The opinion of the court was delivered by: GURFEIN
This is a petition to review an order of Referee Asa S. Herzog denying a discharge in bankruptcy. After the filing of an involuntary petition in bankruptcy on May 28, 1970, the petitioner was adjudged a bankrupt on June 4, 1970. The petitioner was originally denied his discharge by order dated July 12, 1971. On a review of that order, this Court remanded the matter with directions to permit the bankrupt to present additional testimony relating to the one specification of objection to discharge which had been sustained. At hearings held on March 2 and April 21, 1972, the bankrupt gave additional testimony. Referee Herzog remained unpersuaded, and by an order dated February 7, 1973 again denied discharge. Thereupon the bankrupt filed this petition for review.
The one specification which was sustained alleged:
"That on and after May 29, 1969, subsequent to the first day of the 12 months immediately preceding the filing of the petition the bankrupt transferred certain of his property, to wit, diamonds to [certain persons] . . . for an inadequate consideration with intent to hinder, delay or defraud his creditors."
The discharge was refused under Section 14c(4) of the Bankruptcy Act, 11 U.S.C. § 32c(4).
The learned Referee found many instances where the bankrupt bought diamonds on credit and sold them for cash on approximately the same day at a loss. He specifically found fifteen situations where that had occurred. Referee Herzog held that "the bankrupt practiced a fraud on each and every creditor from whom he obtained diamonds on credit, which he promptly sold at a considerable loss for cash" (1st Op. at 7). He held, as a matter of fact, that "an entire series of such transactions [selling below cost] is the clearest indication of an intention to defraud. Instead of kiting checks, the bankrupt was in effect kiting diamonds using the proceeds of his below-cost sales to meet various notes as they fell due. As in all kiting schemes, there came a point where the pressure built up and he could no longer meet the note payments." Id. at 7-8.
The ultimate finding was that "during the period subsequent to the first day of the twelve months immediately preceding the filing of the petition in bankruptcy herein, the bankrupt transferred certain of his property consisting of diamonds to various persons [naming purchasers from him] with intent to defraud certain of his creditors [the vendors]." The conclusion was, as indicated, that the bankrupt was guilty of conduct which, pursuant to Bankruptcy Act § 14c(4), bars his discharge.
On remand by this Court the Referee held a further hearing. Referee Herzog adhered to his earlier decision denying the discharge but he made additional findings. He found that the bankrupt freely admitted the acts charged, but that he claimed that he was without intent to hinder, delay or defraud creditors.
The bankrupt, at the second hearing, testified about ten more transactions in which the persons who bought for cash at a price lower than the bankrupt's cost were the very creditors he is charged with defrauding. His purpose was to show that the "defrauded" vendors knew that the bankrupt was selling below cost.
Referee Herzog, conceding that actual fraud as distinguished from constructive fraud must be proved, found "actual fraud" present "not in any isolated transaction, but in the entire series of transactions, in a course of conduct dating back at least one year prior to the date of bankruptcy" (2nd Op. at 6).
Holding that the burden of ultimate persuasion that the allegations of the specification were untrue had shifted to the bankrupt, Gunzburg v. Johannesen, 300 F.2d 40 (5 Cir. 1962), the Referee decided that the bankrupt had failed to sustain that burden. On the contrary, the Referee found that "there existed the intent to defraud the creditors at the end of the line" (2nd Op. at 9).
All proceeds of the bankrupt's sales for cash were deposited in his business bank account and used to pay notes held by trade creditors.
The bankrupt relies on the circumstance that some of the vendors themselves actually bought from him at prices below his cost. The thrust of the argument is that the vendors were not defrauded, but knowing of the bankrupt's plight, had charged him prices above the market and had taken a calculated gamble.
In reviewing the fifteen transactions, the bankrupt notes the following: (a) no sales were made of merchandise held on memorandum; (b) all purchases were made on long-term credit at prices which were obviously considerably above the market prices; (c) in at least seven transactions the vendors or creditors were paid in full prior to the bankruptcy proceedings; (d) in two instances of the seven paid-in-full transactions the transactions occurred more than a year before bankruptcy; (e) in three instances payments on account were made; and (f) in the remaining transactions no ...