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In re Halpern

decided: May 8, 1970.

IN THE MATTER OF EVELYN HALPERN, APPELLANT,
v.
WARREN C. SCHWARTZ, TRUSTEE IN BANKRUPTCY, APPELLEE



Medina, Waterman and Smith, Circuit Judges.

Author: Smith

J. JOSEPH SMITH, Circuit Judge.

Evelyn Halpern, bankrupt, appeals from an order of March 5, 1969 of the District Court for the Eastern District of New York, John F. Dooling, Jr., Judge, affirming the order of the referee in bankruptcy which denied on summary judgment Evelyn's discharge on the ground that the claims made in the trustee's (Schwartz's) specification of objections to her discharge were concluded by the prior judgment in which she was involuntarily adjudicated bankrupt. We hold that the judgment in the bankruptcy adjudication is not a bar under the doctrine of collateral estoppel to Evelyn's contesting the claims made in the specification of objections to her discharge, and therefore we reverse and direct the district court to order the referee to entertain Evelyn's opposition to the specification.

The relevant facts are as follows. In 1963, Evelyn's husband, Joseph, owned most of the shares of the Vaughn Corporation which was engaged in the construction business. Evelyn and her son, David, owned a minimal number of shares in the company. Vaughn borrowed a substantial amount of money from the Chase Manhattan Bank, secured by Joseph, Evelyn and David as guarantors in their individual capacities. Vaughn then suffered financial difficulties which were aggravated by the collapse of its cofferdam on March 16, 1963. Thereafter Vaughn deteriorated rapidly and finally lost its current construction contract on May 17, 1963.

In order to arrange the liabilities inter se so that Joseph and Evelyn were primarily liable to Chase as guarantors on the Vaughn loan and David only secondarily liable, and in order to indemnify David for any possible liability he might incur as a guarantor, Joseph and Evelyn, on April 8, 1963, assigned to David a mortgage and bond worth about $80,000 (at which time Vaughn was liable to Chase for $100,000). The assignment was never perfected by recording under New York Real Property Law, McKinney's Consol. Laws, c. 50, § 291 (McKinney 1968). See 11 U.S.C. §§ 21, 96, 107 (1968). Vaughn having become insolvent, the three Halperns became individually liable to Chase as guarantors.

On January 30, 1964, Chase filed virtually identical involuntary petitions of bankruptcy against Joseph and Evelyn. The petitions alleged that in assigning the mortgage and bond to David, Joseph and Evelyn: (1) conveyed, transferred, concealed, or removed valuable property with intent to hinder, delay and defraud their creditors (an act of bankruptcy under section 3a(1) of the Bankruptcy Act ["Act"], 11 U.S.C. § 21(a) (1)); and (2) transferred valuable property while insolvent to creditors with the intent to prefer such creditors over others of the same class (an act of bankruptcy under section 3a(2) of the Act, 11 U.S.C. §§ 21(a) (2), 96). Trial was held before Judge Rosling in the District Court for the Eastern District of New York. Although contesting the petition against her, Evelyn neither appeared nor testified at trial; instead she relied on the testimony of her husband Joseph.

Judge Rosling, by opinions of February 18, 1965 and decrees of March 5, 1965, declared each spouse bankrupt, finding that the assignment to David of the mortgage and bond was an act of bankruptcy on three statutory grounds: (1) it was a removal of property with intent to hinder and delay creditors under section 3a(1) of the Act; (2) it was a transfer of property under section 3a(1), fraudulent as to creditors as defined in section 67 of the Act, 11 U.S.C. § 107(d) (2); and (3) it was a preferential transfer of property under section 3a(2) as defined in section 60 of the Act, 11 U.S.C. § 96. The matter was then referred to the referee in bankruptcy, Honorable William J. Rudin. Appellee Schwartz qualified as trustee on April 5, 1965.

The spouses pressed joint appeals to this court of their adjudications of bankruptcy arguing that there was inadequate proof of an assignment to David, that Chase was estopped since if there were a preferential transfer, Chase was preferred, and that Judge Rosling made impermissible inferences from the failure of Evelyn and David to testify. After oral argument, this court affirmed in open court without opinion. In re Halpern, Docket Nos. 29704-05 (2d Cir. June 10, 1965).

Trustee Schwartz opposed Evelyn's discharge from bankruptcy under section 14 of the Act, 11 U.S.C. § 32, by filing specification of objection number 3 to her discharge. That specification charged:

"3. On or about April 8, 1963, * * * she transferred and removed a valuable bond and mortgage owned in part by her on realty in Suffolk County, to her son I. David Halpern, with intent to hinder, delay, or defraud her creditors."

Section 14c(4) of the Act, 11 U.S.C. § 32(c) (4) provides that:

"The court shall grant the discharge unless satisfied that the bankrupt has * * * (4) * * * transferred, removed, destroyed, or concealed * * * any of his property, with intent to hinder, delay, or defraud his creditors * * *."

The trustee then moved, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for summary judgment denying Evelyn a discharge on the ground there was no defense to specification number 3 because the issue had been concluded in the bankruptcy adjudication and was now res judicata. Evelyn made a cross-motion for summary judgment dismissing specification number 3 and granting her a discharge. Referee Rudin, in a considered opinion of June 11, 1968, granted summary judgment for the trustee denying a discharge to Evelyn, and denied her cross-motion for summary judgment. On petition to the district court for review, Judge Dooling, on March 5, 1969, affirmed the referee's order.

In order to deny discharge to a bankrupt under section 14c(4) of the Act, 11 U.S.C. § 32(c) (4), the court must find that the transfer or removal of property in question was effected with actual intent to hinder, delay, or defraud creditors. Minnick v. Lafayette Loan & Trust Co., 392 F.2d 973, 977 (7 Cir. 1968); In re Pioch, 235 F.2d 903, 905-906 (3d Cir. 1956); In re Richter, 57 F.2d 159, 160 (2d Cir. 1932); In re Simon, 197 F. Supp. 301, 303 (S.D.N.Y.1961). Therefore, one prerequisite to sustaining the summary denial of Evelyn's discharge on the ground of collateral estoppel is that in the prior adjudication of bankruptcy Judge Rosling found actual intent to hinder, delay or defraud creditors. See Myers v. International Trust Co., 263 U.S. 64, 44 S. Ct. 86, 68 L. Ed. 165 (1923); Gratiot County State Bank v. Johnson, 249 U.S. 246, 39 S. Ct. 263, 63 L. Ed. 587 (1919); Friend v. Talcott, 228 U.S. 27, 33 S. Ct. 505, 57 L. Ed. 718 (1913). Only one of Judge Rosling's three legal bases for finding an act of bankruptcy necessarily involved a finding of actual intent. Thus, his finding that the assignment was a preferential transfer under section 3a(2) of the Act as defined in section 60, required no inquiry into the bankrupt's intent since the effect of the transfer is the sole criterion of whether it is preferential. 11 U.S.C. § 96(a) (1); In re Julius Bros., 217 F. 3 (2d Cir. 1914). Nor did his finding that the assignment was a transfer of property "fraudulent within the intent of § 3a(1) under the provisions of § 67" of the Act, 11 U.S.C. §§ 21(a) (1), 107, entail a finding of any actual fraudulent intent. The requisite intent for finding an act of bankruptcy based on a fraudulent transfer is set out in sections 67 and 70 of the Act, 11 U.S.C. §§ 107, 110. ...


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