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IN RE LUMA CAMERA SERV.

December 13, 1943

In re LUMA CAMERA SERVICE, Inc.


The opinion of the court was delivered by: LEIBELL

LEIBELL, District Judge.

The respondent, Joseph F. Maggio, president of the bankrupt, brings up for review the Referee's order of August 9, 1943, which directed the respondent to turn over to the trustee merchandise belonging to the estate of the amount and value of $17,500, or the proceeds of the sale of said merchandise.

The bankrupt corporation was engaged in the business of selling photographic equipment and supplies at 340 West 42nd Street, Borough of Manhattan, City of New York. The respondent was the principal active officer and manager of the bankrupt. He owned the stock and dominated and controlled its affairs. The other officers and directors were his wife and mother-in-law. A general assignment for the benefit of creditors was made on December 30th, 1941. On April 14th, 1942, an involuntary petition in bankruptcy was filed and on April 23rd, 1942, there was an adjudication of bankruptcy. The first meeting of creditors was held on June 1st, 1942. The trustee in examining into the affairs of the bankrupt for the year 1941, discovered a merchandise shortage, and on January 18, 1943, he instituted turnover proceedings against the respondent for merchandise of the value of $34,781. After several hearings during which the bankrupt himself testified, the Referee made the order of August 9, 1943, which is the subject of this review.

 The Referee found (finding No. 12): "12. That under the evidence and the authorities the respondent, Joseph F. Maggio, was and now is in possession or control of merchandise belonging to the bankrupt estate of the amount and value of not less than $17,500, or the proceeds of the sale thereof; that said merchandise consists of photographic equipment and supplies of the class and description commonly purchased and dealt in by the bankrupt in the regular course of its business; that the respondent withheld and/or concealed said merchandise from the Trustee herein, and that the same belonged to the estate of the bankrupt herein." In tabulated form, the evidence as adduced before the Referee, appears as follows: Bankrupt's mdse. on hand Jan. 1, 1941 (From fran- chise tax returns and finan- cial statement) $ 30,889.95 Additional mdse. purchased during 1941 (According to the books and records) 101,998.62 Total mdse. to be accounted for $132,888.57 Less Net sales during 1941 amounted to $111,636.95 ac- cording to the books and records. If the sales were made at cost, then $111,- 636.95 of merchandise is thus accounted for. Some sales were made below cost on which the Referee al- lowed a loss of $2,099.34. The aggregate of these two figures is $113,736.29 Net balance of mdse. to be ac- counted for $ 19,152.28 Final Inventory at cost (from inventory sheets signed by Maggio) 1,652.28 Merchandise Shortage (not accounted for) $ 17,500.00

 The Referee refused to find that the bankrupt operated at any specific rate of profit. In this he favored the respondent. The evidence would have supported a finding that bankrupt's average gross profit was about 11%. Respondent testified that about $30,000 of his sales were at cost. In making his calculations the Referee considered that none of the sales in the year 1941 totalling $111,636.95 were made at a profit; in fact, he held that some sales were made at a loss of $2,009.34, although the bankrupt testified that the merchandise sold at a loss was between $1,000 and $2,000. By allowing the bankrupt more than a total loss on the merchandise the bankrupt had testified was sold at a loss, the Referee arrived at a round figure of $17,500, as the value of the merchandise for which the respondent had failed to account. The Referee was more than generous.

 In his petition for review, the respondent contends that the Referee's order is erroneous as contrary to the law and the weight of the evidence in that the trustee failed to prove that the respondent had in his possession merchandise of the bankrupt at the time of the filing of the petition in bankruptcy and at the time of the Referee's order of August 9, 1943, and "in not giving due accord to the evidence with respect to sales at a loss and in arbitrarily arriving at an amount to be turned over by the respondent to the trustee".

 The Referee in his opinion said that "on the evidence it would be impossible to find against the respondent on the basis of any specific rate of gross profit on sales", and therefore concluded that the maximum amount (of merchandise) that can be claimed to have been unaccounted for was the sum of $19,599.34. The Referee also stated:

 "It is true that it does appear that many sales are admitted to have been made by the bankrupt at a profit, but the respondent also claims that a number of sales in the latter part of the year were made at a loss.

 "The undersigned Referee is of the opinion that in view of the fact that the bankrupt has not given clear and explicit testimony with regard to the specific sales which were made at a loss, that under the law little heed can be given thereto. However, taking into consideration the fact that sales were made at a profit and making due and liberal allowance for any sales made at a loss, the undersigned Referee is of the opinion that there has been failure to account for a minimum of $17,500 worth of merchandise."

 The bankrupt's books of account were not written up for November and December, 1941. The sales were listed in the general ledger up to October 31, 1941. The trustee's accountant had to get the subsequent sales (November and December) from the cash book and bills. For the last two months the books were in bad shape. For November and December the figures as reconstructed by the accountant were -- purchases, $1,259.91; sales, $2,928.36; payments to creditors, $4,700.

 A comparison of the debtor's business for prior years with his business in 1941 up to October 31st shows that he did the same average business of purchases and sales in 1941 as in prior years. His franchise tax report and his financial statement to the Sterling Bank showed a net worth of $22,902.75 at the end of December, 1940. All of that was in inventory, which was $30,889 against an inventory of $20,250.24 at the close of 1939. He had bills payable of $18,284.45 at the end of 1940 against $14,397.33 at the end of 1939. His accounts receivable at the end of 1940 were $8,263.66 compared with $10,344.74 at the end of 1939. His larger inventory did not prove to be a handicap because the respondent himself testified that it was hard to get merchandise in 1941, especially after July, and that it cost more because of an increase in taxes. Respondent also testified that his creditors were pressing him in November and December and that he sold merchandise below cost. But his total sales in November and December, 1941, were only $2,928.36. His sales for the first ten months were about $109,000. It is clear therefore that the merchandise shortage occurred in those two months November and December, 1941, for which the bankrupt's books were in such poor shape. Giving respondent the benefit of every doubt, the irreducible minimum of the cost value of the merchandise unaccounted for was the $17,500 for which the Referee held him accountable.

 Petitioner's new counsel in his brief asks that the record be returned to the Referee and that he be directed to reopen the proceeding so that respondent may offer evidence on new matter allegedly not previously testified to, such as --

 1. The return of merchandise for which no credit was received in the turnover proceedings;

 2. Losses sustained on broken, spoiled, or exchanged merchandise, for which no credit was received in ...


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