In re Mid-Center Redevelopment Corp.

• Decision Date: 07 October 1974
• Docket Number: No. B-1115-70.,B-1115-70.
• Citation: 383 F. Supp. 954
• Parties: In the Matter of MID-CENTER REDEVELOPMENT CORP. et al., Debtors.
• Court: U.S. District Court — District of New Jersey

383 F. Supp. 954

In the Matter of MID-CENTER REDEVELOPMENT CORP. et al., Debtors.

No. B-1115-70.

United States District Court, D. New Jersey.

October 4, 1974.

As Amended October 7, 1974.

Bracken & Craig, by John J. Bracken, Newark, N.J., for petitioners.

Ravin & Ravin by David N. Ravin, Newark, N.J., for debtors.

Kleinberg, Moroney, Masterson & Schacter by James E. Masterson, Newark, N.J., for receiver.

OPINION

LACEY, District Judge:

Before this court for a second time is a petition for review of an order in bankruptcy, entered in a Chapter XI proceeding, rejecting petitioners' claims to the stock of Gregory Park Section III (GP 3), an apartment dwelling and a corporation wholly owned by the debtors herein.^* These claims arose from the debtors' conceded failure to honor their agreement to pledge said stock with petitioners under a blank assignment and with the power to sell on default of the underlying loan secured by this stock.¹ This proceeding is but one of many pending before this court involving these debtors, resulting from the financial difficulties of Arthur H. Padula and his several closely held real estate enterprises.²

There follows, in opinion form, this court's findings of fact consistent with its role on this review, and its conclusions of law, under Fed.R.Civ.P. 52.

THE PARTIES

Petitioners are seven individuals (hereinafter referred to sometimes as the Birnbaums) who, as a group, loaned money to Arthur H. Padula Construction Corporation (Padula Construction). Padula Construction and Mid-Center Redevelopment Corporation (Mid-Center) are sister corporations, the stock of which, subject to qualifying shares, is owned by Arthur H. Padula (Padula), and both, along with Padula, are the debtors involved in the within Chapter XI proceedings. Because of Padula's complete and undiluted control of Mid-Center and Padula Construction, this opinion will use the terms "debtors" and "Padula" interchangeably.

PRIOR PROCEEDINGS

On July 23, 1973 the Bankruptcy Judge, upon the application of the Chapter XI Receiver, had declared the debtors' pledge of GP 3 stock to the Birnbaums a nullity as to the Receiver. Thereafter, upon review in this court, additional facts had been developed which suggested that the debtors had not been completely candid with the Receiver or the bankruptcy court. Thus, for example, the Bankruptcy Judge had been first led to believe that on December 10, 1966 the authorized and outstanding stock of GP 3 consisted exclusively of 1000 shares issued to and owned by Mid-Center. In fact, since November 1966, unknown to the Birnbaums, and prior to their loan to Padula Construction, there were outstanding simultaneously GP 3 stock certificates (Nos. 5 and 7) representing 1000 shares issued to Mid-Center, and another GP 3 certificate (No. 8), also for 1000 shares, issued to Arthur H. Padula. By an unreported opinion dated January 3, 1974, and an order entered thereon, dated February 22, 1974, this court remanded the matter to the Bankruptcy Judge "for further consideration in light of the additional facts revealed, and for the taking of such additional testimony as he may deem appropriate". Following remand, the Bankruptcy Judge held an additional hearing on March 26, 1974; and in an opinion dated June 19, 1974 rejected petitioners' claim to the GP 3 stock and reaffirmed his previous order of July 23, 1973, voiding the controverted pledge. The petitioners then filed their petition for review on June 24, 1974, and on July 1, 1974 the Bankruptcy Judge filed a Certificate of Review, setting forth as follows the issues to be determined:

1. Did the Bankruptcy Court commit error when it ruled that the pledge of stock made by the debtor to Birnbaum et als., was an unperfected security interest under N.J.S.A. 12A:9-301 et seq.?

2. Does the Judgment of the Superior Court of New Jersey filed on January 2, 1971, approximately 3 months and 2 weeks after the petition under Chapter XI was filed on September 18, 1970, avoid the four (4) month preference provisions of Section 60 of the Bankruptcy Act.

3. Did the Bankruptcy Court commit error in denying the Birnbaum, et als. application to declare a constructive trust in their favor in the 100% shares of stock issued by Gregory Park Section III, Inc.?

In this court, on this review, petitioners assert only that the Bankruptcy Judge erred as to issue No. 3, and abandon their claims related to issues Nos. 1 and 2.

SCOPE OF REVIEW IN THIS PROCEEDING.

