Petition for a Writ of Certiorari — Jeskowitz v. Carter

Supreme Court of the Auite

OCTOBER TERM 1945

No. 10 78

ABRAHAM .JESKOWITZ,

Petitioner,

against

Lroxarp H. Carter, Trustee in Bankruptey of Union

Fabrics, Inc.,

Respondent.

PETITION FOR WRIT OF CERTIORARI

ArcuipaLpD PALMER,

Counsel for Petitioner.

INDEX

PAGE

Opinions Below 1

Jurisdiction 9

Statement of Facts 2

Questions Presented 10

Statutes Involved 11

Specifications of Error to be Urged 12

Reasons for Granting Writ a

Porxt A—A trustee in bankruptey who, in a turnover

proceeding, relies upon a presumption that the

property was sold at a price not less than cost,

under the provisions of Section 21-L of the Bank-

ruptey Act, and a presumption of continued

possession between the time of the filing of the

petition and the date of the turnover, may not, in

connection with a motion to punish for contempt

for failure to comply with such order, rely upon

a further presumption that the order once made

carries with it the presumption that petitioner

continues to have possession and control of the

property in question 13

Point B—The right of a Trustee to rely upon a pre-

sumption that the turnover order earries with it

the presumption of continued possession should

depend upon the time that elapses between the

date of the filing of the petition and the date of

the turnover order, where such order is predicated

upon a mathematical computation, as in the case

at bar 20

ii

PAGE

Porxt C—The failure to take testimony on the ques-

tion of possession or control of the property and

on the question of whether the refusal to comply

with the turnover order is wilful and deliberate

where petitioner, in his affidavit in opposition to

the motion to punish for contempt, requested that

a hearing be held and testimony be adduced on

such issues, violated the constitutional rights of

petitioner

ConxcLvUsion

23

26

CASES CITED

Brady v. United States, 24 Fed. } i Saas 18

Brown v. Maryland Casualty Co., 55 Fed. (2d) 159... 18

Cohen v. Jeskowitz, 144 Fed. (2d) 39 16

Fisher, In re, 32 Fed. Supp. 69 26

General Reinsurance Corporation v. Southern Surety

Co., 27 Fed. (2d) 265 19

Lincoln Nat. Life Ins. Co. v. Erikson, 42 Fed. (2d) 997 18

Looney v. Metropolitan Railroad Co., 200 U. S. 480, 487,

488, 26 S. Ct. 303, 50 L. Ed. 564 18

Manning v. Insurance Co., 100 U. S. 693, 699, 25 L. Ed.

761 18

Marin v. Ellis, 15 Fed. (2d) 321 20

Oriel v. Russell, 278 U. S. 358, 13 A. B. R. (N. S.)

121 10, 13, 14, 19, 23

Prela v. Hubschman, 278 U. S. 358, 13 A. B. R. (N. 8.)

121 10, 13, 14, 15, 23

Robbins v. Gottbetter, 134 Fed. (2d) 843 16

iii

PAGE

Rosser, In re, 101 Fed. 562, 567, 568 24

Seligson v. Goldsmith, 128 Fed. (2d) 977 16

State of Kansas ex rel. Beck, Atty. Gen. et al. v.

Occidental Life Ins. Co. et al., 95 Fed. (2d) 935... 25

United States v. Ross, 92 U.S. 281, 285, 93 L. Ed. 707... 18

Walt, In re, 17 Fed. (2d) 588 21, 22

STATUTES CITED

Bankruptcy Act:

Section 21-L 11, 12, 13, 16, 23, 24

United States Constitution:

Fifth Amendment 11, 24

Supreme Court of the United States

OCTOBER TERM 1945

No.

ABRAHAM JESKOWITZ,

Petitioner,

against

Lronarp H. Carter, Trustee in Bankruptey of Union

Fabries, Inc.,

Respondent.

PETITION FOR WRIT OF CERTIORARI

‘ To vHE HonoraBLe THE CHIEF JUSTICE AND ASSOCIATE

JusTICESs OF THE SUPREME CouURT OF THE Unrrep STATES:

The petition of Abraham Jeskowitz prays that a return

of certiorari issue to review the order and decree of the

Cireuit Court of Appeals for the Second Cireuit entered

on the 14th day of February, 1946 (R. 51, 52°), affirming

an order of the District Court of the United States for the

Southern District of New York, dated the 10th day of Sep-

tember, 1945 (R. 41 to 44).

Opinions Below

The order was affirmed by the Cireuit Court of Appeals

without opinion (R. 49, 50).

The District Judge rendered an opinion granting the

motion to punish for contempt (R. 41).

* Numbers in parentheses refer to page numbers in the

record. '

Jurisdiction

The decree of the Cireuit Court of Appeals was entered

on the 14th day of February, 1946 (R. 51, 52).

The jurisdiction of the Court is under Section 24 (ce)

of the Bankruptey Act and under Section 240 (a) of the

Judicial Code as amended by the Act of February 13, 1925.

Statement of Facts

Abraham Jeskowitz, the petitioner herein, was the presi-

dent of the Union Fabries, Inc. On December 20, 1939, an

involuntary petition in bankruptey was filed against said

Union Fabrics, Inc., and thereafter, and on January 6,

1940, an order of adjudication was entered referring the

proceedings to the Honorable Peter B. Olney, Referee in

Bankruptey. At a first meeting of creditors Leonard H.

Cohen was duly appointed Trustee in Bankruptey and

qualified by filing the bond as required of him. Subse-

quently examinations under Section 21-A of the Bank-

ruptey Act were conducted (R. 31).

