In re McNay

• Decision Date: 16 February 1945
• Docket Number: No. 5940.,5940.
• Citation: 58 F. Supp. 960
• Court: U.S. District Court — Southern District of California
• Parties: In re McNAY.

58 F. Supp. 960

In re McNAY.

No. 5940.

District Court, S. D. California, N. D.

February 16, 1945.

Grant H. Wren, of San Francisco, Cal., and Philip M. Wagy, of Bakersfield, Cal., for trustee.

Harvey, Johnston & Baker and C. W. Johnston, all of Bakersfield, Cal., for bankrupt.

YANKWICH, District Judge.

Orval Walter McNay filed his voluntary petition in bankruptcy on April 20, 1942. The petition showed that he had been engaged in the business of "roofing, insulation and interior tile contractor" in Bakersfield, Kern County, California, for seven years. His schedules showed liabilities totaling $18,004.94, and assets in the same amount, of which, however, $6,929.95 was property claimed as exempt. Among the assets he listed a stock of merchandise of the value of $4,000, and accounts receivable, as to which it was stated: "The estimated value of the amounts due is two thousand dollars."

As to his books and papers, the schedules stated:

"Books. All my books and business records are at 20 Kentucky Street, Bakersfield, California, in building locked up by the Sheriff of Kern County.

"Deeds. Deeds are in my possession, excepting those in building at 20 Kentucky Street, Bakersfield, California.

"Papers. Papers are at 20 Kentucky Street, Bakersfield, California, where my books are."

The items just reproduced were culled from the schedules because of their significance to the question involved here.

After due notice, under Section 58 of the Bankruptcy Act of 1938, 11 U.S.C.A. § 94, a hearing was had on October 7 and 8, 1942. No creditors appeared in opposition to the discharge. But the trustee filed objections to the discharge. The specifications were grounded on Subdivision c(2) and c(7) of Section 14 of the Bankruptcy Act of 1938, which read:

"c. * * * (2) * * * failed to keep or preserve books of account or records, from which his financial condition and business transactions might be ascertained, unless the court deems such acts or failure to have been justified under all the circumstances of the case; * * *." 11 U.S.C.A. § 32, sub. c(2).

"c. * * * (7) has failed to explain satisfactorily any losses of assets or deficiency of assets to meet his liabilities: * * *." 11 U.S.C.A. § 32, sub. c(7).

On May 15, 1944, the Referee made his findings negativing the charges of the trustee and discharged the bankrupt. The trustee has instituted a review of this order.

Our consideration of the petition is governed by certain principles which are not the subject of dispute between counsel for the trustee and the bankrupt. One of these is that the findings of a referee on conflicting evidence will not be disturbed. See Weisstein Bros. & Survol v. Laugharn, 9 Cir., 1936, 84 F.2d 419; and my opinion in Re Alberti, D.C.Cal., 1941, 41 F.Supp. 380. This is but an application to bankruptcy of the general rule that the findings of a trier of facts, be he commissioner, master, referee, or judge, will be sustained on appeal or review, unless they are clearly erroneous. See Federal Rules of Civil Procedure, rule 52, 28 U.S.C.A. following section 723c; In re Bendix, 7 Cir., 1942, 127 F.2d 759.

Our own Circuit Court of Appeals in applying this principle to discharges of bankruptcy, has declared repeatedly that the granting or denial of such discharge is in the sound discretion of the referee and will not be disturbed except for gross abuse. See Baash-Ross Tool Co. v. Stephens, 9 Cir., 1934, 73 F.2d 902; Hultman v. Tevis, 9 Cir., 1936, 82 F.2d 940; Rosenberg v. Bloom, 9 Cir., 1939, 99 F.2d 249.

This is also the rule in other circuits. See Texas National Bank of Beaumont v. Edson, 5 Cir., 1939, 100 F.2d 789; Baily v. Ballance, 4 Cir., 1941, 123 F.2d 352; In re Marx, 7 Cir., 1942, 125 F.2d 335; In re Bendix, 7 Cir., 1942, 127 F.2d 759.

We proceed to gauge the facts here by these principles.

