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April 14, 1960

Matter of ABC-FEDERAL OIL & BURNER CO., Inc., Bankrupt

The opinion of the court was delivered by: LORD

This matter is before the court upon certificate of review, both sides having filed exceptions to the Referee's findings and opinion. The respective claims arise out of a series of transactions which can best be explained in terms of a history of the case.

 Peltz Street Terminals, Inc., claimant, filed a proof of claim against the Bankrupt, ABC-Federal Oil & Burner Co., Inc., for damages for the breach of a contract for the storage ('thruputting') and blending of fuel oils for the Bankrupt at the Peltz Street Terminals in the City of Philadelphia.

 The trustee in bankruptcy filed objections to the claim, on the ground that no contract was ever made. He also filed a counterclaim for the recovery of sums expended by the bankrupt in constructing a blending plant pursuant to the alleged or supposed contract which was never consummated. His position as to the counterclaim was that Peltz Street Terminals had been unjustly enriched by approximately $ 93,000, and further that the transfers involved in the counterclaim were in violation of Sections 67, sub. d and 70 of the Bankruptcy Act. The last-mentioned statutory sections (11 U.S.C.A. §§ 107 and 110) relate to liens and title to fraudulently transferred property of a bankrupt estate.

 Hearings were held on the proof of claim and counterclaim before Referee Thomas J. Curtin, who filed an opinion and order December 8, 1959 (herein cited as Opinion) dismissing not only the claim of Peltz Street Terminals, Inc., but also the counterclaim of the trustee.

 As to the claim of Peltz Street Terminals, Inc., Referee Curtin found that there was no contract, and therefore no basis for damages for breach of contract.

 As to the counterclaim of the trustees for improvements to the Peltz Street Terminals, he said:

 '* * * this clearly cannot be sustained, basically because of the lack of proof. As stated previously, the testimony of David Gilbert (Manager in name, but in fact completely controlled by Callis) is so full of inconsistencies and his dealings with his alter ego, Eugene M. Callis, so questionable that it is not worthy of belief.

 'The Referee is clearly of the opinion that no knowledge of the real relationship between Gilbert and Callis was ever brought to the knowledge of Stanley Jacobs (principal stockholder of Peltz Street Terminals), he knew nothing of the financial machinations of the same two, acted in good faith when he advanced $ 250,000 for the purchase of the so-called Peltz Street Terminal, never was in any conspiracy to defraud.

 'Accordingly, the trustees have failed to sustain their counterclaim.' (Opinion, p. 6.)

 The trustee, of course, has filed no exceptions to the Referee's holding that there was no contract. His contention is that the Referee's denial of the counterclaim cannot be reconciled with the holding that there was no contract. The trustee argues:

 'If there was no contract, the property of the bankrupt transferred to the claimant purportedly pursuant to the nonexistent contract must necessarily remain the property of the bankrupt. To hold otherwise would be to confer an unjust enrichment upon claimant at the expense of the bankrupt's creditors. * * *

 'Furthermore, the Referee has ruled that the parties are in pari delicto. He has directly and by implication stated that the trustee does not have clean hands and is, therefore, not entitled to equity. Certainly, the evidence justified a finding that the claimant does not have clean hands and consequently does not deserve equitable relief. But to hold that the trustee is barred by the same wrongdoing is absurd.

 'The trustee is the guardian of the bankrupt estate. He represents the innocent creditors whose money and property were misappropriated to the advantage of the claimant. If the Referee's reasoning is sound, then there could never be a recovery by a trustee in a fraudulent transfer case. It is because trustees represent the creditors that the law will set aside in their favor fraudulent dealings between the bankrupt and third persons.'

 The trustee also takes issue with intimations in the Referee's opinion that the parties were in pari delicto. He also disagrees with the finding, quoted earlier herein, that Stanley Jacobs, principal stockholder of Peltz Street Terminals, was at all times free of guilty knowledge or intent.

 Discussion of those contentions, however, is not possible without some recapitulation of the transactions which led up to the present dispute.

 Three companies are principally involved -- (1) ABC-Federal Oil & Burner Co., Inc., the bankrupt; (2) Valley Oil Company; and (3) Peltz Street Terminals, Inc., the claimant.

 The five persons principally involved in the dealings (apart from the trustee) are: Eugene M. Callis, Ethel W. Hurst, David Gilbert, Jack McSherry and Stanley B. Jacobs.

 ABC-Federal Oil & Burner Co., Inc., was the result of a combination of two companies -- ABC and Federal, as its name implies. ABC Oil Company was originally both a partnership and a corporation. The corporation was dormant. The partnership was operated by two men -- Bacal and Grabowsky. Federal Oil & Burner Co., Inc., was a corporation principally owned by two other men -- Abrams and Henninger.

 In February of 1956 Eugene Callis promoted the combination of those two companies to form ABC-Federal Oil & Burner Co., Inc., the bankrupt. At that time, Callis put David Gilbert into the position of nominal head of the newly formed corporation.

 At about the same time, Callis interested Stanley B. Jacobs in the purchase of a barge oil terminal at Peltz Street and the Schuylkill River, Philadelphia, known as 'Peltz Street Terminal' and owned by CFM Terminals, Inc. Jacobs thereupon organized a new corporation, Peltz Street Terminals, Inc. (the claimant) which bought out CFM Terminals, Inc., on August 4, 1956. Jacobs took 60% of the new corporation's stock. The other 40% went to one of the principal stockholders of CFM.

 As a part of the transaction, the CFM wholesale oil business was turned over to Callis. Callis formed a company known as Valley Oil Company to handle this wholesale business. (N.T. p. 551.) *fn1" While the Valley Oil Company was registered in the name of Jack McSherry as a sole proprietorship, it was in fact a partnership in which Callis, McSherry, and one Ethel W. Hurst each owned one-third interests (N.T. p. 550).

 The partners last named comprise three of the five persons previously listed as the principal actors (i.e. Callis, Hurst, Gilbert, McSherry and Jacobs). Of that five, all but Jacobs owed their participation to their previous associations with Eugene M. Callis. Callis had vast experience and knowledge in the oil business going back about 40 years (N.T. p. 532). Ethel W. Hurst had been his business associate for more than 20 years (N.T. p. 583). Jack McSherry was principally a salesman in the oil business and had also at one time worked for Callis.

 The Referee's findings, after reciting the promotion of the merger by Callis, tells of the organization meeting on the 21st of February, 1956, at which (Opinion p. 2)

 The Referee further found, by Gilbert's own testimony, that Gilbert was recruited by Callis and that he was actually operating at the direction of Callis (Opinion, p. 3).

 Mr. Jacobs told of the manner in which he was brought into the operation as follows:

 'In 1956, the forepart of 1956, I met Mr. Callis. Mr. Callis was looking for office space for a company that was being organized and being merged. I had an available building and they looked at it and after some negotiations we ...

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