Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


October 4, 1974


The opinion of the court was delivered by: LACEY

 Before this court for a second time is a petition for review of an order in bankruptcy, entered in a Chapter XI proceeding, rejecting petitioners' claims to the stock of Gregory Park Section III (GP 3), an apartment dwelling and a corporation wholly owned by the debtors herein.*These claims arose from the debtors' conceded failure to honor their agreement to pledge said stock with petitioners under a blank assignment and with the power to sell on default of the underlying loan secured by this stock. *fn1" This proceeding is but one of many pending before this court involving these debtors, resulting from the financial difficulties of Arthur H. Padula and his several closely held real estate enterprises. *fn2"

 There follows, in opinion form, this court's findings of fact consistent with its role on this review, and its conclusions of law, under Fed.R.Civ.P. 52.


 Petitioners are seven individuals (hereinafter referred to sometimes as the Birnbaums) who, as a group, loaned money to Arthur H. Padula Construction Corporation (Padula Construction). Padula Construction and Mid-Center Redevelopment Corporation (Mid-Center) are sister corporations, the stock of which, subject to qualifying shares, is owned by Arthur H. Padula (Padula), and both, along with Padula, are the debtors involved in the within Chapter XI proceedings. Because of Padula's complete and undiluted control of Mid-Center and Padula Construction, this opinion will use the terms "debtors" and "Padula" interchangeably.


 On July 23, 1973 the Bankruptcy Judge, upon the application of the Chapter XI Receiver, had declared the debtors' pledge of GP 3 stock to the Birnbaums a nullity as to the Receiver. Thereafter, upon review in this court, additional facts had been developed which suggested that the debtors had not been completely candid with the Receiver or the bankruptcy court. Thus, for example, the Bankruptcy Judge had been first led to believe that on December 10, 1966 the authorized and outstanding stock of GP 3 consisted exclusively of 1000 shares issued to and owned by Mid-Center. In fact, since November 1966, unknown to the Birnbaums, and prior to their loan to Padula Construction, there were outstanding simultaneously GP 3 stock certificates (Nos. 5 and 7) representing 1000 shares issued to Mid-Center, and another GP 3 certificate (No. 8), also for 1000 shares, issued to Arthur H. Padula. By an unreported opinion dated January 3, 1974, and an order entered thereon, dated February 22, 1974, this court remanded the matter to the Bankruptcy Judge "for further consideration in light of the additional facts revealed, and for the taking of such additional testimony as he may deem appropriate". Following remand, the Bankruptcy Judge held an additional hearing on March 26, 1974; and in an opinion dated June 19, 1974 rejected petitioners' claim to the GP 3 stock and reaffirmed his previous order of July 23, 1973, voiding the controverted pledge. The petitioners then filed their petition for review on June 24, 1974, and on July 1, 1974 the Bankruptcy Judge filed a Certificate of Review, setting forth as follows the issues to be determined:

1. Did the Bankruptcy Court commit error when it ruled that the pledge of stock made by the debtor to Birnbaum et als., was an unperfected security interest under N.J.S.A. 12A:9-301 et seq.?
2. Does the Judgment of the Superior Court of New Jersey filed on January 2, 1971, approximately 3 months and 2 weeks after the petition under Chapter XI was filed on September 18, 1970, avoid the four (4) month preference provisions of Section 60 of the Bankruptcy Act.
3. Did the Bankruptcy Court commit error in denying the Birnbaum, et al application to declare a constructive trust in their favor in the 100% shares of stock issued by Gregory Park Section III, Inc.?

 In this court, on this review, petitioners assert only that the Bankruptcy Judge erred as to issue No. 3, and abandon their claims related to issues Nos. 1 and 2.


 Upon this review, as stated, petitioners advance only their constructive trust claim. In so doing they challenge not only the Bankruptcy Judge's Conclusions of Law, but, as well, his Findings of Fact. To ascertain the appropriate standard of review of those factual determinations, it is to be noted initially that, on this review, jurisdiction is conferred upon this court by § 2a(10) of the Bankruptcy Act, 11 U.S.C. § 11a(10), which empowers the court to

[consider] records, findings, and orders certified to the judges by referees, and confirm, modify, or reverse such findings and orders, or return such records with instructions for further proceedings . . . .

 Implementing this statutory provision, Bankruptcy Rule 810 defines the allowable scope of review of a Bankruptcy Judge's findings of fact as follows:

Upon an appeal the district court may affirm, modify, or reverse a referee's judgment or order, or remand with instructions for further proceedings. The court shall accept the referee's findings of fact unless they are clearly erroneous, and shall give due regard to the opportunity of the referee to judge of the credibility of the witnesses. *fn3"

 In enunciating the "clearly erroneous" rule, Rule 810 does not distinguish between operative facts and ultimate findings of fact, based upon inferences from operative facts. Accordingly, of continuing precedential vitality is the holding in In re Pioch, 235 F.2d 903, 905 (3d Cir. 1956), that a finding of an intent to hinder, delay or defraud creditors is an ultimate finding of fact -- one comprised of legal inferences from other facts -- and thus subject to appellate review free from the "clearly erroneous" standard.

