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. False representations as to liabilities. 8 tions as to his liabilities. Falsity in this respect may arise from an under-statement of the total amount of the liabilities of the debtor. The falsity may like This would bring about considerable shrinkage. To guard against a credit loss due to such shrinkage, the ratio of two to one between liquid assets and current liabilities has been fixed as a reasonable one, so that after shrinkage of the liquid assets upon liquidation, there will be sufficient left to take care of current liabilities. In many cases, a larger ratio than two to one is required, but in practice this proportion between liquid assets and current liabilities is considered as a sufficiently safe one in extending credits in ordinary cases. There is no fixed basis for this rule and it should not be applied except where it creates a sufficient margin of safety. 8. In Hinchman vs. Weeks, 85 Mich. 535, 541; 48 N. W. 790, debtor represented that he had "Margin" $5,750. Debtor actually owed $1,200 to $1,500 to merchandise creditors, and $2,700 to his wife. This statement False representations as to liabilities. wise arise from understating particular liabilities owing to individual creditors. Fraud may likewise arise from an omission of certain liabilities from debtor's financial statement. Debts due to friends, as well as those due to relatives, should have their place on every financial statement issued by an individual. A false statement as to debts due friends and relatives constitutes a fraud, under like conditions as would render fraudulent, a false statement as to debts due to merchandise creditors. Deferred debts, such as mortgage was made December 19, 1887. On the 29th of December, 1888, debtor, being insolvent, made a general assignment for the benefit of creditors. Judgment for fraud was entered against defendant, by reason of the false representations as to debtor's liabilities. In Cox Shoe Co. vs. Adams, 105 Ia. 402, 414; 75 N. W. 316, debtor represented that he had stock, $17,000 5,000 liabilities In Aultman, Miller & Co. vs. Carr, 16 Tex. Civ. App. 430, 432, 42 S. W. 614, the debtor represented that he had: False representations as to liabilities. payments, must likewise be shown in the debtor's financial statement." Frequently, no questions are asked of the debtor as to guaranties and endorsements made by him. If the debtor omits mention of contingent liabilities under those circumstances, he may not be held for fraud.10 However, if questions are asked concern Debt to bank not included in statement of debtor... Debtor held liable for fraud. $27,000 $3,000 $30,000 11,000 $19,000 $11,000 16,000 4,500 $31,500 9. Deferred debts are considered as current obligations to the extent of the payments maturing within a year's time. Indebtedness on such deferred obligations must appear in the statement of the debtor and such statement should show both the full amount of the deferred obligation as well as the installments coming due during the year. A failure to show such obligations in debtor's financial statement works a fraud upon the creditor and constitutes a fraudulent concealment. See section 31 infra, and cases therein cited, on fraudulent concealment. 10. Fraud may not be based on the debtor's omission to show a contingent liability such as a liability on a guaranty (unless the liability has been fixed). Bradley vs. Seaboard National Bank, 46 N. Y. App. Div. 550, 62 N. Y. Suppl. 51. Falsity as to amount of overdrafts. ing contingent liabilities, they must be truthfully answered, and a false representation in regard thereto may be material and may constitute a fraud. In most businesses, the amount of unpaid taxes becomes important and should be mentioned in the financial statement form." § 16. Falsity as to amount of overdrafts. The omission of overdrafts and the concealment thereof by classing them otherwise when a direct in 11. Many forms of financial statements make no mention of liabilities for taxes. As this class of liability has priority upon distribution of the estate of an insolvent debtor, subject to administration expenses (and in bankruptcy proceedings subject further to wage claims and other claims specifically given priority by law, Sec. 64b) taxes should be clearly covered in the financial statement form. Section 3466 of Revised Statutes of the United States, (Fed. Stat. Ann., (2nd Ed.) Vol. 2, page 216) provides a priority for all federal taxes, including income taxes, upon the distribution of the estate of an insolvent. Section 64a of the Acts of Congress Relating to Bankruptcy, provides the same priority in distribution of the proceeds arising from the bankrupt's estate. In addition to the statutory priority in distribution, there is allowed to the United States, a further right under the income tax laws, to file a lien against the property of the bankrupt, which lien has precedence over all other liens and incumbrances, and which attaches to the property, even in the hands of a purchaser for value. Such a lien can be secured by the United States, if the Collector of Internal Revenue files the tax claim in the office of the United States District Clerk, in the District where the property is situated. In states where the law provides for the filing of tax notices in the office of the Register or Recorder of Deeds, notice of tax claims must |