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November 28, 1934


The opinion of the court was delivered by: GALSTON

GALSTON, District Judge.

This cause was transferred from the equity to the common-law side of the court, and was thereupon, upon stipulation, tried without a jury.

Complainant alleges that, within four months prior to the filing of the involuntary petition in bankruptcy against Samuel Elkin, Inc., bankrupt, while insolvent and indebted to the respondent Paragon Paint & Varnish Corporation, made two preferential payments, one by the transfer of outstanding accounts receivable of the bankrupt in the sum of $20,000, and the other by the execution and delivery of its bond and mortgage in the sum of $10,000 on property of Samuel Elkin, Inc. The complainant seeks an accounting and judgment in the amount of $30,000.

 The bankrupt, Samuel Elkin, Inc., succeeded to the business of the firm of Citrin & Elkin. That firm had purchased merchandise over a period of time from the Paragon Paint & Varnish Corporation, and was indebted to the Paragon Paint & Varnish Corporation in October, 1930, in the sum of approximately $25,000. About that time a fire occurred on the premises of Citrin & Elkin. The firm had assured the Paragon Corporation that, as soon as the fire loss was adjusted, a payment of $10,000 would be made on the respondent's account. Thereafter, instead of a payment of $10,000, only $700 was paid to the Paragon Company. Negotiations followed, and various conferences were held between the Paragon Corporation and the firm, and eventually, as a result thereof, the firm caused the incorporation of Samuel Elkin, Inc., to be effected in January, 1931; and at some time, but when does not appear from the record, the firm transferred all of its assets to the corporation.

 On February 7, 1931, various agreements were entered into between the parties. One of these agreements (Complainant's Exhibit 3) was between Paragon Paint & Varnish Corporation and Philip Citrin and Samuel Elkin. This agreement recited that the firm was indebted to Paragon in the sum of $27,000, and, as a consideration for a forbearance to sue, the partners agreed that they would pay to Paragon, on the aforesaid indebtedness, $1,000 on March 10, 1931; $1,000 on April 15, 1931; $1,500 on the 10th of each month thereafter until the entire sum was paid. To secure the payment of the indebtedness, the partners undertook to execute their bond in the sum of $10,000 to be secured by a mortgage on their property at 403 East Jersey street in the city of Elizabeth, N.J.; and as additional security they also agreed to assign all their accounts receivable; and Samuel Elkin undertook to transfer all of his shares of the capital stock in Samuel Elkin, Inc., but with no voting power therein, unless and until a default of the terms and conditions of the agreement arose. Simultaneously there was executed by the partners an assignment of the accounts receivable referred to, aggregating about $28,000, and likewise the bond and mortgage for $10,000.

 On the same day and at the same time an agreement was executed between the Paragon Corporation and Samuel Elkin, Inc., wherein Paragon appointed the corporation as its agent to collect the accounts receivable. Though this agreement provided that the moneys collected by Samuel Elkin, Inc., should be the absolute property of the Paragon Corporation, Paragon, nevertheless, authorized Samuel Elkin, Inc., to retain the moneys collected, on condition that the corporation transmit, to Paragon, $1,000 on March 10,1931; $1,000 on April 1, 1931; and $1,500 on the 10th day of each month thereafter, until the entire indebtedness was paid off. The indebtedness referred to was the indebtedness of the firm to Paragon, the payment of which indebtedness had been assumed by the corporation.

 This agreement further recited that Samuel Elkin, Inc., was empowered in the collection of these accounts to withhold any sums in excess of the aforesaid monthly payments on condition that the corporation set over to Paragon accounts accruing in the regular course of business, in lieu of the amounts collected and retained by Samuel Elkin, Inc.

 It must be observed that the assignment of the accounts receivable from the firm of Citrin & Elkin to Paragon, and the subsequent designation by Paragon of Samuel Elkin, Inc., as its agent to collect those accounts, are not consistent with the proof offered by the complainant that all of the assets of the firm had been assigned to the corporation.

 Of course, if Samuel Elkin, Inc., never had title to these accounts and acted merely as agent in the collection of these accounts, then obviously this action must fall, because the corporation, therefore, was never in a position to assign the accounts. The complainant produced no evidence, so far as I am able to find from the record, of any such transfer of assets from the firm to Samuel Elkin, Inc., except the testimony of Samuel Elkin that all assets had been so transferred, and the recital in the bill in chancery in the New Jersey court filed by Paragon Paint & Varnish Corporation for the appointment of a state receiver of the assets of Samuel Elkin, Inc., wherein the respondent herein, being the plaintiff in the chancery suit, alleged that "the total assets of the partnership were conveyed to the corporation in return for stock received in the corporation," etc.

 On the assumption, however, that the corporation had acquired these accounts receivable by assignment, we may proceed to determine whether the complainant has succeeded is sustaining the burden of proof in respect to his cause of action.

 Section 60a of the Bankruptcy Act (U.S.C. title 11, § 96(a), 11 USCA § 96(a) provides that a person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, made a transfer which would enable any of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.

 Subdivision (b) of the same section (11 USCA § 96(b) enables the trustee to recover the property or its value providing the person receiving the property shall have had reasonable cause to believe that the transfer would effect a preference.

 It is seen then that, as a condition precedent to recovery, the burden is upon the trustee to prove insolvency of the bankrupt at the time of the making of the transfer. Assuming, as we have, that the bankrupt had title to the accounts receivable, the proof discloses that the bankrupt's assets on February 7, 1931, were the following: Accounts receivable $28,416.40 Merchandise 15,000.00 Real Estate -- Equity 6,000.00 Trucks and cars 1,800.00 Equipment -- Fixtures 4,000.00 Mortgage receivable 3,000.00 Total $58,216.40 As against the aforesaid assets the liabilities were the following: Paragon Paint & Varnish Co. $27,000 McDougall Butler & Co. 15,000 Other creditors 5,000 Total $47,000.00

 Of the above figures most of them were given by Samuel Elkin. The equity in the real estate was given by the bankrupt's expert appraiser. The equipment was an item which appeared on a financial statement issued March 31, 1931, to the Chatham & Phenix National Bank, which, however, Elkin contended, though given by himself, was false. This is true also of the item of $1,800 for trucks and cars. If one, therefore, were to deduct the sum of $5,800 in toto from the assets enumerated above, there would still remain $52,416.40, as against $47,000 of ...

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