In re Gross Mfg. & Importing Co.

• Decision Date: 16 July 1971
• Docket Number: No. B.803-68.,B.803-68.
• Citation: 328 F. Supp. 905
• Parties: In the Matter of GROSS MFG. & IMPORTING CO., Inc., a corporation of the State of New Jersey, Bankrupt.
• Court: U.S. District Court — District of New Jersey

328 F. Supp. 905

In the Matter of GROSS MFG. & IMPORTING CO., Inc., a corporation of the State of New Jersey, Bankrupt.

No. B.803-68.

United States District Court, D. New Jersey.

July 16, 1971.

Allan L. Tumarkin, Newark, N. J., for trustee and pro se.

Arthur H. Miller, New Brunswick, N. J., for claimant.

MEMORANDUM

AUGELLI, Chief Judge:

This matter is before the Court on petition of the Trustee in Bankruptcy for review of an order of the Referee, filed on August 4, 1970, which allowed the proof of claim of Estey Musical Instrument Corporation, the major creditor (hereinafter Estey), for $50,473.28 and dismissed the objections of the bankrupt, Gross Mfg. & Importing Co., Inc. (hereinafter the bankrupt or Gross), thereto as well as dismissing the Trustee's counterclaim for $26,049.93, based on certain inventory of the bankrupt which was alleged to have been fraudulently or preferentially returned to Estey. A hearing to review the Referee's order was held before this Court. Decision was reserved to permit the Court to consider certain evidence in the form of invoices which were before the Referee but inadvertently not offered in evidence.

The briefs, supplemental briefs, transcripts and exhibits have been carefully examined in light of General Order 47, which provides that:

Unless otherwise directed in the order of reference the report of a referee or of a special master shall set forth his findings of fact and conclusions of law, and the judge shall accept his findings of fact unless clearly erroneous. The judge after hearing may adopt the report or may modify it or may reject it in whole or in part or may receive further evidence or may recommit it with instructions.

This Order was considered in In re Steiker, 380 F.2d 765, 767-768 (3 Cir. 1967), wherein it was observed:

We recently noted in In re Rubin, 378 F.2d 104 (C.A. 3, 1967), that the mandate of General Order 47 precludes this court as well as the district court from not accepting the referee's basic findings of fact. See In re Wolf, 165 F.2d 707, 709-710 (C.A. 3, 1948). Though ultimate findings are subject to appellate scrutiny free of the "clearly erroneous" rule, as was noted above, those findings should be undisturbed where they are supported by the underlying factual determinations which cumulatively satisfy the applicable standard of proof.

Cf. In re Pioch, 235 F.2d 903 (3 Cir. 1956), wherein it was held that there was insufficient proof for the Referee's decision on the ultimate finding. See also 2 Collier, Bankruptcy, § 39.28 (14th Ed. 1970). Of course, the Court is not restricted by General Order 47 in relating the Referee's findings of fact to the ultimate conclusions of law.

The bankrupt was "* * * in the business of wholesale dealing in musical instrument supplies and related products * * * for approximately forty-six years." It filed a Petition for an Arrangement under Chapter XI on May 28, 1968. However, Gross was adjudicated a bankrupt on December 3, 1968, because of "* * * having failed to proceed with the plan." During its long existence Gross dealt as a distributor for, among others, a sequence of supplier entities which used variations of the name "Estey", but only the "Estey" corporation which commenced dealings with the bankrupt after mid-1967 is the creditor herein involved. Any testimony about a course of conduct between the bankrupt and any other "Estey" must be scrutinized in light of which entity was conducting business at that time.^* The creditor herein was formed on July 14, 1967. At that point no debts were owed to the new Estey. Its dealings with Gross were subsequently conducted in light of the prior trade difficulties with the predecessor Estey companies and Gross's deteriorating reputation. Just prior to the time that Messrs. Green and Knazick formed the new Estey, Green had heard from Mr. Wolf, then secretary-treasurer and Vice-president of the bankrupt, that "* * * the condition of Gross Manufacturing was very bad."

