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Household Finance Corp. v. Suhr

OCTOBER 30, 1963.




Appeal from the Municipal Court of Chicago; the Hon. THOMAS H. FITZGERALD, Judge, presiding. Reversed and remanded with directions.


Fred Suhr, the defendant, refinanced his debt to the plaintiff, Household Finance Company. He defaulted in his payments and judgment was confessed against him. After the judgment was obtained, he commenced bankruptcy proceedings and the indebtedness was discharged.

The plaintiff then brought the present action for the unpaid balance of the refinanced loan, alleging that it had been secured by fraud. Suhr moved to dismiss the complaint on the ground that he had been adjudicated a bankrupt and that the Household Finance obligation and its judgment had been included in the schedule filed by him. His motion was sustained and Household Finance appealed. Suhr did not contest the appeal, however his attorney carried on in his behalf. The attorney moved to appear as amicus curiae and to file a brief. Because of the importance of the question involved, we allowed his motion to appear as amicus curiae and we welcomed his brief and the authorities cited therein.

According to the facts of the complaint, which the motion to dismiss admitted, at the time Suhr refinanced his loan he executed a written statement of his financial condition which was an inducement to making the loan. The statement he gave did not include all his creditors. He said he was indebted to the Citizens Loan Co. in the amount of $480, whereas he also owed and knew he owed the Guarantee Bank & Trust Co. $435.67, Mandel Bros. $267.34 and the Bureau of Internal Revenue $170.27. The complaint further alleged that Household Finance had no knowledge of the omissions, would not have made the loan if it had not been intentionally deceived and that by reason of the false representations suffered damages of $960.83.

The trial court gave careful consideration to the motion to dismiss and briefs were submitted — however, the court's order does not show the exact reason for dismissing the complaint. From the content of the motion, the reason could have been one or more of the following: (1) the action was barred because the prior judgment in contract was res judicata; (2) all obligations Suhr had to Household Finance were discharged in the bankruptcy proceeding or (3) the action was barred under the doctrine of the election of remedies.

The first reason would have been unsound because the issues in a tort action for fraud and in a confession of judgment pursuant to a cognovit note are in no way similar and certainly would not come within the doctrine of res judicata. Schoenbrod v. Rosenthal, 36 Ill. App.2d 112, 183 N.E.2d 188; Charles E. Harding Co. v. Harding, 352 Ill. 417, 186 N.E. 152. The second reason would have been equally unsound. The policy of the Bankruptcy Act is to relieve the burdens of the honest debtor, not the dishonest. The part of the Act which applies directly to the present case is section 17 (11 USCA 35):

"(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. . . ."

Before discussing the third, and what we assume to be the real reason for the trial court's dismissing the complaint, a normal inquiry would be why Household Finance did not take execution on its judgment rather than start a second suit in tort. The answer to this inquiry is found in Lawrence v. Wischnowsky, 344 Ill. App. 346, 100 N.E.2d 816, the case upon which the defendant relies.

In the Lawrence case the plaintiff obtained judgment upon a cognovit note. Subsequently, the defendant was adjudicated a voluntary bankrupt and the judgment was scheduled as an unsecured claim. Discharge followed. Later, the plaintiff sued out a pluries execution on his judgment for the unpaid balance thereon. The execution was delivered to the sheriff in order to levy on certain real estate and the property was advertised for sale. The defendant then filed a motion to recall the execution on the ground that the debt had been discharged in bankruptcy. This motion was resisted by the plaintiff who asserted that underlying the judgment was a liability for willful conversion of property (another exception to discharge under the Bankruptcy Act) and as a result the debt was non-dischargeable under 11 USCA 35. The court rejected the plaintiff's contention and granted defendant's motion to recall the execution. On appeal from that order the court upheld the trial judge and stated the following:

"The question presented here is whether the non-dischargeable character of the original obligation for which a note or other commercial paper has been given may be shown even after the recovery of a judgment on the note, which judgment disclosed nothing to show that the debt is not dischargeable. This question is discussed in an interesting note on the subject in 170 ALR 368. . ..

"Under this view of the law the non-dischargeable character of the original obligation may be shown only by what appears on the judgment record or the record of the proceedings culminating in the judgment; so that, if nothing appears on that record showing that the original obligation was of a character excepted from the operation of the discharge in bankruptcy, the judgment will be discharged; and, conversely if that record discloses the non-dischargeable character of the original obligation, the judgment will not be discharged.

". . . In the case at bar there is nothing in the record to show any non-dischargeable feature of the obligation. It is a money judgment on the note so far as the record shows. We believe the better view is as announced in the note, supra, that the judgment creditor should not be permitted to go behind the judgment to show the non-dischargeable feature of the obligation. For these reasons the obligation being dischargeable in bankruptcy as shown by the record of the judgment, it is conclusive on the judgment creditor and he is not permitted to go behind the judgment."

The thrust of this case is clear. If a creditor takes judgment on a note and this judgment is subsequently discharged in bankruptcy, the creditor is virtually precluded from taking advantage of the exceptions to discharge listed in 11 USCA 35. In order to take advantage of the exceptions he must show the non-dischargeable character of the debt on the face of the record in the prior proceedings. In the normal course of events this would be almost impossible. For example in the instant case, Household Finance would have had to show, based on the record made in the Municipal Court at the time it confessed judgment on Suhr's note, that the debt had been incurred through fraudulent misrepresentation. This it could not do. The record did not show fraud and it could not have shown fraud: fraud would not appear on the face of a judgment note, and the fraud was unknown when the judgment was confessed. The approach the plaintiff has taken, a separate action in tort, gets around the holding of the Lawrence case, since that case applies only to subsequent proceedings on the same judgment which has been discharged. (See, however, the recent opinion in Tower Finance Corp. v. Winemiller, 43 Ill. App.2d 10, 192 N.E.2d 411.)

Since the situation in the present case is not covered by the opinion in the Lawrence case, the real question is whether plaintiff is precluded from instituting this suit under the doctrine of election of remedies, i.e., whether by suing on the note it waived its right to sue in tort for fraud. The case law on this subject indicates that there is no election of remedies in the present situation, that plaintiff can maintain ...

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