In re Hygrade Envelope Corp., No. 375

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtLUMBARD, , and MOORE and FRIENDLY, Circuit
Citation366 F.2d 584
PartiesIn the Matter of HYGRADE ENVELOPE CORP., Bankrupt. Samuel S. BARANOW, Trustee in Bankruptcy of Hygrade Envelope Corp., Appellant, v. GIBRALTAR FACTORS CORP., Respondent.
Docket NumberNo. 375,Docket 30319.
Decision Date13 July 1966

366 F.2d 584 (1966)

In the Matter of HYGRADE ENVELOPE CORP., Bankrupt.
Samuel S. BARANOW, Trustee in Bankruptcy of Hygrade Envelope Corp., Appellant,
v.
GIBRALTAR FACTORS CORP., Respondent.

No. 375, Docket 30319.

United States Court of Appeals Second Circuit.

Argued May 5, 1966.

Decided July 13, 1966.

Modified on Rehearing September 28, 1966.


366 F.2d 585

Abraham L. Popper, New York City (Popper & Popper, New York City), for appellant.

Louis P. Rosenberg, Brooklyn, N. Y., for respondent.

Before LUMBARD, Chief Judge, and MOORE and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge:

Hygrade Envelope Corp. was adjudicated a bankrupt in the District Court for the Eastern District of New York pursuant to an involuntary petition filed January 24, 1963. For many years it had been financed by Gibraltar Factors Corp. under an arrangement by which Gibraltar took as security assignments of its accounts receivable; in November, 1962, Hygrade owed Gibraltar more than $300,000. The key man in Hygrade was its vice president and general manager, Jack Wohl. Gibraltar required Hygrade to take out and assign to it insurance on his life, originally $100,000 but, because one of the policies was a reducing one, only $72,000 in the autumn of 1962. On

366 F.2d 586
November 26, 1962, for reasons recounted below, Gibraltar demanded additional insurance and was assigned another $100,000 term policy on Wohl's life. Although this had a surrender value of only $393, it rapidly matured in consequence of his sudden death on December 5

When Gibraltar moved in the bankruptcy court for an order permitting it to take possession of certain machinery of Hygrade on which it held a chattel mortgage, the trustee counterclaimed that the transfer of the insurance policy was a voidable preference. The referee found that the trustee had failed to establish that at the time Gibraltar had reasonable cause to believe Hygrade was insolvent as required by § 60b. Accordingly he dismissed the counterclaim; on a petition to review by the trustee, the district court affirmed in a short memorandum.

Because of Wohl's death the trustee was forced to develop his case almost entirely out of the mouth of Gibraltar, specifically Herbert Hurwitz, a vice president who had much to do with the Hygrade account. Hurwitz' testimony, first given at examinations under § 21a and elaborated at trial, disclosed that Gibraltar's practice was to verify the accounts receivable assigned by Hygrade by making monthly spot-checks with selected purchasers. When, a few days before November 26, it sought to make such a verification with Avrick & Co., one of the largest accounts,1 the report "came back indicating a discrepancy." Gibraltar immediately summoned Wohl to explain this. He admitted that the assigned Avrick accounts represented goods it had not yet ordered, and also that there were other accounts he had similarly "pre-billed" so that "the amounts shown as due and owing on our books were not in fact due and owing."2 Hurwitz discussed the situation with his superior who reviewed the file. They decided not to make further inquiry because, as Hurtwitz testified, "For us to have called all his accounts at that time would have been to disrupt his entire business and cause a catastrophe as far as he and we were concerned." Finding that the insurance on Wohl's life, which originally had covered the full line of credit, had become a relatively small fraction of the amount owed, they resolved that Gibraltar must get more insurance. With the $100,000 policy assigned, Gibraltar then made further advances, the first, for $12,500, being secured by a chattel mortgage of $15,000 on equipment, and others, aggregating almost $40,000, being secured by the assignment of accounts receivable represented by invoices of actual shipments.

A preference is clearly voidable under § 60b "when such a state of facts is brought to the creditor's notice, respecting the affairs and pecuniary condition of the debtor, as would lead a prudent business person to the conclusion that the debtor is insolvent," 3 Collier, Bankruptcy ¶ 60.53, at 1057-58 (14th ed. 1964). The statute moreover has been properly read as going somewhat beyond this to preclude a creditor from deliberately closing his eyes so as to remain in ignorance of the debtor's condition; "where circumstances are such as would incite a man of ordinary prudence to make inquiry, the creditor is chargeable with notice of all facts

