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IN RE DOLNICK

United States District Court, Northern District of Illinois


March 22, 1974

IN THE MATTER OF ALVIN DOLNICK, BANKRUPT.

The opinion of the court was delivered by: Bauer, District Judge.

MEMORANDUM OPINION AND ORDER

This cause comes on the Referee's certification for review of the Referee's Order in which petitioner's application to determine the dischargeability of the debt due petitioners from the bankrupt was denied and which also discharged the bankrupt from that debt.

On March 30, 1971, the petitioners, the Bank of Ravenswood, a creditor of Alvin Dolnick, the bankrupt, filed its "Specification of Objections to Discharge" which contained, inter alia, the following allegations:

  1. On or about January 6, 1970, for the purpose of
     obtaining money upon credit from the Bank of
     Ravenswood, the bankrupt made a statement, in
     writing, to the said Bank of Ravenswood,
     respecting his financial condition, which
     statement was made with the intent to deceive the
     Bank of Ravenswood, and which written statement
     was materially false in several matters.

  2. That statement in writing materially set forth
     that said bankrupt, upon January 6, 1970, owned
     assets in the total amount of $438,000.00 and
     which consisted of cash on hand and in banks,
     $2,000.00; United States Government Securities,
     $3,000.00; Unlisted Securities, $390,000.00; Real
     Estate owned, $40,000.00; and Automobiles and
     other Personal Property, $3,000.00 and that his
     liabilities consisted of notes payable to
     banks-secured, $110,000.00; Real Estate Mortgages
     payable $18,000.00; or total liabilities of
     $128,000.00 and that he had a net worth of
     $310,000.00. By virtue of this statement, the
     bankrupt obtained from the Bank of Ravenswood the
     sum of $50,000.00 on credit. In truth and in fact,
     at the time that statement in writing was made for
     the purpose of obtaining money on credit, the
     bankrupt did not owe merely $128,000.00 nor
     substantially that amount but owed grossly in
     excess of that amount.

  3. Schedule A-2 of bankrupt's Petition reveals that
     at or about the time bankrupt executed that
     statement in writing, the bankrupt was indebted to
     the Exchange National Bank of Chicago in the
     amount of $125,000.00. More specifically, the
     bankrupt was indebted to said Exchange National
     Bank of Chicago in the amount of $82,500.00 on
     January 5, 1970 which indebtedness does not appear
     on the statement in writing delivered by bankrupt
     to the Bank of Ravenswood on January 6, 1970, this
     indebtedness was not otherwise known to the Bank
     of Ravenswood. At the time the bankrupt executed
     the financial statement in writing to the Bank of
     Ravenswood the bankrupt was indebted to the
     Columbie National Bank of Chicago in the amount of
     $20,000.00 which indebtedness does not appear on
     that financial statement, this indebtedness was
     not otherwise known to the Bank of Ravenswood. At
     the time the bankrupt executed and delivered the
     financial statement to the Bank of Ravenswood the
     bankrupt was indebted to Bear, Stearns and Company
     of Chicago, Illinois in the amount of $2,600.00
     which indebtedness does not appear on said
     statement and which indebtedness was not otherwise
     known to the Bank of Ravenswood. At the time the
     bankrupt executed and delivered the statement to
     the Bank of Ravenswood the bankrupt was indebted
     to Earl Dolnick for a substantial sum of money,
     the exact amount of which is not known at this
     time, but which indebtedness does not appear on
     said statement and which indebtedness was not
     otherwise known to the Bank of Ravenswood. At the
     time bankrupt executed and delivered the statement
     to the Bank of Ravenswood the bankrupt was
     indebted to Drs. Jacobson and Rosenstein in an
     amount not known to the Bank of Ravenswood but
     which indebtedness does not appear on said

     statement and which indebtedness was not otherwise
     known to the Bank of Ravenswood.

  4. The bankrupt did not, either at the time the
     financial statement was made, or at any date
     proximate thereto, possess, after deduction of his
     liabilities from the value of his assets, a net
     worth of $310,000.00, nor substantially such
     amount.

