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July 23, 1970

In the Matter of Herbert L. BEBAR, Bankrupt

Bartels, District Judge.

The opinion of the court was delivered by: BARTELS

BARTELS, District Judge.

Herbert L. Bebar, the bankrupt, petitions for review of an order of Referee William J. Rudin, dated January 19, 1970, sustaining the objections of the Long Island Trust Company ("Bank"), a creditor, and denying the bankrupt's discharge upon the ground that he obtained credit for a corporation of which he was president by making and publishing a materially false financial statement.

 The bankrupt was the president, director and stockholder, and one George B. Newman was the vice president, director and stockholder, of Baronet Confections, Inc. ("Baronet"), a corporation engaged in the business of manufacturing candies and confections; both the bankrupt and Newman together were in sole charge and management of its operations. In September, 1965 the bankrupt obtained a loan from the Bank for Baronet's business, in the amount of $20,000, evidenced by a note of Baronet which was endorsed by the bankrupt and Newman. About the time the loan was made the bankrupt executed a personal financial statement in writing on a form provided by the Bank, which was completed by the bankrupt and returned to an officer of the Bank. When this financial statement was delivered both the bankrupt and Newman were contingently obligated to Refined Syrups & Sugars, Inc. ("Refined") upon a guarantee of a loan made by Refined to Baronet, on which at that time there was due approximately $13,300. The financial statement form provided by the Bank contained the following:

"Contingent Liabilities --- As of the date of this financial statement, I had no contingent liabilities, except as follows: Notes Receivable Discounted or Sold $ /--; Accounts Receivable Assigned or Sold $ /--; Co-maker $ /--; Accommodation Endorser, Guarantor or Surety $ /--; Mortgage Bonds $ /--; Leases $ /--; Claims for Taxes $ /--; Other (describe): /--."

 In the financial statement above quoted the bankrupt failed to fill in the "Contingent Liabilities" blank space and thus omitted to state that he was contingently liable upon a guarantee to Refined on a loan made to Baronet. At the bottom of this statement, above the bankrupt's signature, there was the following:

"Certification -- This is to certify that all the statements contained herein and in any supporting schedules are true and give a correct showing of my financial condition as of the date indicated. I further certify that I had no liabilities, direct or contingent, business or accommodation, except as set forth in this statement, and that the title to all assets therein set forth is in my name solely, except as may be otherwise noted."
(Italics supplied.)

 Bebar contends that (1) his personal financial statement was received by the Bank on September 13, 1965, after the approval of the loan of $20,000 to Baronet by the Bank's loan committee on September 8, 1965; (2) his personal statement was not relied upon; (3) the omission of the contingent liability from the personal financial statement was unintentional; and (4) in all events, it did not constitute a material misstatement. The Bank contends that the statement was materially false, was received and relied upon by the loan committee prior to the approval of the loan to Baronet on September 8, 1965, and denies the bankrupt's other contentions.

 Section 14 of the Bankruptcy Act, 11 U.S.C. § 32, provides that

"c. The court shall grant the discharge unless satisfied that the bankrupt * * * (3) while engaged in business * * * as an executive of a corporation, obtained for such business money or property on 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 * * *."

 and also that

"if, upon the hearing of an objection to a discharge, the objector shall show to the satisfaction of the court that there are reasonable grounds for believing that the bankrupt has committed any of the acts which, under this subdivision [c], would prevent his discharge in bankruptcy, then the burden of proving that he has not committed any of such acts shall be upon the bankrupt."

 In applying this statute, the Second Circuit has held that once the objecting creditor has presented a prima facie case that a materially false statement was made by the bankrupt and relied upon by the objector, the burden of proving the opposite is shifted to the bankrupt. Industrial Bank of Commerce v. Bissell, 219 F.2d 624 (2d Cir. 1955).

 Upon these crucial issues there was a divergence of testimony, which is the basis for the bankrupt's attack upon the Referee's determinations. The bankrupt testified that on a date following the loan committee meeting he telephoned Walter Tindle, an officer of the Bank, concerning his difficulty in filling out the financial statement, and that Tindle told him "Never mind, skip it", and that accordingly this act "was an evidence of good faith on the part of Mr. Newman and myself and that the bank wasn't dependent on this to be accurate." He also maintained that there was no intent on his part to deceive the Bank by the issuance of the financial statement because at the time he was ...

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