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In re Danns


June 29, 1977


Appeal from an order of the United States District Court for the Eastern District of New York, Edward R. Neaher, Judge, affirming an order of Bankruptcy Judge C. Albert Parente. Affirmed.

Clark, Associate Justice,*fn* Lumbard and Meskill, Circuit Judges.

Author: Lumbard

LUMBARD, Circuit Judge:

Household Finance Corporation appeals from a January 17, 1977 decision by Judge Neaher in the Eastern District which affirmed an order by Bankruptcy Judge Parente granting judgment against Keith Danns, the bankrupt, for only a portion of his debt to HFC. Appellant maintains that a false financial statement submitted by a debtor in renewing a loan renders his entire debt nondischargeable under section 17a(2) of the Bankruptcy Act, 11 U.S.C. § 35(a)(2). We conclude that discharge should be barred only as to that portion of the loan regarding which the misrepresentation was material, and accordingly we affirm.

On January 24, 1975, Danns, who was already indebted to HFC for $2019.37, obtained an additional loan of $483, and signed a new note for $3261.96 (which included finance charges) payable over 36 months.*fn1 At the time Danns listed a debt of $50 to one Gerst as his only other indebtedness, although he actually owed some $14,000 to other creditors.*fn2 A year later, when Danns filed for bankruptcy, his debt to HFC stood at $2622.

Section 17 a provides:

A discharge in bankruptcy shall release a bankrupt from all his provable debts . . . except such as . . . (2) are liabilities for obtaining money or property by false representations, or for obtaining money or property on credit or obtaining an extension or renewal of credit in reliance upon a materially false statement in writing respecting his financial condition made . . . with intent to deceive. . . .

11 U.S.C. § 35(a) (emphasis supplied). The italicized language was added by Congress in 1960.

Prior to 1960 a lender who advanced money based on a false financial statement could choose either to bar discharge of the bankrupt entirely under the then § 14 c(3) - and thereby provide a windfall to all the other creditors - or to bar discharge of only the debt itself under § 17a(2). Under the old § 17a(2) where the debtor obtained an additional loan and signed a new note covering the old balance as well, state courts were split over whether discharge should be barred for the entire loan or only for the "fresh cash." Compare cases cited in Townsend, " Fresh Cash " - Another Element of a Bankrupt's "Fresh Start "?, 31 U. Miami L. Rev. 275, 281 n.39 (1977), with cases cited in id. at 281-82 n.40.

In 1960, Congress eliminated the old § 14c(3) and enacted the amendment to § 17a(2). State courts interpreted this as a compromise whereby the defrauded lender lost the right to bar the bankrupt's entire discharge, but was still to be entitled to a complete bar of discharge on his own claim.*fn3 However, since Congress gave the federal courts exclusive jurisdiction over dischargeability questions in 1970, see 11 U.S.C. § 35(c)(1), a large majority of federal district courts and bankruptcy referees have concluded that only that portion of the credit obtained as a result of a fraudulent statement should be barred from discharge. See cases cited in Townsend, supra at 284 n.53.*fn4 Contra, In re Fields, Nos. B-75-443, -444 (D. Conn. Mar. 21, 1977).

We think the proper construction of § 17a(2) is unmistakable. The language of § 17a(2) bars discharge only of "liabilities for obtaining" extensions of renewals of credit "in reliance upon a materially false statement"; this strongly implies that the creditor should be entitled to bar discharge only of that portion of his loan as was obtained fraudulently. There is nothing in the legislative history of the 1960 amendments to indicate a congressional intent that a bankrupt should be penalized for more than simply the consequences of his fraud.*fn5 Nor does it seem equitable for a bankrupt to be deprived of discharge on all his indebtedness to a particular creditor simply because a small portion of it was procured dishonestly.*fn6 Accordingly, since exceptions to discharge are to be narrowly construed, see Gleason v. Thaw, 236 U.S. 558, 562, 59 L. Ed. 717, 35 S. Ct. 287 (1915), we read § 17a(2) as barring discharge only to the extent that the creditor could actually have relied upon the debtor's misrepresentation.

The burden is on the creditor to prove the exception. Here there was no evidence that the original loan was renewed in reliance on the false representation. Indeed, HFC seems to say that the original loan was renewed only because state law required that it be consolidated with the new loan of $483. This was not a true extension of the original loan: the record does not show that Danns' original obligations would have fallen due sooner had it not been for the refinancing. Thus, the only credit extended in reliance on Danns' misrepresentation was the additional amount loaned, and HFC can bar discharge only of the $483 plus finance charges thereon.*fn7

Judgment affirmed.


Judgment affirmed.

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