  5. Based upon the financial statement the bankrupt
     did obtain money upon credit from said Bank of
     Ravenswood, said statement was issued by the
     bankrupt knowing full well that the Bank of
     Ravenswood would rely upon said statement and the
     Bank of Ravenswood in reliance upon said statement
     did grant credit to the bankrupt. Further the
     statement was issued with such a reckless
     disregard by the bankrupt of the true and actual
     condition of his assets and liabilities as to
     constitute the willful issuance of a false
     financial statement with the intent to deceive the
     Bank of Ravenswood as to bankrupt's true financial
     condition.

On June 20, 1972, after hearing the relevant testimony and examining the relevant memoranda submitted by the parties in support of their respective positions, Referee Samuel Berke entered an order denying the Bank of Ravenswood's application seeking to prevent the discharge of the debt owed to the Bank of Ravenswood by the bankrupt Alvin Dolnick. Referee Berke, in this order, made the following findings of fact:

  "A. That on January 12, 1970 the Bank of Ravenswood
      completed its loan to Alvin Dolnick in the sum of
      $50,000.00 and made payment of said sum to the
      Devon Bank and simultaneously therewith received
      from the Devon Bank 10,000 shares of Pig'N
      Whistle stock having a market value as of date
      thereof of $110,000.00.

   B. That the Bank of Ravenswood agreed to, did make
      and approved the aforesaid loan to Alvin Dolnick
      on condition that it would receive collateral of
      10,000 shares of Pig'N Whistle stock as security
      therefor.

   C. That the Bank of Ravenswood made the aforesaid
      loan to Alvin Dolnick in reliance upon his
      reputation based upon inquiries theretofore made
      and contingent upon the collateral security of
      10,000 shares of Pig'N Whistle stock.

   D. That the financial statement bearing date of
      January 6, 1970 was not delivered to the Bank of
      Ravenswood prior to January 12, 1970, but, on the
      contrary, was delivered to it subsequent to the
      date that it approved the loan of $50,000.00 and
      made disbursement of the proceeds thereof.

   E. That Saul Binder had the authority, power and
      right to consider, make and approve the aforesaid
      loan to Alvin Dolnick without the consent,
      approval and authority from other officers or the
      Board of Directors.

   F. That Saul Binder, Vice President of the Bank of
      Ravenswood, admittedly was not familiar with the
      contents of the financial statement.

   G. That John Obereiner, president of the Bank of
      Ravenswood, was not familiar with the loan sought
      by Alvin Dolnick in January of 1970, nor with its
      approval or the payment of the sum of $50,000.00
      made by the Bank of Ravenswood to the Devon Bank
      until after the loan was completed and the
      proceeds disbursed.

   H. That John Obereiner was not familiar with the
      financial statement prior to January 13, 1970;
      that John Obereiner was not familiar with the
      contents of the financial statement, particularly

      the nature, character and extent of the assets
      aggregating $390,000.00.

   I. That the testimony of Saul Binder and the records
      of the Bank of Ravenswood are confusing, unclear,
      ambiguous and contradictory.

   J. That the testimony of John Obereiner, President
      of the Bank of Ravenswood, is unclear, ambiguous,
      confusing and contradictory.

   K. That the testimony of Saul Binder is in conflict
      and contradictory and with the testimony of John
      Obereiner, President of the Bank of Ravenswood."

Referee Berke, in his Order of June 20, 1972, also rendered the following conclusions of law:

  "1. That Alvin Dolnick did not make, execute or
     deliver a financial statement to the Bank of
     Ravenswood prior to January 12, 1970 and prior to
     that date the loan from the Bank of Ravenswood to
     him was completed and the proceeds disbursed.

   2. That the financial statement was not made or
     executed by Alvin Dolnick with intent to deceive
     the Bank of Ravenswood.

   3. That the failure to include in the financial
     statement certain liabilities and certain assets
     was not done with the intent to deceive, but the
     liabilities and assets were inadvertently omitted
     from the statement.

   4. That the Bank of Ravenswood did not rely upon the
     aforesaid financial statement in granting and
     approving the loan of $50,000.00 to Alvin Dolnick.

   5. That no monies were loaned to or credit extended
     to Alvin Dolnick in reliance upon the financial
     statement.

   6. That the Bank of Ravenswood failed in its burden
     to establish that the financial statement was
     made, executed or delivered to it on or before the
     date the funds were disbursed, namely, on or
     before January 12, 1970, or that it extended
     credit to Alvin Dolnick in reliance upon the
     financial statement."