The first specification charges a failure to keep books and records reflecting truly the bankrupt's financial condition. Bankruptcy Act of 1938, Sec. 14, sub. c(2), 11 U.S.C.A. § 32, sub. c(2). At the outset, it should be noted, as appears clearly from a reading of the stenographic transcript of the proceedings before the referee, that the accountant on whom the trustee relies for proof that the bankrupt did not keep adequate books and records, did not attach a separate meaning to the word "records". Throughout, he complained of inadequacy in the formal books of account. He complained, for instance, of the absence in the ledger, cash books and check records of entries after January 10, 1942. Then he added rather dogmatically: "The ledger was not complete, the cash book and the check records were not entirely complete; the entries had not been made there for cash entries after January 10; It was then necessary in order to complete those records was to take these pink slips which are carbon copies of receipts, or receipts, then go for a verification to support these documents that they did actually represent receipts, go to the bank, trace them into the bank, and the same applied to the sales in order to complete the accounts and show that the accounts were supported and the records in order to complete the records for my own work, necessary to follow it through other information unobtainable from the ledger or the cash book or both, so that in order that I would be absolutely correct as far as cash entries were concerned, I had to go to other places for that record than the cash book and the ledgers." Emphasis added.

Counsel for the trustee evidently labors under the same misapprehension. Nowhere in his brief written in support of the petition for review does he attribute to the word "records" a meaning other than "books". These words have been in the bankruptcy statute for so many years that courts have had ample opportunity to rule that records may be written data other than formal accounting books, such as memoranda of sales, receipts, checks, bank deposits and the like. The cases which point out this distinction go further and hold that in determining what books and records are, there is no requirement of conformity to a perfectionism so dear to public accountants, that each case must be judged separately and that businesses which do not require complex records may satisfy the requirement by the crudest forms of books and records. See International Shoe Co. v. Lewine, 5 Cir., 1934, 68 F.2d 517; Anderson v. Haddonfield National Bank, 3 Cir., 1938, 94 F.2d 721; In re Marx, 7 Cir., 1942, 125 F.2d 335; Klein v. Morris Plan Industrial Bank of New York, 2 Cir., 1942, 132 F.2d 809, 144 A.L.R. 1278; In re Bendix, 7 Cir., 1942, 127 F.2d 759. As said in Hedges v. Bushnell, 10 Cir., 1939, 106 F.2d 979, 982: "Here the bankrupt kept and preserved some records. True, they consisted of bank accounts, invoices of gasoline purchased from the refinery, sales slips, cancelled checks and check stubs. But the statute does not exact or concern itself with any particular form of books or records. An impeccable system of bookkeeping which would meet with the approval of a skilled accountant or records so complete that they would satisfy an expert in business is not required as a prerequisite to discharge. Karger v. Sandler, supra 2 Cir., 62 F.2d 80; In re Underhill, supra 2 Cir., 82 F.2d 258. Records need not be so complete that they state in detail all or substantially all of the transactions taking place in the course of the business. It is enough if they sufficiently identify the transactions that intelligent inquiry can be made respecting them." Emphasis added.

The bankrupt was in the roofing and tile contracting business in Bakersfield for seven years, six years at one location, and the last year at the location given in his petition. The charge of failure to keep books does not extend to the entire business career of the bankrupt, or even a substantial portion of it. It covers a short period between December 31, 1941, and January 23, 1942. As of December 31, 1941, the bankrupt had not only books showing accurate entries, but the very accountant who, in court, testified against him, had prepared a complete financial statement from those books and records. The actual deficiency is alleged to date from January 10, 1942, and to terminate on what, for the bankrupt, was a fatal day, when a levy under attachment was made on his business by the Sheriff of Kern County. The Sheriff took possession of the stock in trade, the books and everything that was in the bankrupt's place of business. Thereafter the defendant collected some moneys, with which he paid the labor to complete certain outstanding contracts. The record of such payment is contained in the only book which was not in the store when the attachment was levied, —the pay roll book. The bankrupt's bank account was attached. Whereupon the bank exercised its lien and applied the whole of the bank account, amounting to $2,522.50, to the bankrupt's indebtedness. To secure money to cover outstanding checks, the bankrupt assigned to the bank certain accounts receivable, in the sum of $5221.85. These accounts were duly entered on the books. On the basis of the assignment, the bank loaned him a thousand dollars which he used to complete certain jobs after the attachment. This loan and the accounts assigned were properly listed by the bankrupt in his schedules as secured claims.

The trustee complains that the assignment was not entered on any book, and that no record was made on the books of some accounts collected. The fact, however, is that the bank's record showed the assignment and the bank checks which they honored showed the expenditures made. As the bankrupt's place of business had been attached, these bank checks which, ordinarily, would be picked up periodically by him or by his bookkeeper, remained with the bank. After adjudication, the assignment, the collections, the expenditures were all truthfully reported by the bankrupt. The trustee seems to think that if an expert accountant has to go to a...