Petition for Writ of Certiorari — James v. United States

Sie VOUT, Ua.

FILED

SEP: 18 1964

JW FDA LER

in the

Sree Gout ofthe Mited Stats

-Ocroser Tera, | pees

e511

MIDDLESEX COUNTY NATION AL BANK, ‘

. ‘PETITIONER, : ;

s

as

EDWARD- D. HASSAN, a,

RESPONDENT.

Fe

[In the Matter of

‘ Mystic Pirz & Suppiy Corp.,

Bankrupt. ]

r

* far

PETITION FOR A WRIT OF CERTIORARI'TO THE

UNITED STATES COURT OF APPEALS

FOR. THE FIRST CIRCUIT

Leonarp M. Sarge

One Court Street

| a Boston, Massachusetts

Of Counsel: | ' Attorney for Petitioner.

Cyr Hocnserc ‘.

One Court Street

Boston, Massachusetts

P

Blanchard Press. Inc., Boston., Mass. —- Law Printers

INDEX .: -

ae : Pee ey _ Page

Citations to, Opinions Below ................ gisutiin 78

Judgments Below ../............ Vow seep eenceeerees a

I ovine tsesicen iow Sees Foren e 2

7 IND 5 ds 9 cinsk Cedar gen naneewinawes 2°"

Statutes Involved .......... bnte cen keeaek as way eA «8

Dt ME Ciaykedee cust verse caskal sae benryseeetaw | ae

' “Reasons for Granting. the Se Ben arr seees 8

E Cenclusion ............ Wkep ake kes A ag hay eee ee ee,

Appendix A—Opinions Below .....:.:.........+-5- |

, B—Judgmept Below. ..... pe ap eaay a

: - C—Statutes. ......... cei cceenee Deedeeede 13

e oa st Cueammms °° +

_ Cases ~

4 °

h: * « . .

he 2 ° o.

; i." ;

, : $

Allender v.. Southeast Tractor é Equipment Co., 178.

a. IGE cea ty end auaee ohavek ies caer 6.

Dinkelspiel v. Weaver, 116 F. Supp. 455 ........... Sop if

_ Everett v. Warfield Mining Co., 37 F.2d 328 ......... 7,

= ee Co. v. Friedman,195 Fed.

} MN Ee CRI AEE Me nog ERG coe.

Mutual Savings é& Loan Association v. McCants, 183

‘ F.2d 423 ere we a PEPE Re Tee ee eee eee i 6

| Rosenberg v. Semple, 257 fe his RE 5

) ‘ af Statutes = oe. a8

a) . : | .

, Section 60(a) of the Bankruptcy Act,

(11 U.S.C. Section 96(a) ) ...............0005 13

i Section 60(b) of the Bankruptey Act,

¥ (11 U.S.C. Section 96(b) )..... 6... 0c cen cs 13, 14

| a re Mic ‘i

ii Index

. f aa Page

- Section 1(19) of the Bankruptcy Act, Bh pee

_ (11 U§.C. Section ee ins incnctnees ce ee

Rule 43(a) Federal Rules of Civil Procedure, = ’

Title 28 U.S. C. , A ee Gos REE FERRREOA 14

a ‘ ;

he Miscellaneous

Collier on Bankruptcy (14th ed. ) Videos 1, Section 1. 19

En Peer TTT PE ore y 5

Bupcemé Gout af the Wed States

Octoner es oom . -

: ©

«

MIDDLESEX COUNTY NATIONAL BANK,

| PETITIONER, :

; | v.

EDWARD D. HASSAN, Truster,

_ RESPONDENT.

beeper |

[In the Matter of ;

- Mystic Pree & Suppiy Corp.,

Bankrupt. ]

i pee

+ PETITION FOR A WRIT OF CERTIORARI TO-THE.

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

* ‘Petitioner prays that a Writ of Certiorari issue to review

the judgment of the United States Court of Appeals for

the First Cirenit inthe above-entitled case, entered July 6,

1964. a

Citations to Opinions Below

There was no opinion in the United States District Court

for the District of Massachusetts. The opinion of the

o

Court of Appeals for the First Cireuit is, as yet, unreported

and is printed in Appendix A ‘and pages 31-35 of the record.