The turnover proceedings were commenced by the peti-

tion of the Trustee, verified the 25th day of October, 1940,

charging the petitioner, as president and sole stockholder

of said bankrupt, with having failed to account for certain

merchandise or the proceeds of the sale thereof, a diamond

ring received as collateral by the bankrupt, or the pro-

ceeds of the sale thereof, and certain of the bankrupt’s

books and records, as follows: general ledger for 1937,

journal for 1938, records and inventories of the bankrupt’s

merchandise taken as of January 25, 1937; May 31, 1937;

January 1, 1938; May 31, 1938; October 31, 1938; December

31, 1938; January 31, 1939, and June 30, 1939, and all pur-

chase invoices for the year 1937. Petitioner appeared and

interposed an answer denying the material allegations of

the petition (R. 32).

3

Hearings were commenced on January 27, 1941, and con-

tinued until October 25, 1941, by which time there had been

adduced 315 pages of testimony. Petitioner, who had no

legal training, had no alternative, because of lack of funds,

but to conduct his own defense to the proceedings up to

September 24, 1941, when he was able to retain Chester A.

Lessler, Esq., to conclude the hearing on the original pe-

tition (R. 32).

On October 25, 1941, the Referee granted a petition of

the Trustee for leave to amend the original turnover peti-

tion predicated upon the dollar value of an opening inven-

tory alleged to have existed as of January 31, 1938, the

amount of its purchases from that date to September 238,

1939 (the date of the general assignment for the benefit of

creditors by the Union Fabrics, Inc.}, the cost of the mer-

chandise sold during that period at 10 percent gross profit

or at cost, and the value of the inventory on hand on

September 28, 1939. The amended petition did not seek

the turnover of the purchase invoices for the year 1937

(R. 32).

Additional testimony was taken based upon the amended

petition and answer thereto, which denied the material

allegations of said petition and thereafter, and on the

23rd day of February, 1943, a period of three and a half

years after the general assignment for the benefit of eredi-

tors was made, the Referee handed down a memorandum

decision in which he accepted the figure of $197,785.05 as

representing the cost of the merchandise on hand on Janu-

ary 1, 1939, and the figure of $322,587.36 as representing

the cost of the merchandise sold between January 1, 1939,

and September 28, 1939. The latter figure was based upon

a presumption under Section 21-L of the Bankruptcy Act

that the merchandise was sold at a price not less than cost.

This presumption was indulged in by reason of the Trus-

tee’s contention that the bankrupt did not turn over to

the Trustee the books and records which were necessary

to determine the cost of the merchandise sold by the Union

LE RR PEON A NE

4

Fabrics, Inc., during the said period from January 1, 1939,

to September 28, 1939. Then, by a series of presumptions,

the Referee concluded that petitioner had in his possession

and under his control merchandise of the cost value of

$69,921.24 (R. 32, 33).

The various presumptions which resulted in the making

of the turnover order are as follows:

The first presumption was that allowed by Section 21-L

which resulted in the Referee finding that the merchandise

sold during the period as charged was sold at a price not

less than cost. The accountant for the Trustee testified

that the bankrupt had failed to turn over the books and

records from which the cost price of the merchandise sold

could be ascertained. Petitioner, during the course of

the hearings, did not have an accountant and was not ad-

vised that the Trustee did have books and records from

which the cost price of the merchandise could be ascer-

tained. Consequently the Referee accepted the testimony

offered by the Trustee and, based upon the legal presump-

tion, found that the merchandise sold was at a price not

less than cost. As a result of the figure adopted as the

price of the merchandise sold, the Referee came to: the con-

clusion that the bankrupt failed to account for merchan-

dise of the cost value of $69,921.24.

The second presumption adopted by the Referee was to

the effect that if the bankrupt did fail to account for said

merchandise, then said merchandise must have been in the

possession of petitioner, who was the sole stockholder and

officer of the corporation as of the date of the execution

of the general assignment for the benefit of creditors, to

wit, September 28, 1939. There was never any factual

proof that petitioner did come into possession or have in

his possession or under his control merchandise of the cost

value of $69,921.24 on September 28, 1939, or at any other

date.

The third presumption adopted by the Referee was that

petitioner continued to have possession and control of the

5

property or the proceeds thereof, namely, $69,921.24, on

February 23, 1943, when the order was made, since on the

basis of the prior presumptions he should have had that

property in his possession or under his control on Sep-

tember 28, 1939, more than three and a half years previous

to the making of the order.

The Trustee neither by the original petition nor the

amended petition set forth that he was relying upon a pre-

sumption of law under Section 21-L of the Bankruptcy

Act to establish that the merchandise sold between Janu-

ary 1, 1939, and September 28, 1939, was at a price not

less than cost. Petitioner was therefore not advised

that the Trustee sought to rely on the presumption under

Section 21-L and did not endeavor to meet such an issue.

Had the Trustee indicated in either the original or amended

petition that he would seek to establish his contentions by

relying upon the presumption that the merchandise was

sold at a price not less than cost, the appellant would have

sought to introduce evidence to show that the Trustee had

books and records in his possession from which he could

ascertain the actual cost of the merchandise sold by the

bankrupt (R. 33).

Although the Trustee failed to offer any actual proof

to support the petition for the turnover, the respondent

offered proof to show that there was no basis for the mathe-

matical computation prepared by the Trustee and subinit-

ted as proof in support of the turnover and that he did

not have any property of any kind, nature or deserip-

tion and was unable even to support his family and pay

the rent for his apartment (R. 34).

