a bankrupt in the United States District Court for the Eastern
District of Missouri. Plaintiff, Donald B. Kramer, was
appointed trustee in bankruptcy of the Maltec estate. Plaintiff
filed this suit under the provisions of 60, sub. a of the
Bankruptcy Act, 11 U.S.C. 96, sub. a, to recover alleged
preferential payments of money made by the bankrupt within 4
months prior to the adjudication of the bankruptcy to defendant
Malco, Inc., in the amount of $80,387.22.
At the close of the trial of the cause, Malco's motion for
judgment was denied and the case is now before the court for
decision. Malco is an Illinois corporation engaged in the
distribution and sale of aluminum windows, doors, awnings and
related products. All of Malco's shares are owned by Murray
Scheer, Arthur Wagner and Lilyan Wagner, who are also the
officers and directors of the corporation.
Prior to March 4, 1959, the Malco officers, in collaboration
with one Clinton Jostad, opened two separate outlets for the
sale of the Malco products in St. Louis, Missouri. On March 4,
1959, both outlets were merged and incorporated as Maltec
Designs, Inc., the bankrupt. Maltec then engaged in the
business of selling, installing and servicing aluminum windows,
doors, awnings and related products until its adjudication in
Scheer, Jostad and the Wagners were shareholders of Maltec, and
Scheer acted as Secretary of that corporation until on or about
December 8, 1961. Arthur Wagner became the Vice-President of
Maltec on March 1, 1961, and continued in that capacity until
on or about December 8, 1961.
Malco was the principal supplier of inventory and material used
by Maltec in its operation. With respect to payments alleged as
preferential, the following appears from the evidence: On
December 17, 1961, the start of the 4 months period, Maltec was
indebted to Malco in the amount of $27,357.65; between
September 23, 1961 and January 17, 1962, shipments of
merchandise were made by Malco to Maltec in the amount of
$63,893.31; between September 23, 1961, and January 17, 1962,
Maltec made payments to Malco upon its account in the aggregate
amount of $80,387.22; and as of January 17, 1962, the balance
due to Malco upon its account was $4,817.25.
The evidence adduced tended to show that the bread and butter
operations of Maltec were left to Jostad until November 21,
1961. Some time prior to that date, Jostad became interested in
a competing company under the name of Weather Master, after
which he steered business to Weather Master and away from
Maltec. On the last mentioned date Jostad was stripped of all
authority, and from November 21, 1961, to December 7, 1961,
Scheer and Arthur Wagner took charge of the Maltec operations.
On December 7, 1961, the other shareholders of Maltec disposed
of their stock to Jostad, upon Jostad's promise to pay the
balance owing by Maltec to Malco. When Jostad refused to pay
that balance, a law suit was filed against Maltec. Bankruptcy
To prove a voidable preference under Section 60, sub. a of the
Bankruptcy Act, it must be established that there was a
transfer of property of the bankrupt for the benefit of a
creditor, that the transfer was made on account of an
antecedent debt, that it was made at a time when the debtor was
insolvent, that the creditor knew or had reasonable cause to
believe that the debtor was insolvent and that the effect of
such transfer is to enable the creditor to recover a greater
percentage of his debt than other creditors in the same class.
11 U.S.C. 96, sub. a.
The burden of proof as to each of those elements rests upon the
trustee if he is to establish a voidable preference. Canright
v. General Finance Co., 7 Cir., 123 F.2d 98; Cohen v.
Sutherland, 2 Cir., 257 F.2d 737; Engelkes v. Farmers
Cooperative Co., D.C., 194 F. Supp. 319.
I conclude that the trustee has failed to prove that Maltec was
insolvent when the payments were made to Malco. The evidence
offered by the trustee was the bankruptcy schedules, a report
sale of Maltec assets by the trustee and an audit of Maltec's
books for the fiscal year ended January 31, 1961, each of which
was admitted in evidence, and five balance sheets prepared by
Maltec's accountants. The court's ruling upon Malco's objection
to the admissibility of the balance sheets was reserved.
I hold that the balance sheets, offered as plaintiff's exhibits
1 to 5, inclusive, are not admissible in evidence.