On August 1, 1967 (within the first two weeks of business between Estey and the bankrupt), Mr. Wolf acting as secretary-treasurer and executive vice-president of the bankrupt, and Mr. Knazick, as executive vice-president of Estey, executed a consignment agreement for the protection of Estey. It was stipulated that no financing statement was executed or filed pursuant to the Uniform Commercial Code. Estey also required personal notes from Mr. Wolf upon delivery of merchandise to the bankrupt and billed Gross for the merchandise as well. Sixty-seven duplicate invoice forms were submitted to this Court and were marked in evidence without objection as they had been used but not marked during the Referee's hearing. Those invoices as well as notes signed by Mr. Wolf and an accounts receivable ledger indicate the nature of the course of dealing between the bankrupt and Estey, which was pursued in addition to the consignment agreement, and give the appearance of creating a debtor-creditor relationship, as well as that of consignor-consignee. The terms of the consignment agreement itself bear upon the ostensible method of dealing. The body of the consignment agreement is as follows:

All merchandise which we shall deliver to you is delivered exclusively on consignment and subject to sale by you to others. Title to all such merchandise shall remain with us until its resale by you and any unsold merchandise in factory original sealed cartons may be returned to us at any time. Merchandise returned not in original sealed cartons shall be adjusted for service, handling, and packaging before credit is issued.

In the event of the resale by you, as our distributor, to retail establishments, you shall remit payment of any such items to us not later than thirty (30) days after such sale.

For the purpose of our own bookkeeping, we intend to invoice you for any deliveries we make to you at our agreed prices. Payment of such invoices, however, are subject to the resale of the merchandise so delivered to you, in accordance with the terms of this letter agreement.

Between August 1, 1967, and sometime in April, 1968, business was conducted between the two parties as indicated by the invoices. In April 1968 (the exact date is unclear), Gross returned to Estey merchandise with an invoice value of $26,049.93 either for repairs or for return under the consignment agreement. The Petition for Arrangement was filed on May 28, 1968. Estey issued a credit memorandum for the returned goods dated June 3, 1968. The delay in issuing the memorandum was alleged to be due to the fact that the goods had to be inspected so that deductions could be made for return freight, repair, handling, and repackaging under the terms of the consignment agreement. (An exhibit in evidence reflects a $6,289.89 charge including estimated repair costs.)

The Referee made the following findings of fact:

1. On or about July 17, 1967 Gross Manufacturing & Importing Co. Inc. (Gross) commenced buying musical instruments and supplies from Estey Musical Instrument Corporation (Estey). The sales during July were on open account, and were all paid in the regular course of business.

2. The balance-sheet position of Gross at this time left much to be desired. Estey was unwilling to deliver on open account the volume Gross required. However, Estey was willing to send on consignment the volume of merchandise Gross wanted.

3. On or about August 1, 1967 Gross and Estey entered into a written consignment agreement. Barry Wolf, in charge of the financial affairs of Gross, had full authority to represent Gross in this transaction.

4. Thereafter all shipments by Estey to Gross were made under the consignment agreement, with title remaining in Estey until resale of the merchandise by Gross to others.

5. The parties did not execute a financing statement for filing under the provisions of the Uniform Commercial Code.

6. In view of the inadequate financial condition of Gross, Estey also required negotiable promissory notes, signed by Gross, and by Barry Wolf personally, in connection with invoices for all shipments made after August 1, 1967.

7. The financial condition of Gross worsened. Commencing in January, 1968 many notes were dishonored when presented for payment. During all of 1968 the liabilities of Gross exceeded its assets.

8. In the latter half of April, 1968 Gross, on the initiative of Barry Wolf, returned to Estey most of the merchandise which previously had been delivered on consignment and had not been sold to customers. The merchandise so returned had an invoice value of $26,049.93.

9. On May 28, 1968 Gross filed its petition for an arrangement under Chapter XI of the Bankruptcy Act, and subsequently was adjudicated bankrupt.

10. On June 3, 1968 Estey issued a credit memorandum to Gross for $19,760.04. This was arrived at by deducting the following three items from the $26,049.93 invoice value of the returned merchandise: freight — $795.41, cartons — $494.48, and repairs — estimated at $5,000.00.

11. Subsequently Estey realized approximately $20,000.00 on resale of the merchandise returned by Gross.

Based on the foregoing findings of fact, the Referee made the following conclusions of law:

The consignment agreement of August 1, 1967 is valid. Title to merchandise returned by Gross to Estey in April, 1968 had always remained in Estey and had never been transferred to Gross. Therefore, since the return did not involve assets of Gross, there was no preference or fraudulent transfer.

Giving full credence to the testimony of Saul Knazick, I find that the charges for freight, cartons and repairs were reasonable even though, in the circumstances, the figure for repairs had to be an estimate.

Even if the Referee's findings of fact are not "clearly erroneous" it still remains for the Court to determine the soundness of the legal conclusions reached.

The legal effect of the consignment agreement must be viewed in light of the change in the law brought about by §...