Testimony was introduced on behalf of petitioner that

the Union Fabrics, Inc, was a corporation formed in

1937 and was in the business of converting rayon and

silk fabries, with offices in the City of New York. Said

co~poration had previously taken over the assets and lia-

bilities of a corporation known as Union Silk Mills, Inc.,

which was jointly controlled by petitioner and Louis Berk-

6

man. The formation of the new corporation was due to

the withdrawal of Louis Berkman and the sale of his stock

to petitioner, who took over the entire assets of the Union

Silk Mills, Inec., at a price arrived at through an agreement

between the parties. Petitioner continued the business as

sole owner and manager with the same inventory, assets,

liabilities and records, and continued in business until Sep-

tember, 1939. In September, 1939, the Union Fabrics, Inc.,

was forced to make an assignment for the benefit of the

ereditors because of the financial condition of the busi-

ness. Petitioner and his witnesses offered testimony to

the effect that no piece goods of any kind were ever with-

drawn from the corporation except in the regular course

of business and that entries in connection with all sales had

been made in the books and records of the Union Fabrics,

Inc., and that petitioner had made no withdrawals from

the Union Fabrics, Ine., except in the regular course of

business and only withdrew such moneys as he was entitled

to and for which a record was duly made. The Union

Fabrics, Ine., used, in the main, the same type of book-

keeping as was used by its predecessor corporation and

carried forward the identical perpetual inventory used by

the Union Silk Mills, Inc., for a period of five years prior

to the incorporation of the bankrupt firm. This inventory

book was continued where the old corporation left off, with

its many errors and omissions. These perpetual inven-

tory books were used as a basis for arriving at one of the

Trustee’s theories in his petition for the turnover. The

Referee, however, accepted the figure of $194,785.05 as

representing the cost of the merchandise on hand on Janu-

ary 1, 1939, even though evidence was offered to show

that there were many errors and omissions totaling ap-

proximately 113,000 yards of merchandise in the inventory

record. The Referee applied Section 21-L of the Bank-

ruptey Act and considered the merchandise sold during

the period January 1, 1989, to September 28, 1939, at not

less than eost even though the Trustee had on hand the

7

sales book, the perpetual inventory book and the dye book,

as well as the purchase invoices for the years 1938 and

1939 (R. 34, 35).

Testimony was also introduced on behalf of petitioner

that he never removed any property of any kind from the

Union Fabrics, Inc.; that he had not withdrawn any

moneys from the Union Fabries, Inc., except in the regu-

lar course of business and except as was entered in

the books and records of account; and that he did not have,

either on September 28, 1939, or at any time during the

turnover proceedings, any portion of the said sum of

$69,924.21 (R. 35).

A petition to review the order of the Referee was filed

by petitioner, and upon such review before the District

Court the Referee’s order was affirmed on May 6, 1943,

mainly upon the theory that it could not be said that the

Referee’s finding was so clearly erroneous as to warrant

the District Court to reach a different determination (R,

35).

An appeal was taken to the Circuit Court of Appeals

and on August 8, 1944, the Circuit Court of Appeals

affirmed the order of the District Court. The Cireuit Court

accepted the findings of the Referee since “ * * * The inven-

tory sheets and the records that would disclose the cost

were missing. Section 21, subdivision (L) of the Bank-

ruptey Act, 11 U. S. C. A., Section 44, subdivision (L),

required the Referee to presume ‘until the contrary shall

appear that such property was sold at a price not less

than cost * * *’”. Circuit Judge Frank, in a concurring

opinion, stated as follows:

“T concur but with the hope, expressed by Judge

Learned Hand in Robbins v. Gottbetter, 2 Cir., 134 F.

Qnd 843, 844, and Seligson v. Goldsmith, 2 Cir., 128

F. 2d 977, 978, 979, that the Supreme Court will soon

grant certiorari in some such case as this and over-

rule precedents that fasten upon us what seems to

him and me an irrational rule of presumption, obvi-

8

ously contrary to fact, which enables trustees in bank-

ruptey to employ civil actions as substitutes for crimi-

nal proceedings” (R. 35-36).

Petitioner thereupon filed a petition for a writ of cer-

tiorari to review the order of the Circuit Court of Appeals

for the Second Circuit entered on August 8, 1944. This

petition for writ was denied by the Supreme Court on De-

cember 11, 1944.

After the Circuit Court of Appeals rendered its decision

petitioner sought the advice of Morris H. Gotthilf & Com-

pany, certified public accountants, and Archibald Palmer,

attorney, with respect to this matter. Said accountant

made a study and analysis of the books and records and

found that it was possible for the Trustee to ascertain the

cost of merchandise sold from the books and records which

had been in possession of the Trustee in Bankruptcy.

Based upon such findings petitioner made an application

to the Referee to reopen the turnover proceeding for the

purpose of enabling him to submit testimony that the

Trustee was not entitled to rely upon the presumption

afforded by Section 21-L of the Bankruptcy Act and that

the said Trustee was required to prove the actual cost of

the merchandise sold. The Referee denied this motion upon

the ground that he could not entertain the same unless

petitioner had first obtained permission from the Circuit

Court to apply for such relief to the Referee (R. 38).

Petitioner thereupon made an application to the United

States Circuit Court of Appeals for an order authorizing

him to apply before the Referee to reopen the turnover

proceedings and to take additional testimony thereon, This

motion was denied by the Cireuit Court of Appeals on the

9th day of February, 1945. An application was made for

a writ of certiorari from the order denying said motion.

The said writ was denied (R. 38).

On September 28, 1944, an order was signed by the Hon-

orable Alfred C. Coxe, District Judge, directing that peti-

tioner show cause why he should not be punished for con-

9

tempt for failure to comply with the turnover order. Said

order to show cause was based upon the petition of Leonard

H. Carter, Trustee in Bankruptcy, verified September 26,

1944, a certificate of contempt of the Honorable Peter B.

Olney, Referee in Bankruptcy, and various exhibits an-

nexed thereto. Said order to show eause was returnable

on October 4, 1944, and was adjourned from time to time.

A supplemental petition of Leonard H. Carter, verified

May 29, 1945, was filed in connection with said order to

show cause. The motion for contempt was predicated on

still another presumption to the effect that if petitioner had

possession or control of the merchandise, or its proceeds,

when the original order passed, then he still continues to

have possession and the failure to turn over to the Trustee

was a wilful disobedience of said order (R. 3-9).

