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KRAMER v. MALCO

January 20, 1964

DONALD B. KRAMER, AS TRUSTEE IN BANKRUPTCY OF THE ESTATE OF MALTEC DESIGNS, INC., PLAINTIFF,
v.
MALCO, INC., AND MURRAY SCHEER, DEFENDANTS.



The opinion of the court was delivered by: Mercer, Chief Judge.

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 bankruptcy.

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 followed.

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 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
  (a).

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 ...


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