The opinion of the court was delivered by: MCGOHEY
Jacob Weissman held at least 90% of Charlotte Textile Company's capital stock when it was adjudicated a bankrupt with an estimated deficiency for general creditors of $ 300,000 in November, 1949.
On February 8, 1950 he refused, on advice of counsel, to answer questions during an examination pursuant to Section 21, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 44, sub. a, although directed by the referee to do so. The questions sought information about assets Weissman received from the liquidation of wholly-owned corporations which were closely integrated with the bankrupt. The referee filed his certificate and ordered Weissman to show cause why he should not be punished.
From the transcript of testimony it appears that Weissman's counsel advised him not to answer because the questions were 'outside of the scope of the examination relating to the acts, conduct and property of the bankrupt as such.' The same argument was urged before me but the facts in my opinion do not support it. Indeed, they seem to me to demonstrate the contrary, and so I find that the questions all relate to the acts, conduct and property of the bankrupt.
The bankrupt was organized in North Carolina in 1945 with a total capital of $ 70,000, all of which was paid in by Weissman who continued to be its sole stockholder until 'some time in 1948' when, he claims, he sold 10% of the stock to one Jess Lowen, the bankrupt's President.
The bankrupt manufactured and converted textiles which it sold to the drapery upholstery trade. Weissman, during at least part of the time after 1945, individually and through several wholly-owned corporations sold the same kind of material as the bankrupt dealt in to some of the same trade as the bankrupt served. Among a larger number of Weissman's corporations were the following, which are involved here: Stanwood Textile Mills, Inc., Sherwood Textile Corporation, J. E. Weissman, Inc., Mercury Mills, Inc., Payntar Realty Corporation, Montgomery Factors Corporation.
Lowen, while President of the bankrupt, was also General Manager of these and other Weissman corporations, though he was a stockholder of the bankrupt only and received his compensation from it alone. Weissman's 'advice' was sought, received and followed by Lowen in this over-all management.
During the years 1945 through 1947 the bankrupt and the first four of the above-named wholly-owned corporations, and Weissman personally, stored their merchandise in the same warehouse, which was the property of Weissman's Payntar Realty Corporation. The merchandise was never segregated in any way nor was any formal record kept to show ownership of any part of it. Weissman says that either he or Lowen could tell whose it was merely by looking at it. It seems to have been treated as common property for it was billed out under various names through a system of exchanges directed by Lowen with Weissman's advice and approval. During this period accounts of these enterprises were factored through Montgomery Factors Corporation.
Weissman testified 'the business was still mine whether it was Charlotte (the bankrupt), Haddon or any other instance.' Frank Abrams & Company were accountants for Weissman individually, his wholly-owned corporations and the bankrupt. General accounting reports which he received monthly informed him about purchases, sales, operations, profit and loss, and accounts receivable and payable of all the various enterprises.
In September, 1948, about a year before the bankruptcy, Weissman, who then owed the bankrupt a balance of $ 251,915.30 on a larger debt, decided to liquidate some of his corporations including those named above. He says his decision was based on Lowen's and his own judgment to accept the recommendation of the accountants 'to cut out all overhead and consolidating the business if possible into one.' In the liquidation, Weissman received dividends consisting of accounts receivable, 'possibly * * * some cash in the bank at that time', real estate and merchandise consisting of 'rayon yarns and upholstery fabrics made of rayon yarns * * * in general of the type and character of merchandise which Charlotte had never dealt in before.' Weissman retained part of these dividends, including the real estate, but transferred through book entries to the bankrupt the above described merchandise
at a value of $ 192,000 on account of his $ 251,915.30 debt. The balance was apparently made up by transfer to the bankrupt of some accounts receivable, other claims, fixtures and perhaps some of the case which 'was in the bank at that time.' In any event, on January 31, 1949, nine months before bankruptcy, the books of the bankrupt showed Weissman's debt discharged.
After the liquidation, the former business of the four corporations first named above was carried on by the bankrupt, and Weissman 'came into Charlotte to operate the business with Mr. Lowen.' He then went on its payroll at $ 400 per week, and 'had equal voice in the decisions to be made in connection with the operations and management of the business.' The bankrupt then took over the operation of two mills belonging to two other Weissman-owned corporations
in order to manufacture fabrics out of the yarns received in part payment of Weissman's debt. The bankrupt paid the mills some money monthly- how much Weissman could not recall- for the use of their machinery, facilities, patterns, etc.
To the foregoing might be added much more of similar import from Weissman's testimony, but it would unnecessarily extend this summary of the facts. What is here set down demonstrates, to me, that Weissman dominated and directed one large business enterprise of which the bankrupt and his other wholly-owned corporations were in fact merely departments, though in form they were separate corporations. They dealt in the same merchandise, a common stock in Weissman's warehouse, and they all sold it to the same general trade.
Weissman now says he did not know, prior to or even at the time of the discharge of his $ 251,915.30 debt to the bankrupt on January 31, 1949, that it was having difficulty paying its creditors. This is incredible. The accountants, whose monthly reports on all Weissman's corporations were received by him, say this was apparent as early as December, 1948. That was right in the period when Weissman was liquidating six named corporations so as 'to cut out all overhead and consolidating the business if possible into one.' And it is not disputed that shortly after it released Weissman on his debt, the bankrupt was pressed to get cash for insistent and questioning creditors.
By September 1, 1949, the bankrupt's condition moved its management to make the assignment for creditors. Then came the involuntary bankruptcy.
Weissman accepts as correct an inventory of all the bankrupt's merchandise as of January 31, 1949, and claims that it includes the merchandise credited at $ 192,00 against his debt to the bankrupt on the same date. The trustee's accountants report that accepting this inventory as true and correct, a subsequent one made after the assignment for creditors on September 1, 1949, reveals a shortage of 750,000 yards of merchandise.
Weissman testified on February 8, 1950, that Payntar Realty Corporation's warehouse in Long Island City was sold 'about eight or ten months ago' and brought 'about fifty some odd or maybe sixty thousand dollars', in cash after which the corporation was 'liquidated and dissolved.' At this point he began, on advice of counsel, to refuse to answer. The referee certifies as follows:
'5. The precise questions propounded to the said Jacob Weissman which he refused to ...