Petitioner filed an affidavit in opposition to said peti-

tion and order to show cause, verified June 29, 1945, in

which, in addition to the facts as already set forth herein,

he again stated that at the time of the assignment for the

benefit of creditors by the Union Fabrics, Inc., he did not

have any moneys of any kind, nature or description. As

a matter of fact, he was absolutely penniless and did not

have sufficient moneys to give his wife and children the

bare necessities of life and while the turnover proceed-

ings were pending, and being conducted by him without

the aid of an accountant or attorney until September 25,

1942, he had incurred a liability for rent, which he could

not pay, to the extent of $1,800. Petitioner was unem-

‘ployed for about a year and a half after the assignment

for the benefit of creditors was made, during which time he

borrowed moneys from friends and relatives for the pur-

pose of buying food and clothing for his family. After

that he obtained employment from 8S. T. Paley & Company,

of No. 1412 Broadway, New York, as a salesman, and con-

tinued in that employ for a period of one year, when that

employment ended. It was as a result of this employment

that petitioner was able, in the latter part of 1942, to re-

ee er ne os

” Rete

10

tain Chester A. Lessler to represent him in the turnover

proceedings. In 1942 petitioner obtained employment with

the firm of Fortune Fabrics, Inc., at a salary of $50 a week,

and continued in that employ until approximately Decem-

ber, 1943, and beginning with 1944 he acted as a free lance

broker and in such way was able to earn a livelihood. Peti-

tioner in said affidavit stated that he never had the ability

to comply with the turnover order made by the Referee on

February 23, 1943, and still did not have the ability to com-

ply with said turnover order at that time and requested

that a hearing be held and testimony be adduced on the

question of whether petitioner has possession or control

of the property and whether the refusal to comply with

the turnover order is wilful and deliberate (R. 39, 40).

District Judge Conger, without taking any testimony but

upon the moving papers and opposing affidavit granted the

motion upon the authority of Oriel v. Russell, 278 U. S. 358,

and Prela v. Hubschman.

Petitioner appealed to the Cireuit Court of Appeals and

the Cireuit Court, on February 14, 1946, affirmed the order

of the District Court (R. 51, 52).

Questions Presented

1. Whether a Trustee in Bankruptcy, who, in a turnover.

proceeding, relies upon a presumption that the property

was sold at a price not less than cost, under the provisions

of Section 21-L of the Bankruptcy Act, and a presumption

of possession based upon a mathematical computation and

and continued possession between the time of the filing of

the petition and the date of the turnover order, may, in

connection with a motion to punish for contempt for failure

to comply with such order, rely upon a further presumption

that the order once made carries with it the presumption

that the respondent continues to have possession and con-

trol of the property in question.

>"

11

2. Whether the Trustee, in connection with a motion to

punish for contempt for failure to comply with a turnover

order may rely upon a presumption that the respondent

still has possession and control of the property in ques-

tion, should depend upon the length of time that elapsed

between the date of the filing of the petition and the date

of said turnover order where such turnover order is predi-

cated upon a mathematical computation, as in the case at

bar.

3. Whether the failure ta take testimony on the question

of possession or control of the property and on the ques-

tion of whether the refusal to comply with the turnover

order is wilful and deliberate where petitioner, in his affi-

davit in opposition to the motion to punish for contempt,

requested that a hearing be held and testimony be adduced

on such issues, violated the constitutional rights of peti-

tioner.

Statutes Involved

1. Section 21-L of the Bankruptcy Act:

“In any proceeding under this Act against a bank-

rupt for an accounting by him for his property or the

disposition thereof, or to compel a turnover of prop-

erty to him, if his books, records, and accounts shall

fail to disclose the cost to him of such property sold

by him during any period under consideration, it shall

be presumed, until the contrary shall appear, that

such property was sold at a price not less than the

cost thereof to him.”

29. Amendment V to the Constitution of the United

States:

“No person shall be held to answer for a capital, or

otherwise infamous crime, unless on a presentment or

indictment of a Grand Jury, except in cases arising

in the land or naval forces, or in the Militia, when

Te, nao hse Cod a we on ta be ee Lae cal cee ia ae Uh aks

12

in actual service in time of War or public danger;

nor shal) any person be subject for the same offense

to be twice put in jeopardy of life or limb; nor shall

be maated in any criminal case to be a witness

against himself, nor be deprived of life, liberty, or

property, without due process of law; nor shall private

property be taken for public use, without just com-

pensation.”

Specifications of Error to be Urged

1. The Courts below erred in holding that a turnover

order once made carries a presumption that the respondent

continues to have possession and control of the property,

even though the said order was predicated upon three

separate presumptions, to wit: (a) presumption under Sec-

tion 21-L of the Bankruptcy Act to the effect that mer-

chandise sold during a certain period was sold at a price

not less than cost; (b) presumption that if the bankrupt

failed to account for certain merchandise which, according

to a mathematical computation, should have been on hand

on the date of the filing of the petition, such merchandise

must have been in the possession of the petitioner, who was

the sole stockholder of the bankrupt corporation; and

(ec) presumption that if petitioner had possession of the

property on September 28, 1939, he continued to have the

property on February, 1943, when the order was made.

2. The Courts below erred in failing to hold that where

the turnover order is based upon a mathematical computa-

tion and there is no actual proof of possession at the time

of the filing of the petition but possession is presumed, such

presumption grows weaker as time passes and where there

is a long delay between the time of the filing of the petition

and the date of the turnover order, the Trustee, in connec-

tion with a motion to punish for contempt, should not be

permitted to rely upon a presumption that the turnover

order carries with it the presumption that petitioner still

continues to have possession and control of the property.

13

3.. The Court erred in granting the motion to punish for

contempt without permitting petitioner to introduce evi-

dence to show an inability to comply with the turnover

order and to show that the failure to comply is not wilful

or deliberate.

Reasons for Granting Writ

POINT A

A trustee in bankruptcy who, in a turnover proceed-

ing, relies upon a presumption that the property was

sold at a price not less than cost, under the provisions

of Section 21-L of the Bankruptcy Act, and a presump-

tion of continued possession between the time of the

filing of the petition and the date of the turnover, may

not, in connection with a motion to punish for con-

tempt for failure to comply with such order, rely upon

a further presumption that the order once made car-

ries with it the presumption that petitioner continues

to have possession and control of the property in

question.

