Bankrupt must disprove fraudulent intent.

the debtor's financial statement in ordinary fraud actions, applies with equal force to proceedings to bar the bankrupt's discharge. In order to bar the bankrupt's discharge, the creditor must prove that he relied on the debtor's financial statement as a basis for the credit extended to the debtor and that such statement was materially false.

§ 79. Disproving fraudulent intent by bankrupt.

Substantial discrepancies may creep into the debtor's financial statement and still not form a basis on which to bar a bankrupt's discharge. The element of wicked intent or moral turpitude may be absent. The debtor, when confronted with the statement, will undoubtedly furnish proof that there was no fraudulent intent. With this situation in view, the creditor should exercise care in taking the debtor's financial statement.

It is a common practice for creditors to have a salesman interview customers with reference to the customers' financial condition. Sometimes the salesman carries a financial statement-blank. The salesman then proceeds to obtain the desired information by asking the customer questions as to assets and liabilities and entering upon the financial statement-blank, the figures given by the customer. The salesman then requests the customer to sign the statement and the statement is signed by the customer. After property is delivered and credit is extended in reliance on the debtor's state

3. See sections 36, 37, and 39.

Bankrupt must disprove fraudulent intent.

ment, errors and omissions appear. The debtor immediately denies fraudulent intent.

In Ellet-Kendall Shoe Co. vs. Ward, 26 Am. B. R., 114 (C. C. A. 8th Cir.), 187 Fed. 982, such a situation arose. The creditor contended that the financial statement was false and that it was fraudulent.

4. The court said: "After the salesman had taken an order for goods he produced a printed form containing about forty subjects or matters concerning which his principal, the claimant, desired information. Instead of submitting it to the bankrupt to act on in his own way the salesman read questions and the bankrupt gave answers. There was omitted from the liabilities an indebtedness on outstanding notes aggregating $1,950, given by the bankrupt in purchase of the interest of a former partner in the business. Had this indebtedness been specified it would have shown the liabilities to have been about 60 per cent of the non-exempt assets. The statement produced in evidence. shows no answers to the questions which would naturally have elicited information of the omissions. The answer spaces were left blank. The salesman testified that he asked the questions shown on the form but as he was in a hurry he did not put down all the answers. On the other hand, the bankrupt testified he truthfully answered every question asked, that he had no reason to conceal anything and that the notes to his former partner never occurred to his mind. He examined the statement after the salesman had finished, and signed it, but under the circumstances his attention would naturally be confined to those matters marked by the salesman's writing. It may be noted in this connection that the column of liabilities was not totaled. The indebtedness for merchandise was stated in detail and in the aggregate, but notes for the purchase of a partner's interest, doubtless embracing other things besides merchandise, would not ordinarily belong under that head. The subsequent conduct of the bankrupt fully accords with his honesty and good faith."

Disproving fraudulent intent.

The debtor claimed that material omissions resulted through the salesman's error and through the method employed in the preparation of the statement. The court held that the bankrupt's financial statement was erroneous rather than fraudulent, the element of intent to defraud, being absent."

§ 80. Disproving fraudulent intent, continued: Practice recommended in taking debtor's verbal statement.

The same situation arises when the customer is called to the office of the creditor, where a representative of the creditor asks questions as to the assets and liabilities of the debtor. Figures are frequently entered on the financial statement-blank of the creditor, and then the blank is handed to the debtor for his signature.

In this class of cases, the debtor may not undertake to give an exhaustive and exact statement, in detail, of his assets and his liabilities. Debtor's esti

5. In Acme Harvester Machine Co. vs. Eugenus H. Bennett (C. C. A. 8th Cir.), 47 Am. B. R. 481, 277 Fed. 425, a salesman had taken information from a customer with reference to the customer's financial condition. The assets were overstated and the liabilities were understated. It was claimed by the debtor that the discrepancies in the statement were honest mistakes and incorrect entries made by agents of the debtor. By reason of the fact that mere estimates were given and the figures were zot intended to be taken as exact, and that the creditor's salesman knew this, the court held that the creditors had not proved a fraudulent intent.

Blank not sufficient to bar discharge.

mate of stock may be considerably more than what he actually has on hand. Debtor's estimate of his liabilities may be considerably less than the amount he owes. Likewise, individual debts may be omitted in error when the records of the debtor are not at hand.

The best practice would prompt the creditor to insist upon having the debtor make out the statement himself, preferably at debtor's place of business where his records are available. The statement should be complete and correct, so far as the debtor's records will disclose. This will preclude the possibility of the debtor claiming later, that the false representations were due to error, by reason of the circumstances under which the statement was given. All blanks should be filled out and each ques·· tion should be answered in the affirmative or negative. At the conclusion of the debtor's financial statement, it should appear that such statement is a complete statement of all of the debtor's assets and liabilities.

§ 81. Discharge may not be barred by reason of a blank left in financial statement.

A general discharge in bankruptcy will not be denied by reason of omissions from debtor's financial statement which would in other cases constitute a fraudulent concealment. This is due to the pecu

6. In re Hammage, 44 Am. B. R. 203, certain family debts were omitted. The statement did not purport to give anything more than the indebtedness for merchandise and the amount

Blank not sufficient to bar discharge.

liar wording of the bankruptcy law, which is as follows:

"The judge shall ... discharge the applicant unless he has . . . obtained property on credit from any person upon a materially false statement in writing.'

997

A blank left unanswered in the debtor's financial statement, is not a materially false statement, under the bankruptcy law. For this reason it is of utmost importance that the creditor's statement-blank should contain the printed representation of debtor that his financial statement is a complete statement showing all of his assets and all of his liabilities.

of debtor's stock. A $3,000 obligation owing to the debtor's family for borrowed money was not mentioned in the debtor's statement. It was held that this was no false statement upon the face of the writing. The court said: "There is nothing in the statement at all, as heretofore suggested, to the effect that the figures given, were inclusive of all the indebtedness or that no other indebtedness was subsisting."

In International Harvester Co. vs. Carlson, 33 Am. B. R. 178 (C. C. A., 8th Cir.), 217 Fed. 736, the column marked "liabilities" was left entirely blank, when as a matter of fact, debtor had considerable indebtedness. The court said: "There is nothing in any part of the form which declares that blanks unfilled are to be construed as representing that nothing is owing under this heading. A 'material statement' means not a blank nor an inference from a blank. There must be a direct statement, either negative or positive, which is false, to justify the denial of bankrupt's discharge."

7. Sec. 14-b (3) Bankruptcy Act.