"Judgments Below

The judgment -of the United States District Court for

the District of i aan sata was entered on January. 31,

1964 (R. 25):

The judgment of the Court of Appeals for the First

Circuit is annexed bereto as Appendix B:”

Jurisdiction

The judgment of the Court of — was : entered on

July 6, 1964, (R. 36).

~ Rehearing was denied on July 22, 1964 (R. 40). .

The jurisdiction of this Court i is invoked pursuant to the |

provisions of 28 U.S C. 1254(1).--- *

Questions Presented

14W wathier preliminary findings of fact nani be made by © .

the court prior to the allowance, in its diseretion, of the

introduction of any — under the dectrine of retro-

jection? - :

2. What iieiiiiiiads must be established om the. Trustet

in Bankruptcy. before the Court, in its discretion, allows the

introduction of further evidence under the doctrine of retro- -

¢

—

3. Are the weil established rules coricoyning the admissi-

bility ‘of evidence disregarded when the Trustee in. Bank-

ruptcy invokes the doctrine of retrojection? ag

Statutes Involved —

The’ statutes involved in this ease are Sections 60(a) and

(b) of the Bankfuptcy Act, 11 U.S.C. Section 96(a),and =.

_@

( b) ; Section 1 (19) of the Bankruptcy Act, 11 vU. S.C. Section

_1(15); Rule eh Federal Mules of Civil Procedure, Title

.282 U. S.C.

The pertinent text of these statutes are annexed hereto

as: is es C.

a. 3

‘Statement

_- The bankrupt, Mystic Pipe & Supply Corp. prior to its -

adjudication in bankriiptey on January 23, 1962,-was en-

-- gaged in the business of° Selling plumbing and plumbing

supplies (R. 2-3). During the course and-eonduct of its

business, the bankrupt, had assigned to your petitioner

certain of its-accounts receivables as security for loans

‘ whieh’ your: petitioner: made to the bankrupt’ (R. 5, , 8).

Subsequent to its adjudication. i in bankruptcy, the respond- .

ent was duly appointed as Trustee in Bankruptcy on Febru-

ary 28, 1962 (R.2). Thereafter the respondent commenced

proceedings in the District Court against your petitioner . .

-. under Sections 60(a) and (b):-of the Bankruptey Act, 11

U.S.C. Sections 96(a) and (b) to Set aside rtain transfers, :

" as. voidable preferences made by ‘the bagikrupt to your pe- |

titioner within four months of the a of the petition ( R.

2-3).

At the. trial bedoey’ the Court sifling without a jury, the

respondent called: as a witness a ‘Certified public’ accountant,

in order to show that the bankrupt was insolvent on the

dates of the transfers. The witness testified that according

to his accounting tabulations, the-bankrupt was insolvent.

However, the accountant statéd upon further inguiry that

the figure representing the inventory in his accounting

tabulations was estimated (R. 11) and hence his tabulations .

and conclusion therefronr as to insolvency would not be . -

supported by. Ahe figures as set forth in the general ledger

(R. 11-12). ‘The Court then struck fromthe record the .

é

tentiontey. of. the secuietias with respect to the insolve ency

of the bankrupt-at the time of the alleged voidable prefer-

ences (R. 12). The respondent’s only other witness was

_ the former president and treasurer of the bankrupt. This

witness téstified that: he did not know if the books before

hirii was ‘the general ledger of the bankrupt . (RB. 28-29).

" He was not familiar with the books (R. 29). The respondent

then Sought to. establish the value of the. inventory on the

date the petition was filed though the testimony of this wit--

ness, who had participated in the taking of. the inventory.

The District Court excluded it, on the basis ‘that the. testi-

TmaQny. standing alone was meaningless and remote in as-

certaining the . insolvency of the bankrupt at the enton ere

dates (R. 12-16). oe

The District Court at the conclusion of the hearing,

entertained and granted the petitioner’s motion for 4

ment on the basis that there has been no showing of in-

solvency (R. 18).

The Court of Appeals cecided.and: determined that hei

the doctrine of retrojection, that the excluded testimony

was’ admissible. The judgment of the District Court was *°

vacated and remanded the case for a new trial (R. 31-36). —

Reasons for Granting the, Writ

The decision ‘of the Court ‘of dea disfezarded the

basic concept of thé doctrine ‘of retrojection in its. appli-

cation ‘to this ease.

