binding agreement resulted. The lack of unanimity in oral
consent is apparent from the record, and the referee's finding
that all of the ten creditors consented is clearly erroneous.
Further, the court is of the opinion that none of the
creditors agreed to be bound unless all executed written
assignments of their claims and that such execution by all ten
creditors was a necessary condition precedent to a binding
commitment for acceptance of either the 33 1/3%, or possibly
35%, as a settlement for their claims. There exists no binding
contract which compels the objecting creditors to subordinate
their claims to those of other unsecured creditors.
The separation of unsecured creditors into two separate
classes, Class IV and Class V, in the plan submitted by the
debtor was not made on any reasonable basis and was not proper
because the ten creditors cannot be held to have agreed to a
subordinate creditor status, and such classification is
therefore arbitrary and discriminatory. The referee's order
dismissing creditors' objections directed to such
classification must be overruled and set aside.
Certain additional circumstances have been revealed by the
record upon which the court is compelled to make comment for
they impinge upon the requisite good faith of all petitioners
under the Bankruptcy Act.
The referee entered an order upon the filing of the Chapter
XI petition that the debtor open a new set of books for the
debtor in possession. The debtor ignored this order. This fact
was not revealed to the referee until the hearings on the
objections were almost completed. Section 14, sub. c of the
Act provides that a court shall grant a discharge unless it is
satisfied that petitioner has "refused to obey any lawful
order of * * * the court". 11 U.S.C.A. § 32(c). No
satisfactory explanation has been given for the debtor's
failure to obey the lawful order of the court.
Objecting creditors allege that payment of $74,541.73 was
made by the debtor to unsecured merchandise creditors other
than those in Class V on accounts due and existent before
November 19, 1958, when the Chapter XI proceeding was filed,
and that such payments constituted a preference of certain
creditors over others. At the court's request the debtor
submitted for its inspection certain ledger sheets for
creditors other than the Class V creditors, and there was in
evidence, at the referee's request after discovery that no new
set of books were opened, an analysis of liabilities,
purchases and payments of the debtor on October 31, 1958 and
for the period November 19, 1958 to April 9, 1959. These
records, and the testimony of Mr. Levin, show that payments
were made after November 19th on accounts due before that
date. The failure to open a new set of books after November 19
made it difficult to ascertain the exact amount of such
Another incident in relation to the operation of debtor's
business which merits mention is the maintenance of certain
persons on the debtor's payroll who were not employees of the
debtor. The debtor withheld and paid withholding tax and sent
W-2 forms to seven persons listed on its payroll. Four of
these persons were called by the objecting creditors and all
four testified they never received any salary checks from the
debtor, never endorsed any checks made payable to them by the
debtor; three denied ever having performed any services for
the debtor. They testified that one Harris Turner, who was not
an employee of debtor, spoke to them about doing some work for
him, and only one of the four testified that she did "spot"
investigate certain of the debtor's stores at Mr. Turner's
request and received some, but not all, money due her from Mr.
Turner. Two denied ever receiving any money from Mr. Turner.
At least 114 payroll checks amounting to about $21,000 were
issued to the seven individuals. These checks were delivered
to Lynn Stewart, who endorsed the names of the payees thereon
and cashed the checks. This evidence is not controverted by
the debtor. The payroll procedure was explained on the basis
that Lynn Stewart had loaned the debtor $150,000 and the
services of these persons
were required by Harris Turner on behalf of Lynn Stewart to
protect Stewart's interest. The debtor's motive in approving
the devious withdrawal of $21,000 of its funds when it was
unable to meet its financial obligations remains a mysterious
episode in the conduct of the debtor's business for which no
satisfactory explanation has been made.
The referee's order confirming the plan of arrangement is
set aside and the plan is rejected and confirmation refused.
The cause is referred to the referee for the purpose of
complying with § 376(2) of the Act, 11 U.S.C.A. § 776(2) to
determine whether the debtor should be adjudged a bankrupt or
to dismiss the proceedings under this Chapter.
In order to safeguard the interests of all parties, the
court further finds that it is necessary that a receiver be
appointed to take custody of the assets of the debtor and to
conduct and operate the business of the debtor, Hudson-Ross,
Orders in accord herewith have this day been entered and
copies thereof are enclosed with this memorandum.
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