The opinion of the court was delivered by: GALSTON
An involuntary petition was filed against the bankrupt on December 13, 1939, and an adjudication followed on December 29, 1939. Specifications of objections to his discharge were filed on October 2, 1940, which, among other things, recited:
1. That the bankrupt failed to keep books of account from which his financial condition might be ascertained; that he failed to keep cancelled vouchers issued by him; that he failed to keep a record of monies received and disbursed by him during 1938 and 1939, from which his financial condition might be ascertained.
2. That the bankrupt within twelve months preceding the filing of the petition transferred, with intent to hinder, delay and defraud his creditors, property belonging to the bankrupt estate consisting of 55% of the stock of the Mercer Tube and Manufacturing Corp., of a value of approximately $250,000 without any adequate present consideration therefor.
3. That the bankrupt committed offences punishable by imprisonment in that he made a false oath in the schedules by omitting a debt to the Modern Industrial Bank in the sum of $1,500; that he had no occupation; that he had no money or property in trust, whereas in fact he held $6,750 in trust for his wife, Hilda Greenberg, and that he had repaid no loans nor had he transferred any property within one year preceding the filing of the petition in bankruptcy.
4. That the bankrupt made false oath in the course of these proceedings in that he testified he had issued no financial statement, whereas in fact a financial statement was issued by him to the Modern Industrial Bank; that he had no bank account and had not had a bank account for more than a year preceding the filing of the petition, whereas he had accounts in the Bank of Manhattan Trust Company and the Sterling National Bank; that in the year 1939 and prior to the filing of the petition, he had issued a false statement in writing respecting his financial condition in order to obtain money on credit from the Modern Industrial Bank.
5. Finally that the bankrupt failed satisfactorily to explain losses of assets and to account for the discrepancy between his assets and liabilities, and the insufficiency of his assets of a nominal value to meet his liabilities in the sum of $198,941.12.
The referee, summarizing the record before him, sustained all of the objections set forth in the specifications. Whereupon the petitioner, seeking a review of the referee's order of April 17, 1942, complains that the order was erroneous in that the "relinquishment" by the bankrupt of the stock of the Mercer Tube and Manufacturing Corp. for an inadequate consideration under duress was not a bar to his discharge in bankruptcy; that the petitioner's letter to the Modern Industrial Bank was not intended to constitute a financial statement and was not relied upon by the Bank in making a loan, and cannot constitute a bar to a discharge; that the records of the corporation in which petitioner was interested were not examined in this proceeding, and it was not shown that a proper examination would not have revealed a true situation of the corporation's or petitioner's interest therein; and that failure to schedule the Modern Industrial Bank was due to an oversight on the part of a stenographer and consequently should not bar his discharge.
The referee found, and the record supports him, that as at March 17, 1939, the bankrupt had no assets remaining other than his stock holdings in the Mercer Tube and Manufacturing Corp. and in the Central Herrick Corporation, and that at that time he owed several hundred thousand dollars, either directly or as an accommodation endorser. The stock of the Central Herrick Corporation had no value.
The bankrupt was an officer of the Mercer Tube and Manufacturing Corp. and received a salary of $15,000 annually. He had appropriated from the treasury of the company -- he was a majority holder of the stock -- the sum of $25,000, and had extended credit to various corporations in the amount of $30,000, which corporations apparently were supplying materials to other corporations with which he was associated. In consequence his fellow stockholders, having learned of these unauthorized appropriations and credits, demanded settlement from Greenberg. Accordingly he did assign his stock for the sum of $40,000 upon threat of criminal prosecution. Since he had no other assets of substantial nature, he was left unable to meet liabilities to other creditors approximating $200,000. The value of the stock at the time of the transfer was apparently $200,000, for the accountant for the corporation testified that the book value of the company's capital stock was $380,000, and Greenberg's holding was 55% thereof.
Our first inquiry, therefore, is whether the transfer of the stock in the circumstances related constitutes a transfer with intent to hinder, delay and defraud creditors of the bankrupt so as to prevent his discharge.
Presumably the objecting creditor relies on section 14, subdivision c(4) of the National Bankruptcy Act, 11 U.S.C.A. § 32, subdivision c(4), which provides that a ground of objection to discharge exists if the bankrupt, within twelve months before the date of his bankruptcy, transferred, destroyed or concealed or permitted to be removed or concealed, any of his property with intent to hinder, delay or defraud his creditors. In Dean v. Davis, 242 U.S. 438, 37 S. Ct. 130, 132, 61 L. Ed. 419, the matter related to preferential transfers, and the court considered the question of intent as spelled out of the act of transfer of assets, for the court recognized that there is a distinction between the intent to prefer and the intent to defraud. Mr. Justice Brandeis pointed out that a transaction may be invalid both as a preference and as a fraudulent transfer, though it may be invalid only as a preference or only as a fraudulent transfer. In the present case there can be no question that the bankrupt's obvious intent was to prefer the Mercer Tube and Manufacturing Corp. Did he of necessity intend also to defraud his other creditors? The referee having sustained the objection must have concluded that the bankrupt intended both to defraud his creditors, as well as to prefer the Mercer Tube and Manufacturing Corporation, because the loss of the stock left the bankrupt without any assets of value when at the time he had liabilities of $200,000. In Dean v. Davis, supra, Mr. Justice Brandeis, speaking of the bankrupt, said:
"Jones knew that he was insolvent. He knew that he was making a preferential payment. He must have known that suspension of his business and bankruptcy would result from giving and recording a mortgage of all his property to secure a note which had matured before the mortgage was executed. The lower courts were justified in concluding that he intended the necessary consequences of his act; that he willingly sacrificed his property and his other creditors to avert a threatened criminal prosecution;"
See, also, Mitchell Co. v. Lawton, 3 Cir., 82 F.2d 689; In re Gurney, 2 Cir., 71 F.2d 144; In re Richter, 2 Cir., 57 F.2d 159; In re Winik, D.C., 39 F.Supp. 3; and ...