The Court acknowledged that the Trustee in : Bankruptey

under the doctrine of retrojection must be able to show the

absence of -any substantial or radical changes in the assets

or liabilities of the bankrupt between the retrojection dates.

McClung-Logan Equipment Co. v. Friedman, 195 F2d 16

“(4th Cir. 1952). However, the Court in almost the same ©

. breath states that the excluded testimony of both the ae-

dy

:

—~

countant and the corporate. officer, who was president and:

treasurer, is competent testimony under the doctrine of

_retrojection toward establishing insolveney on the critical

date in issue, even though no evidence had been offered as

. to the absence of any substantial or radical. changes i in the

assets’ or liabilities of the bankrupt between retrojection

dates. The Court i is silent on that point.

The Court discusses the case of Rosenberg v.. Semple, 257

Fed. 72 (3rd Cir. 1919) and cites that case as its authority

for this decision. Clearly that case has ‘10 ‘application to—

this matter. “In the Rosenberg case, the Referee in Bank-

ruptey made a finding of fact that the inventory and -ma-

-chinery was substantially the same in ‘quantity and value

between the date of bankruptcy and the prior critical dates.

Furthermore, that the. Bankrupt conducted very little busi-

ness, subsequent: to ‘the alleged voidable preferences. On

the basis of the factual situation before him the Referee

in Bankruptcy allowed the accountant to’ retroject the

_ financial condition of thé bankrupt in‘arder to show in-.

solvency on the: preferential dates. .The decision of the

~ Court below is in conflict-with Rosenberg v. Semple, supra, °

_and présents a problem of critical importance in the ad-

ministration of the Bankruptcy Act and which should’ be

finally settled by this Court.

‘It is stated in Collier on Bankruptey ( 14th ed.) Section ,

1.19'at page 96-97: a

ra]

ted siaibitlien arises from an adjudication in

bankruptcy that ‘the debter was insolvent for any

period before the petition in bankruptcy was filed, nor

is it permissible-to ‘‘retroject’’ the. insoly reney of the. .

_ bankrupt found to-exist at the time of the adjudication

or petition to a date prior thereto, except only within

_ the narrow limits, depending on time and cireum-

" stances, where it is possible te draw a legitimate

-6

'. inference. to that effect. ‘Consequently, the controlling

valuations of the assets have to be made as of the

critical time.*** . hears Wd hoe 2 eo ae

Mutual me a. a1 Loan Association v. McCants, 183 F2d

423 (4th Cir,, 1950); Everett v. Warfield Mining Co., 37

F2d 328 (4th Cir., 1930) ; Dinkelspiel v. Weaver, (D. C. of

Ark. 1953), 116 F. Supp. 455; Allender v. Southeast. Tractor

% Equipment Company, (D. C. of Tenn. ial 178 F. Supp. -

413.

Nowhere in ariy of the decisions of the Courts construing

the doctrine of retrojection has there been any well —.

rule as to the admissibility of ev idence offered and invoked, *

under this doctriné. The Court below is 0° the opinion that ¢ a

any evidence was admissible even. though it was irrelevant —

or hearsay. This decision in fact has created an exception

‘to the hearsay rule. Needless to say, if this-decision is * [

permitted to stand, it will cloud the already dark area of |

_ the doctrine.of retrojection, and furthermore and more im- _

portant is that the well established rules concerning the ad-

missibility of evidence shall be seriously breached.

" Conelusion

For the foregoing reasons, this ‘petition for a Writ of -

‘Certiorari should be granted. '

Respectfully submitted, é

Leonarp M. Satter. ee

One Court Street -— fa. -

(Bpston, Massachusetts |

i peey a ait Attorney for. Petitioner | a

-Of Counset: ;

Cyrait HocuBerG .

