The opinion of the court was delivered by: BYERS
Hearing on motion for an order to confirm a composition and to reject report of referee sustaining one specification of objection to composition offer.
The referee has filed a report dated September 21, 1936, in which he finds that specifications of objection Nos. 1 and 3 are not supported by testimony, but that specification No. 2 has been sustained. If his report is to be confirmed, the composition will fail.
The objecting creditor offers no argument in behalf of specifications Nos. 1 and 3, and the testimony is confined to specification No. 2, which is that the bankrupt issued a false and fraudulent statement of its financial condition on or about July 22, 1935, knowing the statement to be false, and that the objecting creditor would rely upon the same and extend credit to the bankrupt, and that credit was in fact so extended in reliance upon said statement.
The referee reports the statement to have been false, and that the liabilities of the bankrupt exceeded assets by $45,339.82.
The paper in question is Creditor's Exhibit 1, purporting to show the bankrupt's financial status on July 22, 1935, and shows a total of assets of $163,763.22, as against which the following liabilities are listed:
Accounts payable $ 3,277.60
Notes payable (commercial) None
Notes payable (mortgage A.C.C.) 58,500.00
Profit and loss account 101,985.62
The referee revises the foregoing by the following deductions from the assets side:
Trucks $ 2,500.00
Accounts receivable 3,228.60
Merchandise inventory 15,116.22
and by increasing the liabilities by two items:
Notes payable $10,500.00
The referee does not change the profit and loss item when he increases liabilities by the said $17,000.00 and, having made these changes, he concludes that, when the statement was made and issued, the liabilities exceeded the assets by $45,339.82.
If the two items amounting to $17,000.00, made up as above stated, were to be stated as identified liabilities, the item of "profit and loss" would be reduced to $84,985.62, and the total of liabilities would be either $163,263.22 or $163,763.22, depending upon whether the mortgage were to be listed at $58,000.00 or at $58,500.00. This would reduce the excess of liabilities over assets to something over $28,000.00.
Before considering these figures in detail, it should be stated that Creditor's Exhibit 1 is asserted by the bankrupt to be a tentative balance sheet and not a financial statement. It is thought that this is a distinction without a difference, because the testimony is clearly to the effect that the creditor was seeking information concerning the financial resources of the bankrupt, in order to decide whether to continue to extend credit, and no authority is cited for the proposition that a balance sheet may be false, while a financial statement should not be. Section 14, paragraph b, subdivision (3), of the Bankruptcy Act, as amended (11 U.S.C.A. § 32(b) (3), reads: "or (3) obtained money or property on credit, or obtained an extension or renewal of credit, by making or publishing, or causing to be made or published, in any manner whatsoever, a materially false statement in writing respecting his financial condition."
The circumstances under which the paper was issued are briefly these:
The bankrupt corporation had been acquired by two persons by the name of Davy and Stocker on or about July 1, 1935, pursuant to an arrangement the details of which are somewhat obscure as stated in the testimony. It appears generally that the real estate listed as an asset at $85,000.00 was not owned by the corporation at the time that the statement was issued. It had been contracted for at the price of $65,000.00, and the listing at the value of $85,000.00 is not satisfactorily explained. Probably for present purposes the claim of ownership of the real estate by the corporation was plausible, but the increase in value of $20,000.00 over the purchase price has not been demonstrated.
Seemingly Davy had bought from the corporation its tangible assets other than real estate, consisting of equipment, merchandise, etc., and had given his promissory note for $10,500.00, and he then sold this back to the corporation, which assumed the payment of his note, thus giving rise to the asserted liability in that sum which had been omitted from the statement in question. Davy also paid $6,500.00 for the equity in the real estate, and that amount the corporation undertook to repay to him upon his agreement to transfer his contract to purchase the real estate. Thus, the two items which total $17,000.00 and which the referee says should have been listed as liabilities.
There is testimony that this $10,500.00 was actually paid out of the funds of the corporation to the holder of the note, Mr. Raymond, who had formerly conducted the bankrupt and was its principal, if not only, stockholder. That is consistent with a recognition by the corporation of that item as a corporate liability.
The $6,500.00 was carried on the books of the corporation as a corporate obligation but apparently the testimony fails to disclose that it has been paid.
It appears therefore that the referee is justified in his conclusion that these were corporate liabilities and ...