Levy v. Industrial Finance Corp.

Background

Levy was a bankrupt who served as president and major owner of The American Home Furnishers Corporation. He controlled the company, had made large advances to it, and with a relative owned more than two-thirds of its stock. To obtain a $1,500,000 loan to the corporation, Levy gave the lenders a written statement he knew was false and that greatly overstated the company’s assets. A District Court denied him a bankruptcy discharge, and the Circuit Court of Appeals affirmed. The Supreme Court reviewed the case because different courts had read the same bankruptcy statute differently.

Reasoning

The main question was whether a debtor “obtains” money under the statute when the fraudulent written statement leads a lender to give money to a corporation the debtor controls. The Court said ordinary English and the policy of the law support treating a loan to a company as money obtained by the controlling debtor when he has a substantial financial interest in the company. The Court rejected an overly narrow reading that would let debtors avoid responsibility simply by inserting a corporate shell between themselves and lenders. The opinion limited its holding to the facts here, where the debtor had a clear pecuniary stake in the borrower. The Court noted a later 1926 amendment changed the statutory wording, but that change did not apply to this case.

Real world impact

The decision means people who control a company cannot easily escape bankruptcy consequences by routing fraudulent credit through that company when they personally benefit. Lenders and bankruptcy courts can treat such corporate loans as obtained by the controlling debtor and may deny discharge when fraud is proved.