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In re Kaufhold

UNITED STATES COURT OF APPEALS THIRD CIRCUIT.


June 5, 1958

IN THE MATTER OF HENRY KAUFHOLD, BANKRUPT. W. LOUIS SCHLESINGER, TRUSTEE OF THE ESTATE OF HENRY KAUFHOLD, A BANKRUPT AND FOREST R. TAYLOR, APPELLANTS.

Author: Kalodner

Before GOODRICH, McLAUGHLIN and KALODNER, Circuit Judges.

KALODNER, Circuit Judge.

This is an appeal from the reversal by the District Court of the Order of the Referee in Bankruptcy denying a bankrupt his discharge in bankruptcy.

The situation presented is rather unusual in this respect: The Referee premised his denial of the discharge on the ground that the bankrupt had committed an offense under Title 18 U.S.C. § 152,*fn1 which provides, among other things, "Whoever knowingly and fraudulently makes a false oath or account in or in relation to any bankruptcy proceeding * * * Shall be fined * * * or imprisoned * * * or both."

On review of the Referee's Order the District Court proceeded to take additional testimony.*fn2 Thereafter it filed a "Memorandum and Order"*fn3 in which it "overruled, vacated and set aside" the Referee's Order and directed that the bankrupt be discharged.

The District Court premised its action on its finding it was "unable to find that the false oath so-called was knowingly and fraudulently made; * * * the Bankrupt acted upon advice of counsel after a full disclosure by him of the factual situation; [and] Under the circumstances it is not believed that the Bankrupt could have been convicted at any time of a violation of 18 U.S.C.A. 152."

The critical facts as far as the instant appeal is concerned may be summarized as follows:

On November 15, 1951, the Supreme Court of Pennsylvania*fn4 affirmed a money judgment in favor of Forest R. Taylor against the bankrupt, Henry Kaufhold ("bankrupt"). On January 31, 1952 bankrupt filed a voluntary petition in bankruptcy listing two creditors in his schedules: Forest R. Taylor ("Taylor"), a judgment creditor in the amount of $14,254.90, and a law firm in Erie, Pennsylvania in the amount of $1,869.96.

Shortly after filing of the bankruptcy petition the Referee authorized the Trustee in Bankruptcy to join with Taylor in instituting an equity suit in the Court of Common Pleas of Eric County, Pennsylvania, against the bankrupt and his wife to subject certain real estate held by the bankrupt and his wife as tenants by the entireties to the claims of the bankrupt's creditors.

The bill alleged that the real estate was purchased with assets that were the individual property of the bankrupt and that title was taken by the entireties in order to defraud his creditors. The State Court, after hearing, entered a decree nisi subjecting the jointly held real estate to a pro tanto charge in favor of bankrupt's creditors.*fn5 It specifically found (Finding of Fact No. 33) that the bankrupt was "guilty of fraud and intended to hinder, delay and defraud Forest R. Taylor, his creditor."*fn6

The bankrupt filed no exceptions to the adjudication or the decree. Exceptions filed by his wife were dismissed and a final decree similar in terms to the decree nisi was entered. She then appealed to the Supreme Court of Pennsylvania, which affirmed the lower court's decree. Taylor v. Kaufhold, 1954, 379 Pa. 191, 108 A.2d 713.

The Bill in Equity in the Erie County suit and the bankrupt's Answer to it constitute the premise for the specification*fn7 objecting to the bankrupt's discharge on the ground that he had "knowingly and fraudulently" made a false oath in relation to a bankruptcy proceeding.

In paragraph 9 of the Bill it was alleged that the bankrupt had caused title to be taken in his name and that of his wife (to the real estate involved) "with the intent by Henry Kaufhold to conceal the same and place the same beyond the reach of Forest R. Taylor or any other creditor of the said Henry Kaufhold."*fn8 In paragraph 9 of his Answer bankrupt "expressly denied" the allegations in paragraph 9 of the Bill.*fn9

In his Affidavit to the Answer bankrupt swore that the facts stated therein "are true and correct to the best of his knowledge, information and belief."*fn10

With respect to the Bill filed in the State Court proceeding and bankrupt's Answer and Affidavit thereto, the Referee made the factual findings that bankrupt's statements in paragraph 9 of the Answer were "false and untrue"*fn11 and that he "knowingly and fraudulently made a false oath to the answer."*fn12

The Referee also determined that the State Court's action was an integral part of the bankruptcy proceedings inasmuch as it sought to make assets of the bankrupt available to his creditors; that the Trustee in Bankruptcy had been authorized by the Bankruptcy Court to join in the institution of the State Court action; and that the oath taken by the bankrupt to his Answer was "in relation to a bankruptcy proceeding."

