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IN RE WILLIAM J. MCCARTHY

October 26, 1954

In the Matter of WILLIAM J. McCARTHY, Inc., Bankrupt


The opinion of the court was delivered by: DAWSON

This is a petition by the Vernon Lumber Corporation for review of an order and decree of the Referee in Bankruptcy, dated August 13, 1954, disallowing a claim of the Vernon Lumber Corporation against the bankrupt, in the amount of $ 1,947.92, and taxing costs against the said lumber company.

The petition alleges error in that the Referee admitted into evidence Trustee's Exhibits 3 and 4; that Items 5, 6, 10, and 11 of the Referee's findings of fact are contrary to the evidence; that conclusions of law 1 through 11, inclusive, are contrary to law and contrary to the evidence.

A voluntary petition in bankruptcy was filed by the bankrupt herein on October 28, 1952, in which the schedule of unsecured creditors listed the Vernon Lumber Corporation as a creditor in the amount of $ 1,947.92. On November 1, 1952, Vernon commenced an action in the Municipal Court of the City of New York, against William J. McCarthy, an individual, for goods sold and delivered in the amount of $ 1,947.82. The defense in this action was that the goods were sold to the corporate bankrupt, William J. McCarthy, Inc., not to William J. McCarthy, an individual. Upon the trial of the action, the complaint was dismissed on the merits and judgment entered for the defendant William J. McCarthy. *fn1"

 Thereafter, on May 7, 1953, Vernon filed its proof of claim in the bankruptcy proceeding. It stated in Item 3 that the consideration for the claim was sales to William J. McCarthy as an individual; that thereafter McCarthy swore that the lumber was purchased and used by the bankrupt William J. McCarthy, Inc.; that, therefore, claimant elects to hold both the individual William J. McCarthy and the bankrupt William J. McCarthy, Inc. responsible, and waives no rights against the individual William J. McCarthy by reason of the filing of its claim.

 On March 23, 1954, the attorney for the trustee in bankruptcy moved to disallow the claim of Vernon. On March 25, 1954, Vernon moved to amend its proof of claim so as to set out in detail in Item 3 the determination of the aforementioned action in the Municipal Court of the City of New York; to allege that, in fact, the bankrupt received and used the lumber upon which its claim was based; and to further plead that the bankrupt would be unjustly enriched if not required to pay for the lumber purchased in the amount of $ 1,947.92. Hearings were held on the controverted claim.

 On July 12, 1954, the Referee handed down an opinion in which he disallowed the claim on the ground that claimant had perpetrated a fraud upon the Court. On August 13, 1954, the Referee granted the trustee's motion and ordered that the claim of the Vernon Lumber Corporation be disallowed. It is that order that is now before the Court.

 The Referee arrived at his conclusion that the claim of Vernon should be disallowed on two principal points:

 1. That the affidavit of the corporation, Vernon, by its Vice-President, in the action in the Municipal Court of the City of New York, that the debt in question was the personal liability of William J. McCarthy, cast the burden of proof upon Vernon to satisfy the Bankruptcy Court that, in the exercise of its equitable jurisdiction, it should allow the claim, and such burden had not been met.

 2. That Vernon by deliberately failing to produce its Vice-President and Treasurer, wilfully suppressed available evidence and perpetrated a fraud on the Court.

 In his opinion, the Referee stated:

 
'The evidence at the hearing showed that the bankrupt, William J. McCarthy, Inc., purchased from Vernon this lumber and agreed to pay therefor $ 1,947.92, and Vernon would be entitled to a judgment at law. Such evidence is the listing of the debt in bankrupt's schedules, in its books, and in its copies of orders in the name of William J. McCarthy, Inc. Such evidence makes a prima facie case for a judgment at law. But because of Werfel's affidavit (Vernon's Vice President) in Vernon's motion for summary judgment in the Municipal Court and his failure to claim a sale to the corporation in his deposition to prove a claim, the burden is still on Vernon to satisfy the bankruptcy court that, in the exercise of its equitable jurisdiction, it should allow the claim.'

 The Referee then proceeded to assume that Vernon did not meet the burden. He stated in his opinion:

 
'Entries in the bankrupt's books and statements in its schedules and McCarthy's testimony may not be correct. The bankrupt corporation would not be liable if in fact the lumber was bought by McCarthy individually and not as agent, and McCarthy had resold it or made a gift to the corporation.'

 The record provides no support for either of these assumptions. A court may not arbitrarily assume a hypothetical set of facts and impose the burden of disproving these facts upon a claimant. The filing of a sworn proof of claim is sufficient to establish a prima facie case. To meet objections, a claimant need only prove his claim; he need not disprove other contentions, unless they are raised. Vernon's burden was to substantiate its claim. It did not have to do more. All matters of affirmative defense rested on the objecting trustee. In re Hannevig, 2 Cir., 1925, 10 F.2d 941, ...


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