The Court below based its decision upon the law as laid

down in the cases of Oriel v. Russell; Samuel Prela v. Louis

Hubschman, 278 U. 8S. 358, 13 A. B. R. (N. S.) 121. The

principle of law as laid down in those cases cannot be fol-

lowed in the case at bar. By reason of the creation of

Section 21-L of the Bankruptey Act by Congress in 1938

and other factors which have not been considered previ-

ously by the United States Supreme Court, the case at bar

requires a consideration of the issues unaffected by the

principle of law enunciated in Oriel v. Russell; Prela v.

Hubschman, cited supra.

Oriel v. Russell and Samuel Prela v. Louis Hubschman

(cited supra) were decided on January 14, 1929, prior to

the enactment of Section 21-L of the Bankruptey Act, which

De SR OLA Tete tes

ABERDEEN LSE T LS BELLE LLG LIEN GOIN LEE AICE NE SEO LE LE LPL RANE

14

created another presumption in favor of a Trustee in Bank-

ruptcy.

The Supreme Court, in the cases of Oriel v. Russell and

Prela v. Hubschman, cited supra, not only discussed the

question of the weight which should be given to a turn-

over order but also the degree of proof which was neces-

sary to support the original turnover order. As to the

degree of proof necessary to establish the turnover order

the Supreme Court in Re Oriel v. Russell, 15 A. B. R. (N.

S.) 121, at page 123, stated as follows:

“We think a proceeding for a turnover order in bank-

ruptey is one the right to which should be supported by

clear and convincing evidence. The charge upon which

the order is asked is that the bankrupt, having posses-

sion of property which he knew should have been de-

livered by him to the trustees, refused to comply with

his obligation in this regard. It is a charge equiva-

lent to one of fraud, and must be established by the

same kind of evidence required in a case of fraud in a

court of equity. A mere preponderance of evidence in

such a ease is not enough. The proceeding is one in

which coercive methods by imprisonment are probable

and are foreshadowed.”

As to the question of the weight which should be given to

the turnover order on a motion to punish for contempt for

failure to comply therewith, the Supreme Court at page

126 stated as follows:

“We find ourselves in general accord on this subject

with the remarks of the late Circuit Judge McPherson

of the Third Circuit, who used the following language

in the case of In re Epstein (D. C., Pa.), 30 Am. B. R.

387, 206 F. 568:

‘In the case in hand, the consequence is that, as

the order to pay or deliver stands without sufficient

reply, it remains what it has been from the first—

an order presumed to be right, and therefore an

oyder that ought to be enforeed.’” (Italics writer’s.)

15

The entire reasoning of the Supreme Court is that the

moving party in a motion to punish for contempt is entitled

to rely upon the presumption that the turnover order

which is based upon clear and convincing proof is presumed

to be correct and that the burden is upon the respondent

to establish his inability to comply with the turnover order.

It is important at this point to understand that the pre-

sumption which the Supreme Court had been discussing

was the presumption that the turnover order once made

continues to be correct.

In other words, if a turnover order is made and the

respondent refuses to comply with such turnover order it

is presumed that the respondent has possession of the

property referred to in the turnover and he wilfully and

deliberately refuses to comply therewith. This analysis

may be better illustrated by the language in the majority

opinion of In re Prela, cited supra, where the Circuit

Court at page 414 stated as follows:

“A disobedience of the order to turn over presents

a prima facie case of contumacy for punishment.

The burden rests upon the moving party to establish,

not beyond a reasonable doubt, but by a fair preponder-

ance of proof, such contumacy. Having been directed

to turn over property, it is presumed that the offender

continues in his wilful and deliberate conduct when

he fails to obey the order. Applying the rule stated

in that opinion, it follows that this order must be

affirmed.” (Italies writer’s.)

In the case at bar the Referee, upon a mathematical com-

putation which resulted from testimony of the accountant

for the Trustee, held that as of the 28th day of September,

1939, the Union Fabrics, Inc., bankrupt, should have had

on hand merchandise of the value of $69,921.24 and based

upon that finding presumed that petitioner, who was the

sole stockholder and an officer of the corporation, con-

tinued to be in possession or control of that property or

its proceeds on the date of the making of the turnover or-

as SEEING PI LE EE RTES LE EE LON E FN

16

der on February 23, 1943, approximately three and a half

years later. This question of presumption has never been

considered or decided by the United States Supreme Court.

Seligson v. Goldsmith, 128 Fed. (2d) 977;

Robbins v. Gottbetter, 134 Fed. (2d) 843.

In connection with the appeal from the order directing

the turnover Cireuit Judge Frank, who wrote the concur-

ring opinion, in Cohen v. Jeskowitz, 144 Fed. (2d) 39,

stated, at pages 40 and 41, as follows:

“T eoneur but with the hope, expressed by Judge

Learned Hand in Robbins v. Gottbetter, 2 Cir., 134 KF.

2d 843, 844, and Seligson v. Goldsmith, 2 Cir., 128 F.

2d 977, 978, 979, that the Supreme Court will soon

grant certiorari in some such case as this and overrule

precedents that fasten upon us what seems to him and

me an irrational rule of presumption, obviously con-

trary to fact, which enables trustees in bankruptcy to

employ civil actions as substitutes for criminal pro-

ceedings.”

The turnover order itself is based upon a series of pre-

sumptions.

Section 21-L of the Bankruptcy Act, which went into

effect in September of 1938, provides as follows:

“In any proceeding under this Act against a bank-

rupt for an accounting by him for his property or the

disposition thereof, or to compel a turnover of prop-

erty by him, if his books, records, and accounts shall

fail to disclose the cost to him of such proprty sold

by him during any period under consideration, it shall

be presumed, until the contrary shall appear, that such

property was sold at a price not less than the cost

thereof to him.”

