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DINKELSPIEL v. WEAVER

November 23, 1953

DINKELSPIEL
v.
WEAVER.



The opinion of the court was delivered by: John E. Miller, District Judge.

On March 7, 1953, plaintiff, as trustee in bankruptcy for Harry Archer Davis, bankrupt, filed his complaint against the defendant, Charles Weaver, seeking to set aside certain transfers of money from the bankrupt to defendant on the ground that said transfers were preferences under the provisions of Section 60 of the Bankruptcy Act, 11 U.S.C.A. § 96.

On April 11, 1953, defendant filed his answer in which he admitted receiving the money but denied that said transfers were preferences. The defendant also pleaded a setoff under the provisions of Section 60, sub. c of the Bankruptcy Act.

The case was tried to the Court on October 7 and 8, 1953, and at the conclusion of the trial the Court took the case under advisement pending the submission of briefs by the parties in support of their respective contentions. The briefs have been received, and now the Court, having considered the pleadings, ore tenus testimony of the witnesses, exhibits, stipulations, and briefs, makes and files herein its findings of fact and conclusions of law, separately stated.

Findings of Fact

I.

On April 11, 1951, Harry Archer Davis filed his voluntary petition in bankruptcy in this Court, and on the next day, April 12, was adjudicated a bankrupt. The plaintiff, Leon Dinkelspiel, is the duly appointed and qualified trustee in bankruptcy for the said Harry Archer Davis, bankrupt, and brings this suit in his capacity as trustee.

II.

Prior to September 20, 1950, Mattar's Art Galleries, Hot Springs, Arkansas, was owned and operated by Eli G. Mattar and the said Harry A. Davis as a partnership, but on that date the partnership was dissolved by mutual consent of the partners, and under the terms of the dissolution Harry A. Davis became the sole owner of the said Mattar's Art Galleries and continued to do business under that name. At that time the business was solvent.

Prior to the dissolution of the partnership, the defendant made the following loans to Mattar's Art Gallaries: March 20, 1950, $12,000; April 21, 1950, $8,000; May 20, 1950, $9,734.75; May 23, 1950, $1,342.50; and June 12, 1950, $10,000, making a total of $41,077.25. All of these loans were unsecured except the loan dated June 12, 1950, which loan was secured by certain jewelry and diamonds on that date delivered to defendant by Mattar's Art Galaries.

Seven of the diamond rings which were pledged to defendant on June 12, 1950, were consigned by defendant to Mattar's Art Galleries on June 30, 1950. Three of these rings were redeemed by the said Mattar's Art Galleries but the other four rings having a total value of $4,700 were neither paid for nor returned to the defendant.

On January 5, 1951, subsequent to the dissolution of the partnership, Harry A. Davis paid to the defendant $292.50 on the indebtedness and secured the release from him of one of the pledged rings. On the same date Davis, by check, paid defendant $734.75 as "part payment of loan." Also on the same date, Harry A. Davis executed a series of checks numbered from 414 to 439 inclusive, each in the sum of $500 payable to defendant, and each of the checks was marked "part payment of loan."

The $10,000 which defendant loaned to Mattar's Art Galleries on June 12, 1950, had been borrowed by defendant from the Arkansas Trust Company of Hot Springs, Arkansas, and, after receiving the above-mentioned checks, defendant took them to George Sexton, Vice-President of said bank, and asked him to collect them as he could and apply them on defendant's note with the bank. Being a friend of the defendant, Sexton complied with his request and, when funds were available, he would clear one of the checks by crediting the amount on defendant's note and charging said amount against the Davis account. In this manner the following checks were paid:

Check No. 414, paid on January 27, 1951 Check No. 415, paid on January 29, 1951 Check No. 416, paid on February 2, 1951 Check No. 417, paid on February 12, 1951 Check No. 418, paid on February 17, 1951 Check No. 419, paid on February 27, 1951 Check No. 420, paid on March 8, 1951 Check No. 421, paid on March 27, 1951 Check No. 422, paid on March 28, 1951

Checks numbered 423 through 439, both inclusive, of the said series of checks were not paid and are now attached to a proof of claim filed by defendant as a part of his common claim against the estate of the bankrupt.

During the period of time when checks numbered 414 to 422 were paid, the bank account of Harry A. Davis was very active, but usually at the end of the day there was a very small balance. Checks were turned down practically every day, and, in the words of Sexton, it was "more or less a case of first come, first served."

Sexton knew the state of said bank account of Davis, and handled the checks in the manner above stated as an accommodation to a customer and to aid the customer to pay the bank his debt. Defendant left the entire matter in the hands of the bank and apparently had very little knowledge of the status of the account.

The jewelry and diamonds which were pledged to the defendant on June 12, 1950, with the exception of the seven items defendant consigned to Mattar's Art Galleries, were held by him until January 5, 1951, and on various dates subsequent to January 5 and within about two and one-half months thereafter the defendant, upon the request of Davis, delivered to Davis the remaining jewelry and diamonds defendant had been holding as security. The value of the jewelry returned to Davis by defendant subsequent to January 5, 1951, was $3,938.70, and defendant received no new security.

Approximately sixty days after January 5, 1951, defendant loaned Davis the sum of $1,000, which loan was unsecured and was never repaid.

III.

The amount of unsecured claims filed against the bankrupt's estate is approximately $100,000 and the maximum amount which will be available for distribution to unsecured creditors is approximately $25,000 to $30,000. Therefore, the maximum percentage unsecured creditors may be able to recover is 25 to 30 per cent. Defendant has filed a proof of claim as an unsecured creditor in the amount of $11,773.90, and if the transfers involved herein are permitted to stand, defendant will receive a greater portion of his debt than other creditors of the same class.

IV.

Harry A. Davis did not keep a proper or recognized set of books in the operation of his business. He had a daily sales record in which he entered sales by general classifications; a diamond register; watch register; check book with the stubs of checks he had written; invoice files and similar files of data. He did not have a general register or general ledger, nor did he have a book in which he recorded checks as written. He had no cash receipts and disbursement register and no journal. He had no complete record of notes payable, although he did have a small diary in which he entered the due date of merchandise notes payable.

In June, 1951, plaintiff employed Oscar W. Luebben, a certified public accountant, to review the records of the bankrupt in an effort to ascertain whether a tax deficiency that had been assessed by the Government against Harry Davis and Eli Mattar was a proper deficiency. Luebben did not audit the books but started with the date of September 20, 1950, the date of the dissolution of the partnership, and prepared a "reconstructed" balance sheet for the dates, September 20, 1950, and December 31, 1950. He also prepared a profit and loss statement for the period from September 20, 1950, to December 31, 1950, and for the period from January 1, 1951, to April 9, 1951. Luebben frankly admitted that these documents were not prepared in accord with general accounting principles because it was impossible, due to the state of the bankrupt's books, to verify the assets and liabilities.

The difficult nature of Luebben's work in preparing the documents is demonstrated by the fact that he did not complete them until July or August, 1952, more than a ...


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