In re H. Magen Co.

• Decision Date: 14 December 1925
• Docket Number: No. 34.,34.
• Parties: In re H. MAGEN CO., Inc. Petition of MAGEN.
• Court: U.S. Court of Appeals — Second Circuit

10 F.2d 91 (1925)

In re H. MAGEN CO., Inc.

Petition of MAGEN.

No. 34.

Circuit Court of Appeals, Second Circuit.

December 14, 1925.

Samuel Evans Maires and Thomas W. Maires, both of Brooklyn (Harrington Putnam, of New York City, of counsel), for petitioner.

Shaine & Weinrib, of New York City (Maurice L. Shaine, of New York City, of counsel), for trustee-respondent.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

ROGERS, Circuit Judge (after stating the facts as above).

The present bankrupt corporation appears to have been organized in May, 1920. From that time to February 24, 1924, it was engaged in manufacturing braids, laces and narrow fabrics. During the whole of the period from the date of its organization to February 25, 1924, the date of the bankruptcy, the petitioner was a stockholder in the corporation, was the treasurer and sole manager in control of its business.

The period involved in the turn-over order begins November 1, 1923, and ends February 25, 1924, when the petition in involuntary bankruptcy was filed. The respondent charged petitioner with the bankrupt's purchases of yarn as shown by its books during this period, and credited him with all sales according to the books of the corporation, and also with all merchandise on hand at the time of the bankruptcy.

The testimony adduced before the referee on the application for the turn-over order shows that, without taking into consideration any profits that may have been earned or losses that may have been sustained on such sales, there was an actual deficiency during this period of less than four months, according to the bankrupt's books, of more than $91,798.15. The net purchase of yarn is shown to have been $223,213.02. The sales of yarn were $62,237.85. The sales of manufactured products were $24,184.51. The inventory of merchandise on hand was $131,414.87. This showed the total credits of $131,414.87, and deducting this sum from the net purchases of yarn, above stated as amounting to $223,213.02, left a deficiency unaccounted for of $91,798.15. And it is to be observed that this result takes no account of the merchandise on hand at the beginning of the period in question. And it is also to be noted that the petitioner did not question the accuracy of the bankrupt's books. On his cross-examination he testified: "I know the books were right."

The management and conduct of the business was in his hands alone. No purchases were placed upon the bankrupt's books unless he personally initiated the bills therefor, and no bills for sales were issued and duplicates thereof retained as part of the records of the bankrupt unless he placed his O. K. thereon. All purchases of yarn were made by him. All sales were made under his supervision, and the sales of yarn were all made by him personally. He also made the inventory of the merchandise on hand and at dyers at the time of the bankruptcy.

It is interesting that from January 1, 1921, to November 1, 1923, the bankrupt's purchases were about $100,000, or less than one-half of what they were during the four months prior to bankruptcy. In that period, which was really less than four months, the purchases were at least 20 times more than they were during any similar period of the bankrupt's existence, and, as the referee has found, they "were out of all proportion to the needs of the bankrupt's business." The findings are amply justified, for it appears that the sales of manufactured products in this four-months period were only $24,184.51. The bankrupt paid out for labor in the manufacture of the goods in this same period the sum of $7,715.14, and it also appears that prior to this same period the bankrupt had not sold any yarn, but whatever yarn it used in its business. But during the period under consideration the sales of yarn which this manufacturing corporation made, according to its books, were five times more than the amount of yarn it used in the manufacture of the products it sold.

The sales of yarn may be classified as itemized and unitemized. The itemized sales are those where the grade, poundage and price per pound are disclosed. The unitemized sales are those which do not give the particulars above mentioned, but merely show that "a lot" was sold. And the unitemized sales are subdivided into two parts: One comprises those where the name of the purchaser is disclosed and is known, and the other where the purchaser's name purports to be given, but of whose whereabouts the petitioner, Magen, testified that he knows nothing.

