The opinion of the court was delivered by: ZAVATT
Meadow Brook National Bank (Bank), the objecting creditor, moves to confirm the report of Referee William J. Rudin, dated April 6, 1970, which recommended that the specifications of the creditor be sustained and that the bankrupt be denied a discharge in bankruptcy. The bankrupt challenges the findings of fact and conclusions of law contained in the report and also raises some procedural issues concerning delay in the proceedings and the power of this court to re-refer
the case to the Referee. The court adopts and confirms the Referee's findings of fact and conclusions of law.
In order to understand the issues raised by the instant motion, it is necessary to recount the history of this protracted litigation. On November 20, 1964, Louis C. Ostrer (hereinafter, bankrupt) filed a voluntary petition in bankruptcy and was adjudicated bankrupt on that date. The Bank, a creditor of the bankrupt, filed specifications of objections to the discharge of the bankrupt alleging that the bankrupt had obtained extensions of credit on certain loans from the Bank, by the filing of a false and fraudulent financial statement. See section 14c(3) of the Bankruptcy Act (Act) 11 U.S.C. § 32(c)(3).
Extensive hearings were held before the Referee during December 1965 and January 1966. On October 13, 1966, the Referee rendered his decision. He made findings of fact and conclusions of law and ordered that the specifications be dismissed and the bankrupt granted a discharge. The Referee based his decision on the fact that although the statement submitted to the Bank was erroneous in that it listed assets which were not owned by the bankrupt, it had omitted to list assets of greater value which the bankrupt did own. The Referee concluded that the existence of these unlisted or "balancing assets" negated any intention on the part of the bankrupt to deceive the Bank by the delivery of the financial statement and, therefore, did not fall within the ambit of § 14c(3) of the Act.
On motion of the creditor to review the Referee's report, this court, in a memorandum-order dated February 24, 1967, without reviewing the findings of fact, reversed the Referee on the law. I held that intent to deceive was irrelevant under § 14c(3), if the bankrupt had actual knowledge that the submitted statement was incorrect to a material degree, and held that, since it was undisputed that bankrupt had such actual knowledge, the discharge should not have been granted. On April 19, 1968, the Court of Appeals for the Second Circuit (Judge Ryan, dissenting) reversed this court, In re Ostrer, 393 F.2d 646 (1968), holding that a knowingly erroneous statement, which was not delivered with an intent to deceive or defraud bankrupt's creditors, was not "materially false," within the meaning of section 14c(3) of the Act. The Second Circuit did not pass on the Referee's findings regarding the so-called "balancing assets," remanding the case to this court to consider the Referee's findings in that regard.
As of the date of the remand, no court had yet passed upon the findings of fact contained in the Referee's initial decision. Specifically, no court had reviewed his finding that these "balancing assets" existed, a finding that was the sine qua non of his conclusion that the statement was submitted with no intent to deceive the Bank. Upon reading the entire file, and upon consideration of the Bank's claims in regard to the "balancing assets," this court was unsatisfied with the Referee's findings and, on April 1, 1969, I re-referred the case to the Referee "for further findings in accordance with the decision of the Court of Appeals * * *."
At an unspecified date after the re-reference, the parties appeared before the Referee. It does not appear in the record that the bankrupt challenged the propriety of the re-reference when he appeared before the Referee, and it is certain that he made no motion before this court in connection therewith, although bankrupt now claims, almost two years later, that the re-reference was erroneous. In any event, the parties agreed that there was no necessity for further hearings in connection with the re-reference. The Referee, therefore, reconsidered the entire file. In a report, dated April 6, 1970, he found that the "undisputed testimony" in the record indicated that the "balancing assets" were hypothecated to banks for loans and that the equity in said assets was thereby diminished. In addition, the "balancing assets" had been held by bankrupt's brothers-in-law, the Krieglers, and had been co-mingled with similar assets owned by the Krieglers. Therefore, the Referee found that it was impossible to determine what portion of the bankrupt's assets so pledged for the Krieglers' loans might be jeopardized in the event of a default by the Krieglers. The Referee found that the diminished equity in the "balancing assets," did not offset the value of the assets that had been erroneously included in the statement and, consequently, concluded that the statement was intended to deceive the Bank. He, therefore, changed his original findings, recommended that the Bank's specifications be sustained and a discharge be denied.
The bankrupt now challenges the findings in the Referee's report claiming: (1) that there has been a denial of due process because of the delay in the proceedings; (2) that the court was without power to re-refer the case to the Referee for report and the Referee was without power to change his findings; (3) that since the Referee relied on an incorrect economic theory in reaching his conclusions regarding the "balancing assets," his subsequent findings as to intent are erroneous.
I The claim that due process was denied to bankrupt because of delay in the proceedings.
Bankrupt argues that he was denied due process because of delay in this case which started with the filing of his petition in 1964. The court need not even consider the period predating the Court of Appeals remand in April 1968, since the bankrupt, himself, appealed to that court. As regards the two-year period since the remand, the court does not find that delay "inordinate," nor does it find that the scheme of the Bankruptcy Act has been defeated by said delay. The Court of Appeals remand indicated that the factual findings of the Referee were to be challenged for the first time on the remand. This court, as explained infra, was well within its power when it, in turn, re-referred the case to the Referee to hear and report. The year in which he held the case was not unreasonable, particularly since the file was voluminous and he changed his findings of fact and conclusions of law. This court is particularly unimpressed with bankrupt's claim of delay in light of the fact that he never objected to the re-reference at any time prior to the Referee's report. Now, he not only claims that the re-reference to hear and report was in excess of this court's power, but also claims that he was prejudiced by the delay inherent in that re-reference. The conclusion is inescapable that bankrupt delayed asserting his claim of due process denial until the Referee changed his findings and recommended a denial of discharge. Furthermore, bankrupt cites no authority whatever for his claim that delay in bankruptcy proceedings may constitute a denial of due process. The court holds that the delay was not inordinate and, further, that bankrupt waived any right to contest the delay by not raising that claim until after the Referee had already made his report.
II Was the re-reference in excess of this court's powers?
Bankrupt argues (again, with no supporting authority) that this court lacked the power to send the case back to the Referee following the remand by the Court of Appeals. Bankrupt argues that section 38 of the Act (11 U.S.C. § 66) which sets forth the jurisdiction of referees does not include hearing a case after a remand from the Court of Appeals. Since the Referee had no power to hear the case, he argues, a fortiori, he had no power to make new findings. Bankrupt also argues that the remand from the Second Circuit did not contemplate new findings but only that the district court was to review the original findings. In effect, the argument amounts to nothing more than the bare assertion that this court, as well as the Referee, was bound by the original findings and that the Referee was not entitled to make, nor this court entitled to consider, new findings. 11 U.S.C. § 11(a)(10) provides that courts of bankruptcy are invested with jurisdiction to:
Consider records, findings, and orders certified to the judges by referees, and confirm, modify, or reverse such findings and orders, or return such records with instructions for further proceedings (emphasis added);
11 U.S.C. § 66, concerning jurisdiction of referees provides:
Referees are hereby invested, subject always to a review by the judge, with jurisdiction to (1) consider all petitions referred to them and make the adjudications or dismiss the petitions;
General Order in Bankruptcy 47 provides:
Unless otherwise directed in the order of reference the report of a referee or of a special master shall set forth his findings of fact and conclusions of law, and the judge shall accept his findings of fact unless clearly erroneous. The judge after hearing may adopt the report or may modify it or may reject it in ...