Falsity as to amount of overdrafts.

quiry is made as to overdrafts, constitutes a falsity which may, with other circumstances, constitute a fraud. Overdrafts are a sign of weakness, very frequently of financial distress, and a creditor is entitled to specific information in regard thereto.1

be filed there. After the proper filing of such tax notice, no purchaser or mortgagee can be a bona fide holder of either real estate or personal property or interests therein, so as to claim the property free of the government's lien.

Acts of Congress of March 4th, 1913, Chap. 166, 37 Stat. at Large, 1066, amending Revised Statutes of U. S., Sec. 3186, 3 Fed. Stat. Ann. (2nd Ed.), page 1013.

To illustrate the workings of this statute, the matter of the Ray Battery Company, Bankrupt (U. S. District Court, E. D. Mich.) is in point.

The Collector of Internal Revenue properly filed his notice of claim for taxes in the U. S. District Clerk's office, which claim was as follows:

1. In Gerner vs. Mosher, 58 Nebr. 135, 78 N. W. 384, where a bank falsely listed customers' overdrafts among its loans

Obligations to friends and relatives.

§ 17. False representations as to indebtedness due to friends and relatives.

Merchants and manufacturers who are indebted to relatives for money borrowed or for other indebtedness, are looked upon as a special credit risk. If the books of the business show indebtedness to friends and relatives, such business is given particular scrutiny, and the appearance of this class of indebtedness among the obligations of the debtor is considered a significant circumstance in determining the character of the credit risk. As stated in one case, "such liabilities are earliest discharged if the creditors are related by blood or marriage, when doubt arises as to the ability to pay all creditors.""2

The fact that the aggregate amount of such debts to friends and relatives is comparatively small, will not excuse the omission of this special class of

and discounts, the court held that this constitutes a fraud. By properly listing overdrafts, the debtor's statement gives the creditor the character of the credit-risk undertaken.

2. In In re Brener, 20 Am. B. R. 644, 166 Fed. 930, the court said: "It is a notorious fact of which I think the court may take judicial cognizance, that intending vendors of merchandise are peculiarly sensitive regarding debts for borrowed money. They are apt to look into them with a microscopic eye; they induce suspicion of themselves, and very justly so, for it is also a matter of common knowledge that such liabilities are earliest discharged if the creditors are related by blood or marriage when doubt arises as to ability to pay all creditors."

Obligations to friends and relatives.

indebtedness, if such debts debts were intentionally omitted from the debtor's financial statement."

§ 18. Obligations to friends and relatives,—continued.

It is held that debts owing to near relatives stand out more distinctly in the memory of the debtor, than other classes of indebtedness. This is particularly true where the bankrupt shows the amount of his inventory, and sets forth the details of various classes of obligations which he owes, and shows his net worth, in a financial statement. When the debtor's financial statement omits debts due to relatives and friends, in the absence of convincing evidence, it will be held that the debtor intended to withhold from

3. In re Brener, 20 Am. B. R. 644, 166 Fed. 930, the court also said: "It may be, and I think it was, quite true, that if Brener's statement had shown $6,000 less net worth than it did show, his line of credit would not have been curtailed by those persons with whom he was accustomed to deal; but it does not follow that if his net worth appeared to be $6,000 less than it was stated by reason of borrowed money, intending creditors would not have felt as much confidence as they did feel, nor as much as they would have felt had his worth been decreased for any other reason.

4. In re Perlmutter, 43 Am. B. R. 362, 256 Fed. 862: "Debts owing to near relatives stand out in the mind more distinctly than any other kind. In re Brener (D. C., N. Y.), 20 Am. B. R. 644, 166 Fed. 930-931; in re Arenson, supra. And the experience of general creditors in bankruptcy matters shows that the minds of failing debtors are not any different in this respect."

Obligations due money-lenders.

his prospective creditor, knowledge of such indebted

ness.

As a consequence, if the debtor makes a financial statement for the purpose of obtaining credit, and fails to include in the statement, obligations due to friends or relatives, he renders himself liable for fraud.

§ 19. Falsity as to obligations due money-lenders.

If the debtor omits indebtedness due to moneylenders who make a business of loaning money at usurious rates of interest, such omission constitutes

5. In re Perlmutter, supra, held: "The Title Company was entitled to a true statement, and Joseph, in the absence of convincing evidence that the omission of his wife's and sister's indebtedness from the statement in question was unintentional, must be held to have intended to conceal from this prospective lender a knowledge of such indebtedness, and also the consequences normally flowing from such deception."

6. In Hinchman vs. Weeks, 85 Mich. 535, 48 N. W. 790, debtor, having a $2,600 stock, failed to mention in his financial statement, an obligation of $2,700 owing to his wife. Debtor was held liable for fraud.

In Cox vs. Adams, 105 Iowa 402, 75 N. W. 316, debtor, having a stock of $17,000, failed to mention in his financial statement, an obligation of $16,000 due his brother and an obligation of $2,750 owing to the bank. Debtor was held liable for fraud.

In Aultman vs. Carr, 16 Tex. Civ. App. 430, 42 S. W. 614, debtor, having a stock of $30,000 or less, failed to mention in his financial statement, an obligation of $16,000 due his mother and an obligation of $4,500 due the bank. Debtor was held liable for fraud.

Representations as to net worth.

a fraudulent concealment. The same principle applies in case of false representations relating to obligations due to others who make a business of loaning money at high rates, or who make a business of loaning money with substantial charges in addition to the legal rate of interest. Creditors are entitled to know if the debtor is paying a premium in any form or guise, for the use of money. Information regarding such obligations is highly material for obvious reasons, and a fraudulent omission or false representation in regard to such obligations may support an action in fraud, even though the current ratio of debtor's current liabilities as compared with his liquid assets, is not materially changed through an omission of this class of indebtedness.

§ 20. False representations as to net worth.

8

False representations may likewise relate to the net worth of the debtor. The figure showing net worth, if falsely stated, may be a false representation of fact which will support an action for fraud. Net worth, being a computation in which the total amount of the debtor's liabilities are deducted from the total amount of debtor's assets, is not usually offered as a basis for credit in the absence of a preliminary statement of the amount of assets and liabilities of the debtor. However, it is not necessary that the debtor should show the computation by

7. In re Reed, 43 Am. B. R. 132, 256 Fed. 412.

8. See note 8, section 15, for cases in which fraud was predicated on debtor's false statement as to his net worth.