Irving Trust Co. v. Manufacturers Trust Co.

• Citation: 6 F. Supp. 185
• Parties: IRVING TRUST CO. v. MANUFACTURERS' TRUST CO., et al. In re JOHN CONNORS, Inc.
• Decision Date: 18 January 1934
• Court: U.S. District Court — Southern District of New York

6 F. Supp. 185

IRVING TRUST CO. v. MANUFACTURERS' TRUST CO., et al.

In re JOHN CONNORS, Inc.

District Court, S. D. New York.

January 18, 1934.

Charles Seligson, of New York City, for plaintiff.

Newman & Bisco, of New York City (Henry Landau, of New York City, of counsel), for defendant Manufacturers' Trust Co.

Isidore H. Levey, of New York City (Jacob Landy, of New York City, of counsel), for defendants Jacob, Elsie, and Max Segal.

CAFFEY, District Judge.

It is without dispute that everything with which we are here really concerned, arising under anything involved in the pleadings, occurred within four months prior to the filing of the bankruptcy petition. The issues raised by the nine causes of action are too numerous for me to take up in detail. I do not find it necessary to dispose of them all. On the contrary, I shall confine myself to what seem to me to be the issues which it is essential to pass on in order, as I conceive it, fairly to do justice between the parties. In other words, I shall go to the heart of the controversy. I shall, for convenience, use only round figures.

The issue which has been most controverted and most argued is whether or not the bankrupt was insolvent at the relevant times.

The evidence makes it perfectly clear that there was no substantial change in the financial condition of the corporation between February 19 and March 17, 1932. There was no substantial change either in assets or in liabilities. Such changes as occurred were insignificant, and were so small that they may be ignored for the purpose of ascertaining whether or not the corporation was insolvent. If it was insolvent on March 17, it was insolvent on February 19 and at all times intervening.

As I have said, I shall refer only to round figures. It is plainly established that the debts of the corporation were $35,000. Of those debts $19,000 were secured and $16,000 were unsecured. Were the assets, the aggregate of the property of the corporation, at a fair valuation less than $35,000? That is the question.

There have been a good many efforts to state the meaning of "fair valuation," as employed in the bankruptcy statute (11 USCA § 1(15). The Grandison Case, 231 F. 800, 804, was decided by the Circuit Court of Appeals for the Second Circuit, and governs me. There Judge Rogers laid down the rule that "the fair cash value or the fair market value of the property as between one who wants to purchase and one who wants to sell the property" is the true definition. Dealing particularly with the valuation of choses in action, there have been other definitions; but they come down to the same thing. In the Segen Case (D. C.) 196 F. 903, 905, for example, which concerned accounts receivable of an installment house, the court said that the valuation should be "such as would be available to the bankrupt himself with which to meet his liabilities within a reasonable time." The term is further clarified in the Coddington Case (D. C.) 118 F. 281, 282, where the court says of the value of book accounts that it is not what "could be realized out of them in time by patient and persistent effort," but rather, "It is their value now that is to be taken."

Having in mind those announcements of the courts as to the tests to be applied, let us examine the figures that have been brought out in the evidence.

First, what was realized in the bankruptcy proceeding? The tangibles sold for $2,635, and the intangibles, which are the accounts receivable, for $2,934, making a total of $5,569; in round figures, let us say $6,000. This was all that was available to pay $16,000. Manifestly, therefore, if realization in the bankruptcy proceeding were a test, there was gross insolvency.

Undoubtedly what was realized in the bankruptcy proceeding is a pertinent fact to be considered. The witnesses testified as to how they arrived at their figures and how the sales were made. According to the appraisers, the maximum to which value of the tangibles could be raised is $4,000. After the bankruptcy, by his conduct Mr. Jacob Segal himself put a valuation on the intangibles as a whole; that is to say, on the unassigned accounts receivable plus the equity in the assigned accounts receivable. He refused to give as much as $7,000 for them. He tells us that he brought on the bankruptcy for the purpose of paying the creditors 100 cents on the dollar, as well as with the expectation of getting something on his own stock and for the other stockholders. Yet for the entire accounts receivable, including the equity mentioned, he was unwilling to give $7,000 when the creditors' committee was willing to recommend that the trustee accept it and the trustee apparently was willing to sell for that price. If we add the $7,000 and the $4,000, the total would be $11,000, with which to pay $16,000.

