In re West Produce Corporation

• Decision Date: 17 March 1941
• Docket Number: No. 202.,202.
• Citation: 118 F.2d 274
• Parties: In re WEST PRODUCE CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

118 F.2d 274 (1941)

In re WEST PRODUCE CORPORATION.

No. 202.

Circuit Court of Appeals, Second Circuit.

March 17, 1941.

Stone & Perlman, of New York City, for appellants.

Duberstein & Schwartz, of Brooklyn, N. Y. (Samuel C. Duberstein and Max Schwartz, both of Brooklyn, N. Y., on the brief), for the trustee.

Before SWAN, AUGUSTUS N. HAND and CHASE, Circuit Judges.

SWAN, Circuit Judge.

West Produce Corporation was engaged in the wholesale fruit and vegetable business until it closed its doors on December 27, 1937. It was adjudicated bankrupt in March, 1938. In the following November the trustee in bankruptcy initiated a turnover proceeding against John C. Gale, president of the bankrupt, Julia Chimento, vice-president and secretary, and several other persons, charging them with having conspired to divert and conceal assets of the bankrupt estate. This eventually resulted in an order by the referee which the district court modified by its order of July 24, 1940. This is the order appealed from. It directs John C. Gale to turn over to the trustee fruit and vegetables, or their value in the sum of $4,079.47, and a Brockway truck, or its value (conceded to be $100); and it directs Julia Chimento to turn over the sum of $3,133.32, and a Buick sedan, or its value (conceded to be $150). From these provisions of the order Gale and Chimento have appealed. The order denied the trustee a turn-over order in respect to other items, and as to these items the trustee has cross-appealed.

The merchandise shortage which Gale was ordered to make good, was arrived at by taking the bankrupt's December 1st inventory figure of $1,735.98, adding the December purchases of $25,144.38, making a total of $26,880.36, and deducting the December sales of $22,800.89. If the sales were made at cost there should have been a merchandise inventory of $4,079.47 when business ceased on December 27, but no merchandise then remained in the store. If, however, the book figure of $22,800.89 truly reflected the actual receipts from December sales, the $4,079.47 represented loss on sales at less than cost rather than a diversion and concealment of merchandise. No attempt was made to offer direct evidence of diversion and concealment; the trustee relied upon the presumption created by section 21, sub. l of the Chandler Act as set forth in the margin.¹ The individual sales tickets recording the prices obtained for specific items of merchandise were not turned over to the trustee nor produced at the hearings; hence, it is urged by the trustee that the statutory presumption became applicable. The appellants, on the other hand, contend that regardless of the sales tickets the books accounted for each unit of merchandise. However that may be, the statutory presumption exists only "until the contrary shall appear." The referee's opinion contains the explicit statement: "From December 11, 1937 until December 24, 1937 merchandise was sold at a loss." Savaglio's testimony, if credited, supports such finding. Without the presumption, the finding of concealment of merchandise by Gale, individually or as president of the bankrupt, cannot be supported; and the referee's acceptance of the testimony as to sales below cost destroys the presumption. The trustee urges that the quoted statement of the referee merely sets forth the contention of the witness Savaglio, but we cannot read it as other than a finding by the referee. As to the diversion and concealment of merchandise, the order must be reversed. The trustee has not sustained his burden of proof.

As to the Brockway truck the evidence is also insufficient. The trucking department of the bankrupt's business was conducted in the name of J. C. Produce Co., which was a trade name used by Julia Chimento; but she knew nothing about the business and acted solely as her husband directed. We agree that the truck belonged to the bankrupt; but the issue is as to its possession or control. Savaglio testified that from the time when the bankrupt went out of business the truck had been in a named garage in Brooklyn. Of this there was no contradiction. We find nothing to indicate that Gale had or has either possession or control of the truck. Possession was in the garage man and unless he claims a possessory lien for services (as to which there is no suggestion in the testimony) control of the truck after the adjudication would appear to have been in the trustee himself rather than in the bankrupt's president.

The sum of $3,133.32 which Julia Chimento was ordered to turn over to the trustee is apparently made up of the following items: a check for $800 on December 20th and cash withdrawals charged to her on the bankrupt's books in the amount of $600 and $500 on the 21st, $333.32 on the 23rd, $400 and $500 on the 24th. The $800 check she endorsed to a life insurance company in repayment of its loan on a policy of which she was the beneficiary. The money she had borrowed on the policy had gone into the bankrupt's business. Obviously the $800 check was at worst a preferential payment to Chimento, but the trustee made no effort to prove it a voidable preference. She knew nothing of the condition of the business. As to this item the turn-over cannot stand.

The cash withdrawal of $333.32 presents a similar situation. In March 1937 Julia Chimento borrowed $1,000 from the National City Bank, the proceeds of the loan being deposited in the bankrupt's account and she being credited on the bankrupt's books. The bankrupt made monthly instalment repayments to the bank and in December, 1937, the balance remaining due was $333.32. This balance was paid in cash to the bank by the bankrupt's bookkeeper who entered the withdrawal as a cash payment to Mrs. Chimento. Payment to the bank was proved by record evidence. The money in question never even passed through Mrs. Chimento's hands and, in so far as she benefited, the payment was merely a preference. As to this item also the order was wrong.

The other four items of cash withdrawals were given to her by her husband and she testified that she paid them over to relatives or friends from whom she had previously borrowed like amounts which she had loaned to the bankrupt. Its books showed credit to her for the loans she claimed, but the names of the...