 On the other hand, although ultimate facts may be reviewed free of the "clearly erroneous" rule, if the record reveals a reasonable basis for such findings, a reviewing court cannot reject them and substitute its own therefor simply to achieve what it regards as a more desirable result. In re Arbycraft Co., 288 F.2d 553, 556-57 (3d Cir. 1961). *fn4"

 Thus, when conflicting oral testimony is presented, and a witness' credibility must be resolved, the "clearly erroneous" standard applies, and appropriate deference is due to the bankruptcy court's opportunity to observe the live witnesses and judge their credibility. Cf. Gov't. of the Virgin Islands v. Gereau, 502 F.2d 914 (3d Cir. 1974),. On the other hand, when a finding deals with the effect of certain transactions or events, the "clearly erroneous" rule does not apply. In re Trimble Company, 479 F.2d 103, 112 (3d Cir. 1973). See Electric Materials Co. v. Commissioner, 242 F.2d 947, 949 (3d Cir. 1957); Adler v. Nicholas, 381 F.2d 168, 170-71 (5th Cir. 1967); Bass v. Quittner, Stutman & Treister, 381 F.2d 54, 58 (9th Cir. 1967); In re Anjopa Paper & Board Mfg. Co., 269 F. Supp. 241, 250 (S.D.N.Y. 1967). Nor does it apply when the legal consequences of undisputed acts are determined by the bankruptcy court, and a reviewing court is called upon to reason from and interpret those acts. In re Joseph Kanner Hat Co., 482 F.2d 937, 939 (2d Cir. 1973).

 Finally, and in summary, in evaluating findings based upon evidence consisting in part of oral testimony and in part of documentation, as is true in several instances in the case sub judice, the following rule, applied by Judge (now Chief Judge) Kaufman, in In re Gurinsky, 105 F. Supp. 42, 44 (S.D.N.Y. 1951), aff'd., 196 F.2d 296 (2d Cir. 1952), in reviewing a bankruptcy court's findings, is appropriate:

Where the evidence is partly oral and the balance is written or deals with undisputed facts, then we may ignore the trial judge's finding and substitute our own, (1) if the written evidence or some undisputed fact renders the credibility of the oral testimony extremely doubtful, or (2) if the trial judge's finding must rest exclusively on the written evidence or the undisputed facts, so that his evaluation of credibility has no significance. * * * But where the evidence supporting his finding as to any fact issue is entirely oral testimony, we may disturb that finding only in the most unusual circumstances. Orvis v. Higgins, 180 F.2d 537, 539-40 (2d Cir. 1950) (Frank, J.)

 It is against this background of legal principles that this court, on this review, finds that it must hold certain findings of the Bankruptcy Judge to be "clearly erroneous", lacking any support in the record or contradicted by the documentation in evidence, and hold other findings, as well, in error, all as will be hereinafter explicated. Additionally, this court is of the view that the learned Bankruptcy Judge erred in refusing to impose a constructive trust, in favor of the petitioners, upon the GP 3 stock held by the debtors and that his decision must therefore be reversed.


 December 10, 1966

 The discussion best begins with a closing of a loan on December 10, 1966. On that date Padula Construction borrowed $250,000 from the Birnbaums and the parties executed in connection with this transaction numerous documents, including a loan agreement pledging as security for the loan to Padula Construction Mid-Center's purported 100% of the stock of GP 3; a hypothecation agreement; Mid-Center's "Certificate of Corporate Resolutions" permitting the pledge; minutes of a meeting of Mid-Center's Board of Directors authorizing the pledge; a consent of Mid-Center's stockholders (Mr. and Mrs. Padula) thereto; and an affidavit, sworn to December 10, 1966 by Mr. and Mrs. Padula, as shareholders and as President and Vice President of Mid-Center, embodying representations of GP 3's stock ownership by Mid-Center. It is also undisputed that the aforesaid loan agreement, in addition to the pledge provision, embraced a requirement that the Birnbaums return the stock to Mid-Center upon the happening of any one of three stated events, the relevant event in this proceeding being

The execution of a contract to purchase from the FHA the building and lands presently known as Gregory Park Section 1.

 Significantly, the aforementioned December 10, 1966 Padula affidavit averred that Mid-Center "is the sole stockholder of Gregory Park Section 3, Inc."; that "all the shares of stock" of GP 3 were to be delivered to Michael Bell, as agent for the Birnbaums; that Mid-Center had good title to the shares and "that no other person or persons have any interest therein"; that the stock had not been sold, pledged, or encumbered; and that Mid-Center "has the full right to deliver the said stock to Michael J. Bell, Agent . . .". The affidavit also stated that it was made "to induce Michael J. Bell, Agent, to consummate the loan of $250,000 with Arthur H. Padula Construction Corp." The audacious falsity of the sworn and unsworn averments by Padula, in both his representative capacity (for the debtor corporations), and individually, is immediately apparent.

