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November 9, 1965

In the Matter of Walter BERNFELD, Bankrupt

Zavatt, Chief Judge.

The opinion of the court was delivered by: ZAVATT

ZAVATT, Chief Judge.

On October 20, 1964, Walter Bernfeld filed a petition in bankruptcy. Thereafter, on November 30, 1964, Royal National Bank of New York filed objections to the granting to Bernfeld of a discharge in bankruptcy. The stated grounds of the objections were that the bankrupt assigned "false and fictitious" accounts receivable to the objectant bank, with knowledge that the accounts receivable were "false and fictitious" and "for the purpose of procuring and obtaining" certain moneys from the objectant bank. Objectant further alleged that the accounts receivable "were delivered with the intent to defraud the said Bank. * * *" The objectant bank did not specify the provision of the Bankruptcy Act under which it was objecting.

 A hearing was held before Referee in Bankruptcy Joseph V. Costa on January 20, 1965. At the conclusion of the testimony on behalf of the objectant, the bankrupt moved to dismiss the objections to his discharge

"on the ground the objectant has failed to provide an adequate basis or create any reasonable question as to the conduct of the individual bankrupt in obtaining credit from the Royal Bank and has only introduced documents acknowledging that the bank was willing to advance moneys against post-dated invoices and did so to their financial loss but not through any fault on the part of the bankrupt, who submitted these accounts with post-dates on them and in no way attempted to get money under false pretenses." (Transcript of January 20, 1965 at 79-80.)

 The Referee denied the motion recognizing that the objectant bank had established a prima facie case. (Ibid.) The hearing was adjourned until June 8, 1965 to give the bankrupt "an opportunity to answer charges made." (Id. at 81.) At the conclusion of the hearings, the Referee found "that insofar as the allegations in the specifications are concerned, the objectant has made out a prima facie case." (Transcript of June 8, 1965 at 153-54.) He then continued:

"The question is was there a fraudulent representation made by the bankrupt with an intent to defraud.
My conclusions are that it is the well settled rule that the Bankruptcy Act on the question of discharge is to be strictly construed against the objectant and liberally construed in favor of the bankrupt. The burden of proof on an objection is always on the part of the objectant. I did state in my findings the fact that a prima facie case was made out by the objectant in its direct case and upon the admission made by the bankrupt. However, I find that the bankrupt did make an explanation satisfactory to the Court to indicate that there was no fraudulent intent on his part.
It is well established that the objections, as filed in this case, would indicate a violation of Section 14(c)(1) of the Bankruptcy Act. It certainly does not indicate a violation of Section 14(c)(3), which would be while in or engaged in business as a sole proprietor, et cetera, obtained credit by making or publishing or causing to be made or published a false statement.
I find that the violation is one under Section 14(c)(1), alleging that he committed an offense punishable by imprisonment provided under Title 18, United States Code Section 152, and the law is well settled that in order to sustain an allegation under that subdivision of Section 14, the objectant must prove the commission by the bankrupt of an offense which is punishable by imprisonment, as provided under that section, in that there must be an intent to defraud.
The facts, as adduced by me on this hearing, indicate a failure of proof or a failure on the part of the objectant to sustain that burden to prove that there was an intent to defraud and this conclusion is reached, based upon the dealings between the parties, namely the slipshod manner in which the original agreement itself was drawn, the signing of the same before it was filled in, and the two provisions which I consider to be very important, namely the amount of the extent of credit and the interest to be charged, not being inserted in the agreement, which indicated somewhat of a close relationship or fiduciary relationship between the parties, at least the bank trusting the debtor and the debtor trusting the bank as to the amount or extension of credit or interest to be charged.
That thereafter the dealings between the parties indicated a somewhat different relationship than that of the ordinary borrower in that the father of the bankrupt was an officer of the bank and perhaps there was some tendency upon the officers or employees of the bank to overlook strict adherence to the provisions of the agreement, such as even providing the shipping bills of lading or the shipping receipts, which Mr. Orens claims or stated, was waived in this case.
Also, the leniency with which the bank permitted the debtor or the bankrupt to exceed its limited credit line of $135,000, all which would indicate that there was a relationship here of trusting one another, feeling there would not be any violation of this trust, but still there is no indication of in fact an intent to defraud.
The bank did make a loan beyond the amount it expected to make and the assets of the estate are not sufficient to satisfy the loss on the amount it extended credit upon, based upon shipments which were not fulfilled, but I find the bank should have so known from the documents that were presented to this Court, which came from the records of the bank itself, true as supplied by the bankrupt to the bank. However, they did come from the records of the bank itself concerning which Miss Abrams testified and which they took for granted and they felt that the borrower had complied with certain records, as she understood it, but it was evident from an examination of these schedules, which were submitted by the bankrupt to the bank, right on the face of these papers, that shipments had not yet been made and shipments would not be made until a later date. Notwithstanding that fact the bank decided to continue to extend credit to the bankrupt.
In such a case, I cannot in my heart find it to be an intent to defraud by the bankrupt but rather a course of business conducted by the bankrupt in which the bank acquiesced.
I therefore find that the objectant, the bank herein, has failed to sustain the burden of proof in its specifications of the commission by the bankrupt of an offense punishable by imprisonment as provided under Title 18, United States Code, Section 152 and dismiss the objections." (Transcript of June 8, 1965 at 159-63.)

 Thereafter, on July 19, 1965, Referee Costa ordered Walter Bernfeld discharged from his debts. On July 23, 1965, objectant Royal National Bank filed, in this court, a petition to review the Referee's order, setting forth substantially the same arguments it presented in its original objections to the granting of a discharge. Both the objectant and the bankrupt submitted memoranda to this court. The petition to review was set for argument on August 11, 1965. The objectant, in its memorandum, indicates the statutory provision under which it objects to the discharge by quoting [incorrectly] a portion of section 14, sub. c(1) of the Bankruptcy Act. Objectant, further, seems to assume that it has the "burden of proving" intent on the part of the bankrupt to defraud a creditor. Bankrupt, on the other hand, submits a memorandum designed to establish that objectant bank has not established a case in fraud under New York law. This court held a hearing ...

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