Levin v. Singer

Sybert, J., delivered the opinion of the Court. This appeal requires the determination, for the 'first time in this State, whether or not, in an action against á discharged bankrupt based on a judgment obtained against him before' the discharge, brought on the ground that the debt is' one resulting from false representations, evidence extrinsic to the record of the case in which the judgment was obtained may be considered in order to ascertain whether'the ground relied upon is supported by the facts. The trial court decided that ⁵¹ such evidence could properly be submitted to the jury. From a judgment entered on the jury’s verdict in favor of the plaintiff (appellee), the defendant (appellant) appeals.

The question whether the appellee’s judgment survives the appellant’s discharge in bankruptcy grows out of the provisions of § 17 of the Bankruptcy Act of 1898, as amended, 11 U.S.C. 35, which reads in pertinent part: “(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 wilful and malicious injuries to the person or property of another * * * or (4) were created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity * * The relevant facts in this case had their inception in 1955. The appellant, Abraham H. Levin, and one Edward R. Rammer were operating an enterprise known as the Rammer Painting Company as a partnership. Without reviewing the facts in great detail, we think it can be fairly deduced from the record that in the fall of that year the business was overextended, badly managed and in financial difficulties; that Levin interested the appellee, Joseph R. Singer, in joining with him and Rammer in forming a corporation to take over the enterprise, which was to be operated together by Levin, Rammer and the appellee; that Levin did not inform the appellee of the existing shaky condition of the business, but instead told him, according to the latter, that the enterprise was. “in a very solvent position and that it was a going concern”,, and again that it was “a fine going business which was expanding and that they needed capital with which to get further contracts and it was a glorious opportunity for someone to come in with him”. Appellee requested a statement showing the financial condition of the business, and stated that Levin said he would furnish one within two or three days.

The parties met again a few days later, on October 5, 1955, when, after further ⁵² assurances from Levin, and an excuse that he hadn’t had time to prepare a financial statement, appellee executed an agreement with Levin and Kammer. While, oddly, the agreement, as well as certain other relevant documents, do not appear in either the record extract or the record before us, it is apparent from the testimony that the October 5, 1955, agreement provided that appellee was to have a $10,000 interest in the painting business which was to be incorporated, with shares to be held by the parties to the agreement. Simultaneously with the signing of the agreement, appellee delivered to Levin $5,000 in cash and two promissory notes, one for $2,000 payable at 60 days and the other for $3,000 payable at five months. However, it was agreed that appellee made advance payments amounting to $4,000 by December 5, 1955, making a total, with the original payment of $5,000, of $9,000 paid over by him.

Levin admitted that he deposited the Singer money in a checking account standing in the names of himself and his wife, which he stated was also used for the business. The business was never incorporated and appellee never received a financial statement. In the following January it became obvious that the enterprise was a failing proposition. Appellee engaged counsel to protect his interests and, after negotiation, appellant on April 25, 1956 executed and delivered a promissory note in favor of appellee and his wife for $9,200, payable in monthly installments, intended to represent the total obligation due them from appellant.

At the same time a policy of insurance on the life of appellant was taken out by him and assigned to the Singers. After appellant made a few monthly payments on the note and defaulted, the Singers sued him on the note in the United States District Court for the District of Columbia and obtained judgment on July 30, 1957, for $9,505.51, representing the unpaid balance plus interest and attorney’s fee. Appellant subsequently filed a petition in bankruptcy in the United States District Court for the District of Maryland, including the claim of the Singers in his schedule of indebtedness. On December 29, 1958 appellant was granted his discharge in bankruptcy.

In June, 1959, Singer and his wife filed the instant suit ⁵³ against Levin in the Circuit Court for Montgomery County on the District of Columbia judgment. Levin pleaded denial of liability and discharge in bankruptcy. The Singers’ replication alleged that the debt sued upon was a liability for obtaining money by false pretenses or false representations and was created by fraud, embezzlement, misappropriation or defalcation of Levin while acting in a fiduciary capacity. At the trial, over objection of Levin, the court permitted appellee to introduce evidence extrinsic to the record of the judgment tending to show that the debt underlying the note and the judgment arose out of false representations, one of the reasons established by 11 U. S. C. 35 (a) as exempting a “liability” from discharge.

