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MALONE v. GIMPEL

July 17, 1956

Bernard J. MALONE, as Trustee in Bankruptcy of Little Falls Dairy Company, Inc., Bankrupt, Plaintiff,
v.
David GIMPEL, Defendant



The opinion of the court was delivered by: BRENNAN

The plaintiff in this action seeks the recovery of $ 10,000, withdrawn by the defendant from a bank account standing in the name of the bankrupt, within four months of its adjudication in bankruptcy.

The plaintiff's complaint seeks a judgment against the defendant based upon three separate causes of action. The first and third causes of action are similar in that they allege the wrongful withdrawal of funds belonging to the bankrupt by the defendant who at that time was an officer and director of the bankrupt. The second cause of action seeks the recovery of $ 10,000 upon the theory that the payment made to the defendant created a preference under the provisions of the bankruptcy law.

 As a matter of convenience, this action was tried together with civil action No. 5187, D.C., 151 F.Supp. 544, which involved business transactions between the bankrupt, the present defendant and an additional third party who was made a defendant in the latter action. The evidence offered discloses no serious factual dispute and the findings follow in narrative form.

 The Little Falls Dairy Co. Inc., hereinafter referred to as 'Little Falls' or the 'bankrupt', is a corporation primarily engaged in the purchase of fluid milk from the producers in the vicinity of Little Falls, N.Y. and the marketing of same to distributors in the vicinity of the City of New York.

 The defendant is an officer and director af a corporation known as 'Gimpel Farms Inc.' located at Maspeth, Long Island, and engaged in the distribution of milk in the New York City area. The record discloses that for some years prior to 1953 and continuing up until Jan. 23, 1953 business relationships existed between Little Falls and Gimpel Farms whereby fluid milk was sold by Little Falls to Gimpel Farms. On Jan. 29, 1951 a written agreement of purchase and sale was entered into between the two parties, to commence on Mar. 1, 1951, to run for one year. It was later extended to Mar. 1, 1953. On the same day, a written agreement was entered into between Little Falls, as one party, and the defendant and one Bolstein, as the other party, whereby the sum of $ 30,000 was loaned or advanced by the two individuals, to be repaid in accordance with the terms of the agreement. These agreements are referred to in more detail in case No. 5187 and are not essential to this decision and are mentioned here as a history of the transactions and as indicating some knowledge on the part of this defendant as to the financial standing of Little Falls.

 On Jan. 14, 1953, an agreement was entered into between the defendant and one Zipser and Charles Braveman, individually and as Vice President of Little Falls Dairy Co. This instrument is very definitely involved in this litigation. It bears the individual signatures of defendant and Zipser and the individual signature of Charles Braveman and Little Falls Dairy Co. Inc. by Charles Braveman, Vice President. The agreement recites that Braveman is the majority stockholder of Little Falls which corporation is in financial difficulties and is in immediate need of funds for the continuance of its business. Insofar as material here, the agreement contemplates the investment by Gimpel and Zipser of the sum of $ 20,000 in Little Falls as additional capital. Some 4,500 shares of stock of Little Falls were to be transferred to Zipser and Gimpel or their designees.

 Paragraphs 5 and 6 of the agreement are particularly involved here and set out below.

 '5. The within agreement is further subject to audit of the books and records of Little Falls Dairy Co. Inc. by A. S. Schneck, certified public accountant, and in the event the said Herman B. Zipser and David Gimpel are not satisfied with the financial status of Little Falls Dairy Co., Inc. for investment purposes by reason of circumstances reflected on the complete audit of the said books and records by the said A. S. Schneck, then in such event the said Herman B. Zipser and David Gimpel shall have the right to refuse to proceed with any investment in Little Falls Dairy Co. Inc. and return the stock theretofore received by them to the escrow account of Herman B. Zipser in accordance with the agreement under which he heretofore held same.

 '6. All sums advanced by Herman B. Zipser and David Gimpel prior to the completion of the said audit by A. S. Schneck shall be deemed loans to Little Falls Dairy Co. Inc. to be repaid out of collections due Little Falls Dairy Co. Inc. from Caldwell Farms, Inc. and Gimpel Farms, Inc. subsequent to the date hereof, and for such purpose the said Little Falls Dairy Co. Inc., by Charles Braveman, Vice-President hereby assigns to the said Herman B. Zipser and David Gimpel all sums of money due and payable from the date hereof by Caldwell Farms, Inc. and Gimpel Farms, Inc., as collateral security for the said loan with full right to collect same on account of all sums theretofore advanced if they so desire, and the said Little Falls Dairy Co. Inc. hereby authorizes Joseph McGinley, its sales manager to collect the said checks and endorse same as required to effectuate payment of any said indebtedness.'

