New York Credit Men's Adjustment Bur., Inc. v. Adler

• Decision Date: 30 January 1980
• Docket Number: Bankruptcy No. 78 Civ. 5635.
• Citation: 2 BR 752
• Parties: NEW YORK CREDIT MEN'S ADJUSTMENT BUREAU, INC., as Trustee in Bankruptcy of the Estate of Talmadge Hill, Ltd., Bankrupt, Plaintiff, v. Ira ADLER, Phyllis Adler and Harve Edwards, Defendants.
• Court: U.S. District Court — Southern District of New York

2 B.R. 752 (1980)

NEW YORK CREDIT MEN'S ADJUSTMENT BUREAU, INC., as Trustee in Bankruptcy of the Estate of Talmadge Hill, Ltd., Bankrupt, Plaintiff, v. Ira ADLER, Phyllis Adler and Harve Edwards, Defendants.

Bankruptcy No. 78 Civ. 5635.

United States District Court, S.D. New York.

January 30, 1980.

Hahn, Hessen, Margolis & Ryan, New York City, for plaintiff; William R. Fabrizio, New York City, of counsel.

Fine, Tofel, Saxl & Berelson, New York City, for defendants Ira Adler and Phyllis Adler; Joel A. Reiss, New York City, of counsel.

OPINION

FINDINGS OF FACT AND CONCLUSIONS OF LAW

EDWARD WEINFELD, District Judge.

The trustee in bankruptcy of the Estate of Talmadge Hill Ltd. ("Talmadge") seeks to recover money alleged to have been fraudulently obtained from Talmadge by Harve Edwards, Ira Adler and Adler's wife, Phyllis. Edwards, the Chief Executive Officer and President of Talmadge defaulted. Judgment was entered against him in the amount of $112,383.76 and the case against the Adlers proceeded to trial.

The principal witness on behalf of the trustee was Edwards who testified as to false entries on the books of Talmadge, the issuance of false invoices which were factored with a bank, and other fraudulent conduct. His testimony was sharply contradicted by Adler. Thus the determination of the issues as to which the plaintiff has the burden of proof turns in large measure upon the verity of these witnesses. Based upon a word-by-word reading and study of the entire record, the Court's contemporaneous trial notes which include an appraisal of the credibility of witnesses and their demeanor, the reasonable inferences drawn from undisputed and clearly established facts and upon the totality of the testimonial and documentary evidence, the Court concludes that plaintiff has sustained its burden of proof—in short, the Court finds that Edwards told a substantially truthful story as to matters touching upon and related to transfers and that Adler's testimony was deliberately false. A bookkeeper, who Adler testified would not lie, corroborated Edwards' testimony that Adler was the mastermind who contrived the issuance of fictitious invoices. Adler himself admitted that he originated certain false entries in order to conceal from Talmadge's union the fact that goods were being manufactured in southern factories at cheaper labor costs.

Edwards, at the time of the events in question, was the President and sole stockholder of Talmadge. Because Talmadge was already experiencing financial difficulties in the latter part of 1976 he invited the assistance of Adler, an accountant who had been recommended to him. Adler, by the end of 1976, became Talmadge's financial adviser on a full-time basis. He thereupon assumed full control over the books and records of the company, of its relations with creditors, and its billing procedures; he fully supervised and directed the financial affairs of the company. For these services he received no salary. However, he testified that he had an understanding with Edwards that if Talmadge's financial picture improved he would be given a share of the enterprise, as he described it, "a piece of the action." Adler's wife also reported to Talmadge's office though on a less regular basis.

Upon assuming his duties and in the latter part of 1976, Adler conducted a thorough review of Talmadge's accounts and found that the company was already $25,000 "in the red"—that at this point the total outstanding liabilities of the company exceeded the value of the assets if liquidated by that amount. Despite this knowledge, he initiated a series of transactions within a period of 9 weeks between January 3 and March 11, 1977 that resulted in the diversion of thousands of dollars of corporate funds to the personal use of the Adlers and Edwards and that culminated in the company's demise a month later in April 1977.

Shortly after Adler entered into the life of Talmadge and within a period of less than a month between the 3rd and 31st of January, 1977, a total of $89,000 was withdrawn from Talmadge for non-business purposes and without supporting vouchers. On January 3, 1977, Talmadge issued four checks each in the sum of $2,500 for a total of $10,000; they were payable to and endorsed by Phyllis Adler and deposited in her account. On January 19, 1977 Talmadge issued another check to Phyllis Adler in the sum of $5,000 which was endorsed by her and deposited in her account.