At the conclusion of appellee’s case the trial court granted appellant’s motion for a directed verdict against appellee’s wife because she was not a party to the business agreement but refused the motion as to the appellee. Following the jury verdict for appellee the court denied appellant’s motion for a judgment n.o.v. or in the alternative a new trial. Judgment for $9,780 and interest was entered in favor of appellee and this appeal followed. The principal question presented is (1) whether the trial court erred in permitting appellee to go behind the judgment of the District Court based upon the promissory note and introduce evidence dehors the record to show the nature of the debt represented by the note.

Subsidiary questions raised by appellant are: (2) That under the Federal Rules of Civil Procedure the appellee was required to rely on all alleged grounds of recovery for his claim and having elected to rely upon the note, and having reduced the claim to judgment, appellee is estopped from reopening the judgment to show that the debt was the result of appellant’s fraud; (3) that the “full faith and credit” clause of the federal Constitution does not permit examination of the merits of a claim reduced to judgment in a foreign jurisdiction; (4) that the judgment is res judicata as to the judgment creditor so as to prevent the trial court from considering anything dehors the record of the court in which the judgment was taken; (5) that a novation was effected between the parties which constitúted an accord and satisfaction of the claim arising out of the entire prior ⁵⁴ transactions of the parties and a valid bar and defense to the present action; (6) that the appellee failed to establish a prima facie case that the money had been obtained by appellant by false representations and that the trial court was therefore in error for refusing to direct a verdict for the appellant against the appellee and for allowing the jury to find a verdict on the basis of the evidence presented. (1) As to the main contention, appellant states his position clearly, that the “record of the court in which judgment was taken is decisive as to the nature and character of the claim covered by such judgment and in determining whether a debt reduced to judgment is dischargeable under the Bankruptcy Act, the court may not go outside the record of the proceedings in the court which entered the judgment.” There is a ■line of decisions in other States that support this view. See, for example, Jacobs v. Beatty, 138 N. E. 2d 657 (Ohio 1956) ; Shawano Finance Corp. v. Haase, 30 N. W. 2d 82 (Wis. 1947) ; Lawrence v. Wischnowsky, 100 N. E. 2d 816 (Ill. 1951); Wegiel v. Hogan, 100 A. 2d 349 (N. J. 1953); 170 A.L.R. 374 (citing earlier cases from several other jurisdictions) . The appellee counters with the proposition that the judgment creditor should be permitted to show, by evidence extrinsic to the record of the judgment proceedings, the undischargeable character of the original debt, when the record of the judgment does not itself show that it is based on a debt not dischargeable in bankruptcy.

There are also cases in other jurisdictions which support this view: Greenfield v. Tuccillo, 129 F. 2d 854 (2nd Cir. 1942) ; Fidelity & Casualty Co. v. Golombosky, 50 A. 2d 817 (Conn. 1946) ; U. S. Credit Bureau v. Manning, 305 P. 2d 970 (Calif. 1957); Fireman’s Fund Indemnity Co. v. Caruso, 90 N. W. 2d 302 (Minn. 1958) ; Gregory v. Williams, 189 Pac. 932 (Kan. 1920) ; Young v. Grau, 14 R. I. 340 (1884). It may be helpful to review the legislative history of the provisions of the Bankruptcy Act relating to the discharge of debts. The Bankruptcy Act of August 19, 1841, 5 Stat. 440 , ⁵⁵ § 1, (repealed in 1843), included as eligible for discharge only “* * * debts, which shall not have been created in consequence of a defalcation as a public officer; or as executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity * * The re-enactment of the Bankruptcy Act on March 2, 1867, 14 Stat. 517 , R. S. 5117, § 33, provided that “* * * no debt created by the fraud or embezzlement of the bankrupt, or by his defalcation as a public officer, or while acting in any fiduciary character, shall be discharged under this act * * *.” (Emphasis supplied.) The Bankruptcy Act of July 1, 1898, 30 Stat. 544 , 550, § 17 a, clause (2), provided as exceptions from discharge “* * * judgments in actions for frauds, or obtaining property by false pretenses or false representations, or for wilful and malicious injuries to the person or property of another * * *.” (Emphasis supplied.) The Bankruptcy Act of 1903, 32 Stat. 798 , § 5, enacted the provision with which we are concerned in this case, substantially as it appears at the beginning of this opinion. The most significant change was the substitution of “liabilities” for “judgments” in clause (2) of § 35 (a) of 11 U. S. C. We have no Maryland decision construing the effect of the 1903 act.

