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In re Butler

decided: April 17, 1970.

IN THE MATTER OF JAMES P. BUTLER, BANKRUPT, JAMES P. BUTLER, APPELLANT


McLaughlin, Freedman and Gibbons, Circuit Judges.

Author: Freedman

Opinion OF THE COURT

FREEDMAN, Circuit Judge.

This case, involving an individual bankrupt's right to discharge, is before us for the second time. The bankrupt appeals from an order of the district court affirming the referee's denial of his discharge.

I.

The bankrupt, James P. Butler, was an employee of Miller & Van Winkle Company, a New Jersey corporation. On November 15, 1960, the corporation was indebted to the Franklin Bank for $28,195.87 on an unsecured, overdue note. In order to obtain a new loan the corporation entered into an accounts receivable financing agreement with the Bank. The agreement was signed on behalf of the corporation by Robert J. Cormier, its president, Butler, its treasurer, and Michael Terminiello, its secretary. Next day the corporation delivered to the Bank its promissory note for $50,000, together with an assignment of accounts receivable supported by invoices totalling $62,580 which falsely showed shipments of certain machinery to customers. Payment of the promissory note was personally guaranteed by Butler and Cormier. The Bank then credited $50,000 to the corporation, receiving from it the satisfaction of the corporation's outstanding debt. At various times thereafter the corporation assigned to the Bank other accounts receivable and substituted invoices for some of those involved in the November 16, 1960 assignment. All these assignments, which were executed on behalf of the corporation by Butler as treasurer, were false; the machinery shown on the invoices had not been shipped and the customers shown on the assignments were not indebted to the corporation.

The corporation later went into bankruptcy and the Bank obtained judgment against Butler on his personal guarantee for $15,121.59, the balance due on the note. Butler then filed a voluntary petition in bankruptcy and the Bank, which filed a proof of claim for the amount of its judgment, objected to his discharge.

Butler had been employed by the corporation from February 1960 to March 1961 when it went into bankruptcy. From the commencement of his employment Butler held the office of treasurer, but was not a director of the corporation. He owned 2% of its outstanding capital stock.

The Bank objected to Butler's discharge under § 14(c) (3) of the Bankruptcy Act*fn1 on the ground that as an executive of the corporation he had obtained for it the loan of $50,000 by making what he knew were materially false and fraudulent statements regarding the corporation's financial condition.

After a hearing the referee dismissed the Bank's objections on the ground that the assignments of the accounts receivable were not statements of financial condition within the meaning of § 14(c) (3). The district court vacated the referee's order and remanded the case to him because he had made no findings which would disclose whether the assignment of the accounts receivable constituted a financial statement, and also ordered that if they were the referee should decide whether Butler was an "executive" of the corporation within the meaning of § 14(c) (3).

After a further hearing the referee, on October 26, 1967, denied the application for a discharge. He made findings of fact that the assignments of the accounts receivable to the Bank were materially false statements in writing respecting the financial condition of the corporation, that the Bank relied on these assignments in extending credit to the corporation, that Butler was treasurer of the corporation and represented it in the dealings with the Bank following the execution of the accounts receivable financing agreement, and that he was an executive of the corporation within the meaning of § 14(c) (3). The referee further found that except for the possible effect on the continuation of his employment, the bankrupt received no benefit, direct or indirect, by engaging in the accounts receivable financing with the Bank. The referee concluded that there was no requirement in the law that the executive of a corporation receive a benefit from the transaction. The district court affirmed the referee's order. From this decision the first appeal was taken to this court.

The appeal attacked the referee's decision that Butler was an "executive of a corporation" within the meaning of § 14(c) (3). We refused to decide that question, however, but remanded the case because the record did not contain any finding on the important and underlying question of Butler's knowledge, or reckless indifference amounting to the equivalent of knowledge, of the falsity of the accounts receivable. In re Butler, 407 F.2d 1059 (3 Cir. 1969).We referred to our recently decided case of In re Barbato, 398 F.2d 572 (3 Cir. 1968) (en banc), where in similar circumstances we had remanded a bankruptcy discharge case to the referee to determine whether there was either knowledge of the falsity of the financial statement or a reckless indifference to the facts.

On remand the parties agreed to have the referee decide the question on the existing record without additional testimony. ...


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