The Referee further held that although the finding of the State Court that the bankrupt's statements in paragraph 9 of his Answer were false was not "res judicata" that it "does at least establish a prima facie case", citing 1 Collier on Bankruptcy (14 Ed.) Sec. 14.26 at p. 1326.

Based on the foregoing, the Referee concluded that the bankrupt had committed an offense punishable under 18 U.S.C. § 152 in that he had "knowingly and fraudulently made a false oath in relation to a bankruptcy proceeding" and accordingly found that the third specification of objection to bankrupt's discharge had been sustained, and denied the bankrupt his discharge.

The District Court, as earlier stated, reversed the Referee and granted the bankrupt his discharge, on its own factual finding that it was "unable to find that the false oath so-called was knowingly and fraudulently made" and that "the bankrupt acted upon advice of counsel after a full disclosure by him of the factual situation" in connection with the statements in his Answer and his oath in the Affidavit thereto.

It may be noted, parenthetically, that the District Court agreed with the Referee's conclusion that the State Court action was "in relation to a bankruptcy proceeding." We are in accord.

The issue presented for decision here, simply stated, is this: did the District Court err in reversing the Referee's factual finding that the bankrupt had "knowingly and fraudulently made a false oath", and finding to the contrary?

Applicable to the situation here are these well-settled principles:

A false oath made by a bankrupt in relation to proceedings in bankruptcy, sufficient to justify denial of discharge, must be "knowingly and fraudulently" made; it is sufficient that the bankrupt knows what is true and, so knowing, wilfully and intentionally swears to what is false; the false oath must be to an untrue statement in a matter material to an issue which is itself material to the proceeding;*fn13 the making of a false oath is sufficient to justify an inference of an intent to defraud creditors; the burden of proof is on the objecting creditor to make out a prima facie case, but once he has done so the burden shifts to the bankrupt;*fn14 a finding that an oath was "knowingly and fraudulently" made is in the nature of an ultimate finding of fact, and although it is subject to review free of the impact of the so-called "clearly erroneous rule" applicable to ordinary findings of fact by the trier of the facts, nevertheless it cannot be disturbed if the evidence on which it is premised measures up to the applicable standard of legal proof.*fn15

In applying the principles stated in the instant case we are confronted with this situation - the ultimate findings of the Referee and the District Court on the issue as to whether bankrupt swore falsely are diametrically opposite.

It is clear from the record in the proceedings before the Referee that his ultimate finding was amply supported by the evidence and that had not the District Court itself undertaken to take additional testimony it would, absent such testimony, have been required to affirm the Referee's ultimate finding. However, since the District Court did take additional evidence, which it was emplowered to do, it is necessary to review such evidence in order to determine whether or not it afforded sufficient basis for the District Court's ultimate finding.

The District Court's Memorandum and Order make it clear that it based its ultimate finding on its factual finding that "the Bankrupt acted upon advice of counsel after a full disclosure by him of the factual situation" in swearing to the statements in his Answer in the State Court proceeding. The evidence taken by the District Court does not sustain this factual finding. The record discloses that on direct examination the bankrupt stated he had made full disclosure of the facts to his counsel before the latter prepared bankrupt's Answer to the Bill in the State Court proceeding, while on cross-examination he admitted that the contrary was true.

As the District Court stated during the bankrupt's examination on the controverted point as to whether he had made full disclosure to his counsel:

"Well, he says that [that he didn't make full disclosure] in one breath and in the next breath he says he told them [his counsel] everything."

The conflicting testimony given by the bankrupt on this critical issue was not sufficient to discharge his burden of proof with respect to the prima facie case of a false oath established by the objecting creditor.

Moreover, the District Court's finding that "From the evidence I am unable to find that the false oath socalled was knowingly and fraudulently made" falls far short of the quality required of an affirmative finding sufficient to reverse a Referee's finding based on ample testimony.

We are of the opinion that the District Court erred in reversing the Referee's Order and in granting the bankrupt his discharge.

For the reasons stated the Order of the District Court will be reversed and the cause remanded with directions to the District Court to proceed in accordance with this opinion.


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