O'Rieley v. Endicott-Johnson Corporation

• Decision Date: 30 November 1961
• Docket Number: No. 16573.,16573.
• Citation: 297 F.2d 1
• Parties: M. W. O'RIELEY, Trustee in Bankruptcy of Woerderhoff Shoe Co., Inc., Appellant, v. ENDICOTT-JOHNSON CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

297 F.2d 1 (1961)

M. W. O'RIELEY, Trustee in Bankruptcy of Woerderhoff Shoe Co., Inc., Appellant, v. ENDICOTT-JOHNSON CORPORATION, Appellee.

No. 16573.

United States Court of Appeals Eighth Circuit.

November 30, 1961.

Thomas M. Collins, Cedar Rapids, Iowa, made argument for the appellant, and was on the brief.

Meyer M. Kahn, St. Louis, Mo., made argument for the appellee. Bryce M. Fisher, Cedar Rapids, Iowa, was with him on the brief.

Before VOGEL and BLACKMUN, Circuit Judges, and BECK, District Judge.

BLACKMUN, Circuit Judge.

This appeal involves a reclamation petition filed by Endicott-Johnson Corporation for shoes sold and delivered to Woerderhoff Shoe Co., Inc., prior to the latter's bankruptcy. Woerderhoff filed a voluntary petition in bankruptcy on November 17, 1958, and included Endicott in its list of unsecured creditors. It was adjudged bankrupt two days later. The present petition alleges the rescission of the shoe sales as of November 14 and the surrender of the shoes by the bankrupt to Endicott. By agreement of the parties, the merchandise has been sold and the proceeds are now held subject to the disposition of this controversy. Those proceeds are less than the amount the bankrupt owed Endicott at the time of bankruptcy.

The referee dismissed the petition to reclaim. The District Court reversed and granted it. 184 F.Supp. 479. The Trustee has appealed.

The bankrupt had been in the retail shoe business in Cedar Rapids, Iowa, since about 1946. It operated two stores there. One bore the corporation's own name and was known as the uptown store. The other did business as the South Side Shoe Store. Endicott and the bankrupt maintained separate accounts for the two stores but the bankrupt's operation was a single business. A. L. Woerderhoff was the bankrupt's president and treasurer and he was an experienced businessman.

Endicott had done business with the bankrupt for about three years. By 1957 it was supplying approximately 80% of the shoes sold by the South Side outlet but less than this at the uptown store. Endicott had allowed the bankrupt a line of credit of approximately $8,500. This was on a budget plan basis. The bankrupt submitted financial statements to Endicott. It also delivered to Endicott signed but otherwise blank checks. As the bankrupt placed orders for shoes and as the shipments were made, Endicott would fill out the checks, with amounts determined by formula, and deposit one of them each week for payment. Once the established credit limit was reached, Endicott would ship no further merchandise until a working margin under that limit had again been established. On occasion, one of these weekly checks would be returned unpaid. This, however, was not a matter of great concern to the parties but was attributed to a poor week in the bankrupt's business; the returned check would be presented again for payment or replaced.

Of prime importance in this case are the bankrupt's financial statements for its fiscal years ended January 31, 1957, and January 31, 1958, respectively. Its 1957 statements, consisting of a balance sheet and a profit and loss statement, had been submitted to Endicott in August 1957 and bore the signature of A. L. Woerderhoff. In May 1958, pursuant to the request of Endicott's divisional credit manager, Endicott received from the bankrupt a profit and loss statement, also bearing Woerderhoff's signature, for fiscal 1958. Upon repeated request, it received in June of that year a balance sheet as of January 31, 1958.

The operating statements for the two fiscal years showed net income of approximately $5,400 and $4,200, respectively. The 1957 balance sheet showed a net worth for the bankrupt of about $56,800. The corresponding figure on the 1958 balance sheet was about $49,000. The 1957 balance sheet showed accounts payable of $17,399.50. The 1958 balance sheet showed accounts payable of $21,476.10. It is stipulated that these balance sheets (both of them) "were materially incorrect, in that the amounts payable were substantially and materially understated".

The same understated accounts payable figure for 1957 also appeared in a Dun & Bradstreet report issued in October of that year with respect to the bankrupt and on figures submitted by the bankrupt. Endicott was a subscriber of Dun & Bradstreet. The same understated 1958 accounts payable figure also appeared in the bankrupt's federal income tax return filed for fiscal 1958.

Shipments of merchandise, for which it was not paid, were made by Endicott to the bankrupt in 1958. The first shipments, aggregating $1,821.41, went out from February 21 to April 7, 1958, inclusive. These were after Endicott's receipt of the bankrupt's fiscal 1957 financial statements but before it received the 1958 statements. All this merchandise went to the uptown store. The remaining shipments, aggregating $6,835.82, went out from July 21 through November 3, 1958; these went to the South Side outlet except for a shipment of $713.35 made September 8 to the uptown store and two other single pair orders sent there. These later shipments took place after Endicott's receipt of the fiscal 1958 statements. The shipments from February 21 to November 3 totaled $8,625.36 in net invoice value. It is this amount for which the bankrupt was indebted to Endicott at the time of bankruptcy.

