Fidelity & Deposit Co. of Md. v. Arenz
Headline: Court reverses and denies bankruptcy discharge for a contractor who obtained a construction bond by false financial statements, protecting the surety who paid a $10,000 judgment and kept its claim.
Holding: The Court held that the debtor obtained the surety’s obligation as "property" on credit by making materially false written statements, so his bankruptcy discharge should be denied and the surety’s claim stands.
- Denies bankruptcy discharge when a debtor obtained a bond by materially false written statements.
- Allows sureties who paid judgments to keep and enforce assigned claims against the debtor.
Summary
Background
In 1929 a man seeking a highway construction contract in Oregon gave the State a bond and false written statements about his finances. A surety company agreed to back that bond. After work-related debts went unpaid, a supplier won a $10,000 judgment against both the contractor and the surety. The surety paid the judgment and took an assignment of the judgment. In 1931 the contractor was declared bankrupt and asked the court for a general discharge that would wipe out debts including the surety’s claim.
Reasoning
The Court considered whether the contractor’s false written statements meant he had "obtained" the surety’s obligation as property on credit, which would bar discharge under the Bankruptcy Act provision for obtaining money or property by materially false written statements about financial condition. The Court concluded that the surety’s obligation is "property," that the bond was obtained on credit, and that the contractor’s fraud falls within the statute. Therefore the contractor’s request for discharge should have been denied. The Court reversed the lower courts that had sustained the contractor’s discharge.
Real world impact
This decision means that when someone fraudulently obtains a bond or similar obligation by false written financial statements, a bankruptcy discharge can be denied. It protects sureties who pay judgments after being induced by fraud and lets them keep and enforce the claims they acquire.
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