In re Stridacchio, 69-51.

• Decision Date: 02 October 1952
• Docket Number: No. 69-51.,69-51.
• Citation: 107 F. Supp. 486
• Parties: In re STRIDACCHIO.
• Court: U.S. District Court — District of New Jersey

107 F. Supp. 486

In re STRIDACCHIO.

No. 69-51.

United States District Court D. New Jersey.

October 2, 1952.

Milberg & Milberg, Jersey City, N. J., for petitioner.

Milton B. Levin, Newark, N. J., for trustee.

SMITH, District Judge.

This matter is before the Court on a petition for review filed herein by N. Torczyner & Son, Inc., hereinafter identified as the claimant, pursuant to Section 39, sub. c of the Bankruptcy Act as amended, 11 U.S.C.A. § 67, sub. c. The petition alleges generally that the Referee in Bankruptcy erred in the dismissal of a petition for reclamation filed by the claimant.

The claimant filed a petition for the reclamation of certain merchandise, to wit, two diamonds, which had been sold and delivered to the bankrupt on January 22, 1951, approximately two weeks before the voluntary petition in bankruptcy was filed herein. The right to rescind the sale and reclaim the merchandise was predicated solely on the ground of fraud; there was no dispute as to the sale. The Referee in Bankruptcy, after hearing, determined "that there was an outright sale and delivery of the diamonds" and dismissed the petition for reclamation. The Referee, however, made no finding on the issue of fraud, a finding essential to the determination of the ultimate issue here raised.

It appears from the record before the Court that the order of dismissal was based solely on the said determination, which was amply supported by the evidence. The dismissal of the petition solely on this ground, however, was error. The mere fact that there was a "sale and delivery" of the diamonds would not defeat the claimant's right of rescission if the sale had been induced by the fraudulent representations of the Bankrupt. It is well established that the sale of merchandise induced by the fraudulent representations of the buyer, although not void, is voidable at the instance of the seller; the seller may, if he acts promptly upon the discovery of the fraud and before title has passed to an innocent purchaser, rescind the sale and recover the merchandise. Manly v. Ohio Shoe Co., 4 Cir., 25 F.2d 384, 59 A.L.R. 413, and the cases therein cited. The transfer of title and the delivery of the merchandise does not defeat the right of the seller to rescind the sale.

The rule which must be applied is succinctly stated in the cited case, 25 F.2d at page 385: "The law applicable to the case seems well settled. Where goods are obtained by fraud of the bankrupt, the seller may rescind the contract of sale and reclaim them if he can identify them in the hands of the trustee. This is on the theory that fraud renders all contracts voidable, and that neither in law nor in morals would the trustee be justified in holding goods obtained by the fraud of the bankrupt for the benefit of other creditors. Such creditors have no right to profit by the fraud of the bankrupt to the wrong and injury of the party who has been deceived and defrauded. In re Hamilton Furniture & Carpet Co., D.C., 117 F. 774, 776; Standard Oil Co. v. Hawkins, 7 Cir., 74 F. 395, 33 L.R.A. 739. This does not result in a preference in favor of the seller who thus retakes goods obtained from him by fraud, because in such case the seller retakes his own property which he must be able to identify. Cunningham v. Brown, 265 U.S. 1, 11, 44 S.Ct. 424, 68 L.Ed. 873. There is little in the suggested danger of improper preferences being obtained under the guise of thus rescinding contracts of sale and reclaiming goods sold on the ground of fraud; for in every case the fraud must be established to the satisfaction of the court by evidence clear, unequivocal, and convincing."

Since this matter must be referred to the Referee in Bankruptcy for further proceedings, we think it should be noted that the record made by the claimant at the hearing was inexcusably meager and inadequate. The argument advanced in support of the petition for reclamation rests primarily on the alleged insolvency of the bankrupt at the time of the sale, but there was no evidence presented to support the allegation. We assume that the claimant relied on the documentary evidence in the files of the court, but the files were not offered in evidence at the hearing. It would have been improper, therefore, for the Referee in Bankruptcy to consider such evidence. In Re Aughenbaugh, 3 Cir., 125 F.2d 887. The litigant who rests his case on the documentary evidence contained in the...