[No. 34408. Department Two. Supreme Court May 29, 1958.]
ZEREGA DISTRIBUTING COMPANY, Respondent, v. JOHN C.
GOUGH et al., Appellants.«1»
[1] BANKRUPTCY - DISCHARGE OF BANKRUPT - DEBTS NOT DISCHARGED -BURDEN OF PROOF. The burden is upon a creditor to show that a debt is excepted from discharge in bankruptcy.
[2] SAME - DISCHARGE OF BANKRUPT - DEBTS NOT DISCHARGED - DEBTS INCURRED THROUGH FALSE OR FRAUDULENT STATEMENTS - FACTORS TO BE ESTABLISHED. Under § 17(a)(2) of the bankruptcy act excepting from discharge all liabilities for obtaining money or property by false pretenses or false representations, a creditor must show that the bankrupt's representations were material and false in fact, that they were made with intent to deceive or defraud or made recklessly without knowledge of their truth as a positive assertion, and that the creditor must have believed, acted, and relied upon them to his prejudice.
[3] SAME - DEBTS INCURRED THROUGH FRAUDULENT OR FALSE STATEMENTS APPLICATION OF RULE. In an action for a money judgment based on an obligation arising from goods purchased and delivered, held that the trial court applied the proper rule in concluding that the defendant's obligation was not dischargeable in bankruptcy because it was a liability for obtaining money or property by false pretenses or false representations, where the record supported the findings of fact that in order to secure credit, the defendant gave two false and fraudulent financial statements to the plaintiff.
Appeal from a judgment of the superior court for Lewis county, No. 23817, Murray, J., entered June 24, 1957, upon findings in favor of the plaintiff, in an action for a money judgment. Affirmed.
Muscek & Adams, for appellants.
Whitmore, Vinton & Powers, for respondent.
WEAVER, J. -
Defendant appeals from a money judgment against him, based upon an obligation arising from goods purchased and delivered.
The case was presented to the trial court, and to this court, upon the theory that the debt sued upon was not a debt dischargeable in bankruptcy, by reason of § 17(a)(2) of the bankruptcy act, which provides:
«1» Reported in 325 P. (2d) 894.
[2, 3] See 17 A. L. R. (2d) 1208; 6 Am. Jur. 1005.
444 ZEREGA DISTRIBUTING CO. v. GOUGH. [52 Wn. (2d)
"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 obtainng money or property by false pretenses or false representations." 11 U. S. C. 1952 ed. § 35(a)(2). (Italics ours.) See, also, 11 U. S. C. 1952 ed. § 32(c)(3).
The general problem presented is not one of first impression before this court. See Nichols v. Doak, 48 Wash. 457, 93 Pac. 919 (1908); In re Pulver, 146 Wash. 597, 264 Pac. 406 (1928); Guernsey-Newton Co. v. Napier, 151 Wash. 318, 275 Pac. 724 (1929); Ernst v. Hingeley, 11 Wn. (2d) 171, 118 P. (2d) 795 (1941); Emigh v. Lohnes, 21 Wn. (2d) 913, 153 P. (2d) 869 (1944); Rustuen v. Apro, 40 Wn. (2d) 395, 243 P. (2d) 479 (1952).
Nothing would be added to the case law of this jurisdiction were we to detail all of the facts and circumstances surrounding the transaction by which defendant secured a line of credit for merchandise to be retailed by him. It is sufficient to note that, in order to secure the credit, defendant gave two written financial statements to plaintiff. The record adequately supports the finding of the trial court that these "financial statements were false at the time they were given in that said financial statements did not truly show the assets and liabilities of said defendant."
Further, the trial court found
"That said false financial statements were fraudulently and recklessly given to the plaintiff by the defendants with the intent and purpose that they be relied on, and that the plaintiff extend credit to the defendants. That the plaintiff did rely upon said false financial statements and delivered property to the defendants on credit."
From this, the trial court concluded that the debt on which plaintiff sued was "a liability for obtaining money or property by false pretenses or false representation and is not a dischargeable debt in bankruptcy."
Defendant urges that the trial court did not apply the proper rules of law when it interpreted the facts and held that defendant's obligation was not dischargeable in bankruptcy.
May 1958] ZEREGA DISTRIBUTING CO. v. GOUGH. 445
[1, 2] The burden of proof is upon the creditor to show that the debt is excepted from a discharge in bankruptcy. Emigh v. Lohnes, 21 Wn. (2d) 913, 916, 153 P. (2d) 869 (1944). The creditor must show that the bankrupt's representations were material and false in fact; that they were made with an intent to deceive and defraud or made recklessly without knowledge of its truth and as a positive assertion; and that the creditor must have believed, acted, and relied upon them to his prejudice. See annotation 17 A. L. R. (2d) 1208 (1951).
The rule is well stated in 8 Remington on Bankruptcy (1955 ed.) § 3320, p. 178, as follows:
"Generally speaking, the element of intent to defraud must have been present or at least presumable from the circumstances. . . .
"Reckless disregard of the truth in making statements can be tantamount to wilful misrepresentation.
"All the elements of actionable fraud must be present before a claim can fall within the exception, and it must accordingly appear (1) that defendant made a material representation; (2) that it was false; (3) that he made it when he knew it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury."
[3] We conclude that the record amply sustains the trial court's findings of fact, and that the proper rule was applied when the court concluded that defendant's obligation was not dischargeable in bankruptcy.
The judgment is affirmed.
HILL, C. J., DONWORTH, ROSELLINI, and FOSTER, JJ., concur.