 The next day after the execution of the agreement referred to above and on the evening of Jan. 15, 1953, a meeting of the directors of Little Falls was held at Little Falls N.Y. Braveman resigned as Vice President and director of Little Falls. The defendant Gimpel was present at the meeting and was elected a director and treasurer of Little Falls. The defendant, Gimpel, and one Bolstein, who was also elected a director, were authorized to sign checks for Little Falls. The next day, on Jan. 16, 1953, two new bank accounts were opened by Gimpel in the Herkimer County Trust Co. at Little Falls. The account in the name of 'Little Falls Dairy Co. Inc., Milk Account' was made up of a check of $ 10,000. The check was signed by Gimpel Farms Inc. and payable to Little Falls. Without dispute, this check represented an advancement or loan by the defendant, Gimpel and Zipser and the plaintiff contends the agreement was in accordance with the written agreement of Jan. 14, 1953. The balance of the account, $ 7,508.62, was made up of a check from Gimpel Farms, payable to Little Falls, and represented the balance due from Gimpel Farms to Little Falls on account of milk previously delivered. The second bank account was opened in the same banking institution in the name of 'Little Falls Dairy Inc.', the original deposit of $ 3,018.40 consisting of a check of Caldwell Farms Inc., payable to Little Falls and represented payment to Little Falls for milk previously delivered by Little Falls to Caldwell Farms. Little Falls had previously maintained three bank accounts at the Little Falls National Bank, one known as a 'milk account', one as a 'dividend account' and the other simply bore the name of 'Little Falls Dairy Co. Inc.'. These three bank accounts became essentially inactive after the opening of the two new accounts as above set forth.

 In accordance with the agreement of Jan. 14, 1953, a partial audit of the books and records of Little Falls was made by Mr. Schneck. His pencilled report showed liabilities as of Jan. 21, 1953 of $ 193,668.09. The report did not attempt to enumerate the assets of Little Falls. The report so furnished by the accountant did not meet the approval of the defendant and on the same day, to wit, Jan. 21, 1953, he drew a check in the amount of $ 8,000 payable to himself and signed 'Milk Account, Little Falls Dairy Co. Inc., David Gimpel, Treasurer'. On the same day, he drew a check in the amount of $ 2,000, payable to David Gimpel, signed 'Little Falls Dairy Co. Inc., David Gimpel, Treasurer'. The defendant received the cash represented by the two checks in the total amount of $ 10,000. One-half of said amount was returned to or credited to Zipser. The milk account at the time the check was drawn had a balance of $ 8,657.41 and the other account at the time the $ 2,000 check was drawn had a balance of $ 2,517.05. On the evening of the same day, Jan. 21, 1953, a meeting of the directors of Little Falls was held. The defendant disclosed the financial condition of the company as reported by the accountant which he asserted was contrary to the statement made to him by Braveman and which was therefore unsatisfactory to him. He indicated an election to cancel the contract. Defendant Gimpel also resigned as Treasurer of Little Falls and the resolution, authorizing the defendant and Bolstein to sign checks of the corporation, was rescinded.

 On Feb. 16, 1953 Little Falls filed a petition under Chapter 11 of the Bankruptcy Act in the Clerk's office of this district. Bernard J. Malone was thereafter appointed trustee and he brings this action, as indicated above.

 The defendant, in his answer and in the brief submitted, denies the allegations of the complaint and appears to take alternative positions -- (a) That the $ 10,000, which is the subject of this action, never became the property of Little Falls but that title was retained by the defendant during the period of time required to audit the books of the bankrupt and was subject to the condition that such audit would reveal a financial condition satisfactory to the defendant. (b) That the moneys advanced were induced by the false representation of Little Falls through its Vice President and General Manager, Braveman, as to the extent of Little Falls' outstanding liabilities. Defendant concludes that paragraphs 5 and 6 of the agreement of Jan. 14, 1953, above quoted, were induced by such fraud which vitiated the agreement and that the repayment to Gimpel of the moneys represented by the $ 8,000 and $ 2,000 checks was in fact and law the turning back to him of moneys which were rightfully and legally his.

 To decide the problem presented, the arrangement under which the moneys were received by Little Falls, ...


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