' The partners who did not sign the statement, may not be barred of their individual discharge. This rule will undoubtedly yield to construction in case one partner issues a false financial statement and the other partner connived in its issuance or ratified it. The partner who stands by and permits the perpetration of a fraud by his co-partner, and accepts the fruits of his partner's fraud, should be estopped to deny the partner's agency to execute such financial statement for him.

§ 74. Intent to deceive must be shown.

It is essential in proving the falsity of a financial statement, to show more than mere error or untruthfulness in the making of such statement.

7. In re Cotton & Preston, 25 Am. B. R. 517 (Dis. Ct. Ga.), 183 Fed. 181-190; Hardie vs. Swofford Bros. Co. (C. C. A. 5th Cir.), 21 Am. B. R. 457, 165 Fed. 588, 91 C. C. A. 426.

8. False statement must be knowingly and intentionally untrue. Re Perlmutter, 43 Am. B. R. 362, 256 Fed. 802. Re Cloutier Bros. (D. C., Me.) 36 Am. B. R. 319, 228 Fed. 569; Peck vs. Lowenbein, 24 Am. B. R. 138, 178 Fed. 178 (C. C. A. 4th Cir.); Doyle vs. Bank (C. C. A. 4th Cir.) 36 Am. B. R.

Intent to deceive must be shown.

An intent to deceive must be proved. By this is meant that the debtor must have had a purpose to issue a designedly untrue financial statement.1 The character of the fraud which will prevent a discharge requires moral turpitude.2

Such intent may appear from a gross inaccuracy in the valuation of the debtor's property. The in

331, 231 Fed. 649; Perlmutter vs. Hudspeth (Appeal D. C., N. J.), 45 Am. B. R. 540 (C. C. A., 3rd Cir.), the following appeared in bankrupt's financial statement: Assets over liabilities, $22,000; borrowed money $5,000. Liabilities not mentioned in statement, $10,000. It was held that such a substantial reduction in the margin of safety would make the debtor's statement, a false financial statement. Debtor also omitted debts due to his wife and sister, but always included them in the trial balances drawn by him for firm members. It was held that a fraudulent intent was proved by these omissions from bankrupt's statement.

9. In re O'Callaghan, 199 Fed. 662, 29 Am. B. R. 304; Firestone vs. Harvey, 174 Fed. 574, 23 Am. B. R. 468; In re Braverman, 199 Fed. 863, 28 Am. B. R. 513; Gilpin vs. Merchants National Bank, 165 Fed. 607, 21 Am. B. R. 429 (C. C. A. 3rd Cir.); In re Arenson, 195 Fed. 609, 28 Am. B. R. 113; Peck Co. vs. Lowenbein, 178 Fed. 178, 24 Am. B. R. 138; Shaffer vs. The Koblegard Co., 183 Fed. 71, 24 Am. B. R. 898; In re Kyte, 174 Fed. 867, 23 Am. B. R. 414; In re Terens, 172 Fed. 938, 22 Am. B. R. 895; contra, In re William Goldberg (Dist Ct., Mass.), 43 Am. B. R. 127, 256 Fed. 541; In re Kerner (C. C. A. 2nd Cir.), 41 Am. B. R. 507, 250 Fed. 993.

1. Matter of Rosenfeld (C. C. A. 2nd Cir.), 44 Am. B. R. 390, 262 Fed. 876.

2. Gregory vs. Pierce (Ia. Supr. Ct. 1919), 44 Am. B. R. 36, 172 N. W. 288.

Burden of proof.

tent may be inferred from debtor's false statement made in reckless disregard as to whether the statement is true or not. Fraudulent intent may be implied where there is a notoriously gross discrepancy between the facts and the representations. Contemporaneous statements showing material discrepancies may be shown to prove fraudulent intent on the part of the bankrupt. On the other hand, although the assets may be overstated, if the liabilities are overstated, making the bankrupt's balance on the statement approximately as it exists in fact, fraudulent intent may be negatived in some cases, although the financial statement may be materially false as to other things apart from net worth."

§ 75. When bankrupt's knowledge of falsity appears, burden of proof shifts to bankrupt to disprove fraudulent intent.

In proving specifications in opposition to a bankrupt's discharge, based upon a false financial state

3. In re Ellerbee, 198 Fed. 952, 29 Am. B. R. 87.

4. See Encyc. of Evidence p. 33, and cases there cited.

5. See Gerner vs. Yates, 61 Neb. 100, 85 N. W. 596. But see contra, In re Maaget (D. C., Wy.), 40 Am. B. R. 221, 245 Fed. 84, where it was held that liabilities omitted from the bankrupt's financial statement may not be charged against assets omitted. The court said: "Neither a bankrupt nor any one else may defend a written statement of his financial condition, merely by showing that the balance is substantially correct."