One Court Street , Wis

Boston, Massachusetts — |

7

"Appendix A a

United States Court of Appeals

For the First Circuit -

No. 6313.-

=

‘EDWARD D. HASSAN, Trustee,

PLAINTIFF, APPELLANT, nee

. spi cen ‘«

MIDDLESEX COUNTY NATIONAL BANK, |

DEFENDANT, APPELLEF. ; s

Unt the Matter of :

Mystic Pree & Scones Corp.,

"Bankrupt. ]- "

APPEAL FROM THE UNITES onesee DISTRICT COURT ae

. ee FOR THE DISTRICT OF. ‘MASSAC HUSETTS

| _ Before Wassnini: Chief J sles, onl Harticas

. 3 7 ke and Atprticn, Circuit Judges. |

-Michaél H. Goshko,. with EN John F. McCarty, Jr., and Cohn,

Riemer & Pollack were on brief, for appellant. .

Cyril Hochberg,. with whom Arthur T. Wasserman and Wasserman

&. Slater were on brief, for appellee.

Le. gg OPINION OF THE COURT.

Be fe ee

t Hartican, Circuit ‘Judge. Plaintiff-appellaat, Edward :

F D. Hassan, Trustee in Bankruptcy. of Mystic Pipe & Supply

4 Corp., brought suit in the United States District Court for -

- the District of ‘Massachusetts under Sections 60(a) and

_ (b) of the Baykruptey Act to set aside as voidable prefer-.

ences three transfers alleged to have been made by the .

. : : 8

\

bankrupt to defendant-appellee, Middlesex County National .

Bank, within four months of the filing of the petition. The

district. Court riiled that there had been no showi ing of

‘insolvency and no proof to. suppert the allegation of the

complaint .that Mystic was insolvent when the questioned ¢

transfers took place. Jtdgment was entered for appellee

on J anuary 31, 1964, and appellant appeals.

The facts are these. On January 23, 1962, Mystic Pipe’.

& Supply Corp., a Massachusetts corporation engaged in .

the business of selling plumbing supplies, filed-a petition in

' bankruptcy pursuant to Section 322 of the Act. Appellant

was ‘appointed trustee and subsequently brought this action

| against ‘Middlesex.- T'wo of the transfers sought to be set |

aside were alleged to have taken place on October 23 and

25, 1961°and were of accounts receivable which Mystic had

assigned - to appellee as security for loans made to it by”

appellee. The third transfer was allegedly made on No-

vember 10, 1961 and éoncerned a payment to Middlesex

of $10,000.

-At the trial before the cdurt sitting without a jury, the?

trustee sought to show that Mystic was insolvent on the

_ dates of the transfers. To this end, a certified public ac-

which showed that on September 30, 1961 the bankrupt

hada net deficit of $84,252.54. The figures and computations

used to reach that result were obtained from the general

ledger of Mystic with the exception of the figure -used for

- eountant testified that he had prepared a .balance sheet —

inventory. That figure was arrived at by the accountant’s —

taking the results of a closing physical inventory, taker? as

of January 23, 1962 by Mystie’s president and treasurer,

Marino Matrundola, and, werking backward through the

entries in the general ledger, adjusting the January 23

figure to reflect sales, purchases and returns made since

September’ 30, 1961. -By similarly -working. backward

‘through the general ledger, and with Mystie’s financial con-

2 <a ie

dition as of September 30 established, appellant intended

to demonstrate the bankrupt’s insolvency on each of the

transfer dates.

. = lay the foundation necessary for placing the general

ledger in evidence as a basis for the accountant’s testimony,

appellant called Matrundola to the stand. He stated that

he was unfamiliar with the corporation’s s books. Appellant

seemed surprised at this result and the court- allowed the

‘ accountant.-to testify anyway with the p®oviso that if the

ledger was not subsequently admitted’ in evidence, the testi-

mony would have ro foundation: Appellant, however, was _

given no: further opportunity to lay the proper foundation

for the ledger through another witness. Upon learning that

the. result-reached on the balance sheet was not derived

solely from the general ledger, the court struck the ac-

countant’s testimony and the three exhibits offered in con-

‘junction therewith as hearsay.! - Since.the only other source

- relied on by the account was the physical inventory taken

by Matrundola, he was recalled to the stand to testify con-

-certing that procedure. The ourt then stated its belief

that even ifgappellant succeede@l in. establishing Mystie’s’

financial condition as of September 30, 1961 ‘and then, work-——~—

ing backward from the January, 1962 inventory, showed |

Mystic’s insolvency on the transfer dates, it would riot be -

persuaded by such testimony due to the possible existence

of thieves, embezzlers, careless deliveries, ete., which would

make the situation as it was in January, 1962 ‘not very

persuasive'as to what the situation was’’ on earlier dates.

