Morimura, Arai & Co. v. Taback

Background

Two brothers who ran a silk business called Taback Brothers were made bankrupt in September 1920 and asked for a court discharge of their debts. A silk supplier, Morimura, Arai & Co., opposed the discharge, saying the brothers had given a written financial statement in January 1920 that was false and that they had hidden or failed to keep records. A referee (special master) reported the brothers were entitled to discharge, the District Court denied the discharge, and the Court of Appeals reversed and ordered a discharge.

Reasoning

The Supreme Court focused on whether the January 7 written statement was materially false and was given to obtain credit. The Court compared that statement to the firm’s new books opened January 1, 1920, and found the statement showed far greater assets and far fewer liabilities than the books did. The Court concluded the statement was materially and grossly incorrect, and that it was made or acquiesced in with knowledge or reckless indifference to the truth. The supplier had extended credit and delivered silk in reliance on that statement. Because the false written statement was used to obtain credit, the Court held the brothers were not entitled to a bankruptcy discharge under the statute.

Real world impact

The case returns to the District Court with instructions to deny the bankrupts’ discharge based on the false written statement. It shows that a debtor’s materially false written financial statement given to a creditor to get credit can block a bankruptcy discharge, and that courts will compare statements to company books when deciding discharge objections.