The trustee charges that some of these unitemized sales were fictitious. These "sales" are as follows:

                  Jacob Jeremiah Kasselmanheim ....... $ 5,155.97
                  Lapedis Lagasowitz .................  13,875.30
                  H. Lapser ..........................   4,453.41
                                                       __________
                     Total ........................... $23,484.68
                

The referee found that Magen had not truthfully explained or accounted for the merchandise alleged to have been sold to these three men, and that he had not accounted for other merchandise. The conclusion of the referee was that the bankrupt was not a victim of imperfect bookkeeping, but that he planned the entries in his books and records and the alleged sales so as to enable him to conceal his property, and that the amount of his property which he concealed amounted to $32,779.74. He accordingly entered the order directing him within five days after the service of the order to turn over and deliver to the trustee in bankruptcy the sum of $32,779.74 in cash, or, at his option, silk and cotton yarn of that value; and this order was confirmed by the District Judge, who was satisfied that "a bold and outrageous fraud" had been perpetrated.

If a bankrupt is shown to have purchased large amounts of property within a short period prior to his bankruptcy, and has only a nominal amount in his possession at the time of his bankruptcy, and is unable or unwilling to explain what he has done with it, it is not unreasonable to infer that he has it in concealment. As proof of a fact the law permits inferences from other facts, and there arises a presumption of fact, which is a reasonable and natural inference of the existence of one fact from the proof of some other fact established by direct evidence.

The law relating to turn-over orders is pretty well established in this circuit. In 1900 this court decided In re Schlesinger, 102 F. 117, 42 C. C. A. 207. In that case the referee found no definite property or money in the possession of the bankrupt. He therefore refused to enter a turn-over order. The District Court reversed his decision, inasmuch as it appeared that upwards of $10,000 had been unaccounted for by the bankrupt. It therefore held that it was still in his possession or control. But to avoid any question of doubt the court fixed the amount to be turned over at $6,500. The case was brought into this court upon a petition to review and the order of the District Court was affirmed. Judge Shipman, writing for the court, said:

"If we had power to review the correctness of the finding that the testimony was such as to satisfy one beyond a reasonable doubt that the money was in the possession or under the control of the bankrupt, and mindful of the importance of observing caution in the investigation, we should have no hesitation in affirming the finding of fact. It is not denied that clause 13 of section 2 of the Bankrupt Act Comp. St. § 9586 authorizes the court of bankruptcy to `enforce obedience by bankrupts, officers, and other persons to all lawful orders, by fine or imprisonment, or fine and imprisonment,' and that disobedience of a lawful order of a referee is punishable by the judge as for a contempt committed before the court of bankruptcy; but it is contended that disobedience of an order to the bankrupt to pay or deliver a sum of money in his possession to his trustee cannot be punished by proceedings in contempt, because the order is for the payment of a debt, and imprisonment for debt has been abolished in the state of New York, and by section 990 of the Revised Statutes Comp. St. § 1636 no person can be imprisoned for debt by process issuing from the courts of the United States in a state where by its laws imprisonment for debt has been abolished."

The court disposed of the objection arising from the fact that imprisonment for debt had been abolished by declaring that the order was not for the payment of a debt, but for the delivery by the bankrupt of the assets of his estate to his trustee in bankruptcy. "He was not indebted to the trustee. The money was a part of his assets and estate, which had by operation of law become vested in the trustee."

In 1905 this court decided In re Levy, 142 F. 442, 73 C. C. A. 558. The question came up on petition to review a turnover order. At the time of the filing of the involuntary petition in bankruptcy it appeared from the books of the bankrupts that there should have been on hand at the time the petition was filed a balance in goods or cash of $18,921.87. The value of the goods on hand amounted to only $6,000, and the value of goods unaccounted for was $12,921.87. The referee declined to order this amount turned over to the trustee, holding that the showing on the books at most raised an inference that the property was in the hands of the bankrupts. The District Judge refused to confirm the order and said:

"The...