Credit terms, expenses, profits. weakness in production. So also, an over-supply of raw material, without a demand for the finished product, or an over-supply of finished goods, are material elements in determining the character of the credit risk. A statement materially false in these respects, furnishes the basis of a fraud suit the same as though the assets had been overstated or the liabilities understated. § 13. Credit terms, expenses, profits. The proportion of outstanding accounts compared with the amount of sales, and the terms of credit given to customers, are material in a financial statement. Large sales or small sales, with too many bad accounts, will generally furnish a bar to the extension of a full line of credit. Even though the accounts be considered good, if the amount of the unpaid accounts is out of proportion to the gross sales, it will soon become apparent to the person extending credit, that the debtor is operating a larger business than his capital warrants. The evidence of such over-expansion is very material on a financial statement. Consequently the proportion of unpaid outstanding accounts as compared with the sales made by debtor, should be dealt with in detail, and representations made in regard thereto, are material in the extension of credit. The merchant's expense is likewise material in dealing with the question of credit. Likewise the profit which he is charging, must be considered by the person extending credit, for this, also, is material in the extension of credit. Small profits and large CHAPTER II. FALSE FINANCIAL STATEMENTS AS A SPECIES OF FRAUD. Section 5. General considerations. 6. Written and verbal financial statements distin guished. 7. Statement must be a representation of fact. 8. Representation must relate to a material fact. 9. Representations held to be material. 10. False representations as to assets. 11. Falsity as to valuation basis: cost versus market value. 12. Falsity as to amount of manufactured goods, goods in process of manufacture, raw material. 13. Credit terms, expenses, profits. 14. Falsity as to sales; fixing amount of current liabilities and liquid assets. 15. False representations as to liabilities. 16. Falsity as to amount of overdrafts. 17. False representations as to obligations to friends and relatives. 18. Obligations to friends and relatives, continued. 19. Falsity as to obligations due money-lenders. 20. False representations as to net worth. 21. False representations as to gains made in business. 22. Continuing effect of representation. 23. Continuing effect of representation: illustrative cases. 24. False financial statements published through mer cantile agencies. 25. Creditor need not see original statement given by debtor to mercantile agency. 26. Financial statements and other financial reports published by debtor. 27. Fraudulent intent must be proved. Written and verbal financial statements distinguished. Section 28. Fraudulent intent may be imputed to debtor who negligently issues false statement. 29. By giving a financial statement to a mercantile agency, debtor held to intend that statement be communicated to the business public. § 5. General considerations. In this chapter, the discussion will be confined to false financial statements as a species of fraud. The various parts of the financial statement will be examined with a view to determine what representations are material in a legal sense, that is, what representations constitute an inducing cause for the extension of credit. The manner in which financial statements may be communicated, and the legal effect of making them, will be discussed. The rights and remedies of creditors in civil fraud proceedings against the debtor, will then be considered. § 6. Written and verbal financial statements distinguished. Financial statements issued as a basis for obtaining credit, may be verbal or written. Verbal statements as to a purchaser's financial condition are more frequently given than written statements. The credit-manager, in his discussion of the resources and liabilities of the customer, finds it comparatively easy to obtain the desired statement for credit purposes, by conversation with the customer, rather than by the written inquiry and written answer. For the purposes of a fraud suit, debtor's verbal statement regarding his financial condition, has the same effi False representations as to liabilities. lation of the current indebtedness of a merchant or manufacturer, as compared with his liquid assets, is highly important and is a recognized basis on which credit is extended. If a false representation is made in regard to the liquid assets as compared with the outstanding current indebtedness, such a representation is material and may be used as a basis for a fraud action." § 15. False representations as to liabilities. The debtor may render himself liable for fraud if his financial statement contains false representa compute the amount of sales divided by inventory, being sales Turnover= This method, although the one in inventory common use, is inaccurate, in that sales are figured at selling price, whereas inventory is usually figured at market-cost. Second, the computation can be made by taking the cost of all merchandise sold and dividing by the average cost of the cost of merchandise sold inventory, being Turnover= average inventory cost Figures for the latter method, while more accurate, are usually not available to the business public and hence the first method must usually be employed. Care should be taken in ascertaining which method was used in arriving at the stock-turnover, as the two methods produce widely differing percentages of turn over. 7. It is a recognized rule among bankers, manufacturers, and wholesalers that a credit risk is not a good one unless the borrower has twice as much in liquid assets as he has in current liabilities. This rule is designed to furnish a margin of safety. Should it become necessary for a merchant or manufacturer to liquidate, his quick assets would have to be reduced to cash. Financial statement must be a representation of fact. spects, however, a verbal statement made by the debtor as to his financial condition, has the same legal effect as his written financial statement. § 7. Statement must be a representation of fact. A creditor has no right to rely on statements made by the debtor as to his expectations; nor has a creditor the right to rely on general statements made by the debtor to the effect that the debtor will be able to pay his bill when it comes due; nor has a creditor the right to rely on a statement by the debtor that he (debtor) is entirely trustworthy. When a debtor states an opinion as to the condition of his business, rather than an existing fact, he does not render himself liable to any of the penalties for the making of a false financial statement. The buyer's opinion is never actionable if no more than an opinion is ex 4. Jude Snow & Co. vs. Woodburn, 27 Vt. 415. But see Rothschild vs. Mack, 115 N. Y. 1, 21 N. E. 726, where defendant represented that a note bearing defendant's endorsement is as good as the Bank of England. The court held that this representation constituted a fraudulent representation of fact and a fraud on the purchaser of the note, the endorser being insolvent at the time of the transfer of the note. In Dickinson vs. Atkins, 100 Ill. App. 401, debtor represented "that he had abundant means to pay any judgment rendered against him, whereas he was insolvent at the time. Debtor was held liable in fraud for false representations. It is held that a representation by the debtor to the effect that he may be safely trusted or may be safely given credit, is not actionable. Lyons vs. Briggs, 14 R. I. 222, 51 Am. Rep. 372. On the other hand, it is held that a representation made by an insolvent merchant to a wholesaler's traveling agent "that |