Debtor's status fixed by bankruptcy.

§ 82. Debtor can not change his status by payment after bankruptcy to a creditor holding false

financial statement.

From the date of the filing of a bankruptcy petition, the status of the debtor as a bankrupt is fixed. If prior to that date, the bankrupt has obtained property on credit, on a false financial statement, the bar to a discharge in bankruptcy is absolute, if the other elements to be proved under the statute are shown. The fact that thereafter the bankrupt caused or permitted to be paid or discharged, obligations which rendered his financial statement false, does not mitigate the falsity of the financial statement, nor would the payment of such omitted debts provide a defense to the bankrupt on specifications based on the bankrupt's false financial statement.

8. In Josephs vs. Powell & Campbell, 32 Am. B. R. 222 (C. C. A., 2nd Cir.), 213 Fed. 627, the court said: "The commissioner finds that at this time he owed his father about $10,000 and to other relatives sums aggregating over $2,000. In other words, he was hopelessly insolvent and could not have paid his creditors fifty cents on the dollar. How can we overlook so plain a case of false representations? Were not those who were asked to extend credit to the bankrupt entitled to know that he owed $12,000 to his relatives? Is it likely that any one would have extended credit had he known that the bankrupt was insolvent to the extent of $7,000? There is no doubt that the bankrupt made a materially false statement for the purpose of obtaining credit. The moment this was done the bar to a discharge, if the creditors chose to assert it, was absolute. The bankrupt had done an act which prevented his obtaining a discharge. The fact that two years afterwards these debts had been paid or released or that when the statement was made the bankrupt believed that the relatives to whom he owed money would not press him for payment, in no way mitigates the falsity of the statement when it was made."

CHAPTER VII.

RECLAMATION OF GOODS OBTAINED BY MEANS OF

FALSE FINANCIAL STATEMENT.

Section 83. General rule governing reclamation.

84. Specific intent to defraud, need not be proved to

sustain a reclamation.

85. Disaffirmance.

86. Defenses to reclamation petitions.

87. Waiver and election of inconsistent remedy.

88. Laches as a defense.

89. Parties must be placed in statu quo.

90. Seller may reclaim goods and also file claim for conversion of goods not recovered.

91. Pleading and practice.

92. Proofs required on reclamation.

§ 83. General rule governing reclamation.

When the seller's goods have been obtained on credit by false and fraudulent representations as to the buyer's financial condition, the seller may recover his property if it can be found among the assets of the bankrupt. This remedy is known in the bankruptcy practice as reclamation. A petition for reclamation will usually be allowed by the bankruptcy court under the same circumstances permitting a replevin of goods in the state court. Material falsity in the debtor's financial statement, coupled with an intent to deceive (actual or constructive), together with the creditor's reliance on debtor's statement and the creditor's consequent

1. Levi vs. Picard, 17 Am. B. R. 430, 148 Fed. 654.

No specific intent to defraud necessary.

delivery of goods, must be proved as in other fraud cases.2

§ 84. Specific intent to defraud need not be proved to sustain a reclamation.

In reclamation proceedings, it is the rule that an intent to deceive the seller, is imputed to the insolvent debtor if his financial statement is materially false. This is undoubtedly true in cases involving financial statements which are issued by a debtor with an intent to obtain credit thereby. The debtor is presumed to know the true status of his affairs whereas the creditor usually has no exact information as to the buyer's financial condition except that appearing in the buyer's statement. Therefore, if the buyer obtains credit on a false financial statement, specific fraudulent intent need not be proved, but a fraudulent intent will be imputed to the debtor.s

The general rule is qualified in cases where the debtor shows that the discrepancies in his financial statement were due to honest mistake and that the

2. Collier on Bankruptcy, Vol. 2, p. 1720 (13th Ed.).

3. See Sec. 28. In re Epstein, 109 Fed. 874, 6 Am. B. R. 60, the court said: "That a sale induced by such false representations may be rescinded, although the purchaser made them with no fraudulent intent, is well settled. . . (cites many cases). The law requires, not only the utmost good faith between the parties, but a full disclosure of the financial standing of the party desiring to obtain credit, so as to enable the other party to determine his financial ability to pay for the goods when the account matures."

Disaffirmance.

statement was issued in good faith as a truthful statement of what it purported to show with reference to debtor's financial condition."

885. Disaffirmance.

5

The right to disaffirm for fraud may be exercised as long as the rights of innocent parties have not intervened. The lien given to the trustee in bankruptcy by the statute (Sec. 47-a [2] Bankruptcy Act) is not such a lien as makes the trustee a bona fide purchaser with rights superior to those of a de

4. In Ellet Kendall Shoe Co. vs. Ward (C. C. A. 8th Cir.), 26 Am. B. R. 114, 187 Fed. 982, a reclamation petition was filed, based upon a false financial statement. It appeared that claimant's salesman wrote down question and answer as to forty items relating to debtor's assets and liabilities; that claimant's salesman omitted in error, certain liabilities of the debtor; that blanks which would have disclosed a large indebtedness for the purchase of a partner's interest, were not filled in; that there was a separate blank for merchandise indebtedness concerning which debtor answered fully and truthfully; that claimant's salesman acted hurriedly when he filled out the statement for debtor; and that debtor offered to return claimant's goods when he found out that he could not pay for them. It was held that no fraud was shown and hence no reclamation would be allowed.

5. If the right to disaffirm is lost under the state law, in cases where bona fide purchaser's rights intervene, in such cases the bankruptcy court will not allow a reclamation in favor of the seller. The same rule applies in favor of persons who have acquired a lien, for a valuable consideration and in good faith.

Waiver and inconsistent remedies.

frauded creditor seeking to reclaim property obtained by the bankrupt through fraud."

§ 86. Defenses to reclamation petitions.

Generally speaking, any defense on the merits, which may be urged to defeat a rescission suit in equity or a replevin action at law, may be interposed as a defense against reclamation proceedings. As applied to reclamations for fraud arising from the debtor's use of a false financial statement in obtaining goods on credit, defenses to an action for fraud would constitute equally good defenses to a reclamation petition. The fraud of the debtor must be proved in a reclamation proceeding, and if this proof fails, the reclamation petition must be denied, (except that an intent to deceive need not be proved in this class of cases). Though claimant proves his right to rescind, the receiver or trustee may defend on the ground of waiver, laches, and the failure of petitioner to place the receiver or trustee in status quo.

§ 87. Waiver and election of inconsistent remedy.

It is no absolute defense to a reclamation petition, that a creditor has already proved his claim in debtor's bankruptcy proceedings as an open account

6. In re Whatly Bros., 199 Fed. 326, 29 Am. B. R. 64; In re Collins, 39 Am. B. R. 510, 242 Fed. 975.

7. For defenses to a fraud action on a false financial statement, see sections 57 to 60.