In Re Barbato

• Decision Date: 09 February 1970
• Docket Number: No. 17965.,17965.
• Citation: 421 F.2d 1324
• Parties: In the Matter of Albert M. BARBATO, Bankrupt, Royal Indemnity Company, a Corporation of the State of New York (a creditor), Appellant.
• Court: U.S. Court of Appeals — Third Circuit

421 F.2d 1324 (1970)

In the Matter of Albert M. BARBATO, Bankrupt Royal Indemnity Company, a Corporation of the State of New York (a creditor), Appellant.

No. 17965.

United States Court of Appeals, Third Circuit.

Argued December 18, 1969.

Decided February 9, 1970.

James E. Masterson, Kleinberg, Moroney, Masterson & Schachter, Newark, N. J., for appellant (Stickel, Kain & Stickel, Newark, N. J., on the brief).

Herman Osofsky, Kronman & Osofsky, Passaic, N. J., for bankrupt.

Before McLAUGHLIN, FREEDMAN and ADAMS, Circuit Judges.

OPINION OF THE COURT

PER CURIAM.

In this bankruptcy matter, a bonding company creditor objected to the discharge of the bankrupt contractor. The Referee, holding that the bankrupt by his statement of December 31, 1963 had no actual intent to deceive the bonding company, allowed the discharge of the bankrupt. The District Court confirmed that decision. On appeal this court remanded the case for further proceedings to ascertain whether the bankrupt had sustained his burden of establishing that he was not recklessly indifferent to the actual facts in issuing his said statement.

In accordance with the above directive the Referee held a further hearing and as a result thereof made detailed additional findings of fact and conclusions of law. These found that the bankrupt had been in the construction business for many years prior to 1963. On entering that business he engaged a certified public accountant as his accountant. The latter set up the bankrupt's books on a cash basis. On the recommendation of the accountant, he hired a bookkeeper to take care of his business books and records. The semi-annual statements required by the bonding company were prepared by the accountant from those books and records and from schedules of receivables and payables compiled by the bookkeeper. The bankrupt checked the statements as to their accuracy and the accuracy of the schedules and receivables and payables. He asked questions about every item which did not seem to him to be correct. There were times when conferences with the bookkeeper and accountant were necessary and when changes had to be made. The bankrupt examined the figures and accompanying schedules of the December 31, 1963 statement, "and satisfied himself that they were accurate, with respect to all the information of which he had knowledge." In January 1964 when his statement was given to the bonding company, the bankrupt "had the pleasant feeling that he was doing as well in the construction business as the statement indicated." In February 1964, "the bankrupt first became aware of the fact that he would suffer a financial loss on the United States Picatinny Arsenal job and he also knew that he faced a heavy income tax on his 1963 operations." He consulted and retained another accountant, Mr. Comperatore, who specialized in tax matters. That accountant "by working backwards to January 1, 1964 set up the Bankrupt's books on an accrual (as opposed to a cash) basis. That accountant also prepared bankrupt's income tax return which the bankrupt signed on or about March 14, 1964."

The tax accountant testified that the bankrupt's books were properly kept on the cash basis employed. On cross-examination he agreed with the attorney for the creditor that "Cash systems are used and permitted by the Internal Revenue." He explained that "it takes into consideration certain accounts receivable and certain accounts payable, the accounts receivable that have been received as of the date of the statement and the accounts payable that have been received as of the day of payment." As to amounts owed by the bankrupt other than appeared in his statement, the tax accountant said "He never received those invoices and had no knowledge of those accounts payable when I walked in there." Even after the witness had prepared the bankrupt's tax return on an accrual basis which showed substantial further indebtedness the witness stated that "I don't believe Mr. Barbato knew the full impact of his problems." Asked "Do you know why he wouldn't know of it?", the witness answered "My opinion, it was because of the method of accounting used, this cash basis." (Emphasis supplied.)

The bankrupt, recalled to the stand, testified that there were large losses in January and February 1964 in connection with the completion of the Picatinny job; increased payroll, equipment, including "duplication of material purchases again in January, February and March that were on the job prior to that, and then they weren't there anymore." In his main testimony he made it very clear that he had had no experience with bookkeeping. Asked, "Did you ever keep books for yourself?", he answered "No, I always had the accountant." He said that his work was always in the field, on the job itself.

It is unchallenged that the bankrupt relied upon Stier, his first accountant, and the cash system he installed; as the creditor's attorney stated "here is the Bankrupt under my own questioning still of the opinion that all he owed is $92,000." Immediately thereafter the attorney asked the bankrupt "What did you do to insure the accuracy and the completeness of the invoices which you directed your girl to make available to Mr. Stier for the statement?" The bankrupt answered "They were all the ones that I saw that they gave to me that I received in the mail and that they gave to me and I had given jobs out. In other words that I had knowledge of. They were all there." The bankrupt stated as to the $92,000. total "That is all I owed, as far as I had knowledge of, the bills that we actually owed. There were three other people that verified it with me, that works with me." Queried as to what efforts he made to ascertain that this was all he owed he answered "Because I had made all the efforts I can. That's all the bills I had,...