Appeal from the Circuit Court for Montgomery County; Shure, J.
Henderson, Hammond, Horney, Marbury and Sybert, JJ. Sybert, J., delivered the opinion of the Court.
This appeal requires the determination, for the first time in this State, whether or not, in an action against a discharged bankrupt based on a judgment obtained against him before the discharge, brought on the ground that the debt is one resulting from false representations, evidence extrinsic to the record of the case in which the judgment was obtained may be considered in order to ascertain whether the ground relied upon is supported by the facts. The trial court decided that
such evidence could properly be submitted to the jury. From a judgment entered on the jury's verdict in favor of the plaintiff (appellee), the defendant (appellant) appeals.
The question whether the appellee's judgment survives the appellant's discharge in bankruptcy grows out of the provisions of § 17 of the Bankruptcy Act of 1898, as amended, 11 U.S.C. 35, which reads in pertinent part:
"(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as * * * (2) are liabilities for obtaining money or property by false pretenses or false representations, or for wilful and malicious injuries to the person or property of another * * * or (4) were created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity * * *."
The relevant facts in this case had their inception in 1955. The appellant, Abraham H. Levin, and one Edward R. Kammer were operating an enterprise known as the Kammer Painting Company as a partnership. Without reviewing the facts in great detail, we think it can be fairly deduced from the record that in the fall of that year the business was overextended, badly managed and in financial difficulties; that Levin interested the appellee, Joseph R. Singer, in joining with him and Kammer in forming a corporation to take over the enterprise, which was to be operated together by Levin, Kammer and the appellee; that Levin did not inform the appellee of the existing shaky condition of the business, but instead told him, according to the latter, that the enterprise was "in a very solvent position and that it was a going concern", and again that it was "a fine going business which was expanding and that they needed capital with which to get further contracts and it was a glorious opportunity for someone to come in with him".
Appellee requested a statement showing the financial condition of the business, and stated that Levin said he would furnish one within two or three days. The parties met again a few days later, on October 5, 1955, when, after further
assurances from Levin, and an excuse that he hadn't had time to prepare a financial statement, appellee executed an agreement with Levin and Kammer. While, oddly, the agreement, as well as certain other relevant documents, do not appear in either the record extract or the record before us, it is apparent from the testimony that the October 5, 1955, agreement provided that appellee was to have a $10,000 interest in the painting business which was to be incorporated, with shares to be held by the parties to the agreement. Simultaneously with the signing of the agreement, appellee delivered to Levin $5,000 in cash and two promissory notes, one for $2,000 payable at 60 days and the other for $3,000 payable at five months. However, it was agreed that appellee made advance payments amounting to $4,000 by December 5, 1955, making a total, with the original payment of $5,000, of $9,000 paid over by him. Levin admitted that he deposited the Singer money in a checking account standing in the names of himself and his wife, which he stated was also used for the business. The business was never incorporated and appellee never received a financial statement.
In the following January it became obvious that the enterprise was a failing proposition. Appellee engaged counsel to protect his interests and, after negotiation, appellant on April 25, 1956 executed and delivered a promissory note in favor of appellee and his wife for $9,200, payable in monthly installments, intended to represent the total obligation due them from appellant. At the same time a policy of insurance on the life of appellant was taken out by him and assigned to the Singers. After appellant made a few monthly payments on the note and defaulted, the Singers sued him on the note in the United States District Court for the District of Columbia and obtained judgment on July 30, 1957, for $9,505.51, representing the unpaid balance plus interest and attorney's fee.
Appellant subsequently filed a petition in bankruptcy in the United States District Court for the District of Maryland, including the claim of the Singers in his schedule of indebtedness. On December 29, 1958 appellant was granted his discharge in bankruptcy.
In June, 1959, Singer and his wife filed the instant suit
against Levin in the Circuit Court for Montgomery County on the District of Columbia judgment. Levin pleaded denial of liability and discharge in bankruptcy. The Singers' replication alleged that the debt sued upon was a liability for obtaining money by false pretenses or false representations and was created by fraud, embezzlement, misappropriation or defalcation of Levin while acting in a fiduciary capacity. At the trial, over objection of Levin, the court permitted appellee to introduce evidence extrinsic to the record of the judgment tending to show that the debt underlying the note and the judgment arose out of false representations, one of the reasons established by 11 U. S. C. 35 (a) as exempting a "liability" from discharge. At the conclusion of appellee's case the trial court granted appellant's motion for a directed verdict against appellee's wife because she was not a party to the business agreement but refused the motion as to the appellee. Following the jury verdict for appellee the court denied appellant's motion for a judgment n.o.v. or in the alternative a new trial. Judgment for $9,780 and interest was entered in favor of appellee and this appeal followed.
The principal question presented is (1) whether the trial court erred in permitting appellee to go behind the judgment of the District Court based upon the promissory note and introduce evidence dehors the record to show the nature of the debt represented by the note. Subsidiary questions raised by appellant are: (2) That under the Federal Rules of Civil Procedure the appellee was required to rely on all alleged grounds of recovery for his claim and having elected to rely upon the note, and having reduced the claim to judgment, appellee is estopped from reopening the judgment to show that the debt was the result of appellant's fraud; (3) that the "full faith and credit" clause of the federal Constitution does not permit examination of the merits of a claim reduced to judgment in a foreign jurisdiction; (4) that the judgment is res judicata as to the judgment creditor so as to prevent the trial court from considering anything dehors the record of the court in which the judgment was taken; (5) that a novation was effected between the parties which constituted an accord and satisfaction of the claim arising out of the entire prior
transactions of the parties and a valid bar and defense to the present action; (6) that the appellee failed to establish a prima facie case that the money had been obtained by appellant by false representations and that the trial court was therefore in error for refusing to direct a verdict for the appellant against the appellee and for allowing the jury to find a verdict on the basis of the evidence presented.
As to the main contention, appellant states his position clearly, that the "record of the court in which judgment was taken is decisive as to the nature and character of the claim covered by such judgment and in determining whether a debt reduced to judgment is dischargeable under the Bankruptcy Act, the court may not go outside the record of the proceedings in the court which entered the judgment." There is a line of decisions in other States that support this view. See, for example, Jacobs v. Beatty, 138 N. E. 2d 657 (Ohio 1956); Shawano Finance Corp. v. Haase, 30 N. W. 2d 82 (Wis. 1947); Lawrence v. Wischnowsky, 100 N. E. 2d 816 (Ill. 1951); Wegiel v. Hogan, 100 A.2d 349 (N. J. 1953); 170 A.L.R. 374 (citing earlier cases from several other jurisdictions).
The appellee counters with the proposition that the judgment creditor should be permitted to show, by evidence extrinsic to the record of the judgment proceedings, the undischargeable character of the original debt, when the record of the judgment does not itself show that it is based on a debt not dischargeable in bankruptcy. There are also cases in other jurisdictions which support this view: Greenfield v. Tuccillo, 129 F. 2d 854 (2nd Cir. 1942); Fidelity & Casualty Co. v. Golombosky, 50 A.2d 817 (Conn. 1946); U. S. Credit Bureau v. Manning, 305 P. 2d 970 (Calif. 1957); Fireman's Fund Indemnity Co. v. Caruso, 90 N. W. 2d 302 (Minn. 1958); Gregory v. Williams, 189 Pac. 932 (Kan. 1920); Young v. Grau, 14 R. I. 340 (1884).
It may be helpful to review the legislative history of the provisions of the Bankruptcy Act relating to the discharge of debts. The Bankruptcy ...