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IN RE STEVENS

August 16, 1979

In the Matter of Edward S. STEVENS, Bankrupt; Leonard S. SINGER, As Receiver for Heat Recovery Corporation, Plaintiff-Appellee,
v.
Edward S. STEVENS, Defendant-Appellant.



The opinion of the court was delivered by: LACEY

The bankrupt, Edward S. Stevens (Stevens), appeals from a determination of the bankruptcy court that his debt of $ 6,648, founded upon a state court judgment, and owed to the receiver, was non-dischargeable under § 17a(4) of the Bankruptcy Act (Act), 11 U.S.C. § 35a(4), which, in pertinent part, provides:

A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as . . . were created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity . . . .

 Id.

 The bankruptcy court found the underlying debt was created by Stevens' "misappropriation."

 The facts are largely undisputed and the record in the bankruptcy court was made by stipulation, without oral testimony.

 The plaintiff, state-court appointed receiver for Heat Recovery Corporation (HRC), charged below that the aforementioned sum of $ 6,648 was due and owing to him from Stevens and sought to have the debt declared nondischargeable. Stevens had previously filed a petition in bankruptcy.

 Well before 1977, and at all critical times, Stevens was president of HRC and owned 49% Of that company's stock.

 In June 1977 the receiver, through counsel, and pursuant to the powers granted him by the state court, conducted a hearing at which Stevens testified. Subsequently, the receiver proceeded in state court to recover from Stevens the sum of $ 7,648 which, the receiver alleged, had been improperly taken from HRC. On March 10, 1978, the dispute was settled and judgment was entered against Stevens, upon his consent, in the sum of $ 6,648. Stevens, having now filed his bankruptcy petition, contends that judgment debt is dischargeable. The receiver, of course, contends otherwise.

 The total amount of the consent judgment comprises two separate sums and transactions:

 
1. An HRC check, No. 388, signed by Stevens for the company, dated April 7, 1977, for $ 2,348, drawn to the order of cash, which Stevens then cashed on April 7, retaining the proceeds for his own use on a claim that this represented his salary for the month of April 1977;
 
2. An HRC check, No. 398, signed by Stevens for the company, dated April 12, 1977, for $ 4,300, drawn to the order of cash, which Stevens then cashed on April 13, retaining the proceeds for his own use on a claim that the sum represented partial payment of vacation pay due and owing him over the preceding four years.

 These checks were procured by Stevens at a time when HRC's financial picture was grim. As the bankruptcy court quite properly found:

 
In April 1977 Heat Recovery Corporation was indebted to the First National State Bank of New Jersey in the sum of $ 495,000. The indebtedness arose out of certain ninety day notes which had been renewed every ninety days since they were executed in early 1976. No payments on the indebtedness were ever made.
 
For the previous two years Heat Recovery Corporation had been operating at a deficit. During the last eight months of 1976 it showed losses of $ 88,340 and, as of the end of 1976, showed a capital deficit of approximately $ 170,000. It was unable to pay its U.S. Internal Revenue taxes due for the last quarter of 1976, which nonpayment had prompted a visit from federal internal revenue officials in 1977.
 
For some time previous, the First National State Bank of New Jersey had expressed concern over the status of its account. As a result of its dissatisfaction with the nonpayment of its loan, on April 12, 1977 three officials of the bank, accompanied by two members from the law firm which represented it, appeared at the offices of Heat Recovery Corporation. They advised the bankrupt that, pursuant to the financing agreement, they were calling in their loan and were taking possession of the funds and receivables of the company. They suggested to the bankrupt that he might want to advise the company employees that they would be terminated, as there would be no funds available to meet the payroll.

 Opinion, 2.

 On this appeal the bankrupt does not contest the finding of the bankruptcy court that the bankrupt, at the time he received and cashed the two checks (nos. 388 and 398) had "knowledge of the insolvent condition of the company and . . . actual knowledge of the takeover of assets of ...


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