The opinion of the court was delivered by: KIRKPATRICK
The very complete and careful report of the referee states the case, and his findings of fact are confirmed and adopted. The surcharge of the trustee in the amount of $14,003.20 arising out of his attempt to defraud the estate of that amount in connection with the sale of the assets is fully warranted, and, as a matter of fact, is acquiesced in by him.
The only question, therefore, before the court is the propriety of the second part of the referee's order by which the trustee is surcharged in the additional amount of $11,174.59, representing loss which the referee found that the estate suffered by reason of the trustee's failure to complete certain merchandise.
The referee states the question involved as follows: "* * * whether the Trustee was obliged under penalty of surcharge, to expend the sum of $11,840 to complete the unfinished merchandise under the circumstances as developed in this case, with or without an order from the Bankruptcy Court."
The bankrupts were manufacturers of men's clothing. When the trustee (then receiver) took over the plant, he found approximately 2,400 unfinished garments in various stages of completion, representing possibly 20 per cent. in value of the merchandise on hand. Upon his own petition an order was made by which "the Receiver or the Trustee is authorized to contract for the completion of these unfinished garments for a price of approximately $6,000."
As a matter of fact, instead of $6,000, the minimum cost of completing the garments would have been nearly $12,000. Consequently it was impossible for him to carry out the work within the terms of his authorization.
However, instead of trying to ascertain the cost and getting a new authorization to complete the work at a higher figure or at least laying the facts before the creditors for their action, the trustee simply let the whole matter drop. The reason for this was that within a short time after the order was made, he was engaged in working out the details of a fraudulent conspiracy which involved a sale of all the assets of the estate at less than their value.
An order of sale was obtained and the goods sold. The creditors must have known that the trustee was not completing the unfinished merchandise and that the sale would end his power to do so. No one seems to have raised any question about it.
Note: The chronology is of value in appraising the whole situation and is as follows:
On January 23d the trustee petitioned for leave to complete the garments in question. No action was taken on that day, in view of a pending offer of composition. On February 27th, the order authorizing completion of the garments was made, but dated March 4th to await action on the composition offer.
On March 11th, the composition order was rejected by a vote of the creditors.
On April 21st, the trustee's petition for private sale of all the assets was brought before the creditors at a meeting specially fixed for that purpose, after ten days notice to all of the creditors. There being no objection, the sale took place on that day.
Subsequently, the trustee's fraud was uncovered and he has been surcharged by the amount which the estate lost through it. The scheme was to remit some $14,000 of the purchase price to the purchaser, who was acting in concert with the trustee, by means of a fictitious rebate for lost or undelivered goods. However, the referee has found as a fact that the price obtained at the sale (and which with the surcharge will ...