Shaw v. UNITED STATES RUBBER CO., NAUGATUCK CHEMICAL DIV.

• Decision Date: 31 May 1966
• Docket Number: No. 22837.,22837.
• Citation: 361 F.2d 679
• Parties: Charles C. SHAW, Trustee in Bankruptcy of Bemporad Carpet Mills, Inc., Appellant, v. UNITED STATES RUBBER COMPANY, NAUGATUCK CHEMICAL DIVISION, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

361 F.2d 679 (1966)

Charles C. SHAW, Trustee in Bankruptcy of Bemporad Carpet Mills, Inc., Appellant, v. UNITED STATES RUBBER COMPANY, NAUGATUCK CHEMICAL DIVISION, Appellee.

No. 22837.

United States Court of Appeals Fifth Circuit.

May 31, 1966.

Clinton J. Morgan, Rome, Ga., for appellant.

Isaac C. Adams, Dalton, Ga., for appellee.

Before TUTTLE, Chief Judge, BELL, Circuit Judge, and KILKENNY,^* District Judge.

TUTTLE, Chief Judge.

This is an appeal from the judgment of the District Court, setting aside an order of the Referee in Bankruptcy avoiding an alleged preference in the sum of $5,655.15, paid by the bankrupt to United States Rubber Company, Naugatuck Chemical Division, within four months of bankruptcy.

The alleged preference arose by appellee's receipt, on January 6, 1964, of the proceeds of a check for the amount sued for as a payment on a past-due account. The company filed its voluntary petition, and was judged a bankrupt on March 18th, a little over two months later. The only contested issues in the Bankruptcy Court were the question of solvency at the time the payment was made,¹ and whether, assuming insolvency, the Appellee had in its possession facts sufficient to constitute reasonable cause for a belief that the debtor was insolvent as of January 6, 1964.²

The evidence adduced at the Referee's hearing, included: (a) the Bankrupt's consolidated balance sheet for the fiscal year ending June 30, 1963, a copy of which was received by United States Rubber Company in September of 1963, which balance sheet showed an excess of liabilities over assets to the extent of $106,778.00 (this statement showed assets at cost less depreciation); (b) testimony by an officer of the Appellee that the President of the bankrupt informed him that this balance sheet was incorrect and that a new balance sheet was to be prepared which would assign a true appraisal of the assets; (c) a subsequent pro forma balance sheet, based on the appraised value of the assets, and which showed a net worth of $169,133.00 instead of a deficit as shown on the earlier statement; (d) evidence that Appellee had been informed by the Hamilton National Bank of Chattanooga, a bank having no apparent interest in the litigation, that it considered the debtor to be a company with strong financial standing; (e) the fact that the check which, when paid, represented the alleged preference, was originally issued on December 10, 1963; that this check was returned to the Appellee on December 23rd because of a lack of funds in the bankrupt's account; that on this same date, an officer of the Appellee talked to the Comptroller of the bankrupt, at which time the latter advised Appellee that he need not worry, that this non-payment was due to a mistake, and that Appellee should redeposit the check; that the check was redeposited and paid, and the bankrupt's account was debited on January 6, 1964.

At the hearing before the Referee, the Comptroller of the bankrupt company was permitted to testify, without objection, that the bankrupt was insolvent as of the time of the several financial statements. Both the December 14th, 1963, balance sheet and one prepared for February 8th, 1964, showed an insolvent condition, and the November, 1963 bank statement, also introduced into evidence, showed an overdraft in the amount of $18,200.09.

On this record, the Referee determined as a fact that, "From December 18th, 1963, up to and including March 18th, 1964, the bankrupt was insolvent." This, of course, included the date on which payment was made on the check. The trial court, on review of the Referee's order, determined that the evidence by the Comptroller, expressing his opinion of insolvency, and the several balance sheets were inadequate to warrant a finding of insolvency. We disagree, and conclude that this evidence was ample to warrant the Referee's determination of insolvency on the critical date in the absence of any effort by the creditor to place the fact of insolvency directly in issue.

With respect to the further requirement, however, to establish a voidable preference, we are constrained to agree with the District Court, first, that the determination of whether the Appellee had such notice as to constitute reasonable cause for a belief that the debtor was insolvent as of January 6th, was a matter which could be as readily determined by the trial court and, of course, by this court, as by the Referee; and, second, that under the circumstances known by the...