_ It felt, therefore, that testimony as tg the value of inventory

as of the January date was of ‘no significance and sustained |

appellee’s objection tu such testimony, thus cutting.short

-appellant’s attempt to prove imsolveney through rétro-

~ jection, the only way it could be proved under the cireum-

~

1 The exhibits included the above mentioned balance sheet and a —

trial balance and profit and loss statement: ;

a 10 ‘ ~

stances. Qn the’ basis of. appellee’s failure to prove in-

_ solvency on the critical dates, judgment was entered for

appellee.

We believe the lower court oneal in ruling that the trus-

tee could not prove insolvency on the preferential dates in

the only manner available to him. Appellant was forced to.

resort to this round-about method due to the fact that-no

. inventory of the corporation taken simce June of 1960 had

_ been certified by an accountant or made available to him.

Insolvency is not always susceptible of direct proof and

frequently must be determined by the proof of other facts

or factors from which the ultimate fact of insolvency on

. transfer dates must be inferred or presumed. 1 Collier

on Bankruptcy 123 (14th ed. 1962). The method sought to

be used by appellant is not novel and has been utilized often

in bankruptcy proceedings. See, e.g., Inter-State National

Bank of Kansas City v. Luther, 221 F.2d 382, 391 (10th

Cir. 1955) ; Mutual Savings ¢ Loan Association v. McCants,

183 F.2d 423, 425 (4th Cir. 1950) ; Rosenberg v. Semple, 257

Fed. 72 (3rd Cir. 1919); In re Great Western Biscuit Co.,

85 F. Supp. 314 (S.D. Cal. 1949). In Rosenberg v. Semple,

supra, a balance sheet dated December 1 showing the

bankrupt to be running a deficit shortly before the pre-

ferred transfer was competent to help establish insolvency

on the transfer date where, as here, the statement was made

up from books of the company with the exception of the

inventory item, which was taken from the inventory and

appraisement filed in the bankruptcy proceedings’ antl

worked back to the December 1 date. When such a method

is sought to be invoked it is essential that the trustee be

able to show the absence of. any substantial or radical

changes in the assets or liabilities of the bankrupt between

the retrojection dates. McClung-Logan Equipment Co. v.

Friedman, 195 F.2d 516 (4th: Cir. 1952). This appellant -

was prepared to do through the general ledger. Appellee

*

came ate oa omn

of,

i

Oe

‘ argues that the failure of the trustee to get the ledger ad-.

mitted into evidence was fatal to his’ ease. But even if

appellant had been given another opportunity to gain its

admission, which he was not, the trial court’s view as to the

January-23 inventory would have made the Jedger mean-

ingless. —

Assuming -the eventual foundation being laid for the

_ general ledger; the testimony of the accountant and of

Matrundola was competent testimony toward establishing

insolvency on the three dates in issue. See Abdo v. Towns-

hend, 282 Fed. 476, 480 (4th Cir. 1922); see also Badders

‘Clothing Co. v. Burnham-Munger-Root D. G. Co., 228 Fed.

470, 474 (8th Cir. 1915). The probative force of such testi-

mony was, of course, for the court to determine, but appel-

lant should have been allowed to intfoduce all his evidence

in an effort to establish his case and allow the court to draw

the proper inferences. An a priori finding by the court

that, if admitted, it would not believe a particular piece of

testimony is not a proper basis for an exclusionary ruling.

The probative forc> of testimony is to be determined when

all offered admissivle evidence has been introduced, and

- counsel has had an opportunity to argue his case. The

error was particularly marked here because the issue was .

not the credibility of the proffered. testimony, but was

_whether the conclusion that would normally follow there-

from should not be drawn because of some additional cir-

cumstances—‘‘thieves, embezzlers,’’ ete. As to this the

- burden would not have been. on the proponent of the evi-

dence; but on the opponent. The court’s personal feeling, —

amounting, in effect, to a conclusive presumption of wrong-

doing was, at best, premature.

Judqment will be entered vacating the judqment of the

district court, and remanding the case for a new trial con-

sistent with this opinion.

oe

Appendix B

UNITED STATES COURT OF APPEALS.