The Trustee in the case at bar did rely upon such pre-

sumption and submitted figures as to the cost of the mer-

chandise sold, predicated upon such presumption. The

figure of $69,921.24 is hased upon a mathematical compu-

ae at Re TA Tae é PUR ALAIN ELE IY A IEG TET BS eK EE IS Pic:

17

tation to the effect that the bankrupt had on hand, as of

December 31st, according to a certain perpetual inventory

sheet, a certain amount of merchandise; that between Janu-

ary 1 and September 28, 1939 it sold merchandise of a

cost value in a given amount; that it had purchased a given

amount of merchandise according to its purchase invoices ;

and that it therefore should have had on hand the amount

directed to be turned over on September 28, 1939. In

order to arrive at the amount alleged to be unaccounted

for, the Trustee relied on the presumption that the mer-

chandise was sold at a figure not less than cost, and the

Referee adopted the figures as submitted by the Trustee’s

accountant.

The courts below, in granting the turnover order, per-

mitted the Trustee to rely upon a presumption under Sec-

tion 21-L; the presumption that if there was a failure to

account, according to the mathematical computation of the

Trustee’s accountant, petitioner was in possession or con-

trol of the property unaccounted for as of the date of the

filing of the petition in bankruptcy, and the presumption

that if petitioner had possession on the date of the filing

of the petition in bankruptcy he had possession and con-

trol on the date of the making of the turnover order, three

and a half years later.

Petitioner contends that the Trustee cannot now again

rely upon a further presumption that petitioner still con-

tinues to hold the property and that his refusal to turn

same over is deliberate and wilful but, on the other hand,

that the Trustee should be required to prove, by clear and

convineing evidence, that petitioner still has possession

and control of the property and that petitioner wilfully and

deliberately refuses to turn the same over to the Trustee

in Bankruptey. This contention is based primarily upon

the theory that the Trustee, in connection with a motion

to punish for contempt for failure to comply with a turn-

over order, should not be permitted to rely upon a pre-

sumption that the order, once made, carries a presump-

GL Sy AY MALIA A BRET LE IIMS ERY IOS ML FEE ELE NG HEBER PE 8 OEE ETE IGE Bren RittD ty IMR ZINC MPR eae

18

tion that petitioner continues to have possession of the

property where the order itself was based upon three sep-

arate presumptions. Such a situation has not been dis-

cussed by the United States Supreme Court or by any

other Court in connection with contempt proceedings aris-

ing out of a turnover order.

One presumption cannot be built upon another.

Looney v. Metropolitan Railroad Co., 200 U. S. 480,

487, 488, 26 S. Ct. 303, 50 L. Ed. 564;

United States v. Ross, 92 U. S. 281, 285, 23 L. Ed.

707;

Manning v. Insurance Co., 100 U. 8S. 693, 699, 25 L.

Ed. 761.

_ In Brady v. United States, 24 Fed. ( 2d) 399, the court at

page 404 stated as follows:

“It is well settled that presumptions cannot be based

on presumptions. Vernon v. U.S. (C. C. A. 8) 146 F.

121, 126; 22 C. J. p. 84, See. 27, page 99, See. 40. We

conclude that the evidence was insufficient to support

the verdicts of guilty. See Freeman v U.S. (C. C. A.

3) 20 F. (2d) 748.”

In Lincoln Nai. Life Inc. Co. v. Erikson, 42 Fed. (2d)

997, the court at page 1002 stated as follows:

“The result is that plaintiff’s case is built upon pre-

sumptions based one upon another. Such a course of

procedure is not allowable, either in a civil or crim-

mal case. 22 C. J. p. 84, See. 27; 9 Encye. of Evid.

p. 880; Brady v. United States, 24 F. (2d) 399, 404

(C. C. A. 8); General Reins. Corp. v. Southern Sur.

Co., 27 F. (2d) 265, 272 (C. C. A. 8) and cases cited.”

(Italics writer’s.)

To the same effect see:

Brown v. Maryland Casualty Co., 55 Fed. (2d) 159.

DPS POT LE OTL, THEN LEP LLL SES TLTL II LISELI PLETE OLEAN LLOEGR LMI IS I

ERI LTE ‘ co BS eae , ;

P

19

In General Reinsurance Corporation v. Southern Surety

Co., 27 Fed. (2d) 265, the court at pages 272, 273, stated

as follows:

“The argument does not appear to us to be sound.

In the final analysis it bases one presumption upon

another presumption. The first presumption is that,

if the surety company had investigated, it would have

obtained knowledge of the insolvency of the trust com-

pany and of Bell. The second presumption is that, if

the surety company failed to disclose such knowledge,

it would be guilty of a fraudulent concealment. ‘he

second presumption, viz. of fraudulent concealment, is

thus based upon the first presumption, of knowledge.

But a presumption, in order to be valid, must be based

upon facts, not upon another presumption. 9 Encye.

of Evid. p. 880; United States v. Ross, 92 U. 8. 281,

23 L. Ed. 707; Manning v. Ins. Co., 100 U. 8S. 693, 698,

25 L. Ed. 761; United States v. Carr, 132 U.S. 644, 653,

10S. Ct. 182, 33 L. Ed. 483; Looney v. Metropolitan R.

Co., 200 U.S. 480, 488, 26 S. Ct. 303, 50 L. Ed. 564; Cun-

ard S.S. Co. v. Kelley (C. C. A.) 126 F. 610, 615;

Uhlman v. Brewing Co. (C. C.) 53 F. 485; U. S. F.

& G. Co. v. Bank, 145 F. 273, 279 (C. C. A. 8); Vernon

v. United States, 146 F. 121 (C. C. a 8); Missouri,

K. & T. Railway v. Foreman, 174 F. 377, 383 (C. C.

A. 8); Smith v. Pennsylvania R. Co. (C. C. A.) 239

F. 103; Ringrose v. Sloane (D. C.) 266 F. 402; Atchi-

son, T. & S. F. Ry. Co. v. DeSedillo, 219 F. 686, 689

(C. C. A. 8); Wagner v. United States, 8 F. (2d) 581,

586 (C. C. A. 8); In re Elias (D. C.) 240 F. 448; Keen

v. United States, 11 F. (2d) 260 (C. C. A. 8); Nieder-

luecke v. United States, 21 F. (2d) 511 (C. C. A. 8).”

