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IN RE STANLEY KARMAN

September 7, 1967

In the Matter of STANLEY KARMAN, INC., Bankrupt


The opinion of the court was delivered by: MOTLEY

Memorandum Opinion and Order on Petition to Review

 MOTLEY, District Judge.

 Petitioner, Stanley Karman, Inc., was adjudged a bankrupt on December 12, 1966. At that time, the Referee denied confirmation of an amended plan of arrangement submitted by petitioner in a Chapter XI proceeding commenced in a pending involuntary bankruptcy proceeding. 11 U.S.C. §§ 721, 723, 766.

 Petitioner seeks a review and reversal of the order of December 12, 1966 which also vacated a stay of the involuntary proceeding (entered upon the request of petitioner) and directed that that proceeding continue. 11 U.S.C. §§ 725, 776. Petitioner also seeks review of an order entered upon the same day denying petitioner's application to reopen the hearing on the objections and confirmation and a stay of adjudication.

 The involuntary petition in bankruptcy was filed on April 6, 1966, by Martin Goldstein, Inc., and three other corporations. The involuntary petition was predicated on the fact that petitioner had made an assignment for the benefit of creditors to American Fur Merchants Adjustment Bureau, Inc., which was filed in the office of the clerk of the County of New York, on February 24, 1966. 11 U.S.C. § 21. On April 7, 1966, the alleged bankrupt commenced proceedings for an arrangement under Chapter XI of the Bankruptcy Act pursuant to which a plan was filed on July 29, 1966, and an amended plan on October 17, 1966.

 The amended plan was accepted by the requisite majority in number and amount of all creditors affected by the arrangement whose claims had been proved and allowed. Thereafter, pursuant to notice published October 26, 1966, a hearing was held on November 10, 1966 to determine whether the arrangement should be confirmed. This hearing was continued until November 17, 1966, since objections were filed by Martin Goldstein, Inc., on November 7, 1966, objecting to confirmation of the amended plan.

 The amended plan provided for payment of administration expenses and allowances in full in cash on confirmation or in accordance with such terms and conditions as might be arranged between the debtor and each administration creditor and each person entitled to such allowance. Priority claims were to be paid in full. The balance of the plan provided as follows:

 
Unsecured creditors will receive the following:
 
a) To pay a sum equal to Thirty seven and one-half (37 1/2%) Per Cent of the indebtedness due to its general unsecured creditors payable in cash Thirty (30) days after confirmation.
 
b) In addition to the foregoing cash payment, the Debtor will execute an Assignment to the AMERICAN FUR MERCHANTS ASSOCIATION, INC., (hereinafter referred to as the Association) the proceeds the Debtor may be entitled to receive from the UNITED STATES FIDELITY & GUARANTY COMPANY under Policy Number SC108627, covering a loss sustained by the Debtor on January 21, 1966, so that the Association shall receive out of the net proceeds the first sum of $10,000., and an additional sum equal to Fifty (50%) Per Cent of the balance then remaining after the receipt of the aforesaid $10,000 payment. The amount so received by the Association shall be received by them for and on behalf of the general unsecured creditors of STANLEY KARMAN, INC. and shall be distributed by the Association pro rata amongst the creditors. The Debtor agrees that it will not retain any attorney or firm of attorneys to prosecute its claim under said policy of insurance unless said attorney or firm of attorneys shall first be approved in writing by the Association, and that said attorney or attorneys so engaged will not in any way compromise, settle or adjust the claim without prior written consent of the Association."

 On the continued hearing on confirmation and objections, testimony in support of the objections to the confirmation was heard, following which the Referee denied confirmation. At that hearing, petitioner did not offer any proof. The Referee based his refusal to confirm the plan on two grounds: 1) the plan is not in the best interest of creditors; and 2) the proposed amended plan and its acceptance were not in good faith. 11 U.S.C. § 766. The Referee's decision was based upon the following facts established at the hearing and appearing in the record generally.

 1) Two assignments of accounts receivable had been made by petitioner to Stuart Trading Corp. which were not perfected as required by the Uniform Commercial Code making these assignments vulnerable to attack by a trustee in bankruptcy or a debtor in possession, 11 U.S.C. § 742, and petitioner, the debtor and debtor in possession apparently proposes to recognize this voidable security interest.

 2) An inventory of merchandise which had belonged to Stanley Karman, Inc., the petitioner, had been sold to N.R.P. Corp. after the assignment for the benefit of creditors. N.R.P. Corp. is wholly owned by the uncle of Stanley Karman, the president, a director, and sole stock holder of Stanley Karman, Inc.

 3) The inventory of merchandise which had been sold to N.R.P. Corporation netted $20,000. The sale was negotiated at the premises of Stanley Karman, Inc. which had been occupied by N.R.P. ...


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