No. 76-B-2292United States Bankruptcy Court, E.D. Wisconsin
April 12, 1979
Former Bankruptcy Act — Discharge of Debt — Breach of Fiduciary Duty — Failure to Inform of Change of Status
IHLENFELDT, Bankruptcy Judge
A bankrupt ex-stockbroker breached his fiduciary duty by failing to inform his clients of his change in status. Accordingly, an investment loan advanced by the creditors at a time when the stockbroker allegedly was no longer licensed was nondischargeable under Section 17a(4) of the Bankruptcy Act. See Sec. 17a(4) at ¶ 2148 and Sec. 523(a)(4) at¶ 9230.
Former Bankruptcy Act — Discharge of Debt — FalseRepresentations — Omission of Fact
A bankrupt stockbroker who induced his creditor-clients to invest in his venture was not entitled to a discharge of the debt under Section 17a(2) of the Bankruptcy Act since he misrepresented the safety of the investment and concealed the fact that there would be a delay in obtaining a second loan. See Sec. 17a(2) at ¶ 2146 and Sec. 523(a)(2)at ¶ 9228.
[Digest of Opinion]
The bankrupt, a licensed stockbroker, became interested in the ski industry, and in August 1971, purchased a ski hill, advancing $30,000 as his share of the purchase price and receiving back a note in that amount from the corporation. A few months later, the bankrupt began talking to the creditors, the bankrupt’s clients, with the purpose of inducing them to join in the venture. Besides assuring them of the safety of the investment, the bankrupt offered them a one-half interest in the note for $10,000, pointing out that the effect of the $5,000 discount would be to bring the equivalent of 12-1/2 percent over the ten year period. When one of the creditors protested that he could do better in government bonds, the bankrupt assured him of the higher effective interest rate.
In January, 1972, one of the creditors gave the bankrupt $10,000 for a half-interest in the note and the promise of a 2-1/2 percent interest in the holding company that was to be formed. When the creditor didn’t have the cash, the bankrupt told him which stocks he should sell to raise the cash, and arranged for the sale of the securities. On March 12, 1974, the bankrupt’s company filed a petition for reorganization under Chapter XI of the Bankruptcy Act. A receiver was appointed on June 2, 1974, and on July 18, 1974 the corporation was adjudicated a bankrupt.
The issue presented was whether the bankrupt obtained the $20,000 from the creditors by false pretenses or false representations as provided in Section 17a(2), or alternatively, by fraud while acting in a fiduciary capacity within the meaning of Section 17a(4). The bankrupt argued that he was not dealing with the creditors in the fiduciary capacity of a stockbroker.
The bankrupt’s claim, however, was not consistent with the facts. First, his telephone calls to the creditors from his desk at his brokerage company, as well as various other aspects of the transaction, took place outside the time which he fixed as his unlicensed period. Second, his failure to disclose his change in status was in and of itself a breach of fiduciary duty. Furthermore, even if the bankrupt’s claim was accepted, the record showed that the creditors were not aware that he wasn’t acting in this capacity.
Nor could this case be excused as one of “puffing.” The parties were not involved in an arm’s length transaction. The bankrupt was the creditor’s paid investment advisor in whom “they placed their complete trust and to whom they looked for advice.” The bankrupt was also in a serious conflict of interest position because he failed to inform the creditors that the investment was in difficult cash position due to a delay in obtaining the second loan. Thus, as a broker, he not only had a duty not to make any untrue statements of fact, but also not to omit giving information without which his clients would be misled. He breached that duty not only by misrepresenting facts, but by concealing facts in a situation where he had a duty to disclose. The court concluded, that given the circumstances and the nature and character of those misrepresentations and omissions, his conduct amounted to a fraud, within the meaning of Section 17a(2) and (4) of the Bankruptcy Act.