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September 29, 1941

In re EISENBERG et al.

The opinion of the court was delivered by: KALODNER

KALODNER, District Judge.

This is a review of the referee's decision denying the trustee's petition for an order against the bankrupt to turn over certain assets. The proceedings are for what is commonly known as a "turnover order".

The bankrupts were clothing manufacturers who began this business on May 1, 1937. The method of manufacture was to cut the cloth, which they had previously purchased, at their own plant; the cut garments were then sent to outside contractors for completion and assembling.

 On June 21, 1938, they filed a petition under Section 74 of the Bankruptcy Act, 11 U.S.C.A. ยง 202, in which proceedings they sought to effect a settlement with their creditors. Several settlements were proposed but none was accepted by the creditors. Finally, on October 8, 1938, an order of liquidation was entered.

 On February 24, 1939, the trustee filed a petition for an order on the bankrupts to turn over certain quantities of suits, pants, trimmings and linings. The application for the order to turn over the trimmings and linings was subsequently abandoned by the trustee. A voluminous record of 361 pages, exclusive of exhibits, was made in the hearings before the referee. The referee dismissed the trustee's petition.

 The facts of the case will be more fully developed in the discussion of the three questions which the referee poses as essentially controlling this case:

 (1) Whether a certain book marked "Exhibit 27" has been properly proved so as to become relevant in this proceeding;

 (2) Whether the inventory and appraisement of May 31, 1938 prepared by Fred B. Emerson, et al. is true and correct; and

 (3) Whether the report prepared by Morris Cohen et al. is based upon clear and convincing proofs.

 With reference to the first question, it appears that in the general examination (the portion of which was offered in the turnover proceedings) Morris Eisenberg, one of the bankrupts, identified this book as the "production record" which his nephew Al ("Little Al") Eisenberg maintained under his, Morris Eisenberg's, supervision. The testimony further shows, and it was not denied, that this book had been turned over to and used by the bankrupts' own accountants in making reports for the bankrupts to justify the settlement which they attempted to make. This book was likewise turned over by the bankrupts to Mr. Cohen, the trustee's accountant, together with all the other records of the bankrupts, when Mr. Cohen called for the possession of same.

 At the hearing in the turnover proceedings, the bankrupt Morris Eisenberg asserted that this exhibit was not a record of the business, but was "Little Al's" personal record which was kept for the purpose of deceiving the union (N.T. 22, 23). The bookkeeper, Evalyn Miller, testified that she did not keep this record, but the testimony discloses that there were other records admittedly belonging to the bankrupts which she did not keep. An inspection of the book discloses obvious erasures. Objection was made to the offer of the book in evidence. The referee held the matter under advisement, and, at the conclusion of the hearings, ruled that it was inadmissible as evidence on the grounds that the trustee failed to show that the book was kept in the ordinary course of business; that the entries were made at or about the times of the divers transactions therein stated; and that the entries were true and correct.

 The courts is of the opinion that the referee erred in ruling out this exhibit. The referee mistakenly applied the "shop book rule" in determining the admissibility of the document. It is true that if this were a suit for goods sold and delivered, the "shop book rule" should be strictly followed. However, this record was in the nature of an admission by the bankrupts, and can be used for whatever probative value it may have against them. The book in question was admittedly used by the bankrupts in the determination of their affairs, and was actually found in the bankrupts' place of business and turned over to the trustee or the trustee's accountant as one among other of the bankrupts' records. The mere fact that there were erasures does not render the document inadmissible; otherwise, it would be in any bankrupt's power, by the simple device of mutilating his records, to render impossible an honest examination of his affairs. The relevancy and probative value is, of course, a matter for the particular case. In the instant proceeding, this exhibit sheds light on the transactions of the bankrupts, and in a large measure substantiates the trustee's contentions.

 "Little Al", who was available, was not called as a witness by either side, but inasmuch as this is a record possessed by the bankrupts, reflecting their operations, and previously identified as such by them, their failure to call "Little Al" weighs heavily against them.

 As to the second question, the inventory and appraisement of May 31, 1938, was prepared by Fred B. Emerson, the bankrupts' own certified public accountant. Mr. Emerson testified that the inventory was made by actual count in the presence of Morris Eisenberg, one of the bankrupts, who assisted in making the inventory and approved of same. Morris Eisenberg denied that he was present at the time or approved the inventory, and he further denied that the inventory was accurate. Were the accuracy of this inventory based on conflicting evidence involving only questions of credibility of witnesses, the court would not disturb the referee's finding and substitute its views for those of the referee. The accuracy of this inventory is, however, supported by arithmetical computation from admitted or undisputed facts. The bankrupts made an inventory on November 30, 1937, which has been admitted to be correct. This inventory shows 2,128 suits to be on hand at that time. Starting with that inventory we can make the following table: Inventory of 11/30/37 2,128 suits Firm's production 12/1/37 to 5/1/38 12,769 suits Total to be accounted for 14,897 suits Less sales 12/1/37 to 5/31/38 12,540 suits Units that should be on hand 5/31/38 2,357 suits


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