On August 9, 1972 the petitioner filed its "Petition for Review of Referee's Order" in which the petitioner sets forth the following allegations, inter alia:

  1. "That said Order contains Findings and Conclusions
     which are contrary to both the law and facts of
     this case, which are not supported by the record,
     which are clearly contrary to the manifest weight
     of the evidence."

  2. "That the referee committed error in failing to
     find that the Bank of Ravenswood loaned money to
     the bankrupt in reliance upon the bankrupt's
     financial statement that showed that the only bank
     the bankrupt was indebted to was the Devon Bank in
     light of the bankrupt's admission that at the time
     the financial statement was executed he was
     indebted to other banks and that he knowingly
     omitted to list such other creditor banks on his
     financial statement and that the failure to make
     such a finding was contrary to the manifest weight
     of the evidence."

  3. "That the referee committed reversible error in
     refusing to consider Applicant's Exhibit 4
     (Original Loan History) in reaching his ultimate
     decision after having previously admitted said
     Exhibit into evidence. That the referee's refusal
     to consider Applicant's Exhibit 4 after said
     Exhibit was admitted into evidence was an error of
     law and was the result of the referee's
     prejudice."

  4. "That the Conclusions of the Referee No. 1-6 of
     the Order herein complained of are contrary to the
     manifest weight of the evidence

     and are based upon Findings which are contrary to
     the manifest weight of the evidence and which are
     unreasonable and improper inferences to be drawn
     from the testimony of the witnesses."

  5. "That the Conclusions of the Referee are erroneous
     as a matter of law in that the Referee erroneously
     made Conclusions without considering all of the
     evidence admitted during the hearing of this
     cause."

  6. "That Finding `D' of the Referee that the
     financial statement bearing date January 6, 1970,
     was not delivered to the Bank of Ravenswood prior
     to January 12, 1970, but, on the contrary, was
     delivered to it subsequent to the date that it
     approved the loan of $50,000.00 and made
     disbursement of the proceeds thereof is contrary
     to the manifest weight of the evidence, is not a
     reasonable inference to be drawn from the
     testimony of the witnesses, is contrary to the
     evidence admitted during the trial which the
     referee refused to consider and is based on the
     uncorroborated testimony of the bankrupt, who
     admitted that he knowingly submitted a financial
     statement of the Bank of Ravenswood that was not
     correct."

  7. "That Findings `E' through `K' of said Order are
     contrary to the manifest weight of the evidence,
     are not reasonable inferences to be drawn from the
     evidence and are the result of the referees'
     refusal to consider all of the evidence admitted
     during the trial of this cause."

On September 21, 1972, Referee Thomas James certified the petitioner's petition for review.

The issue presented by this review is whether the Order of Referee Berke should be reversed on the grounds that the findings and conclusions of the referee are clearly erroneous. It is the opinion of this Court that the findings and conclusions of Referee Berke in his Order of June 20, 1972 are not clearly erroneous.

THE FINDINGS OF FACT, THE CONCLUSIONS OF LAW, AND THE ORDER
    ENTERED BY THE REFEREE IN BANKRUPTCY IS CONCLUSIVE WHERE
    THERE IS EVIDENCE TO SUPPORT THE DECISION.

The Bankruptcy Act of 1938 attributes a much greater finality to referee's decision in the discharge proceeding than did the prior acts. By Section 38(4), 11 U.S.C. § 66(4) the referee is empowered to grant and deny discharges. A referee's opinion is no longer the mere suggestion of a special master. The final decision of a referee is subject, of course, to review by the district judge. The referee's findings of fact are to be accepted by the judge unless clearly erroneous. See Morris Plan Industrial Bank of New York v. Henderson, 131 F.2d 975 (2nd Cir. 1942); In re Rich, 134 F.2d 779 (2nd Cir. 1943); Williamson v. Williams, 137 F.2d 298 (4th Cir. 1943); In Matter of Van Jeffreys, 50 Am.Bankr.Rep.N.S., 328 (W.D.Pa. 1942).*fn1

In recently enacted Bankruptcy Rules, Rule 810, governing the weight accorded referee's findings, provides as follows:

    "Upon an appeal the district court may affirm,
  modify, or reverse a referee's judgment or order, or
  remand with instructions for further proceedings. The
  court shall accept the referee's findings of fact
  unless they are clearly erroneous, and shall give due
  regard to the opportunity of the referee

  to judge of the credibility of the witnesses."

