United States v. Knight (336 U.S. 505)/Opinion of the Court

Robert Michael was trustee in bankruptcy of the Central Forging Co. and Donald Reifsnyder was his counsel. Maxi Manufacturing Co. was a competitor of Central and one of its creditors. George Fenner and respondent Harry S. Knight were attorneys for Maxi. After negotiations which it is unnecessary to relate here, a plan of reorganization under ch. X of the Bankruptcy Act 52 Stat. 883, 11 U.S.C. § 501 et seq., 11 U.S.C.A. § 501 et seq., was approved by the court and accepted by more than two-thirds of the creditors. Under this plan Maxi was to acquire all the assets of Central; the stockholders of Central were to receive nothing; the secured creditors of Central were to receive 20 per cent and its unsecured creditors 5 per cent of their claims in bonds of Maxi; and all taxes, costs, and expenses of the reorganization were to be paid in full in cash by the trustee. The cash requirements of the plan were to be furnished by Maxi.

The amount of those requirements and the nature of Maxi's commitment are sources of the present controversy. Michael and Reifsnyder concededly obtained funds in connection with the reorganization for which they did not account. It is the theory of the prosecution that those funds were part of the bankruptcy estate. It is the theory of the defense that they were gifts by Maxi of its own property.

There was evidence (including Michael's testimony in this case and one construction of respondent's testimony concerning the same transactions in an earlier contempt case against Michael) that Maxi agreed to pay $26,404.33 in cash for Central's net current assets in addition to the $17,000 in bonds. If this version of the transaction were believed, there was a scheme to value the assets of Central at $3,000 less than $26,404.33 and to divert the $3,000 to Michael's and Reifsnyder's own ends.

There was another version of this phase of the plan which is also supported by evidence, viz. that Maxi was to pay in cash all expenses of the reorganization provided they did not exceed $26,404.33. In this view the difference between $26,404.33 and the expenses allowed by the Court, $23,404.33, was Maxi's to do with as it pleased.

The court confirmed the plan and ordered the transfer of all of Central's assets to Maxi on receipt of the bonds and on payment of the costs and expenses as allowed by the court, 'within the imits of the funds as set forth in the Trustee's report filed April 15, 1942.' That report listed the net current assets of Central at $23,404.33. There was some evidence that the value of those assets had been falsified in the report by deducting $3,000 from the accounts receivable.

The expenses approved by the court and paid by Maxi included allowances for the fees and expenses of Michael and Reifsnyder. Knight arranged for Maxi also to draw a check for $3,000 to Fenner which Fenner cashed and, after deducting $500 for income tax, paid over to Michael and Reifsnyder who never accounted to the court for it.

Knight and Fenner were indicted for aiding and abetting Michael to appropriate property of the bankruptcy estate in violation of the Bankruptcy Act, 30 Stat. 554, as amended, 11 U.S.C. § 52(a), and for conspiring with Michael and others to do the same. Knight and Fenner were found guilty by a jury on all counts. Knight was fined $1,000. The Court of Appeals reversed his conviction and directed entry of a judgment of acquittal, one judge dissenting. 169 F.2d 1001. The case is here on a petition for certiorari which we granted because of the importance of the ruling in the administration of the Bankruptcy Act.

There was substantial evidence that Maxi agreed to pay $26,404.33 for the net current assets of Central and that Knight was party to a scheme to divert $3,000 of that consideration to the personal ends of Michael and Reifsnyder. It was therefore an improper interference with the jury's function for the lower court to reject that theory of the case and to accept one which to it seemed more credible. See Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 469, 470, 86 L.Ed. 680; Kotteakos v. United States, 328 U.S. 750, 763-764, 66 S.Ct. 1239, 1247, 1248, 90 L.Ed. 1557.

But even if, as the defense urges, Maxi only agreed to pay expenses up to $26,404.33, the result is the same. Maxi in fact paid that amount. It was paid in connection with the reorganization. It was paid for services allegedly rendered by Michael and Reifsnyder in the proceedings. It was paid secretly and in a devious way. The assets of the estate which were transferred to Maxi were worth $26,404.33. This is a substantial showing that $26,404.33 was in fact paid for the assets and that the form of the arrangement served only to syphon a part of the consideration to Michael and Reifsnyder without court approval.

All the consideration which is paid for a bankrupt's assets becomes part of the estate. No device or arrangement, however subtle, can subtract or divert any of it. It is the substance of the transaction not its form which controls. If that requirement were not rigidly enforced, control of the plan of reorganization and control of allowances, would pass from the court to the parties. That would subvert the statutory scheme.

This consequence is sought to be avoided here by the argument that when the $3,000 was diverted to Michael and Reifsnyder, the rights of creditors and stockholders in the estate had been fixed and all the allowances had been determined. It is therefore said that there would have been no rightful claimants to the money had it been paid into court. By that procedure parties woul arrogate to themselves the control over the estate which Congress has entrusted to the bankruptcy judge.

Reversed.

Mr. Justice MURPHY, Mr. Justice JACKSON, and Mr. Justice RUTLEDGE took no part in the consideration or decision of this case.

Mr. Justice FRANKFURTER, dissenting.