 Thus, it is undisputed that, as required by the loan agreement, GP 3 stock certificates 5 and 7, representing 1000 shares issued in the name of Mid-Center, were tendered to Mr. Bell, the Birnbaums' agent. *fn5" However, certificate 8, for 1000 shares, in the name of Arthur H. Padula, was issued to Padula by GP 3 on November 1, 1966, over one month prior to the debtors' execution of the aforementioned loan agreement and Padula's affidavit. Yet, at the December 10, 1966 closing, not only did Padula not give this certificate to Mr. Bell, he did not even tell him about it. By this act of fraudulent concealment did Padula thus signal the approach he was to take throughout in his dealings with the Birnbaums, and create the situation which saw him holding certificates 5 and 7, without knowledge of the Birnbaums, from and after February 1967.

 From all that appears of record, the existence of certificate 8 did not become known to the Birnbaums until this matter came to this court on the first petition for review. The Bankruptcy Judge too, when the matter was first before him, was permitted by Padula to remain ignorant of the separate existence of this certificate. The Bankruptcy Judge has now found that Padula never told anyone of the existence of certificate 8 (Fdg. of Fact 29).

 The FHA Agreement of December 30, 1966

 Having thus deceived the Birnbaums in what is contemporary verbiage might be characterized as the first stage of the "set up", Padula, as the Bankruptcy Judge found (Fdg. of Fact 4), on December 30, 1966 activated the above quoted condition in the loan agreement, calling for the Birnbaums' release from pledge of Mid-Center's GP 3 stock (certificates 5 and 7), by entering into an agreement, on behalf of Padula Construction, with the FHA to purchase an apartment project known as Gregory Park, Section 1. By letter of February 3, 1967, Mr. Bell, duly performing under the December 10, 1966 agreement, released from pledge and delivered certificates 5 and 7 to Padula's counsel, to be held in escrow pending consummation of the Gregory Park purchase. *fn6" Then, on February 10, 1967, at the closing with the FHA, Padula pledged with that agency 1000 shares of GP 3 stock, not, however, in the form of certificates 5 and 7 owned by Mid-Center and then held in escrow by his counsel, but rather in the form of certificate 8, which designated Padula personally as the owner. (Fdg. of Fact 6). The Bankruptcy Judge found that it was "Padula's testimony" that certificate 8 (rather than 5 and 7) was tendered because the FHA required as security shares of stock representing 100% of the GP 3 stock, in his name personally (rather than in Mid-Center's name), since he, Padula, was the guarantor on the FHA-Padula Construction agreement of February 10, 1967 associated with the purchase of Gregory Park Section 1 (Fdg. of Fact 20). *fn7"

 The Bankruptcy Judge neither credits nor rejects Padula's "testimony" offered to support his corporate chicanery, and the parties did not put into the trial record the FHA-loan documentation. However, in this court the parties, by stipulation supplementing the record, have now supplied said documentation. See Stipulation of September 11, 1974, Exhs. A, B, and J. It appears that as early as September 13, 1966 Padula may have been apprised of the fact that the FHA would require pledge of all of the stock in GP 3. Unbelievably, in the FHA documentation, Padula masquerades as the sole owner of all of the GP 3 stock (See Exh. A, Contract of Sale and Purchase, dated December 30, 1966, introductory clause; para. 5(b); amendment to para. 5. See Exh. B, dated February 10, 1967, in which Padula pledges with FHA "all of his stock in . . . GP 3"). Mid-Center's interest is not mentioned. Thus it is clear Padula lied to FHA both on December 30, 1966 and February 10, 1967, and on the latter date delivered to FHA certificate 8, which was not worth its weight.

 Next, Padula, having three days before delivered certificate 8 to the FHA, personally received, by letter of February 13, 1967 from his counsel, the validly issued certificates 5 and 7 which had been delivered to the latter in escrow by the Birnbaums on February 3, 1967. *fn8" Notwithstanding Padula's protestations of innocence and good faith, these certificates were never cancelled. That Padula had known of and used the cancellation procedure, when certificates were actually replaced, is evidenced by the fact that other GP 3 certificates (certificates 1, 2, and 3) were thus voided by him when replaced by new certificates. (Fdg. of Fact 19). Padula's secret retention of these uncancelled certificates continued until May 1970 when, as will be hereinafter discussed, he pledged them with Public Service Electric and Gas Co. (Public Service). *fn9"

 Given the foregoing facts relating to Padula's surreptitious switching of GP 3's stock certificates, the petitioners regard the aforementioned Padula affidavit of December 10, 1966 as striking proof of their claim that Padula, at the earliest stage, had determined consciously to, and did deceive and defraud them.

 The Bankruptcy Judge, it is noted, made no findings bearing directly upon the verity of Padula's December 10, 1966 affidavit, or the debtors' commitments in the accompanying loan agreement; nor did he make a Finding of Fact as to Padula's state of mind when, on behalf of Padula Construction, he entered into the December 10, 1966 loan agreement with the Birnbaums while explicitly misleading them about the GP 3 stock certificates then issued and outstanding. *fn10" The Bankruptcy Judge did, however, state (Opinion, at 12):

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.