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IN RE BARTON

January 18, 1979

In the Matter of Gerald C. BARTON, Individually and d/b/a Sher-Bar Land and Cattle Co. and d/b/a Sher-Bar Land and Cattle, Bankrupt. Ernest GAFNI, Plaintiff-Appellant,
v.
Gerald C. BARTON, Defendant-Appellee



The opinion of the court was delivered by: EDELSTEIN

DECISION

This appeal to the District Court from an order of Bankruptcy Judge Howard Schwartzberg involves an attempt by Ernest Gafni, the appellant to bar the discharge of his claim against the bankrupt, appellee Gerald Barton, who seeks dismissal of Gafni's complaint.

 FACTS

 On October 9, 1973, Gafni entered into a written agreement with Sher-Bar Management Corp., by which he loaned $ 100,000 to the corporation. Barton, an attorney who had represented Gafni in the past, was the President of Sher-Bar Management Corp. at this time and Word B. Sherrill, Jr. was the Vice President/Secretary. Pursuant to the terms of this agreement, Barton and Sherrill personally guaranteed the promissory note of Sher-Bar Management Corp. Barton and Sherrill formed a partnership known as Sher-Bar Land and Cattle Co., which acquired land in Pecos County, Texas, for $ 1,100,000. Sherrill assumed the management and operation of the cattle ranch and maintained the books and records in his office in Texas. Barton invested approximately $ 150,000 of his own money in the venture. Sher-Bar Management Corp., from which Gafni was to receive monthly installments of $ 1,100 as interest on the loan, made the interest payments directly to Gafni by checks signed by Sherrill in Texas.

 Gafni entered into a written agreement with the Sher-Bar Management Corp. dated August 1, 1974 by which he loaned the corporation an additional $ 25,000. This agreement terminated the contract of October 9, 1973, while substantially duplicating its terms, including Barton's and Sherrill's personal guarantees of the promissory note of Sher-Bar Management Corp., as well as payment to Gafni of interest in ten equal monthly installments in the amount of $ 1,600. These payments were made.

 In June, 1975, Barton informed Gafni that they had "a bad crop" and requested that the latter roll over the loan. Consequently, Gafni and Sher-Bar Management Corp. entered into a new loan agreement dated June 30, 1975 which terminated the contract of August 1, 1974. The new agreement was patterned after the two previous agreements and again provided for Barton's and Sherrill's personal guarantees and for payment of interest in equal monthly installments through March 1, 1976. This loan agreement also included a provision for repayment of the principal balance at the rate of 13% Per annum as of March 31, 1976.

 Sher-Bar Management Corp. made monthly payments pursuant to the loan agreement through December 1975. In early January, 1976, Gafni did not receive the installment that was due on the first of the month and relayed this information to Barton who thereupon contacted Sherrill in Texas. Barton advised Gafni that some problems had developed with respect to the cattle ranch venture and requested that Gafni forbear collection. Gafni agreed, on January 16, 1976, to postpone collection of the monthly payments until March 31, 1976. The consideration was an assignment by Barton of 1,630 shares of Towbar Apartments, Inc., held by Barton and another as tenants in common, as additional security for the loan. Although Gafni received from Barton an executed stock power over the latter's interest in the 1,630 shares, the shares were held by a law firm under claim of attorney's lien, and were never delivered into escrow for Gafni's security as required by the agreement of January 16, 1976.

 Barton visited the cattle operation in Texas and discovered that Sherrill had both mismanaged and mortgaged the property to the point that "the business was wiped out." *fn1" Barton's personal finances had also suffered. As the bankruptcy court determined, "in retrospect, the bankrupt's financial status in January 1976 was not worth the confidence that the plaintiff exhibited in accepting it." *fn2"

 On March 11, 1976, Barton filed a voluntary petition in bankruptcy. Gafni filed a timely complaint to recover from Barton, as guarantor, the debt of Sher-Bar Management Corp. as a debt not dischargeable in bankruptcy. Barton was thereafter adjudicated bankrupt and Gafni now appeals from an order of the bankruptcy judge dismissing his complaint after a trial. Gafni argues that the bankruptcy court erred in determining that the facts as related above do not give rise to claims against Barton that are nondischargeable pursuant to Bankruptcy Act sections 17(a)(2), (4), and (8), 11 U.S.C. sections 35(a)(2), (4), and (8) (1976). Additionally, Gafni attacks specific findings of fact upon which the bankruptcy court premised its determination. Believing that the court below correctly decided the law, and that no pertinent findings of fact are clearly erroneous, Bankruptcy Rule 810, 11 U.S.C.App. (1976), this court now affirms.

 DISCUSSION

 I. Section 17(a)(2)

 This section provides:

 
(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as . . . (2) are liabilities for obtaining money or property by false pretenses or 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 or published or caused to be made or published in any manner whatsoever with intent to deceive, or for willful and malicious conversion of the property of another . . . .

 At the outset, we must reject Gafni's novel assertion that the attorney-client relationship between Barton and him, coupled with a conflict of interest relating to the instant debt, renders Barton's conduct a fraud that is nondischargeable by force of the provision recited above. It has long been understood that the salutary purposes of the Bankruptcy Act require confining exceptions to discharge of a debt to those plainly stated in section 17. Gleason v. Thaw, 236 U.S. 558, 35 S. Ct. 287, 59 L. Ed. 717 (1915); Danns v. Household Finance Corp., 558 F.2d 114 (2d Cir. 1977). The 1903 amendment to the Act eliminated the requirement of a pre-existing judgment to bar discharge, thus broadening the exception, but substituted for the generalized "fraud" ground the narrower formulation "false pretenses or false representations." A reading of the cases under the 1903 amendment makes it clear that Gafni's thesis is unsupportable. Fraud implied in law from the relationship of the parties alone, "which may exist without imputation of bad faith or immorality, is insufficient" ...


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