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IN RE OCEANSIDE NAT. CORP.

February 11, 1933

In re OCEANSIDE NAT. CORPORATION


The opinion of the court was delivered by: BYERS

BYERS, District Judge.

Hearing on motion for an order confirming the report of the referee dismissing the specifications filed in opposition to the discharge of the bankrupt.

There are five specifications, of which the first is the most important; it is as follows:

 "First: For the reason that with intent to conceal its true financial condition, it has failed to keep books of account or records, or has destroyed and concealed books of account and records from which said financial condition might be ascertained."

 The foregoing is deemed to be sufficient in form to invoke the applicable provision of the Bankruptcy Act governing discharges, which may not be granted where the bankrupt has "(2) destroyed, mutilated, falsified, concealed, or failed to keep books of account, or records, from which his financial condition and business transactions might be ascertained; unless the court deem such failure or acts to have been justified, under all the circumstances of the case; * * *." Section 14b (2), Bankr. Act, 11 USCA § 32 (b) (2).

 Probably the form of specification goes beyond the present requirements of the statute, because the intent to conceal is no longer a necessary element of the failure to keep books.

 A reading of the testimony taken before the referee discloses that no books of account whatever were kept by this bankrupt, and indeed so much is conceded by its attorney; consequently there are no written corporate records from which the financial condition and business transactions of the bankrupt could be ascertained, and the discharge will have to be denied, therefore, unless the court, under all the circumstances of the case, can deem such failure to keep books of account to have been justified.

 The corporation was organized in January, 1928, to take title to two parcels of unimproved real estate in Long Beach, which yielded no income, and which were subject to two first mortgages held by the objecting creditor. The incorporators had knowledge that a proceeding was in contemplation to widen Long Beach Road, upon which the property fronted, and during 1929 that was accomplished, and on July 25th of that year the corporation received an award of $8,010.00 for a strip of its property so taken, which, as stated, was covered by a first mortgage; if the mortgagee's right to participate in the award had been protected by the bankrupt, proper records of a financial nature would have been set up in the form of books of account of the corporation.

 This was not done, however, but the money was turned over to the treasurer, who testified that he had disbursed it in payment of other debts said to have been owing by the corporation to his mother. There was no corporate record of these debts because, as has been stated, there were no books of account of the corporation. It is true that five of eleven items of alleged corporate indebtedness were probably shown, in the testimony before the referee, in the form of checks drawn by the mother of the treasurer, but, as to the remaining six items, there is no corporate record, and therefore the proper basis for alleged execution and delivery of one or more corporate notes to the mother of the treasurer cannot be vindicated as the result of an inspection of the corporate financial records. As the indebtedness which is said to have been paid was on account of these corporate notes, the importance of an entire absence of books of account becomes apparent.

 The check said to have been used by the treasurer in disbursing the $8,000.00 paid by Nassau County to the corporation was not produced before the referee, and is said to have been lost or mislaid. The entire explanation of this handling of corporate funds rests in the testimony of the treasurer of and attorney for the corporation, and what has been gleaned from his personal bank account.

 The referee was satisfied with the explanation made to him, so far as the truth is concerned of the facts testified to, but it is thought this is not the test to be applied to the above quoted provision of the Act.

 This corporation took title to other properties, and the officers who were examined say that this was done for the convenience of the real owners, who were relatives, in order to racilitate the raising of building loans; the result was that one such loan was negotiated and over $4,300.00 was paid by the lending company to the bankrupt, and disbursed by it through the individual account of the same officer who handled the $8,000.00; in other words, this was an agency transaction, even though the funds involved were handled as though they were the property of the corporation.

 Without questioning, for present purposes, the truth of the testimony given, it must be apparent that, if any significance is to be attached to the applicable provision of the Bankruptcy Act, it would be a hazardous thing for a court to say that the failure of the corporation to keep books of account from which such transactions might be ascertained should be deemed justified under all the circumstances of the case.

 The transfers of property referred to in the fourth and fifth specifications involve these very properties now said to have been held by the corporation as agent; perhaps, if the bankrupt had caused books of account to be kept, the facts would have been so clearly ...


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