Opinion
Archibald Palmer, of New York City, for the motion.
Leo J. Linder, of New York City (William Walzer, of Brooklyn N.Y., of counsel), opposed.
GODDARD, District Judge.
The report of Henry K. Davis, Acting Special Master, is as follows:
This is a motion to vacate seven subpoenas served upon various corporations in which above-named bankrupt owns a part or all of the stock.
Each subpoena indicates the records sought to be produced in the following form: 'All books, papers and records, including stock books, minute books, stock transfer books, of 307 West 38th Street, Inc., the journal, ledger, cash books, check books, cancelled vouchers, check stub books, bank statements, bonds, mortgages, as well as all other papers, and records pertaining to the financial transactions of the 307 West 38th Street, Inc., and the interest of Lawrence Rukeyser thereto.'
The corporations whose records are subpoenaed, the office held be bankrupt therein, and the percentage of stock thereof which he respectively owns therein are as follows:
Corporation
Office
Stock
Magna Syndicates, Inc.
Secretary
25%
Franklin Gardens, Inc.
President
100%
Willis Manor, Inc.
President
100%
Printarts Building, Inc.
Secretary
33 1/3%
105 Edgecombe Corp.
President
100%
Investors Capital Corp.
President
25%
307 West 38th Street Corp.
Secretary
20%
A basis for the production of the records sought has been laid under Bankr. Act Sec. 21a (11 USCA § 44(a) examinations of the alleged bankrupt.
July 31, 1931, alleged bankrupt issued to a creditor a financial statement showing a net worth as of November 30, 1931, of $1,301,905.35. Among the corporations above stated, said statement showed very substantial investments therein as follows:
Investors Capital Corporation ..
$125,950.00
Franklin Gardens, Inc............
422,964.03
307 W. 38th St. Corp.............
232,861.02
Printarts Building, Inc..........
252,365.25
105 Edgecombe Corp................
88,598.09
His stock in above corporations alleged bankrupt testified he assigned to his aunt, Della Max, to secure a loan of $14,000 she made to one Stember; the examination of alleged bankrupt seemed to throw some doubt on alleged bankrupt's liability on his indorsement of Stember's note.
Counsel for the petitioning creditors asserts that he cannot fully inquire into the good faith of the transaction mentioned without examining the records of the corporations mentioned.
Counsel for petitioning creditors in his memorandum has called attention to testimony of alleged bankrupt which it seems to me goes sufficiently far to show that the record of the corporations subpoenaed are under alleged bankrupt's control.
As to the corporations in which he owns 100 per cent. of the stock, viz. Franklin Gardens, Willis Manor, Inc., and 105 Edgecombe, it seems to me there can be no doubt of the duty of alleged bankrupt to make these records available for examination. As to the others, I think enough has been shown to call for their production.
This is not a case where an alleged bankrupt happens to own a few shares of a corporation not in his bankruptcy; his ownership is substantial, but, in addition to this, the management of the corporations as the examination shows seems to be largely under his direction.
This is a search for assets. In an old case, speaking of the purpose of this examination, Judge Addison Brown said: 'There is no precise rule governing the admissibility of such testimony, other than that it should be reasonably pertinent to the subject of inquiry. In general, a large latitude of inquiry should be allowed in the examination of persons closely connected with the bankrupt in business dealings, or otherwise, for the purpose of discovering assets and unearthing frauds, upon any reasonable surmise that they have assets of the debtor. The intent of the bankrupt law is that only the (honest) debtor * * * shall be discharged; and that any proper assets of the estate, however concealed, shall be made available to creditors. The examination for this purpose is * * * to a considerable extent a fishing examination. ' In re Foerst (D.C.) 93 F. 190, 191.
It is true that the comments of Judge Addison Brown above quoted related to the examination of the wife of bankrupt, and not a corporation through its officers, but I think the same principle applies.
Under the authorities, a corporation of which bankrupt is a stockholder is required to produce corporate books for examination. In re Ironclad Mfg. Co. (C.C.A.) 201 F. 66. That case, Judge Lacombe writing the opinion, is an authority on the question here. In re Horgan & Slattery (C.C.A.) 98 F. 414. This case, through Judge Wallace, holds that officers of corporations are properly punished for contempt in failing to produce books of corporation in which bankrupts are interested. See, also, opinion of Judge Thatcher in Re Bleecker (D.C.) 14 F. (2d) 1018, 8 A.B.R. (N.S.) 820, affirmed on appeal (C.C.A.) 14 F. (2d) 1019, 8 A.B.R. (N.S.) 824.
I do not overlook the objection of counsel for alleged bankrupt that the subpoena as issued is too broad and his citation of Rawlins v. Hall-Epps Clothing Co. (C.C.A.) 217 F. 884 in support of this contention.
Again we are met with a practical consideration: Examiner starts with the knowledge that alleged bankrupt has a substantial interest as stockholder and officer in numerous corporations. What is the financial value of that interest? That question cannot be answered until a starting point creditor has examined the records where such interest is.
I do not overlook the criticism in Hale v. Henkel, 201 U.S. 43, 26 S.Ct. 370, 50 L.Ed. 652, that the allowing of a subpoena might have the effect of stopping the business of the corporation. I do not think the facts here and there considered are at all comparable.
As a practical disposal of the matter, it seems to me that opportunity should be afforded counsel for creditors through their accountant to examine respondent's records at such places as they may be, thus avoiding the need of transporting a large mass of records to the referee's office where they would not be available for use until they had undergone an accountant's examination, which would cover considerable time.
Accordingly, while the subpoenas are upheld, it is recommended that, instead of taking the records away from the place where they now are, they be examined during business hours by accountant for petitioner at that place, reserving the right to creditor to produce any particular book or paper at the referee's office for confrontation of witness, if so desired.
Motion to vacate subpoenas for the reasons stated and with the last suggestion denied.
Please submit order.
Report confirmed.