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IN RE SAGMAN

January 6, 1953

In re SAGMAN


The opinion of the court was delivered by: WEINFELD

Respondent, N. Torczyner & Son, Inc., seeks to review an order of the Referee in Bankruptcy directing it to turn over various rings and other specified jewelry to the trustee of the estate of the bankrupt, a partnership consisting of Herman Sagman and his sons, William and Milton. The respondent was, and still is, engaged in selling diamonds. The bankrupt was also in the jewelry business.

The turnover proceeding was instituted upon the trustee's petition, which alleged that the respondent, within four months before the filing of an involuntary petition against the bankrupt, had obtained from it the rings and other jewelry and that their continued retention by respondent and refusal to deliver it to the Estate constituted a preference and a fraud, as defined by the Bankruptcy Act, 11 U.S.C.A. § 1 et seq.

 The respondent appeared specially, challenging the jurisdiction of the Referee and the Court, asserting that it held the property under a bona fide and substantial adverse claim, and that the jewelry was not in the actual or constructive possession of the Court at the time of the filing of the involuntary petition. It also filed an answer, which admitted the retention of the rings, but denied the material allegations of the petition as to its knowledge of insolvency and preference, and set up as an affirmative defense that it had obtained the chattels from the bankrupt as collateral for the return of various diamonds previously delivered to the bankrupt at various times on memorandum. *fn1"

 After hearings, the Referee overruled the plea of lack of jurisdiction and entered an order directing the turnover of the property to the trustee. It is this order which respondent now seeks to reverse, assigning various errors.

 The facts as found by the Referee substantially are as follows:

 On May 9, 1952, an involuntary petition was filed against the bankrupt. It had been indebted to the respondent on open account for $ 6,000; and, in addition, had received from the respondent diamonds on memorandum of the value of $ 9,596.08, which the bankrupt neither returned nor paid for. These transactions had taken place over many months prior to April 4, 1952, when the incident occurred which gave rise to the turnover proceeding.

 As early as November 1951, the bankrupt encountered financial difficulties. In February 1952, respondent was advised by the attorney for the bankrupt of its insolvency. Thereafter, over an extended period, respondent's and bankrupt's representatives held numerous conferences, some of which were attended by their attorneys, aimed at solving the bankrupt's financial difficulties. One proposal under consideration was an advance of funds by the respondent to the bankrupt to enable it to effect a compromise arrangement with the remaining creditors. Under this plan the respondent was to participate in the bankrupt's business. During the progress of these negotiations, the bankrupt became entitled to the possession of certain jewelry, referred to as the 'Boston parcel,' consisting of various rings, the subject matter of the instant proceeding. This jewelry was unrelated to, and did not constitute any part of, the merchandise previously delivered by respondent to the bankrupt on memorandum.

 On April 4, 1952, respondent requested Milton Sagman of the bankrupt firm to produce the 'Boston parcel' at its place of business for the alleged purpose of examining the same in furtherance of the proposed plan by which respondent was to finance the contemplated settlement with other creditors. The property, which was in regular jeweler trays, was examined and evaluated and then forthwith impounded in a safe by an officer of the respondent, who advised Milton Sagman that it would be held until the money due and owing to respondent from the bankrupt was paid. It was retained against Milton Sagman's protest, who finally demanded, and received, a receipt prepared by respondent's attorney, which omits any reference to terms or conditions of the retention of the property. Milton Sagman returned with an hour with his father and again demanded the return of the goods, which was refused. Repeated demands for its return by the bankrupt and creditors' representatives prior, and by the trustee subsequent, to the filing of the petition in bankruptcy were of no avail and respondent still retains the property, the value of which is stated to be $ 8,062.52.

 The foregoing summarizes the facts as found by the Referee. His conclusions of law were to the effect that at no time had bankrupt parted with legal possession of the 'Boston parcel'; that the respondent took the property tortiously and without the consent of the bankrupt; and, finally, that the respondent's asserted adverse claim to the property is not substantial, but is a mere pretense without legal justification and was advanced in bad faith.

 The Referee also rejected for failure of proof the respondent's affirmative defense that the property had been obtained by it from the bankrupt and held as collateral for the return of the merchandise previously delivered on memorandum.

 The respondent assigns various errors in seeking a reversal of the turnover order. Thus, findings of fact 4, 5, 6 and 7, which go to the issue of insolvency and respondent's knowledge thereof on and prior to April 4, 1952, are attacked on the ground that there is no proof in the record to sustain them. This contention dissolves upon a reading of the testimony and can hardly have been advanced with hope of success. The evidence establishes that knowledge of the insolvency of the bankrupt was conveyed directly to officers of the respondent by bankrupt's attorney and by the bankrupt itself and that respondent's representatives participated in a series of conferences to effect compromise arrangements of bankrupt's affairs where a basic consideration was the fact of insolvency. These and other facts and circumstances compel the conclusion that the bankrupt was hopelessly insolvent. So, too, must the attack fail upon the other findings which relate to the events of April 4, 1952, the value of the jewelry and demand for their return. All the findings are abundantly supported by the evidence. After reading the testimony and the record, I am persuaded that any contrary findings would have been 'clearly erroneous.'

 Respondent next urges that all the conclusions of law were decided erroneously by the Referee, but the principal challenge is directed towards the Referee's conclusion that the Bankruptcy Court had summary jurisdiction to determine the issues raised by the trustee's petition and respondent's answer and to issue the turnover order. It contends that as an adverse claimant it asserted a substantial, and not a colorable, claim, even though such claim may possibly be fraudulent.

 A Court of Bankruptcy has summary jurisdiction to determine and pass upon claims to property which is in the actual or constructive possession of the Court. Constructive possession exists 'where the property is held by one who makes a claim, but the claim is colorable only.' *fn2" The Court is not ousted of jurisdiction by the mere assertion of an adverse claim; it still retains the power to pass upon and determine the question of possession upon which depends its jurisdiction to make a summary order with respect to the disputed property. *fn3" Thus, the question is whether the adverse claim here asserted by respondent to the jewelry obtained from the bankrupt is substantial or merely colorable. If the latter, the Bankruptcy Court had constructive possession and so had jurisdiction and the power to make the summary order; if the former, the jurisdictional attack should have been sustained and the trustee relegated to a plenary suit. *fn4"

 It is undisputed that the bankrupt submitted the 'Boston parcel' for examination and inspection to the respondent's officer, who thereupon retained and withheld it. There was no voluntary surrender of the merchandise by the bankrupt. Respondent obtained physical possession by gaining the confidence of the bankrupt, posing as its benefactor, and misrepresenting the purpose for which it desired to examine the goods. Significantly, the answer admits that respondent 'induced the Bankrupt to deliver said chattels to (it) on the representation that the Respondent desired and ...


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