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IN RE BARBATO

November 15, 1966

In the Matter of Albert M. BARBATO, Bankrupt


The opinion of the court was delivered by: WORTENDYKE

 WORTENDYKE, District Judge:

 Royal Indemnity Company (Royal), a creditor of Albert M. Barbato (Barbato), an adjudicated bankrupt, has petitioned this Court for review of the Order of Honorable William H. Tallyn, Referee in Bankruptcy, entered July 20, 1966, dismissing Royal's objections to bankrupt's discharge.

 The Referee found, upon substantial evidence, and has set forth in his Certificate of Review, dated September 7, 1966, the following facts:

 
1. The bankrupt, general contractor, was engaged in business as a sole proprietor. Many of his contracts were for Federal projects, and many of them were for substantial amounts.
 
2. The bankrupt devoted his efforts to the field work and relied on his office staff and his accountants to take care of the paper work.
 
3. In order to obtain contracts for Federal projects, the bankrupt was required to post payment and performance bonds with an approved surety. He applied to Royal Indemnity Company to act as his surety on such bonds. In this connection the Royal Indemnity Company asked for semiannual financial statements.
 
4. Shortly after January 1, 1964 Erich Stier, accountant for the bankrupt, prepared a financial statement as of December 31, 1963, based on the financial records of the bankrupt (which were kept on a cash basis) and on schedules of receivables and payables prepared by Joan Vaslyk of the bankrupt's office force.
 
5. This financial statement showed the payables at $92,000.90, and the net worth at $163,685.64.
 
6. Mr. Stier gave this financial statement to the bankrupt and he, in turn, mailed or delivered it to Royal Indemnity Company.
 
7. Subsequently, the bankrupt applied to Royal Indemnity Company for at least three bonds. Royal became obligated as surety on these bonds in reliance on the accuracy of the financial statement of December 31, 1963.
 
8. Sometime after January 1, 1964 the bankrupt became worried about the amount of his income tax liability for 1963. He consulted Vincent B. Comperatore, an accountant specializing in tax matters. Mr. Comperatore decided to put the bankrupt's books on an accrual basis in order to lessen the impact of the income tax. Early in March, 1964 he had assembled the information for this purpose, and he then set up the bankrupt's bonds on an accrual basis, commencing as of January 1, 1964.
 
9. These books, as set up by Mr. Comperatore, showed payables as of January 1, 1964 at $354,889.75, thus eliminating the net worth as shown on the financial statement of December 31, 1963 and putting the bankrupt in a deficit position. (Whereas Joan Vaslyk had included only unpaid invoices in the schedule of payables given to Mr. Stier, the payables found by ...

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