Appellant relies on one case from this state, American Surety Co. of N. Y. v. Spice, 119 Md. 1 , 85 Atl. 1031 (1912), which may appear at first glance to offer support for his view. However, analysis of the case reveals that the Court considered only the applicability of the 1898 act to a judgment revived by scire facias in 1901, where an intervening discharge in bankruptcy was pleaded, and neither considered nor mentioned the amendment of 1903 enlarging exemption from discharge to “liabilities” based on false representations, etc., in place of “judgments”. In holding that, under the 1898 act, the judgment was not excepted from the effect of the discharge, the Court said, at p. 8: ⁵⁶ “In Hargadine-McKittrick Dry Goods Co. v. Hudson, 111 Fed. Rep. 361, the Court cited the earlier Act, and said: Tf the question at bar had arisen under the section just quoted, a decided conflict of authority might readily be cited but the present law reads as follows’ (quoting section 17 of 1898), and then said, ‘the difference in language is striking. Under the old law no debt created by the fraud or embezzlement of the bankrupt was discharged by the proceedings in bankruptcy, but in the present Act it is “judgments in actions for fraud” which are not released by the discharge in bankruptcy * * *.

The Legislature had some object in view in making this change. Its object therefore must have been to change the law in this respect * * * Where a note is founded in fraud two remedies exist. The holder may waive the contract and sue for the fraud, or he may sue upon the note and waive the fraud. The plaintiff in this case chose the latter course and took its judgment on the notes.

Under this statute it must be bound by that record, and cannot go back of it.’ * * *” (We added last emphasis ; all others in original.) The Court also said, at pp. 7-8: “In In re Rhutassel, 96 Fed. Rep. 597, the judgment under consideration was obtained upon two promissory notes and the Court said the judgment was founded on the express promise to repay the money loaned by the bank, and in reply to the argument of the bank that the notes were procured by false property statements, said: Tf the Bankrupt Act provided that claims created by fraud, false statements or false pretenses, were excepted out from the bar of a discharge, then the mere fact that the claim had been put into judgment would not preclude the holder thereof from proving its original or essential nature in order to enable the Court to determine whether it came within the exceptions of the statute.’” (Emphasis in original.) ⁵⁷ In view of the rationale of the cases cited in the Spice case, it seems likely that the Court would have reached a different conclusion if it had been considering the change of wording from “judgments” to “liabilities” effected by the 1903 amendment. In any event, the case would seem to have no authority in support of appellant’s argument in the instant case. The parties in oral argument have sought to attach the elusive label of “majority view” to their own respective views. The legal sources tend to favor the appellant’s view as reflecting the opinion of the majority of jurisdictions.

However, we shall be concerned not with the weight to be accorded to each view as measured by the number of states that have adopted the one or the other, but rather with the weight to be assigned to each on the basis of sound legal reasoning. In our view, the balance on the basis of soundness and legal persuasiveness is plainly in favor of the authorities supporting the appellee’s position. The leading and oft-cited case expressing this view is Fidelity & Casualty Co. v. Golombosky, supra. The Connecticut Supreme Court of Errors had before it a fact situation which paralleled the one before us in all essential points.

That court, in resolving the case in favor of the defrauded creditor, stated at pp. 819-820 of 50 A. 2d: “The decisions which have held that in determining the nature of the indebtedness a court cannot go behind the judgment and record seem generally to have overlooked two principles which the cases place beyond dispute: Where an action is brought upon a note, and a discharge in bankruptcy is set up as a defense, proof is admissible to show that the underlying debt was created by fraud or one of the other excepted causes, American Surety Co. v. Mc-Kiearnan, 304 Mich. 322 , 8 N. W. 2d 82