of a referee who has heard oral testimony on this issue is
entitled to great weight on appeal in view of the peculiar
importance in a § 67, sub. d(2)(d) case of the credibility of
witnesses examined on the intent issue.
In re Gallis, 115 F.2d 626 (7th Cir. 1940). Cert. denied
312 U.S. 704, 61 S.Ct. 808, 85 L.Ed. 1137, 1941.
The finding of the requisite intent may be predicated upon the
concurrence of facts which, while not direct evidence of actual
intent, lead to the irresistible conclusion that the transferor's
conduct was motivated by such intent. McWilliams v. Edmonson,
162 F.2d 454 (5th Cir. 1957). Courts have repeatedly observed that
each case under § 67, sub. d(2)(d) must depend upon its own
facts. 4 Collier 67.37, pp. 374-381.
In re Chorost v. Grand Rapids Factory Show Room, Inc.,
172 F.2d 327 (3rd Cir. 1949), the court held in construing subdivision (d)
that the finding of the requisite intent could be predicated upon
the concurrence of facts which, while not direct evidence of
actual intent, would lead to the irresistible conclusion that the
transferor's conduct was motivated by such intent.
In the case of In re Venie, D.C., 80 F. Supp. 250 (W.D.Mo.
1948), the court held that where the transferee and owner of the
transferor had knowledge that the transfer would deplete the
debtor's assets and deprive creditors of their right to be paid
out of the firm's property in a transaction in which the
consideration would not run to the benefit of the debtor, the
transaction was fraudulent, and the chattel mortgage which was
part of the transaction was void. In this Circuit our Court of
Appeals in Edward Hines Western Pine Co. v. First National Bank,
61 F.2d 503 (1932), held transfers by the owners of a bankrupt
which benefited the owners personally and not the bankrupt
corporation was a transfer to hinder, delay or defraud creditors.
Also see Lytle v. Andrews, 34 F.2d 252 (8th Cir. 1929). M.V.
Moore & Co. v. Gilmore, 216 F. 99 (4th Cir. 1914) for cases
involving purchase of shares by corporation which were held to be
The foregoing authorities fully support the Referee's finding
that the transfers were fraudulent under § 67, sub. d(2)(d). The
consequences or result of the withdrawal of $2,000,000 in working
capital from the debtor and the placing of its prior lien for
$2,500,000 against all the assets of Manz could only result in
hindering and delaying creditors in the obtaining of payment of
their claims or result in their being unpaid and the creditors
defrauded. Armstrong's intention to cause just such a result is
fully supported by the record. It is elementary that a party is
held to intend the natural consequences of his acts. Armstrong's
arranging for and causing the unwarranted withdrawal of
$2,000,000 in working capital from Manz at a time when Manz was
having difficulty paying its debts clearly and conclusively
justifies the Referee's conclusion that the transaction of
December 14, 1961 is voidable under § 67, sub. d(2)(d) of the
Bankruptcy Act. Additional support for this conclusion rests on
the evasive testimony of Armstrong's witnesses covering the
transaction. Autrey Bros. Inc. v. Chichester, 240 F.2d 498 (9th
Cir. 1957); the manner in which the proceeds of the loan were
paid to a third party (Schwartz, attorney for the debtor) rather
than directly to the shareholders, which would have made tracing
the proceeds of the loan much easier; Armstrong's vacillating
between the position of shareholder and that of a secured
creditor depending upon the circumstances; the hinderance and
delay to creditors, is conclusive in Trustee's Exhibit 78.
On the basis of this record, I hold that the Referee could make
no finding other than the transfer of December 14, 1961 is void
under § 67, sub. d(2)(b), (c), (d), of the Bankruptcy Act.
That Armstrong is not entitled to the saving provision of § 67,
sub. d(6) in favor of a bona fide lienor as to that portion of
the proceeds of the loan that actually benefited Manz, is
the Referee's finding of actual fraudulent intent on its part in
the transaction under § 67, sub. d(2)(d). Armstrong cannot
possibly claim that it acted in "good faith" as a bona fide
lienor without fraudulent intent. 4 Collier 67.41, pp. 421-428.