The Trustee's position here is that Endicott, in order to reclaim, must establish that the bankrupt at the time of its purchases did not intend to pay for the goods or that the financial statements were false and fraudulent and Endicott relied upon them in granting credit and shipping the merchandise. The Trustee then asserts that Endicott has not established any of these facts.

Endicott claims that the bankrupt's written financial statements were materially and knowingly false; that Endicott justifiably relied upon them in extending credit and in making the shipments; and that its petition for reclamation must therefore be granted.

1. At the outset, we recognize that reclamation in bankruptcy is a positive remedy. It has been said that

"`Reclamation proceedings are not favored, "except when accompanied with strict proof."'" In re Triangle Shoe Mfg. Co., E.D.N.Y.1924, 7 F.2d 704, 707. The claiming creditor has the burden. Idem, p. 708 of 7 F.2d; In re Iowa Egg Co., S.D.Iowa 1951, 96 F.Supp. 390, 391-392; Collier on Bankruptcy (14th Ed.), Vol. 4, Par. 70.393, p. 1312. Fraud is not to be presumed. In re Wilson-Nobles-Barr Co., W.D.Wash., 1918, 256 F. 966, 968. See, also, United States v. Colorado Anthracite Co., 1912, 225 U.S. 219, 226, 32 S.Ct. 617, 56 L.Ed. 1063 and United States v. Wunderlich, 1951, 342 U.S. 98, 100, 72 S.Ct. 154, 96 L.Ed. 113.

2. We are immediately confronted with the question of the precise point of impact of the clearly erroneous rule. Rule 52(a), F.R.Civ.P., 28 U.S.C.A., reads in part:

"In all actions tried upon the facts without a jury * * * the court shall find the facts specially and state separately its conclusions of law thereon * * *. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses. * * *"

General Order in Bankruptcy 37, 11 U.S. C.A. following section 53, provides that the federal rules shall be followed in bankruptcy proceedings "as nearly as may be". It has been held specifically that Rule 52(a) applies to bankruptcy proceedings. United States Machinery Movers v. Beller, 8 Cir., 1960, 280 F.2d 91, 94, cert. den. 364 U.S. 903, 81 S.Ct. 236, 5 L.Ed.2d 195; In re Rockford Baseball Club, 7 Cir., 1953, 201 F.2d 685, 686. But General Order in Bankruptcy 47 provides:

"Unless otherwise directed in the order of reference the report of a referee or of a special master shall set forth his findings of fact and conclusions of law, and the judge shall accept his findings of fact unless clearly erroneous. The judge after hearing may adopt the report or may modify it or may reject it in whole or in part or may receive further evidence or may recommit it with instructions."

Where, as here, the district court rejects a referee's findings, is the clearly erroneous standard to be applied to the decision of the referee or to the reversing decision of the district court?¹

Where this question has arisen, most federal courts of appeals have held that the standard is to be applied to the referee's findings. Morris Plan Industrial Bank v. Henderson, 2 Cir., 1942, 131 F.2d 975, 976-977; Phillips v. Baker, 5 Cir., 1948, 165 F.2d 578, 581; Hoppe v. Rittenhouse, 9 Cir., 1960, 279 F.2d 3, 7. See In re Skrentny, 7 Cir., 1952, 199 F.2d 488, 492, and In re Arbycraft Co., 3 Cir., 1961, 288 F.2d 553, 556. The Fourth Circuit appears to hold to the contrary. Mutual Savings & Loan Association v. McCants, 1950, 183 F.2d 423, 426-427.²

In any event, we hold, with respect to a matter of general reference (where no further evidence has been introduced) that in this circuit the clearly erroneous standard is to be applied to the referee's findings and not to those of the district court. Certain of our cases have evoked comment suggesting that this circuit leans away from the majority rule. See, for example, Mutual Savings & Loan Association v. McCants, supra, p. 426 of 183 F.2d; Stewart v. Ganey, 5 Cir., 1940, 116 F.2d 1010, 1013, footnote 1; Collier on Bankruptcy (14th Ed.), Vol. 2, Par. 25.30, footnote 23, and Vol. 4, Par. 70.39 2, footnote 38, which cite and refer to Rait v. Federal Land Bank of St. Paul, 8 Cir., 1943, 135 F.2d 447, 451; Katcher v. Wood, 8 Cir., 1940, 109 F.2d 751; and In re Kansas City Journal-Post Co., 8 Cir., 1944, 144 F.2d 791, 807. Our adherence to the majority rule, however, was clearly indicated by Sanitary Farm Dairies v. Gammel, 8 Cir., 1952, 195 F.2d 106, 114, 118, and is evidenced, in practical result, by our holdings in, for example, Teasdale v. Robinson, 8 Cir., 1961, 290 F.2d 108, 116; Becker v. Shields, 8...