366 F.2d 587
which a reasonable diligent inquiry would have disclosed" and "an inquiry of the debtor alone is generally insufficient." Id. at 1063-65. We have approved this principle in many cases. See, e. g., Levy v. Weinberg & Holman, Inc., 20 F.2d 565, 567 (2 Cir. 1927); Pender v. Chatham Phenix Nat. Bank & Trust Co., 58 F.2d 968, 970 (2 Cir. 1932); Margolis v. Gem Factors Corp., 201 F.2d 803, 805 (2 Cir. 1953); Robinson v. Commercial Bank of North America, 320 F.2d 106, 107-108 (2 Cir. 1963). Knowledge that a debtor securing advances by assignment of accounts receivable had deliberately written up one of its largest accounts to include goods the customer was merely expected to order would beyond doubt incite a man of ordinary prudence to make inquiry. See Margolis v. Gem Factors Corp., supra, 201 F.2d at 805. There could scarcely be a clearer case for considering inquiry of the debtor to be insufficient than where it acknowledged the falsification discovered by the creditor was not the only instance and where this was found in one of the largest accounts. The man of ordinary prudence would at least have proceeded to verify the six big accounts, see fn. 1, and very likely would have insisted on a check of all customers of any significance. What inquiry would have revealed is indicated by Hurwitz' testimony that after Hygrade closed in December and outstanding accounts were collected, there were still some $155,886 in supposed receivables from apparently solvent purchasers on which Gibraltar expected to realize only $10,000. Once such extensive "machinations" — using Hurwitz' expression — had been discovered,...

To continue reading

Request your trial
55 practice notes
  • United States v. JB Williams Company, Inc., No. 236
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • May 2, 1974
    ...common approach seeking to dichotomize all decisions as either `law' or `fact' is too simplistic." See also In re Hygrade Envelope Corp., 366 F.2d 584, 588 (2 Cir. 1966). The different stance of the two issues here stems in part from the fact that with respect to the commercials there is no......
  • U.S. v. McCombs, Nos. 478
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • July 13, 1994
    ...our review on this appeal is " '[a]n area over which "law" and "fact" have battled for over a century.' " In re Hygrade Envelope Corp., 366 F.2d 584, 588 (2d Cir.1966) (alteration in original) (quoting Ellerman Lines, Ltd. v. THE PRESIDENT HARDING, 288 F.2d 288, 292 (2d In any event, our ca......
  • Securities and Exchange Com'n v. Texas Gulf Sulphur Co., No. 296
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • August 13, 1968
    ...erroneous" rule would apply, but to his understanding of the legal standard applicable to them. See Baranow v. Gibralter Factors Corp., 366 F.2d 584, 587-589 (2 Cir. 1966), and cases cited in footnote 11 supra. Our survey of the facts found below conclusively establishes that knowledge of t......
  • In re Anjopa Paper & Board Manufacturing Co., No. 93218.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • April 6, 1967
    ...of factual inferences from circumstantial evidence are protected by the `unless clearly erroneous rule.'" In Re Hygrade Envelope Co., 366 F.2d 584, 588 (2d Cir. 1966). Where credibility is not involved and the facts are undisputed it has been said that the Court "may more freely draw differ......
  • Request a trial to view additional results
55 cases
  • United States v. JB Williams Company, Inc., No. 236
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • May 2, 1974
    ...common approach seeking to dichotomize all decisions as either `law' or `fact' is too simplistic." See also In re Hygrade Envelope Corp., 366 F.2d 584, 588 (2 Cir. 1966). The different stance of the two issues here stems in part from the fact that with respect to the commercials there is no......
  • U.S. v. McCombs, Nos. 478
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • July 13, 1994
    ...our review on this appeal is " '[a]n area over which "law" and "fact" have battled for over a century.' " In re Hygrade Envelope Corp., 366 F.2d 584, 588 (2d Cir.1966) (alteration in original) (quoting Ellerman Lines, Ltd. v. THE PRESIDENT HARDING, 288 F.2d 288, 292 (2d In any event, our ca......
  • Securities and Exchange Com'n v. Texas Gulf Sulphur Co., No. 296
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • August 13, 1968
    ...erroneous" rule would apply, but to his understanding of the legal standard applicable to them. See Baranow v. Gibralter Factors Corp., 366 F.2d 584, 587-589 (2 Cir. 1966), and cases cited in footnote 11 supra. Our survey of the facts found below conclusively establishes that knowledge of t......
  • In re Anjopa Paper & Board Manufacturing Co., No. 93218.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • April 6, 1967
    ...of factual inferences from circumstantial evidence are protected by the `unless clearly erroneous rule.'" In Re Hygrade Envelope Co., 366 F.2d 584, 588 (2d Cir. 1966). Where credibility is not involved and the facts are undisputed it has been said that the Court "may more freely draw differ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT