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December 23, 1977

STERLING NAVIGATION CO., LTD., et al., Defendants

The opinion of the court was delivered by: DUFFY


 Plaintiff, Council Commerce Corporation ("Council"), appeals from the order of Bankruptcy Judge Ryan denying, after trial, the relief sought by Council against Sterling Navigation Co., Ltd. ("Sterling"), a bankrupt Bahamian corporation. Council has presented a number of issues for review involving certain evidentiary rulings of Judge Ryan and alleged errors in his findings of fact and conclusions of law. Before discussing each of the points raised by Council, a brief review of the undisputed facts would be helpful.

 Sterling was organized in 1967 for the purpose of carrying on the business of chartering vessels and booking cargoes. Sovereign Marine Lines, Inc. ("Sovereign") a New York Corporation, was the general agent for Sterling, authorized to charter, sub-charter, and conduct the business of chartered vessels. (Plaintiff's Exh. 6). Council is a New York Corporation engaged in the business of making secured loans.

 On September 5, 1975, Marvin Buchner, president of Council, met with Joseph DeCarlo, an officer of Sovereign, to discuss a possible loan by Council to either Sovereign or Sterling. DeCarlo told Council that Sovereign was authorized to execute a promissory note and security agreement on behalf of Sterling. The loan was advanced on September 24, 1975, following DeCarlo's execution of a security agreement on behalf of Sterling, granting Council a security interest in all assets, rights and interests presently, or thereafter existing or arising in Sterling. The money was first credited to Sterling's account but was immediately withdrawn and deposited in Sovereign's account. Most of the $230,000 was used to pay Sterling's debts. Council did not obtain resolutions from Sterling's Board of Directors authorizing the loans, but rather, apparently relied on the representations of Mr. DeCarlo that he had authority to enter into the loan transactions.

 Following Sterling's filings under Chapter XI of the Bankruptcy Act, Council sought to enforce the alleged security interest against Sterling's Trustee in Bankruptcy. Judge Ryan held a trial and, after evaluating all the evidence, concluded that Council's loan was not authorized by Sterling and that, accordingly, it could be avoided by the Trustee.

 Council maintains as its first point on appeal that Judge Ryan erroneously excluded from evidence the transcript of Arne Fronsdal, Chief Operating Officer and Chairman of the Board of Sovereign, and recently appointed president of Sterling, given in the course of a hearing held under Rule XI-4 of the Bankruptcy Rules for the Southern and Eastern Districts (Local Rules). At the time of the Rule XI-4 hearing on December 12, 1975, Fronsdal had been president of Sterling for about one week and had held no position in that company during the time of the loan transaction in question. Council offered the Rule XI transcript to show Fronsdal's beneficial ownership of Sterling's shares. As such a beneficial owner, Council urges, Fronsdal "authorized, directed and empowered Mr. DeCarlo to proceed with the loan transaction on Sterling's behalf." (Plaintiff's Memorandum on Appeal at 21). Council seeks to admit this testimony as either former testimony under Rule 804(b)(1) of the Federal Rules of Evidence, or as falling within the "catchall" exception to the hearsay rule F.R.E. 804(b)(5).

 Rule 804(b)(1) provides that

[testimony] given as a witness at another hearing of the same or a different proceeding, or in a deposition taken in compliance with law in the course of the same or another proceeding, if the party against whom the testimony is now offered, or, in a civil action or proceeding, a predecessor in interest, had an opportunity and similar motive to develop the testimony by direct, cross, or redirect examination,

 is not excluded by the hearsay rule. Council claims that the conditions of 804(b)(1) were met since a predecessor in interest (the unofficial creditors committee) of the party against whom the testimony is now offered (Mr. Landis Stovall, the Trustee of Sterling) had both the opportunity and motive to develop the testimony. Even assuming that the unofficial creditors committee can be characterized as the predecessor in interest of the trustee, it appears that the similar motive to develop testimony in the non-adversary Rule XI-4 hearing was lacking. In the first place the trustee had not yet been chosen and issue had not yet been joined on the question of the authorization of the loan. Moreover, Rule XI-4 hearings are non-adversary fact-finding proceedings which lack defined issues. As such, they cannot be said to give rise to the type of adversarial cross-examination contemplated by Rule 804(b).

 Nor are the requisites of Rule 804(b)(5), the "catchall" provision, met. In order to fall within this exception to the hearsay rule, the proponent must demonstrate that the evidence is "more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts." This rule was enacted to cover certain exceptional circumstances where the evidence has a high degree of probativeness and necessity. See Moore's Federal Practice ┬ž 803(24)[7]. Here it appears that the requisite necessity was lacking. Although Fronsdal was concededly unavailable to testify, no effort was made to depose or produce Sterling's Bahamian shareholders on the question of ownership and authority (TR. 297-98). Council protests that Judge Ryan refused to permit any adjournment to compel such testimony under Bahamian law and thus the Rule XI-4 transcript is the only available evidence on the subject. In so arguing Council appears to disregard the fact that it urged the trial to proceed without adjournment on February 24, 1976, asserting that it had taken all the discovery it wanted (Hearing on February 24, 1976, pp. 3, 7). At that time, however, no affirmative steps had been taken to depose the Bahamian shareholders, nor were any efforts made as of May 6, 1976 (TR. 297-98). It appears that Council was content to offer its transcript without making the requisite reasonable efforts to obtain other evidence. In view of this attitude it can hardly be said that the interests of justice would be served by admitting the evidence.

 Council next asserts that Judge Ryan erroneously applied Bahamian law to determine the question of authorization. It is true that in his findings of fact Judge Ryan concluded that

the law of the Bahamas governs whether or not a loan purportedly made to a Bahamian corporation was authorized; which is substantially similar to that of New York.

 (Conclusions of Law at 5). Council does not suggest that a result other than that reached by Judge Ryan would follow from an application of New York law, but rather urges reversal regardless of the futility involved. Moreover, it appears that despite his conclusion of law, Judge Ryan applied New York law on the questions of actual and apparent authority, as evidenced by his memorandum decision. Thus, it appears that reversal on this ground would be inappropriate.

 Council also cites as error the exclusion of Sterling's Petition for Arrangement, schedules and statement of affairs, offered to show Fronsdal's beneficial ownership of Sterling's shares. This evidence included a statement by Fronsdal, while he was president of Sterling in connection with the filing of schedules with the bankruptcy court, that he was the beneficial owner of Sterling shares. It was offered as either an admission against interest or under Rule 804(b)(5). For the reasons set forth above the Rule 805(b)(5) exception may not be invoked. Nor can this statement be considered an admission against interest since it was made after the petition was filed and thus not while the estate was in the debtor. Cf. In re Weissman, 19 F.2d 769, 771-72 (2nd Cir. 1927). Moreover, when Fronsdal made the sworn statement he was president of Sterling for a limited purpose only -- to facilitate the filing of schedules with ...

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