Brune v. Fraidin

• Decision Date: 02 January 1945
• Docket Number: No. 5300.,5300.
• Citation: 149 F.2d 325
• Parties: BRUNE v. FRAIDIN.
• Court: U.S. Court of Appeals — Fourth Circuit

149 F.2d 325 (1945)

BRUNE v. FRAIDIN.

No. 5300.

Circuit Court of Appeals, Fourth Circuit.

January 2, 1945.

Paul R. Kach, of Baltimore, Md. (Louis J. Sagner, of Baltimore, Md., on the brief), for appellant.

Samuel J. Fisher, of Baltimore, Md. (Wilfred T. McQuaid, of Baltimore, Md., on the brief), for appellee.

Before PARKER and DOBIE, Circuit Judges, and HARRY E. WATKINS, District Judge.

HARRY E. WATKINS, District Judge.

This is an appeal by the trustee from an order of the District Court affirming the referee in dismissing the trustee's petition for a turnover order against the bankrupt. It is another case where the trustee does not trace specific assets into the bankrupt's hands, but relies entirely for his proof on a shortage in merchandise values estimated or determined by an accounting method, and upon the much discussed presumption of continued possession of the goods or their cost value in money.

The District Court held (1) that the interval between the date of bankruptcy and the application for the turnover order, under the circumstances of the case, precluded the effective application of the presumption as to continued possession, and (2) that the evidence with regard to the merchandise shortage was not sufficiently clear and convincing to require a turnover order. We agree with the District Judge on both propositions.

The bankrupt was engaged in the sale at retail of cosmetics, drug supplies and similar articles in Baltimore. He also compounded certain cosmetics in a manufacturing establishment on the second and third floors of his place of business. An involuntary petition in bankruptcy was filed against him on August 26, 1940. The trustee objected to his discharge and a discharge was refused by Referee Parker on two grounds, failure to keep sufficient books, and concealment of assets, after a full hearing before the referee upon both charges. Upon review of that order, the District Court on November 10, 1942, affirmed the action of the referee on the ground of failure to keep sufficient books of account. On July 23, 1943, nearly three years after the bankruptcy proceeding began, the trustee filed with Referee Kintner his petition for a turnover order against the bankrupt. In opposing discharge the trustee claimed a shortage of $39,000. In this turnover proceeding the amount claimed was $20,795 at one time, $26,728.89 at another, and then a total shortage of $32,264.23 was claimed in the trustee's last amended turnover petition. The bankrupt denied any shortage. Evidence taken shows that the bankrupt was hard pressed for cash, resorted to gambling, and kept no books. He filed an income tax report for 1939, showing a net profit of $6,806. Between January 1 and July 27, 1940, he withdrew $6,642 for salary and personal expenses. Shortly after bankruptcy he was convicted in the District Court of a criminal offense in connection with the sale of alcohol and served six months in prison. On January 7, 1944, after three years and four months had elapsed, the case was submitted to the referee for decision. On February 17, 1944, the referee dismissed the petition. He found that there was a merchandise shortage "before the bankruptcy of goods of the value of $12,761.70". However, he concluded that since the trustee relied entirely for his proof of present possession upon the presumption of continued possession, the interval of more than three years between the date of bankruptcy and the hearing on the turnover order, so weakened such presumption that it could not be sustained as a matter of fact. We think the District Judge was correct in affirming the referee upon this point.

Counsel for the trustee contends that in a turnover proceeding it is not necessary or proper to consider the question as to whether the bankrupt had the then present ability to comply with the order, either by turning over the merchandise or the proceeds of sale. He says that since the referee found a merchandise shortage at the time of bankruptcy, he should have entered a turnover order automatically, leaving the question of present possession open for consideration on possible subsequent contempt proceedings. Such is the holding of the Third Circuit. In re Eisenberg, 3 Cir., 130 F.2d 160, 162; In re Amdur. 3 Cir., 137 F.2d 708, 710. These cases hold that in proceedings for a turnover order the sole burden upon the trustee is to prove possession or control of property belonging to the bankrupt estate at the time of filing the petition in bankruptcy and failure to deliver such property to the trustee, without the necessity of showing continued possession or ability to turn over at the time of making the turnover order. In the Second Circuit it is necessary for the trustee to prove not only possession at the time of filing petition in bankruptcy, but also possession or control at the time of the turnover proceedings. In re Pinsky-Lapin Co., 2 Cir., 98 F.2d 776; Seligson v. Goldsmith, 2 Cir., 128 F.2d 977; Robbins v. Gottbetter, 2 Cir., 134 F.2d 843; Cohen v. Jeskowitz, 2 Cir., 144 F.2d 39.

We agree with the view expressed by the Second Circuit, which was here followed by the referee and the District Judge, and which is supported by the weight of authority. In the matter of J. L. Marks & Co., 7 Cir., 85 F.2d 392; In re Rosser, 8 Cir., 101 F. 562; Marin v. Ellis, 8 Cir., 15 F.2d 321; In re Goldman, 1 Cir., 62 F.2d 421, 424. The exact question has not heretofore arisen in this court, although in Kirsner v. Taliaferro, 4 Cir., 202 F. 51, it was strongly indicated that in a turnover proceeding proof of continued possession or ability to comply at the time of the turnover order was necessary.

This difficulty in proof of present possession has been met by the courts with a presumption. The courts have consistently held that the trustee has the burden of showing that the bankrupt withheld assets belonging to the estate, but after such possession is shown there is a presumption that the bankrupt still has the assets, and the burden is on him to prove his inability to turn them over. See 8 C.J.S., Bankruptcy, § 206, p. 676 and cases there cited. The rule was the same under the law of 1867 and also under the English Bankruptcy Law. Remington on Bankruptcy, 4th Ed., Sec. 2420 and cases there cited. The mere denial of the bankrupt is not alone sufficient to meet this presumption.

In deciding whether possession has continued, this presumption is considered in the light of all the evidence in the case. The presumption of continued possession is only as strong as the nature of the circumstances permits. The presumption loses its force and effect as time intervenes and as circumstances indicate that the bankrupt is no longer in possession of the missing goods or their proceeds. Where the property is of the type which the bankrupt would likely dissipate such as money or saleable goods, the presumption is further weakened. Such presumption of continuing possession in bankruptcy cases is an application of a general and well recognized rule of the law of evidence. With reference to the effect of lapse of time upon this presumption, see 31 C.J.S., Evidence, § 124, page 737, as follows: "Always strongest in the beginning the inference steadily diminishes in force with lapse of time, at a rate proportionate to the quality of permanence belonging to the fact in question, until it ceases or perhaps is supplanted...