Upon this review, as stated, petitioners advance only their constructive trust claim. In so doing they challenge not only the Bankruptcy Judge's Conclusions of Law, but, as well, his Findings of Fact. To ascertain the appropriate standard of review of those factual determinations, it is to be noted initially that, on this review, jurisdiction is conferred upon this court by § 2a(10) of the Bankruptcy Act, 11 U.S.C. § 11a(10), which empowers the court to

consider records, findings, and orders certified to the judges by referees, and confirm, modify, or reverse such findings and orders, or return such records with instructions for further proceedings . . . .

Implementing this statutory provision, Bankruptcy Rule 810 defines the allowable scope of review of a Bankruptcy Judge's findings of fact as follows:

Upon an appeal the district court may affirm, modify, or reverse a referee's judgment or order, or remand with instructions for further proceedings. The court shall accept the referee's findings of fact unless they are clearly erroneous, and shall give due regard to the opportunity of the referee to judge of the credibility of the witnesses.³

In enunciating the "clearly erroneous" rule, Rule 810 does not distinguish between operative facts and ultimate findings of fact, based upon inferences from operative facts. Accordingly, of continuing precedential vitality is the holding in In re Pioch, 235 F.2d 903, 905 (3d Cir. 1956), that a finding of an intent to hinder, delay or defraud creditors is an ultimate finding of fact — one comprised of legal inferences from other facts — and thus subject to appellate review free from the "clearly erroneous" standard.

On the other hand, although ultimate facts may be reviewed free of the "clearly erroneous" rule, if the record reveals a reasonable basis for such findings, a reviewing court cannot reject them and substitute its own therefor simply to achieve what it regards as a more desirable result. In re Arbycraft Co., 288 F.2d 553, 556-557 (3d Cir. 1961).⁴

Thus, when conflicting oral testimony is presented, and a witness' credibility must be resolved, the "clearly erroneous" standard applies, and appropriate deference is due to the bankruptcy court's opportunity to observe the live witnesses and judge their credibility. Cf. Gov't. of the Virgin Islands v. Gereau, 502 F.2d 914, 920-21 (3d Cir. Aug. 15, 1974). On the other hand, when a finding deals with the effect of certain transactions or events, the "clearly erroneous" rule does not apply. In re Trimble Company, 479 F.2d 103, 112 (3d Cir. 1973). See Electric Materials Co. v. Commissioner, 242 F.2d 947, 949 (3d Cir. 1957); Adler v. Nicholas, 381 F.2d 168, 170-171 (5th Cir. 1967); Bass v. Quittner, Stutman & Treister, 381 F.2d 54, 58 (9th Cir. 1967); In re Anjopa Paper & Board Mfg. Co., 269 F.Supp. 241, 250 (S.D.N.Y. 1967). Nor does it apply when the legal consequences of undisputed acts are determined by the bankruptcy court, and a reviewing court is called upon to reason from and interpret those acts. In re Joseph Kanner Hat Co., 482 F.2d 937, 939 (2d Cir. 1973).

Finally, and in summary, in evaluating findings based upon evidence consisting in part of oral testimony and in part of documentation, as is true in several instances in the case sub judice, the following rule, applied by Judge (now Chief Judge) Kaufman, in In re Gurinsky, 105 F.Supp. 42, 44 (S.D.N.Y. 1951), aff'd, 196 F.2d 296 (2d Cir. 1952), in reviewing a bankruptcy court's findings, is appropriate:

Where the evidence is partly oral and the balance is written or deals with undisputed facts, then we may ignore the trial judge's finding and substitute our own, (1) if the written evidence or some undisputed fact renders the credibility of the oral testimony extremely doubtful, or (2) if the trial judge's finding must rest exclusively on the written evidence or the undisputed facts, so that his evaluation of credibility has no significance. * * * But where the evidence supporting his finding as to any fact issue is entirely oral testimony, we may disturb that finding only in the most unusual circumstances. Orvis v. Higgins, 180 F.2d 537, 539-40 (2d Cir. 1950) (Frank, J.)

It is against this background of legal principles that this court, on this review, finds that it must hold certain findings of the Bankruptcy Judge to be "clearly erroneous", lacking any support in the record or contradicted by the documentation in evidence, and hold other findings, as well, in error, all as will be hereinafter explicated. Additionally, this court is of the view that the learned Bankruptcy Judge erred in refusing to impose a constructive trust, in favor of the petitioners, upon the GP 3 stock held by the debtors and that his decision must therefore be reversed.

THE FACTS

The conduct of the debtors, and, more particularly, Padula, is a tableaux of false swearing, wilful breach of contract, fraudulent concealment of vital facts, and other shabby practices. Moreover, this court is repelled by the record's reflection of Padula's vague, incredible, and often inherently self-contradictory testimony, offered to explain his misconduct as he let truth languish. This court commends the Bankruptcy Judge for his patience in this matter, and in the hearings held, notwithstanding that it finds itself in disagreement with the result he reached.

December 10, 1966

The discussion best begins with a closing of a loan on December 10, 1966. On that date Padula Construction borrowed...