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May 10, 1946


The opinion of the court was delivered by: BYERS

Motion to dismiss petition to review order of referee denying discharge.

The sole creditor of the above-named bankrupt has successfully contested his discharge before the referee, and the correctness of that ruling is contested under the following showing: The creditor, Quern, recovered a deficiency judgment in foreclosure of a mortgage executed by the bankrupt in June of 1941, which took the place of an unrecorded mortgage dated November 4, 1937, and which is the source of the creditor's status in this proceeding.

 The specification of objection which was sustained is confined to the bankrupt's application for a loan to the National City Bank, dated February 4, 1941, over three years after Quern's claim arose; the loan was for $ 204, and was stated to have been sought to pay for medical service; that loan was paid in due course.

 The specification is extended in form, as will be seen:

 '1. That the bankrupt prior to the filing of the petition in bankruptcy, in order to obtain money and property on credit and/or obtain an extension or renewal of credit from the National City Bank, did make, issue and publish, in violation of the Bankruptcy Act, a false statement in writing, respecting his financial condition, in that the bankrupt issued a false financial statement in writing on February 4th, 1941 to the National City Bank respecting his financial condition, wherein the bankrupt stated, amongst other things, that the only lien against the property owned by him at 130 Kenilworth Place, Brooklyn, New York, was a mortgage of $ 6975.00 held by the Flatbush Savings Bank of Brooklyn and that he had no other loans outstanding and was making no installment payments and that all taxes, assessments and fire insurance were up to date except water taxes for $ 25.00 due February 1st, 1941, whereas in fact the bankrupt was indebted to Frederick G. Quern in a sum in excess of $ 5,000.00, which obligation was incurred by the bankrupt in connection with the purchase of the premises of 130 Kenilworth Place, Brooklyn, N.Y., and which purchase constituted a lien against the premises, evidenced by the unrecorded bond and third mortgage. That there was also outstanding a second mortgage against the property held by Winwell Realty Co.; the bankrupt was also indebted upon outstanding loans to Frederick G. Quern, Mary Jane Haggerty, Margaret Soden and Thomas F. Demic in excess of $ 3500.00, and the bankrupt was making installment payments upon said obligations, as well as to the Flatbush Savings Bank, and in addition the bankrupt was in arrears on taxes owing upon the said premises, and further, based upon the said statement, the bankrupt did obtain money by way of a loan from the National City Bank on or about February 6th, 1941 and said bankrupt issued the said statement knowing full well that the National City Bank would rely upon said statement, and the National City Bank upon reliance of said statement, did grant a loan to the bankrupt on February 6th, 1941 for $ 204.00.'

 The specification is addressed to Section 14, sub. c(3) of the Act, 11 U.S.C.A. § 32, sub. c(3), which provides that the discharge shall be denied if it appears that the bankrupt 'obtained money or property on credit, or obtained an extension or renewal of credit, by making or publishing or causing to be made or published in any manner whatsoever, a materially false statement in writing respecting his financial condition'.

 Collier (14th Edition) at page 1351 contains this resume of the law as it has been expounded:

 'It has been held that an intent to defraud is essential; the word 'false' means more than erroneous or untrue and imports an intention to deceive, and a materially false statement in writing must have been knowingly or intentionally untrue to bar a discharge. Intention to deceive is always material as an element of proof, and, by the weight of authority, such intent is an essential element. It must be shown that the bankrupt's alleged false statement in writing was either knowingly false or made so recklessly as to warrant a finding that he acted fraudulently. * * * '

 Such of the numerous authorities in support of the text as the Court has been able to examine are in accord with the quotation.

 Concededly, if the statement furnished to the bank fell within the prohibition of the statute, the bankrupt was under the burden of demonstrating a lack of intent to deceive the bank, and the record has been examined in the light of that understanding.

 The referee has made thirty Findings of Fact, at the instance of the creditor, of which No. 25 concerning the alleged failure of the bankrupt to meet the burden above referred to, and No. 26 concerning the failure to ask a question of the representative of the National City Bank who testified, and No. 27 with regard to the failure to set forth the personal obligations of the bankrupt, namely, those referred to in Finding 28, seem to require attention; also Nos. 21 and 23.

 It will be seen that the position of the objecting creditor is completely insulated from the influence of any equitable consideration whatever, since his position in 1937 could not have been influenced by anything that occurred in February of 1941, when the bankrupt procured his loan.

 The bank which advanced him the money is not a creditor, and makes no contention whatever that it was misled by anything that the bankrupt said or did.

 Mr. Daniel J. Gallagher, employed by the bank, was subpoenaed by the objecting creditor, and it appears that he was the one who received the application for the loan and probably recommended the bank's approval. His testimony is important, and therefore is quoted:

 'Q. I show you this question -- 'applicant will list any obligations. loans outstanding here or elsewhere'. Do you recall whether Mr. Haggerty had any conversation with you with respect to his being indebted on personal loans to friends or relatives? A. No.

 'Q. Had Mr. Haggerty had such a conversation with you at which he told you that he was indebted to friends and relatives would you have told him that it was perfectly all right to answer that question 'none' and to omit the personal indebtedness?

 'Mr. Steel: I object to the question.

 'The Referee: I will allow him to answer it.

 'The Witness: Is his objection sustained?

 'The Referee: No.

 'The Witness: Will you be kind enough to read the question again? (Question read back by stenographer.) A. Yes.

 'Q. You would have advised him that he could omit mentioning the personal indebtedness and answer the ...

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