In Re Leichter, 197 F.2d 955 (3d Cir. 1952)

Can a bankrupt be denied his discharge in bankruptcy on the mere showing that, in his capacity as president of a corporation of which he was a stockholder, he gave a false financial statement with respect to its corporate assets which induced a loan to the corporation?

This is the primary question presented by this appeal by a bankrupt from the affirmance by the District Court of the Order of a Referee in Bankruptcy denying his discharge.

The denial of the discharge was premised by the Referee on the bankrupt's alleged violation of the provisions of Section 14 sub. c(3) of the Bankruptcy Act as amended.¹ 

Section 14 sub. c(3) provides:

"c. The court shall grant the discharge unless satisfied that the bankrupt has * * * (3) obtained money or property on credit, or obtained an extention 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; * * *."

A detailed statement of the litigation and the transaction on which the Referee based his finding that there was a false statement given by the bankrupt in negotiating a loan for his corporation is stated in the margin.² 

The Referee made the specific finding that the bankrupt in his capacity as president and general manager of a corporation made a false statement as to its assets and obtained credit for it as a result. The record sustains that finding. Additionally, although he did not do so in specific terms, the Referee found the bankrupt was "a large stockholder" of the corporation. That is apparent from the fact that in concluding the bankrupt had violated the provisions of Section 14, sub. c(3) he said:

"It has been settled by the Supreme Court of the United States that it is sufficient for the bankrupt to have received indirectly the benefit from the false statement as by credit given to a corporation of which the bankrupt was the president, general manager and large stockholder." (Emphasis supplied.)

The record, however, utterly fails to support the Referee's determination that the bankrupt was "a large stockholder" in the corporation. Indeed, it is bare of any proof as to the extent of the stock holdings of the bankrupt; there is only testimony to the effect that he was a stockholder — nothing more, nothing less. Moreover, there is nothing in the Referee's statement of facts or in his conclusion of law which gives any light as to his reason for finding that the bankrupt was "a large stockholder". Apparently the Referee based his finding on "speculation" or "intuition".

On that score, we have on previous occasions held that "A finding of fact must have more substantial foundation than an intuition * * *." and that while the trier of the facts "`* * * has the primary function of finding the facts * * *. weighing the evidence, and choosing from among conflicting factual inferences and conclusions those which it considers most reasonable' it is well-settled that speculation cannot be substituted for proof and `the requirement is for probative facts capable of supporting, with reason, the conclusions expressed in the verdict.'" In re Tueders' Estate; 3 Cir., 1947, 164 F.2d 128, 133; Sharon Herald Co. v. Granger, 3 Cir., 1952, 195 F.2d 890, 895.

Under the circumstances we are constrained to reverse the judgment of the District Court (affirming the Referee's determination) that there had been a violation by the bankrupt of Section 14, sub. c(3). The absence of proof as to the extent of the bankrupt's stock interest in the corporation makes academic here the holding of the Supreme Court in Levy v. Industrial Finance Corporation, 1928, 276 U.S. 281, 48 S. Ct. 298, 72 L. Ed. 572, relied on by the Referee, or Wilensky v. Goodyear Tire & Rubber Co., Inc., 1 Cir., 1933, 67 F.2d 389, and In re Licht, D.C.E.D.N.Y. 1930, 45 F.2d 844, cited by counsel for the objecting creditors in support of the judgment of the District Court. In the Levy case the bankrupt was a large stockholder in the corporation and in both the Wilensky and Licht cases he was the sole stockholder.

It may be observed, with respect to the Levy case that it involved the construction of Section 14, sub. b(3)³  of the Bankruptcy Act of July 1, 1898, c. 541, 30 Stat. 550; June 25, 1910, c. 412, Sec. 6, 36 Stat. 838, 839, 11 U.S.C.A. § 32, sub. b(3).

That fact was referred to by Mr. Justice Holmes who spoke for the Supreme Court in the Levy case. In doing so he pointed out 276 U.S. at pages 283, 284, 48 S. Ct. at page 298, that Section 14, sub. b(3) had been amended by the Act of May 27, 1926⁴  and that "The * * * amendment * * * serves to limit the bars to a discharge more narrowly and by indirection to favor the defendant's (bankrupt's) position by a change of the words to `a materially false statement * * * respecting his financial condition.'" (Emphasis supplied.)

Whether under the 1926 and subsequent amendments⁵  a false statement concerning the financial condition of a corporation in which the bankrupt was the sole stockholder may be deemed a false statement concerning the bankrupt's own financial condition, need not be here decided because even under the Referee's own finding the bankrupt in the instant case was not the sole stockholder but only "a large stockholder".

There remains for disposition one other point. The Referee also premised his denial of the discharge on his finding that the bankrupt had violated the provisions of Section 14, sub. c(2) of the Bankruptcy Act, as amended,⁶  by failing to preserve "books of account or records, from which his financial condition and business transactions might be ascertained". The Referee, however, failed to set forth the evidence upon which his fact finding and conclusions of law with respect to the alleged violation were premised, as he was required to do under General Order 47, Section 30 of the Bankruptcy Act.⁷ 

The failure to comply with General Order 47 would alone require reversal of the Referee's denial of the discharge on the ground that the bankrupt had violated Section 14, sub. c(2). However, even had there been compliance with General Order 47, the record itself discloses that the Referee's finding that the bankrupt had violated Section 14, sub. c(2) was clearly erroneous. It was testified that in 1945, three years prior to the filing of his bankruptcy petition, the bankrupt closed out a checking account with his bank and after he had done so, disposed of his check books, bank books and cancelled vouchers. There was nothing in the evidence to show that the missing records were necessary to determine the bankrupt's financial status as of the date of the filing of the bankruptcy petition, or that there was any fraudulent intent on the part of the bankrupt in discarding them To sustain an objection to a discharge under Section 14, sub. c(2) the evidence must disclose that the failure to preserve records makes it impossible to determine the bankrupt's "financial condition" and material "business transactions". In re Milne, D.C. N.J.1941, 40 F. Supp. 89, 91; In re Weisberger, D.C.M.D. Pa. 1930, 41 F.2d 275.

We have on previous occasions held that in a review proceeding the burden is upon the objecting creditor to establish the facts necessary to prevent the bankrupt's discharge. Lodi Trust Co. v. Cohn, 3 Cir., 1939, 108 F.2d 26; In re Wolf, 3 Cir., 1948, 165 F.2d 707, 710. In the instant case the objecting creditor failed to sustain that burden. It is regrettable that the Referee failed to give consideration to the well-settled principles that the right to a discharge is statutory, and that Section 14 of the Bankruptcy Act must be construed strictly as against the objector and liberally in favor of the bankrupt. Roberts v. W. P. Ford & Sons, 4 Cir., 1948, 169 F.2d 151; In re Pinkston, D.C. Texas, 1950, 93 F. Supp. 942.

For the reasons stated the Order of the District Court denying the bankrupt's discharge will be reversed.