Brown v. Freedman

• Decision Date: 04 March 1942
• Docket Number: No. 3742.,3742.
• Citation: 125 F.2d 151
• Parties: BROWN v. FREEDMAN.
• Court: U.S. Court of Appeals — First Circuit

125 F.2d 151 (1942)

BROWN v. FREEDMAN.

No. 3742.

Circuit Court of Appeals, First Circuit.

March 4, 1942.

Joseph B. Wolbarsht, of Boston, Mass., for appellant.

Arthur J. Santry, of Boston, Mass. (Frederick Fish, of Boston, Mass., on the brief), for appellee.

Before MAGRUDER, MAHONEY, and WOODBURY, JJ.

WOODBURY, Circuit Judge.

This is an appeal under Section 24, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 47, sub. a, from an order of the District Court affirming an order of a referee in bankruptcy sustaining a petition to reclaim and repossess certain machinery, and directing the defendant named therein, the appellant here, as trustee in bankruptcy of the International Chewing Gum Company, to turn over the proceeds of the sale thereof to the appellee.¹

The appellee Freedman, the petitioner below, is a member of the Massachusetts Bar. In 1937, and for some years prior thereto, he was counsel for the National Chicle Company, a corporation engaged in the business of manufacturing chewing gum. In the course of his duties he became very friendly with that corporation's vice-president and sales manager, one Alvin S. Livingston. In 1937 the National Chicle Company became involved in financial difficulties; an attempt to reorganize it under Section 77B of the Bankruptcy Act, 11 U. S.C.A. § 207, failed; an order of liquidation was entered against it; and on July 17 of that year its machinery and assets were sold at public auction. At this sale Freedman purchased the machinery of the bankrupt for $20,460.30, and this is the property which in this proceeding he seeks to reclaim and repossess.

It appears that Freedman's purchase was made at the instance of Livingston, who wished to continue in the gum manufacturing business, and that it was made in accordance with an understanding between Freedman and Livingston whereby each was to contribute approximately $5,000 to a new corporation which they were to form for the purpose of entering the gum candy business. Accordingly on July 20, 1937, Freedman formed a Massachusetts corporation called the International Chewing Gum Company (it will be referred to hereafter simply as the Company) with Livingston as president and treasurer and himself as counsel. As organized the Company's directors were Livingston, one Phillips, who subsequently became the Company's manufacturing superintendent, and Miss Madaline Dunne who was Freedman's secretary.

The Company began business operations on the premises in Cambridge formerly occupied by the defunct National Chicle Company, and Freedman, without ever having removed his machinery from those premises, permitted the Company to use it. From time to time as need arose, Livingston and Freedman made cash advances to the Company, which eventually totalled approximately $12,000. At first these advances were listed on the Company's books as debts, but eventually, to conform with the original understanding of the parties, these entries were changed and stock in the Company was issued in payment therefor.

In view of the issues raised by this appeal, we quote the actual words used by the referee to describe the events which followed.

"During the six months following the inception of the new enterprise several attempts were made by Livingston, in which Freedman may or may not be said to have actively participated, to raise substantial capital from third parties both to provide funds for working capital and to take over from Freedman the aforesaid machinery and equipment. As time went one and it became increasingly apparent that a large part of the hoped for new capital would not materialize, the problem of the machinery purchased by Freedman and being used by the corporation became uppermost in the minds of those most directly concerned. Discussions ensued between Freedman and Livingston on the subject, resulting in the execution on December 27, 1937, of a conditional sales contract between Freedman as party of the first part and said corporation as party of the second part, whereby all said machinery was sold by Freedman to the corporation for the price paid for same by Freedman, title to remain in Freedman until the corporation met in full the payments and other conditions called for under said contract.

"On the day prior to the execution of said conditional sales contract, one Seiden, an outsider, had been prevailed upon to subscribe to $6500 of new stock of the corporation and had handed his check for $3000 to Livingston as part payment therefor. Whether or not Seiden knew at this time of the existence of said conditional sales contract is in dispute, but it is clear that he afterwards paid up the balance of $3500 of his subscription with full knowledge of the situation and having obtained representation on the board of directors.

"Following the execution of said conditional sales contract, further discussions were held from time to time with the result that a modification of said agreement was executed March 2, 1938, at a time when it is clear that all parties with capital investments in the corporation were in full possession of the facts with respect to the ownership of the machinery claimed by Freedman and no question was then raised as to the validity of the agreement. On behalf of creditors, evidence was submitted by the respondent to the effect that during the period following the formation of the corporation and the subsequent execution of the conditional sales contract, the petitioner represented or assented to representations by Livingston that the machinery owned by him in fact belonged to the corporation. I find that such representations were not at any time made by the petitioner nor did he authorize others directly or by implication to make them for him.

"I further find that no creditor was shown to have advanced substantial credit on any such representations nor has it been proven to my satisfaction that any of the claims in existence on the date of bankruptcy, namely, April 10, 1939, were outstanding on the date of the execution of the conditional sales contract or the modification thereof. * * *

"The machinery was purchased by the petitioner personally and was never listed on the bankrupt corporation's balance sheets or statements until after the execution of the conditional sales contract; the machinery was insured by the petitioner personally in his own name and not until after the conditional sales contract was executed did the insurance papers show the corporation to have any interest therein; the first certificate of condition filed by the corporation, August 8, 1938, clearly set forth the fact that the machinery was held under a conditional sales contract; the conditional sales contract was duly authorized by the board of directors by unanimous vote at a meeting held for that specific purpose and that purpose alone, and the modification thereof was later authorized, also by unanimous vote of the directors, at a meeting held for the transaction of important corporate business; payments were made by the corporation in accordance with the terms of said conditional sales contract and modification thereof for more than a year after their execution; according to the corporate books the corporation was solvent upon the dates of the execution of the conditional sales contract and the modification thereof and remained so until sometime in 1939."

"Even such evidence offered by the respondent as was undisputed did not, in my opinion, disprove the petitioner's contention that the machinery in question was merely loaned and not donated to the corporation as a capital contribution."

The appellant contends in substance that on the evidence in the record it must be found that Freedman turned his machinery over to the Company not as a loan but as a capital contribution, and that even if he did not do so, established rules of law prevent him from now being heard to contend otherwise. Specifically, the points upon which the appellant relies in this appeal are that neither the referee's findings of fact nor his order are supported either by the evidence or the weight of the evidence; that the referee's conclusions of law are erroneous; that his failure to report any findings at all on eight specified issues advanced by the appellant "manifests a patent misconception" of the issues before him; that his characterization of Livingston as the "chief witness for the respondent herein" indicates "a distorted emphasis of the testimony adduced by the appellant"; that the referee erred in rejecting seven specified "contentions of law and fact" advanced by the appellant; and that he committed five errors, also specified, in admitting, and one error in excluding, testimony. As to the District Court, the points relied upon are that its order confirming the order of the referee "constituted an affirmation of the errors of the referee herein specified"; and that it also erred in affirming the order of the referee and in failing to order that the petition be dismissed.

Counsel for the appellant, both in his brief and in argument before us, evinces a misconception of the scope of judicial review in cases of this sort. In his brief he says that the District Court "may...