This Rule is a revision of the General Order 47, which courts have applied when reviewing referee's orders under Section 39, sub. c of the act, 11 U.S.C. § 67(c). See Potucek v. Cordeleria Lourdes, 310 F.2d 527 (10th Cir. 1962), cert. denied 372 U.S. 930, 83 S.Ct. 875, 9 L.Ed.2d 734 (1963); Allen v. Lokey, 307 F.2d 353 (5th Cir. 1962); Mazer v. United States, 298 F.2d 579 (7th Cir. 1962). This rule defines the judge's authority in disposing of judgments, orders and findings on review in conformity with Section 2, sub. a(10) of the act, 11 U.S.C. § 11(a)(10), and requires the same effect to be given the referee's findings as Rule 52(a) of the Federal Rules of Civil Procedure accords to the findings of the trial court.*fn2 Gross v. Fidelity & Deposit Co. of Md., 302 F.2d 338 (8th Cir. 1962); Simon v. Agar, 299 F.2d 853 (2nd Cir. 1962).

After carefully examining the testimony of the relevant witnesses, the memoranda and all the exhibits presented by the parties in support of their respective positions, it is the opinion of this Court that the findings of fact, conclusions of law and order of the referee, entered on June 20, 1972 in this action, which denied the petitioner's objections to discharge of its debt pursuant to Section 17, sub. a(2) of the Act, 11 U.S.C. § 35(a)(2), are not clearly erroneous. Accordingly, such an order of the referee should not and cannot be reversed by a district court.

The provisions of the Bankruptcy Act created the broad discharge medicament for the financially sick debtor. The Bankruptcy Act was designed by Congress to give a debtor, hopelessly mired in debt, an opportunity for a fresh start. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1933). The denial of a discharge under the Bankruptcy Act is a most punitive measure directed against bankrupts who have obtained credit on the basis of intentionally false statements. See In re Lovich, 117 F.2d 612 (2nd Cir. 1941); In re Rosenfeld, 262 F. 876 (2nd Cir. 1919). In weighing the facts put forward in a contest over a discharge, a court should keep in mind the beneficial policy allowing the honest debtor to get a new start in business and life and should construe Section 17 of the Act strictly against the objections and liberally in favor of the bankrupt. In re Tabibian, 289 F.2d 793, 795 (2nd Cir. 1961). See also Gross v. Fidelity & Deposit Co. of Md., supra.

A financial statement which is merely erroneous but is not prepared with any intention to deceive is not a false statement within the meaning of Section 14, sub. c(3) and 17, sub. a(2) of the Act. Feldenstein v. Radio Distributing Co., 323 F.2d 892 (6th Cir. 1963); Schapiro v. Tweedie Foot Wear Corporation, 131 F.2d 876 (3rd Cir. 1942); Third National Bank v. Schatten, 81 F.2d 538 (6th Cir. 1936).

In order for Section 17, sub. a(2) to bar a discharge, the party alleging fraud must meet the requirements of proving positive fraud. That is, the alleged fraudulent representations must have been made with an intent to deceive and defraud, and the creditor must have relied on the representations in acting to his prejudice. Bazemore v. Stehling, 396 F.2d 701 (5th Cir. 1968); Greenfield State Bank v. Copeland, 330 F.2d 767 (9th Cir. 1964); Sweet v. Ritter Finance Co., 263 F. Supp. 540 (W.D.Va. 1967).

The Bankruptcy Act of 1938 conferred upon the referee the power to hear and pass upon objections to petitions for discharge, and this Court may not set aside his order upon such petition merely because the testimony might lead it to a different conclusion. Before the referee's judgment may be reversed the Court must find that no testimony exists for the support of his order, or that he has acted arbitrarily and capriciously. After carefully reviewing the record in this action, no such finding is possible. The referee had the witnesses before him, and it was for him to pass upon their credibility. Were this Court to undertake to reverse his judgment, although not having viewed the witnesses, it would be acting arbitrarily and capriciously. Of course, the district judge has the responsibility of reaching the right conclusion on review, and there is no doubt that he has the power to reverse the referee's decision on the evidence where it is clearly erroneous. However, the instant record clearly reveals that this action is not such a case.

Accordingly, it is hereby ordered that Referee Berke's Order of June 20, 1972 is approved as being proper and just and not clearly erroneous.


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