Brief pp. 107-108. See In re B-F Building Corporation,
312 F.2d 691 (6th Cir. 1963). In re Venie, D.C., 80 F. Supp. 250 (W.D.Mo.
The Referee also found the transaction in question violated §
70, sub. e of the Bankruptcy Act, which incorporates State law as
grounds for invalidation. Armstrong has shown no error in the
Referee's rulings that the transfers to it are voidable under the
Illinois Statute relating to fraudulent conveyances.
Ill.Rev.Stat. Ch. 59, § 4; Woodham v. Miller, 319 Ill.App. 388,
49 N.E.2d 317; Phillips v. Kesterson, 154 Ill. 572, 39 N.E. 599;
Sherwin-Williams Co. v. Watson Indus., 361 Ill. 598,
198 N.E. 704, are cases in point supporting the Referee's ruling as to the
transfers to Armstrong constituting fraudulent conveyances under
Nor has Armstrong shown that there is any error in the
Referee's conclusion that the transfers are voidable as part of
a conspiracy to cause an illegal redemption of the shares of
stock of Manz at a time when Manz was unable to pay its debts as
they matured in violation of § 6 and § 58 of the Illinois
Business Corporation Act. Ill.Rev.Stat. Ch. 32, §§ 157.6, 157.58.
In re Kranz Candy Co., 214 F.2d 588, (7th Cir. 1954), is directly
in point. Also see Maggiore v. Bradford, 310 F.2d 519 (6th Cir.
In addition to invalidating the liens held by Armstrong against
the Manz properties arising out of the loan agreement of December
14, 1961 as being contrary to the provisions of 67 and 70 of the
Bankruptcy Act, the Referee subordinated the entire claim of
Armstrong including the claims based upon advances made to Manz
secured by assignments of accounts receivable, as well as the
chattel mortgage loans of May 24 and June 10, 1962.
The subordination was based upon the Referee's finding that the
bankrupt Manz was the alter ego of Armstrong; that Armstrong was
not a secured creditor but in substance the owner of Manz through
its holding of over 90% of its stock and its control over all of
its income. Further grounds for the subordination, in the
Referee's order, are predicated upon the unfair, inequitable,
unconscionable and fraudulent conduct of Armstrong in its
transaction with Manz to the detriment and damage of its
Armstrong in its brief claims the Referee erred in his order of
subordination; that it was a mere lender or mortgagee holding
Manz' shares of stock as collateral security; that it made a loan
of $2,500,000 to Manz and Manz distributed the proceeds; and
further that it had nothing to do with the redemption and that it
did not deprive Manz of any working capital; and that the
transaction was at "arms length". Armstrong contends there is no
evidence of domination, control, breach of fiduciary duty or
faithless stewardship as required by the cases it cites for
subordination. An examination of the cases cited by Armstrong in
its brief discloses that they are not applicable to the facts in
The Referee found, as stated above, that the transaction of
December 14, 1961 was made with intent to hinder, delay and
defraud creditors; that Armstrong participated and directed the
illegal redemption of stock which deprived Manz of $2,000,000 of
working capital; and that the conduct and actions of Armstrong
toward Manz and its creditors were unfair, inequitable and
Armstrong does not show that any such findings of the Referee
are in any way erroneous. On the contrary, the record fully
supports these findings of the Referee. That such findings fully
support the order of subordination is clear from the applicable
authorities. 3 Collier on Bankruptcy, 14 Ed. 57.14, 63.06, 63.08,
65.06 and cases cited. Bell Tone Records, Inc., D.C., 86 F. Supp. 806
(D.N.J. 1949). International Tel. & Tel. Corp. v. Holton,
247 F.2d 178 (4th Cir. 1947).
Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281.
Central States Corp. v. Luther, 215 F.2d 38, 46, (10th Cir.
1954). Costello v. Fazio, 256 F.2d 903, (9th Cir. 1958). In the
latter case the court held that a finding of fraud was not
essential to an order of subordination. Cases in point are
collected in an article by Harry S. Gleick in the 33rd Edition of
the Journal of the National Association of Referees in
Bankruptcy, page 69 (1959), wherein the author sets forth grounds
or basis for subordination applied by the courts, most of which
were present in this record.
The evidence of Armstrong's control, domination, spoliation,
ownership and breach of fiduciary duty is clearly established by
the record and fully justifies the Referee's order of
subordination of Armstrong's entire claim.