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United States v. Michael

decided: August 13, 1948.

UNITED STATES
v.
MICHAEL ET AL.



Author: Maris

Before MARIS, McLAUGHLIN, and KALODNER, Circuit Judges.

MARIS, Circuit Judge.

Homer N. Davis, George L. Fenner, Sr., Donald M. Johnson, Harry S. Knight and Robert Michael were indicted in the Middle District of Pennsylvania upon two counts charging the violation of Section 29, sub. a, of the Bankruptcy Act, 11 U.S.C.A. ยง 52, sub. a, and a third count charging a conspiracy to commit the violations set out in the previous counts. In the first two counts Michael was charged as principal and the other defendants as aiders and abettors. Michael pleaded guilty to all three counts of the indictment and after a trial in the district court Davis and Johnson were acquitted and Fenner and Knight were convicted upon all three counts. From the judgment of conviction Knight took the present appeal. On appeal his principal contention is that the testimony adduced at the trial did not support the charges made against him in the indictment and that accordingly it was error for the trial judge to deny his motion for a directed verdict of not guilty.

The case grew out of the reorganization of the Central Forging Company under Chapter X of the Bankruptcy Act. That company was engaged at Catawissa, Pennsylvania, in the manufacture of valves. A reorganization proceeding had been instituted in the District Court for the Middle District of Pennsylvania some time prior to January 1, 1942 and Walter H. Compton had been appointed trustee but the reorganization plan which he had formulated had been rejected by the creditors. On January 1, 1942 Compton resigned as trustee in order to accept appointment as referee in bankruptcy and defendant Michael succeeded him by appointment by Judge Johnson of the district court. By like appointment J. Donald Reifsnyder became the trustee's counsel. Reifsnyder was named in the indictment as a confederate but was not living when it was submitted.

Defendant Knight was special counsel for Maxi Manufacturing Company, a large user of the products of the Central Forging Company, whose officers had been operating the Forging Company's plant for both trustees. Early in 1942 Michael and Reifsnyder in consultation with Knight worked out a plan of reorganization which was subsequently approved by the creditors and by the court and carried out. Under this plan the Maxi Company acquired all the assets of the Forging Company, paid its secured creditors 20% and its unsecured creditors 5% of their claims in bonds subsequently paid off in cash and paid all the expenses of the reorganization proceeding and of a preceding receivership in the state court. Since the Forging Company was found by the court to be insolvent its stockholders were barred from any participation in its assets. Defendant Davis was secretary and treasurer of the Maxi Company and defendant Fenner was its general counsel.

The indictment in its first count charged that Michael unlawfully appropriated to his own use $13,000 belonging to the estate of the Central Forging Company which money had come into his charge as trustee. Specifically the count alleged:

"That the defendant Robert Michael, acting as Trustee * * * did arrange for the sale of all the assets of said Central Forging Company to the Maxi Manufacturing Company, under what was then designated a plan of reorganization, for an agreed amount; that the defendants and confederate herein did arrange that a part of the amount agreed upon as the purchase price of said assets, to wit, Three Thousand Dollars ($3,000.00) to be paid to * * * Michael, individually and not as Trustee * * * that the defendants * * * did pay to the defendant Robert Michael $3,000.00 * * * that the defendants * * * did thereupon cause the accounts receivable in the assets of the estate * * * to be reduced in the valuation thereof by the sum of * * * $3,000.00 and did thereupon cause to be entered in the accounts of said estate the amount received from said Maxi Manufacturing Company for the estate of * * * Central Forging Company in a sum less by * * * $3,000.00 than had actually been paid therefor to the defendant * * * Michael, as Trustee; * * * Defendants * * * knowing that said * * * $3,000.00 was part of the purchase price then and there paid by * * * Maxi Manufacturing Company for the assets of the estate of * * * Central Forging Company did aid, abet, counsel, induce and procure * * * Michael * * * not to deposit the same in the funds nor list the same in the accounts of the estate of said Central Forging Company and not to use the same for the benefit of said estate, but on the contrary to appropriate the same * * *."

