Opinion
No. BK-76-18
October 24, 1978
Debts Not Affected By Discharge — False Financial Statement — Intentional Omission of Debt
The "fresh cash" portion of a renewal loan was non-dischargeable where the bankrupt, in applying for the second loan, intentionally failed to list a substantial indebtedness on the financial statement while at the same time listing obligations in much smaller amounts. The bankrupt's omission was intentional and made for the purpose of deceiving the lender.
The creditor lender alleged that the bankrupt's debt to it was non-dischargeable under Section 17a(2), in that substantial debts were not disclosed. In order to prove all the elements of fraud, under Section 17a(2), the creditor must establish that the bankrupt made a materially false representation, said representation was made with intent to receive, and that the creditor relied upon and was misled by the false representation.
The bankrupt argued that the loan was granted in reliance on factors not related to the information supplied by him, such as the bankrupt's previous payment history. Although the creditor did not rely solely on information supplied by the bankrupt, noted the court, it did rely substantially on such information and thus the court concluded that reliance had been proven.
The lender also proved that the bankrupt intentionally deceived it by the omission. It was established that the debtor did not inform the lender of the debt in question in applying for either the first or second loan. The amount of the debt, $7000, was substantial, and its omission created a materially false statement. Although the bankrupt was aware of this substantial debt at the time he applied for the second loan, he failed to list it on the financial statement, while at the same time listing obligations in much smaller amounts. The court found this omission to be intentional and made for the purpose of deceiving the lender.
Previously, the court had held that only the "fresh cash" portion of a renewal loan was non-dischargeable, see In re Barlick, CCH BANK. L. REP. ¶ 65,535, By limiting recovery to that portion of a loan actually advanced in reliance on the false financial statement at issue, noted the court, the primary purpose of the Bankruptcy Act, giving the debtor a fresh start, is achieved. Thus, the court concluded that the "fresh cash" portion of the debt was non-dischargeable. See Sec. 17a(2) [§ 523(a)(2)] at ¶ 9228.