It is clear therefore that the principle of law laid down

by the Supreme Court in Re Oriel v. Russell, cited supra,

that a turnover order raises the presumption that the order

was correct and that the respondent still has possession of

the property and his refusal constitutes a deliberate and

wilful violation of the order does not apply to the facts in

the case at bar since the order itself was based upon at

least three separate presumptions. Under such eireum-

ES AER, Aaa mete GRAS LIME IEEE GOEL AS TELE ECA

—

20

stances another rule of law should apply, namely, that the

Trustee must establish by clear and convincing proof,

through facts rather than presumptions, that the order is

correct and that petitioner has ability to comply and that

his refusal constitutes a wilful and deliberate violation

thereof.

POINT B

The right of a Trustee to rely upon a presumption

that the turnover order carries with it the presump-

tion of continued possession should depend upon the

time that elapses between the date of the filing of the

petition and the date of the turnover order, where such

order is predicated upon a mathematical computation,

as in the case at bar.

The Trustee in the case at bar relied upon a mathematical

computation. The assignment for the benefit of creditors

was executed on September 28, 1939, and the turnover

order was not made until February 23, 1943, a period of

three and a half years later. Petitioner contends that the

presumption that a bankrupt continues to hold assets which

at the time of adjudication he unlawfully withheld from the

Trustee grows weaker as time passes until it finally ceases.

In the case of Marin v. Ellis, 15 Fed. (2d) 321, the bank-

rupt was adjudicated on December 27, 1922. The Trustee

filed his petition for a turnover on November 27, 1923, ap-

proximately ten months after the adjudication, and did not

bring his petition on for hearing before the referee until

June 17, 1924. An order denying the turnover was made

by the referee on August 27, 1925. The Trustee filed his

petition to review on October 19, 1925. The denial of the

petition was based upon the fact that the Trustee had

failed to prove that the bankrupt, at the time that the order

was made, had possession or control, or could turn over

to the Trustee merchandise or its cash equivalent of the

21

value of $15,000. The District Court confirmed the order

of the referee dismissing the Trustee’s petition for a turn-

over order and the Circuit Court of Appeals also confirmed

the referee and, in so doing, stated at page 321 as follows:

“The legal presumption is that a bankrupt, who at

the time of his adjudication in bankruptcy has and un-

lawfully holds back from his trustee in bankruptcy a

part of his property, or of its proceeds, continues to

hold it or them, but this presumption grows weaker as

time passes, until it finally ceases to exist.” (Italics

writer’s.)

Another case which is directly in point and supports the

contention of petitioner is /n re Walt, 17 Fed. (2d) 588. In

connection with the motion to punish for contempt in that

ease testimony was adduced on the question of the bank-

rupt’s inability to comply with the turnover order and the

court, at pages 592, 693, stated as follows:

“The testimony which the bankrupt has offered as

an excuse for not complying with the order of the ref-

eree is not convincing. I am of the opinion that he has

been dishonest with reference to this creditors; that if

he was ordered to go to jail, he would probably find

the $2,500 and pay it over. In fairness, however, I

must admit that I am not morally certain that he now

has possession or control of this $2,500, and that, if

I made an order committing him for contempt, it would

he upon my belief merely that he has it or can get

it. It must be conceded that it is now two years

since he failed, that he has a wife and children, and

that they have been sick. Whether the business has

made money or not does not appear. The presumption

that the bankrupt still has this money ts not as strong

as it was when the referee made his order. If the trus-

tee had procured the turnover order sooner, and had

brought a contempt proceeding more mptly, the sit-

uation would be we Aobere It ts probable that the bank-

rupt has been guilty of concealment of assets and of

false swearing; but, being in doubt as to the sufficiency

of the evidence to justify a commitment for contempt,

I shall give the bankrupt the benefit of the doubt.

22

“The order to show cause will be discharged, and

the order of January 18, 1927, entered prior to the

last hearing, will be vacated and set aside.” (Italics

writer’s.)

In the case at bar the general assignment was made on

September 28, 1939. An involuntary petition was filed on

December 20, 1939. The turnover proceedings were not

instituted until October 25, 1940, and as late as October

25, 1941, the Trustee served an amended petition with re-

spect to the turnover. The order for the turnover was not

made until February 23, 1943, three and a half years after

the assignment was made. An order to show cause to

punish for contempt was not obtained by the Trustee until

June 14, 1943, returnable on June 30th. Because of ap-

peals from the turnover order to the Cireuit Court of

Appeals and the Supreme Court of the United States, the

motion to punish was not decided until September 10, 1945.

Using the language of the Court in Jn re Walt, cited

supra, even if the Trustee was entitled to rely upon the

presumption of continued possession in connection with

the obtaining of the order, the lapse of time has created

more than sufficient doubt of the evidence of possession

and control of the property in question to warrant the

refusal to grant an order to punish the respondent for

contempt.

The least that can be said under the circumstances is

that because of the lapse of time involved the Trustee

should not be permitted to rely upon a presumption that

the appellant still has possession and control of the prop-

erty in question and wilfully withholds the same from the

Trustee, but he should be relegated to prove such posses-

sion and control by facts separate and distinct from the

presumption relied upon by him.

23

POINT C

The failure to take testimony on the question of

possession or control of the property and on the ques-

tion of whether the refusal to comply with the turn-

over order is wilful and deliberate where petitioner,

in his affidavit in opposition to the motion to punish

for contempt, requested that a hearing be held and

testimony he adduced on such issues, violated the con-

stitutional rights of petitioner.