The second count charged that Michael unlawfully transferred certain property of the estate of Central Forging Company, to wit: accounts receivable to the approximate value of $3,000. It alleged:

"That * * * Michael * * * did arrange for the transfer of the assets of said Central Forging Company to the Maxi Manufacturing Company under what was then designated a plan of reorganization for an amount which was agreed upon between them; that the defendants * * * did thereupon cause certain assets of said Central Forging Company to wit, accounts receivable, which had theretofore been valued at approximately $23,534.50, to be shown in the records of said estate to have a valuation of $20,534.50, then and there well knowing that the said Maxi Manufacturing Company was paying for said assets * * * an amount which included the accounts receivable at their value of $23,534.50, and did represent the amount received from said Maxi Manufacturing Company for said assets to be a sum less by * * $3,000.00 than was actually being paid by said Maxi Manufacturing Company therefor and which was * * * $3,000.00 less than was actually being received by the defendant * * * Michael, as Trustee * * * that * * * defendants * * * did aid, abet, counsel, induce and procure * * * Michael to deprive said estate of the use and benefit of the * * * $3,000.00 * * * in that * * * Michael did transfer said assets to said Maxi Manufacturing Company without depositing in his funds as Trustee * * * the sum of * * * $3,000.00 * * * and thereby deprived the estate of the Central Forging Company of the benefit of the purchase price therefor to the extent of * * * $3,000.00 * * *."

The third count charged all the defendants with conspiring to commit the offenses set out in the first and second counts.

Defendant Donald M. Johnson is a son of a former judge of the district court. There was evidence that he had been instrumental in securing the appointment by his father of Michael and Reifsnyder as trustee and counsel respectively. The theory of the prosecution was that the sum of $3,000 which was charged as having been diverted from the estate had been paid over by Michael and Reifsnyder to defendant Johnson pursuant to a plan by which he was to share in their fees. The jury, however, acquitted Johnson, and the Government's theory as to the purpose of the transaction involving the $3,000 and the receipt of the money by Johnson, therefore, falls out of the case, leaving only the charge that Michael, for purposes of his own, appropriated $3,000 belonging to the estate and in that connection transferred $3,000 of accounts receivable without consideration being received therefor by the estate.

We turn then to the consideration of the facts established by the evidence in order to determine whether they furnish support for these charges. It appears that in January, 1942 Michael and Reifsnyder approached Knight as special counsel for the Maxi Company with the suggestion that a plan be worked out whereby the assets of the Forging Company be taken over by the Maxi Company upon terms satisfactory to the creditors. Following this conversation Knight on January 29th made a written offer on behalf of the Maxi Company to purchase the fixed assets of the Forging Company for $17,000 cash and to waive its claim as a secured creditor of the Forging Company. He calculated that under these circumstances the payment of the sum of $17,000 would be sufficient to pay the secured creditors of the Forging Company 2% and the unsecured creditors 5% on their claims. In his letter Knight suggested that the Forging Company's plant be kept operating and that its current assets be liquidated for an amount sufficient to pay expenses.

Further discussion arose between the parties as to whether the Maxi Company should take possession of the assets of the Forging Company as of the date when the final order approving the plan should be made or as of January 1, 1942. The parties had before them an accountant's report showing the assets and liabilities of the Forging Company of December 31, 1941. It was realized that the operation of the plant subsequent to that date had resulted and would continue to result in the use of current assets and their conversion into the form of finished products and new accounts receivable. Knight accordingly suggested that the Maxi Company should take over all the assets as of January 1, 1942, assuming the results of the trustee's operations during the intervening period and paying for the current assets thus taken over in addition to the sum of $17,000 agreed to be paid for the fixed assets.

After some further negotiations the parties reached an agreement upon a revised plan of reorganization under which the Forging Company was to be merged with the Maxi Company, all of its assets being transferred to the Maxi Company, its secured creditors were to receive 20% of the face amount of their claims in debenture bonds of the Maxi Company and its unsecured creditors were to receive 5% of the amount of their claims in similar bonds, such bonds aggregating $17,000. Under the plan the stockholders of the Forging Company were to receive nothing and the fees and expenses of the prior receivership in the state court and of the reorganization proceeding in the destrict court were to be paid in cash by the trustee. The trustee at the time did not have funds in his possession for this purpose and the plan did not specify the source from which he was to obtain the necessary funds. It is perfectly clear from the evidence, however, that it was understood by everyone that these funds were to come from the Maxi Company and it is equally clear that the Maxi Company's ...


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