Before the end of the month, the largest withdrawals occurred, totaling $74,000; this money was used to purchase a 50% stock interest in Avante, a company which manufactured women's sportswear and which, soon after this transaction, filed an involuntary petition in bankruptcy. Although both Edwards and Ira Adler testified that the purchase was made "on behalf of Talmadge Hill," the overwhelming weight of the evidence indicates that the use of the corporate funds was for the individual benefit of the two stockholders. The written agreement of purchase and sale lists Edwards and Adler as the purchasers; it makes no reference to Talmadge Hill. The Avante shareholders testified that the sale was to Edwards and Adler as individuals and there was never any discussion of Talmadge acquiring an interest in Avante or any plans or mention of any merger of the two companies.

Other circumstances surrounding the withdrawal of the funds establish that it was not a corporate purchase nor for the corporation's benefit. The purchase was financed by two checks issued by Talmadge; each was payable to Ira Adler; one was in the sum of $39,000 dated January 28, 1977 and the other in the sum of $35,000 dated January 31, 1977. The checks were endorsed by both Ira and Phyllis Adler and deposited in Phyllis Adler's personal account. In turn, Ira Adler used his personal checks for the purchase of his and Edwards' interest in Avante. The reason for the separate issuance of the two checks, one in the sum of $39,000 on January 28 and the other on January 31 in the sum of $35,000, three days apart, is not without significance as to Talmadge's financial condition. On January 28 when the first check was issued, Talmadge had insufficient funds on hand or other resources to cover the total purchase price of the shares.

There were still other withdrawals. On March 1, 1977, Talmadge issued a check to J. Elliot Scott in the sum of $5,221.80 which was deposited in an account maintained by J. Elliot Scott Inc. (a company owned or controlled by the Adlers). This was followed on March 11 by another check issued payable to cash in the sum of $4,500 and deposited in Phyllis Adler's account.

During the entire period from January 3, 1977 to March 11, 1977 when the aforesaid funds were withdrawn, Talmadge was in dire financial straits; it was behind in payment of its current obligations; its bank account at times was overdrawn and at other times checks were withdrawn in favor of creditors' obligations and were not mailed because there were not sufficient funds on hand to meet the drawn checks.

The explanations offered by Adler as to the reasons for the withdrawal of these vast sums and their deposit in his wife's account are as varied as they are false. The principal claim that these were repayments of loans or monies advanced by them for expenses on behalf of Talmadge or for services rendered to it is belied by substantial evidence.

Edwards testified that sometime in January 1977 Adler suggested that Talmadge could raise money to meet its requirements by issuing fraudulent invoices and assigning the resulting accounts receivable to the company's factor, Bankers Trust Company, and thereby securing substantial advances against them. Both Edwards and Talmadge's bookkeeper, Eva Botnick, testified that Ira Adler had initiated and directed the issuance of the fraudulent invoices. The scope of the fraudulent scheme is evident when it is noted that between January 11 and April 12, 1977 Talmadge created and assigned to Bankers Trust Company fictitious invoices with a face value of more than $400,000. Edwards testified that the funds used to purchase his and Adler's shares of Avante were themselves generated through the issuance of fictitious invoices, testimony which was verified by records kept at the Bankers Trust Company. Further, Edwards testified that one of the reasons that he and Adler purchased an interest in Avante was to facilitate a close exchange of such invoices and thereby delude for as long as possible the two companies' respective factors. The documentary evidence —including the checks issued to Ira Adler and Phyllis Adler, the purchase of Avante, the fraudulent invoices assigned to Bankers Trust, the falsified ledger books and the absence of a single entry on the books of Talmadge showing that any advances or loans were made or expenses incurred on behalf of Talmadge—all substantially corroborate Edwards' testimony. Moreover, the Court finds that Adler induced Edwards to sign a false affidavit purporting to exonerate Adler of his participation in the wrongful conduct in the affairs of Talmadge—an act which permits an inference of consciousness of guilt.¹ Indeed, Edwards' self-characterization as a "puppet" in explaining his yielding to Adler's directions is fully justified by the record.

In further support of its claim the trustee presented the testimony of Bernard Augen an expert accountant with considerable experience in bankruptcy accounting. Despite the myriad of problems encountered— including the lack of books and records, of physical inventory, and of any certified financial statements prepared by the previous accountant—he was able to reconstruct an accurate picture of Talmadge's financial situation in the months prior to its collapse. He testified that at all times between December 31, 1976 and March 11, 1977, the period within which the transfer of funds from Talmadge was effected, Talmadge's liabilities exceeded its assets by no less than $150,000, and...