FOR THE FIRST CIRCUIT

_ No. 6348. P :

EDWARD D. HASSAN, Trustee,

lata APPELLANT,

MIDDLESEX coURTY NATIONAL BANK,

DEFENDANT, APPELLEE.

[In the Matter of

Mystic Pree & Suppry Corp.,

Bankrupt. ]

JUDGMENT

July 6, 1964

This cause came on to be heard on appeal from the United

Stutes District Court for the District of Massachusetts, and

was argued by counsel. |

Upon consideration whereof, It is now here ordered, ad-

judged and decreed as follows: The judgment of the Dis-

trict Court is vacated, and the case is remanded -to that

. Court for further proceedings consistent with the opinion:

filed this day.

rz)

By the Court:

(s) Roger A. STINCHFIELD,

[ec: Messrs. Goshko and Hochberg. | ;

..

Appendix Cc >

Section 60(a) of: the Sudhiciian Act, u baa ‘Section

96(a) :

bg preference i: is a transfer, as defined in: this title, of

any of the property of a debtor to or for the benefit of a

ereditor for or on account of an antecedent debt, made or

suffered by such debtor while insolvent and within four

months before the filing by or against him of the petition in

bankruptcy, or of the original petition under chapter 10,

11, 12, or 13 of this title, the effect of which transfer will

_ be to enable such creditor to obtain a greater percentage

— of his debt than some other creditor of the same class. For

the purposes, of ‘subdivisions a and b of this section, a -

transfer shall be deemed to have been made at the time

when it beeame so far perfected that no bona-fide purchaser

from the debtor and rio creditor could thereafter have ac-

quired any rights in the property so transferred superior

to the rights of the transferee therein, and, if such transfer

is not so perfected prior to the filing of the petition in

bankruptey or of the original petition under chapter 10, 11,

12 or 13 of this title, it_shali be deemed-to have been’ made

immediately before bankruptey.*’

Section 60(b) of the Bankruptey -Act, 11 — Section

— |

96(b)

‘*Any such preference may he avoided i the trustee if

the creditor receiving it or to be benefited thereby or his .

agent acting with reference thereto has, at the time when

the transfer is made, reasonable causp to believe that the .

debtor is insolvent. Where the preference is voidable, the

trustee may recover the property or, if it has been con-

verted, its value? from any person who_ has received. or

converted such property, except a hona-fide purchaser from

or lienor of the debtor’s transferee for a present fair equi-

valent value: Provided, however, that where sueh = pur-

ee. oes ae

chaser or lienor has given less than such value, he shall

nevertheless have a lien upon such property, but only to

the extent of the consideration actually given by him. Where

a preference by way of lien or security title is voidable, the

_Court may on due noticé order such lien or title to be pre-

served for the benefit of the estate, in which event such lien ©

or title shall pass to'the trustee. For the purpose of any

recovery or avoidance under this section, where plenary

proceedings are necessary, any State court which would -

have had jurisdiction if bankruptcy had not intervened and

any court of bankruptcy shall have concurrent jurisdiction.

Section 1(19) of the Bankruptcy Act-11 U.S.C. Section

(11.15).

‘*A person shall be deemed ‘insolvent within the pro-

visions of this Act whenever the aggregate of his property,

exclusive of any property which he may have :conveyei,

transferred, concealed, removed, or permitted . to he con-

céaled or removed, with intent to defraud, hinder, or delay

his creditors, shall not at a fair valuatien be ‘sufficient in

amount to_pay his debts ;’’

Rule 43 (A) of the Federal Rules of Civil Procedure, Title

28. U.S.C.A. ;

‘Tn all trials the testimony of witnesses shall be taken

orally in open court, unless otherwise provided by these

rules. <All evidence shall be admitted which is admissible . -

under. the statutes of the United’ States, or under. the rules

of evidence heretofore applied in the courts of the United

States on the hearing of suits’in equity, or under the rules

of evidence applied i in the courts of general jurisdiction. of

the state-in which the United States court is held. In any

case, the statute or. rule which favors the reception of the.

evidence governs and the evidence shall Le presented ae-

cording to the most convenient method prescribed in any.

of the statutes ‘or rules to which reference is herein made.

The competency of a witness to testify shall be determined

in like manner.’’ eh See.