National Finance Company of Utah v. Valdez , 11 Utah 2d 339 ( 1961 )

CALLISTER, Justice.

Action, upon a promissory note and chattel mortgage. The defendant appeals from an adverse judgment.

' Plaintiff’s complaint, in addition to the -usual allegations concerning the execution of the note and defendant’s default, alleged that the defendant, prior to obtaining the loan and as an inducement therefor, submitted a written financial statement to plaintiff which was false and fraudulent. Defendant filed an answer containing what is substantially a general denial and also, .as an affirmative defense, alleged that he had been adjudicated a bankrupt and that plaintiff’s claim had been scheduled in the bankruptcy proceedings.

At the pretrial conference the plaintiff was permitted to amend its complaint by adding to the prayer thereof that the court •determine that the claim sued upon was not dischargeable in bankruptcy.

It appears from the pretrial order and stipulations of counsel that the sole issue presented to the court below was whether ■or not the claim of plaintiff was discharged in the bankruptcy proceedings, the defendant contending that it was and therefore plaintiff could not maintain this action on •contract but would have to sue for damages in a tort action for fraud and deceit. This issue was argued and submitted to the lower •court upon the hearing of defendant’s motion to stay the proceedings. This motion, which was filed subsequent to the entering •of the pretrial order, was based upon the ground that defendant had been adjudicated a bankrupt and plaintiff’s claim had been discharged.

Thus, the primary question before this court is whether the trial judge erred in holding that the debt sued upon was not discharged in bankruptcy and awarding plaintiff a judgment upon the note and mortgage.

Section 17 of the Bankruptcy Act, Title 11, Bankruptcy, Section 35, U.S.C.A., provides :

“(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts * * * except such as * * * (2) are liabilities for obtaining money or property by false pretenses or false representations * *

In considering the question before us, it must be remembered that a discharge in bankruptcy is neither a payment nor the extinguishment of debts. It is simply a bar to their enforcement by legal proceedings.¹ Thus, the note here sued upon was not extinguished by the bankruptcy, but is still in existence and its collection enforceable if excepted from a discharge under Section 17 of the Bankruptcy Act.

We believe that a loan, evidenced by a promissory note, which is obtained by fraud is excepted from a discharge in bankruptcy. This being so, the plaintiff here could maintain its action on the note and was not confined to an action based upon fraud.² In Section 17 it is not provided that a cause of action for fraud is not discharged, but that no debt created by fraud shall be discharged.³

Where a creditor sues a bankrupt after discharge, the question whether the claim involved is within the operation of the discharge or within the exceptions of Section 17, must ordinarily be left to the court in which the action is brought.⁴ The court below correctly held that the instant claim was not within the operation of the discharge.

Defendant next contends that there was not sufficient evidence before the trial court to prove all of the essential elements of fraud. Undoubtedly, the burden of proof is upon the creditor who claims that his duly scheduled debt is excepted from the operation of the discharge in bankruptcy because of a false representation or pretense⁵ and all the essential elements of the fraud must be proved. However, in the instant case, because of the pretrial order, stipulations and admissions of counsel, the allegations of the complaint and the essential elements of' fraud were admitted by the defendant.. The existence or lack of all the fraud elements was not an issue before the court below, and was not raised until after the.court’s ruling.

The defendant’s final contention is. that the plaintiff, by electing to rely upon, the contract, had waived the issue of fraud. This contention, for the reasons heretofore, set forth, is without merit.

Affirmed. Costs to plaintiff (respondent)..

WADE, C. J., and HENRIOD and. McDonough, jj., concur.

1 . 1 Collier on Bankruptcy, 14th Ed., p. 1654; Helms v. Holmes, 4 Cir., 129 E.2d 263, 141 A.L.B.. 1367.

2 .Argall v. Jacobs, 87 N.Y. 110, 41 Am. Rep. 357; Personal Finance Corp. of Waterbury v. Robinson, Sup., 27 N.Y.S. 2d 6; Ohio Finance Co. v. Greathouse, Ohio App., 110 N.E.2d 805; Stewart v. Emerson, 1872, 52 N.H. 301.

3 . Argall v. Jacobs; Personal Finance Corp. v. Robinson; Ohio Finance Co. v. Greathouse; supra, n. 2.

4 . 7 Remington on Bankruptcy, 5th Ed., Sec. 3438; White v. Public Loan Corp., 8 Cir., 247 F.2d 601.

5 . 1 Collier on Bankruptcy, 14th Ed., p. 1608.