The federal statute provides in part:
"* * * any writing or record, whether in the form of an entry
in a book or otherwise, made as a memorandum or record of any
act, transaction, occurrence, or event, shall be admissible
as evidence of such act, transaction, occurrence, or event,
if made in regular course of any business, and if it was the
regular course of such business to make such memorandum or
record at the time of such act, transaction, occurrence, or
event or within a reasonable time thereafter." 28 U.S.C. § 2
Records must not only be shown to have come from the files of
the party to whom they relate, but they must otherwise be
competent as evidence. Schmeller v. United States, 6 Cir.,
143 F.2d 544, 550. The accountants who prepared these balance
sheets were not called as witnesses. The instruments are the
accountants' interpretation and summary of the information
presumably supplied to them from the original business records
of Maltec, but there is lacking any proof that the instruments
themselves are an accurate summary of the original records upon
which they are based. The federal act provides an exception to
the hearsay rule, giving competency to otherwise incompetent
evidence upon proof that the entries relied upon were made
contemporaneously with the facts which they purport to record
in the usual course of the business of the person whose records
they are. These balance sheets do not meet that minimum
safeguard. They are, at best, a hearsay summary of hearsay
entries which would, upon adequate proof, be admissible, under
the federal statute.
The original records of Maltec are not shown to be unavailable.
In fact, the bankruptcy schedules suggest that the existence of
such records is a fact. The books of the corporation were not
offered in evidence.
Moreover, it must be borne in mind that these summaries are
offered as evidence against a third party, not against the
party whose records they purport to summarize. United States v.
Potson, 7 Cir., 171 F.2d 495, and United States v. Freeman, 7
Cir., 167 F.2d 786, cert. denied 335 U.S. 817, 69 S.Ct. 37, 93
L.Ed. 372, are distinguished on that basis. In the former, the
summaries admitted in evidence were shown to have been made by
employees of the defendant in the regular course of his
business, while in the latter an audit of the defendant's own
books was admitted in evidence against the defendant. By
contrast to the instant case, in each of those instances the
defendant was protected both by his opportunity to cross
examine the person who made the summary and by his opportunity
to refute the credibility of the summary by producing his own
books and records.
The decision in Gencarcella v. Fyfe, 1 Cir., 171 F.2d 419, is
also of interest. In a personal injury case, a report of a
policeman who had investigated the accident was held to be
admissible as a business record to the extent that it was based
upon the policeman's observations and personal knowledge, but
not admissible as to hearsay statements made to the policeman
by witnesses at the scene of the occurrence. Clearly, the
taking of those statements was a part of the usual course of
the officer's duty in investigating the occurrence. Although it
is not so particularly articulated in the court's opinion, the
inadmissibility of such statements rests upon the fact that the
accuracy thereof could not be attested by the officer or by the
existence of his report.
The insolvency to which Section 60, sub. a refers is insolvency
time when the payments were made. Cohen v. Sutherland, 2 Cir.,
257 F.2d 737. A subsequent adjudication of bankruptcy does not
prove insolvency of the debtor at a prior time when transfers
of property were made. Liberty National Bank of Roanoke v.
Bear, 265 U.S. 365, 44 S.Ct. 499, 68 L.Ed. 1057; Arkansas Oil &
Mining Co., v. Murray Tool & Supply Co., 8 Cir., 127 F.2d 564.
The schedules filed by the bankrupt which tend to show that the
aggregate of Maltec's property was insufficient to pay its
debts as of January 17, 1962, has no tendency to prove Maltec's
insolvency on the dates prior to January 17 when the payments
were made to Malco.
The report of the sale of Maltec's assets by the trustee has no
relevant bearing upon this critical issue of fact. The sale
price of those assets under the stressed condition inherent in
bankruptcy cannot be taken as indicative of the value of such
assets prior to the bankruptcy adjudication and while Maltec
was still being operated as a going business. Upon the issue of
solvency, the determinative question is the fair market value
of assets at the time when transfers of property were made,
Arkansas Oil & Mining Co. v. Murray Tool & Supply Co., 8 Cir.,
127 F.2d 564, valued as the property of a going business
operation. J. W. Butler Paper Co. v. Goembel, 7 Cir., 143 F.
295; In re Bucyrus Road Mach. Co., 6 Cir., 10 F.2d 333.
Plaintiff's exhibit 10, being a report of an audit of Maltec's
books for the fiscal year ended January 31, 1961, is subject to
the same infirmities indicated in the discussion as to the
admissibility of the Maltec balance sheets. Moreover, if this
exhibit be taken at face value as showing a deficit balance as
of January 31, 1961, it has no tendency to prove Maltec's
insolvency in the period from September 17, 1961, to January
Defendant adduced evidence tending to prove that the value of
work in progress was never shown on Maltec's books, but, on the
contrary, no entry was made on Maltec's books until each work
project was completed. That evidence was not contradicted.
I hold that plaintiff failed to sustain his burden of proof
upon the essential element of Maltec's insolvency at the time
when the payments to Malco were made.
The Court's findings of fact and conclusion of law are included
in the above memorandum.
Judgment is ordered in favor of the defendant, plaintiff to pay
the court costs.
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