In the cases of Oriel v. Russell and Prela v. Hubschman,

cited supra, the Supreme Court at page 127 stated as

follows:

“In the two cases before us, the contemnors had

ample opportunity in the original hearing to be heard

as to the fact of concealment, and in the motion for

the contempt to show their inability to comply with

the turnover order. They did not succeed in meeting

the burden which was necessarily theirs in each case,

and we think, therefore, that the orders of the Circuit

Court of Appeals in affirming the District Court were

the proper ones.” (Italics writer’s.)

The Trustee in his petition on the original turnover

proceedings made no reference to Section 21-L of the Bank-

ruptey Act. After all of the testimony was adduced and

the hearing was closed the Referee made a finding that

the merchandise was sold at a price not less than cost, based

upon the presumption under Section 21-L and not upon

proof as to actual cost. Petitioner, during the course of

the hearing, was not advised of any contention by the Trus-

tee that he relied on Section 21-L of the Bankruptcy Act

and therefore did not present testimony that the Trustee

did have in his possession books and records from which

the price of the merchandise sold during the period in

question could be ascertained and although an opportunity

24

was sought to introduce such evidence by a motion to re-

open the proceedings such application was denied and

petitioner never obtained an opportunity to prove these

facts.

Further, in the affidavit submitted in opposition to the

motion to punish for contempt petitioner requested that a

hearing be held and testimony be adduced on the question

of whether petitioner had possession or control of the

property in question and as to whether the refusal to com-

ply is wilful and deliberate, but the motion to punish for

contempt was granted without affording petitioner an

opportunity to adduce such testimony.

The Fifth Amendment to the Constitution of the United

States provides that no person shall be deprived of life,

liberty or property without due process of law. In the

case at bar petitioner will be deprived of his liberty if an

opportunity is not given to present the evidence which is

necessary to refute the proposition that the Trustee is

entitled to rely on a presumption of law under Section

21-L and to present evidence that he does not have in his

possession or control the property set forth in the turn-

‘over order, and that the failure to comply with said turn-

over order is not wilful and deliberate.

One of the basic requisites of due process when applied

to judicial proceedings is that the parties shall have notice

and an opportunity to present every available defense. To

that effect see In re Rosser, 101 Fed. 562, 567, 568, where

the Court stated:

“And the opportunity to be heard must be such that

he may, if he chooses, cross-examine the witnesses pro-

duced to sustain the claim, and produce witnesses to

refute it, if a question of fact is in issue, and, if a

question of law is presented, the opportunity to be

heard must be such that his counsel may, if they de-

sire, argue the justice and propriety of the judgment

or order proposed. Judicial orders or pengnen af-

fecting the lives or property of citizens in the absence

of such a notice and opportunity to the party affected

25

are violative of the fundamental principle of our laws,

and cannot be sustained. Gentry v. U. S. (C. C. A.),

101 Fed. 51; Burton v. Platter, 10 U. S. App. 657,

663, 4 C. C. A. 95, 99, 53 Fed. 901, 905; Windsor v.

MeVeigh, 93 U. 8. 274, 277, 278, 23 L. Ed. 914; Capel

v. Child, 2 Cromp. & J. 558, 574; Hovey v. Elliott, 167

U. S. 409, 414, 416, 446, 17 Sup. Ct. 841, 42 L. Ed. 215;

Galpin v. Page, 18 Wall. 350, 368, 21 L. Ed. 959; Un-

derwood v. McVeigh, 23 Grat. 409, 413; Henry v.

Carson, 96 Ind. 412; Hovey v. Elliott, 145 N. Y. 126,

39 N. E. 841; Taussig’s Ex’rs v. Glenn, 4 U. S. App.

524, 541, 2 C. C. A. 314, 318, 51 Fed. 409, 413; Merrill

v. Rokes, 12 U. S. App. 183, 188, 4 C. C. A. 433, 435,

54 Fed. 450, 452.”

In State of Kansas ex rel. Beck, Atty. Gen. et al. v.

Occidental Life Ins. Co. et al., 95 Fed. (2d) 935, the Court,

at page 937, stated as follows:

“The basic requisites of due process when applied

to judicial proceedings are that, having due regard

to the form and nature of the proceeding and the char-

acter of the rights which may be affected, the order,

judgment, or decree be entered by a court clothed with

jurisdiction of the subject matter and that the party

or parties bound by it have notice and be afforded an

opportunity to present every available defense.”

It appears that in a case where the turnover order was

based upon three separate presumptions, as herein dis-

cussed, though the law is well settled that a presumption

cannot be based upon a presumption, the due process of

law clause of the Constitution of the United States and

justice require that petitioner be permitted to introduce

evidence to show his inability to comply with the turnover

order and to show that his failure to comply was not

wilful or deliberate. The failure of the Courts below to

afford petitioner an opportunity to submit such testimony

will deprive him of his liberty without due process of the

law.

PEEL ORATOR OS FE EEL

26

In Jn re Fisher, 32 Fed. Supp. 69, the Court, at page 73,

stated as follows:

“Even if the bankrupt still fails to give any credible

explanation of the disposition of the missing mer-

chandise and books, or otherwise to account therefor,

still the turnover order should not be passed if the

referee is satisfied from further evidence that it is

entirely beyond the power of the bankrupt to comply

with the order. May v. Henderson, supra, 268 U. S.

page 120, 45 S. Ct. 456, 69 L. Ed. 870; Kirsner v.

aliaferro, supra, 202 F. page 60.”

The granting of the motion to punish for contempt with-

out the taking of testimony has, therefore, deprived peti-

tioner of his constitutional rights.

CONCLUSION

It is respectfully submitted that this case is one calling

for the exercise by this Court of its supervisory powers

in order that this important question may be determined

and that to such end a writ of certiorari be granted and

that this Court review the decision of the Circuit Court

of Appeals and finally reverse it.

ARCHIBALD PALMER,

Counsel for Petitioner.

mY