So, if we should apply the second test I have discussed, there was insolvency.

We have had a lot of testimony by an accountant. He made a comprehensive review of the books. Counsel have fully examined him as to how he arrived at every figure of consequence which he used. Out of the mass of material gone over he has furnished a pretty definite statement of both assets and liabilities. I think I should go over it and give it careful attention.

According to the evidence, the total debts were $35,000. That sum is accepted by both sides. It is borne out by the books as well as by the oral testimony.

According to the accountant's scheme of putting his valuations on the assets, they should have yielded slightly over $48,000. It will be noted that these identical assets as a whole yielded only $5,569 when they were actually sold during the bankruptcy proceeding; and the tangible portion was put down, as I recall, in the schedules at $2,900 or thereabouts. It is to be observed also that for the intangible portion, which was the greater part, Mr. Segal was not willing to pay as much as $7,000. Yet the accountant, according to his method of figuring, arrived at $48,000 as the valuation of all the assets; that is to say, the accountant made estimates leading to that figure, under cross-examination by counsel for one of the defendants.

Let us see if $48,000 is a fair sum to be accepted through application of any of the tests which have been laid down by law. Let us employ some of the tests to ascertain, first, whether the amount allocated by the accountant to the accounts receivable is fair.

In the tabulation by which the accountant under cross-examination arrived at the figure of $48,000, he included the receivables in their entirety at a valuation of $39,000; the remainder of the assets working out at $9,000. Max Segal himself got $3,000 of accounts receivable. The testimony of Miss Cohen, as well as all the other testimony on the subject, indicates that the receivables turned over to him were choice. After about twenty-two months these netted him $914; in other words, considerably less than one-third of their face.

The entire face of the accounts receivable carried in the accountant's statement was, as of February 19, 1932, a little less than $78,000. If they were worth one-third—that is to say, if we should use the test of realization by twenty-two months of handling, which brought in less than a third — the total value would be $26,000. Could it be expected, however, if the accounts were put on the market for present sale in a transaction between a willing seller and a willing buyer, that they would bring as much as by twenty-two months of effort? Obviously not. Or if we were to apply the test of giving to the bankrupt itself an opportunity within a reasonable time to collect on them, could it be expected that as high a ratio would come in as arose from the activity of Max Segal in pursuing choice receivables? It seems to me that, when in twenty-two months he could get only a third, the application of the test of one-third, as a criterion to determine what is a fair valuation in the sense of the bankruptcy statute, cannot properly be complained of by the defendants. Moreover, it is to be borne in mind that the one-third is taken from the actual handling by Max Segal himself, who was the collector for the bankrupt and knew the business.

Again, when analyzed, the testimony of Mr. Zagoren, who has had long experience with an entirely different concern in the line of business in which the bankrupt was engaged, is in substance that he employs about the same one-third test in estimating the value of receivables generally.

One-third of $78,000 is $26,000. In other words, this would mean that instead, as the accountant did, of putting the receivables in his statement at a valuation of $39,000, they should be put in at only $26,000. If that were done, then, standing alone, this would cause a reduction by $13,000 of the $48,000 total valuation put on by the accountant for all the assets as of February 19, 1932. Without any other change, on that basis, the assets would be worth $35,000, which is the precise amount of the liabilities. Is this, however, fair to the trustee in bankruptcy?

Analysis of the bankrupt's income tax return and of other documents in evidence shows that, at the minimum, $41,000 of the accounts receivable involved go back to the day of John Connors individually. They consist of debts owing by his personal customers, which came into existence prior to the organization of the corporation. They were considerably more than a year old at the time of the transactions under inquiry. At the time of the bankruptcy they were fifteen months old. Another analysis of the figures would carry the receivables, which should be classed as John Connors' old accounts, to as high as $53,000. Let us see what is the result.

If there were $41,000 of the accounts which were fifteen months old in the group with which we are dealing, a maximum allowance for their value would be 10 per cent. of their face; and I think it defies common sense to suppose that the corporation could have...