J. JOSEPH SMITH, Circuit Judge.
The bankrupt operated, between 1945 and 1959, the Nassau Rug & Carpet Company, primarily a one-man business dealing in retail sales, laying and cleaning of carpets. The objecting creditors, in January and February of 1959, obtained two judgments against Tabibian in the New York state courts totaling almost $4,000. On March 11th of that year, Tabibian filed a voluntary petition with the bankruptcy court in the Eastern District of New York and he was adjudicated a bankrupt the same day. The present controversy concerns Tabibian's right to a discharge.
The referee conducted a hearing on the objectors' specified grounds for the denial of a discharge. The only testimony offered was that of Tabibian himself and that of the appellees' attorney. The creditors claimed that the bankrupt had concealed or transferred his assets in fraud of his creditors, Bankruptcy Act § 14, sub. c(7), 11 U.S.C.A. § 32, sub. c(7); and that he had "committed an offense punishable by imprisonment as provided under Section 152 of Title 18," Bankruptcy Act § 14, sub. c(1), 11 U.S.C.A. § 32, sub. c(1), by "knowingly and fraudulently mak(ing) a false oath."
The basic facts upon which the referee and district court reached opposite conclusions
The false oaths relied upon below also center principally upon the two motor vehicles. The bankrupt, in filling out the necessary verified forms for his petition, answered "none" to a query as to what, if any, transfers of property he had made in the preceding year. A fortnight later, however, at the first meeting of creditors, he testified openly and rather spontaneously as to both transactions involving the motor vehicles. In addition, Tabibian exhibited a good deal of confusion concerning his working activities during the two weeks directly preceding the filing of his petition and also concerning the business address of his wife's newly formed corporation.
The rule in this circuit is that the findings of a referee in bankruptcy are to be upheld unless found "clearly erroneous" under the test of Rule 52(a), F.R.Civ.P., 28 U.S.C. Stim v. Simon, 2 Cir., 1960, 284 F.2d 58; In re Di Palo, 2 Cir., 1955, 218 F.2d 816. There is authority in other circuits supporting the thesis that findings of "ultimate fact" should be reviewed on a much broader basis by both the District Court and the Court of Appeals. In re Pioch, 3 Cir., 1956, 235 F.2d 903; Costello v. Fazio, 9 Cir., 1958, 256 F.2d 903. In the instant case, especially on the issue of the alleged "false oaths," the credibility of the bankrupt is a very important factor. Since only the referee heard that testimony and observed the bankrupt giving it, the scope of review should be relatively narrow in accordance with the earlier cases in this circuit.
The general rule as to the burden of proof in a contested discharge is that the objectors must make a prima facie case, i. e., establish "reasonable grounds for believing" that there was fraud, etc., at which point the burden shifts to the bankrupt to "satisfactorily explain" the questioned transactions. McMullin v. Todd, 10 Cir., 1955, 228 F.2d 139, 142; In re Roberts, D.C.M.D.N. Car.1959, 176 F.Supp. 361. It is true that a discharge is a privilege granted the honest debtor and not a right accorded to all bankrupts. In weighing the facts put forward in a contest over a discharge, however, a court should keep in mind the beneficial policy allowing the honest debtor to get a new start in business and life — and should construe § 14 strictly against the objectors and liberally in favor of the bankrupt. In re Leichter, 3 Cir., 1952, 197 F.2d 955.
The referee was correct in finding that the objectors had failed to prove their case concerning the alleged fraudulent concealment or disposition of assets. Appellees, and the court below, make much of the fact that the wife paid nothing for the assets of the business; the objectors did not make the slightest
There is, similarly, insufficient evidence to support a finding of fraudulent transfer or concealment of the motor vehicles. The bankrupt's testimony that the truck was sold for $300 to finance his bankruptcy has not been controverted. Such a transaction is not a surprising one for a man in financial difficulties. Although Tabibian's explanation of the repossession of his station wagon is rendered somewhat suspect by its lack of documentary substantiation, there is no affirmative evidence of fraud. It is only too common in this era for a man's automobile to be encumbered and a court is not warranted in "presuming" there was a fraudulent transfer absent an affirmative showing that some equity of the debtor was transferred without consideration.
Denial of a discharge for failure to "explain satisfactorily" a loss or deficiency of assets, 11 U.S.C.A. § 32, sub. c(7), is the other side of the fraudulent conveyance coin. It may be successfully employed where objectors do not know in what manner the bankrupt's assets were dissipated — but where they can establish the presence of assets before bankruptcy which were not declared as such on the property schedules. The burden is then placed on the bankrupt to account for their absence. In the present case only Tabibian's explanation of the station wagon transfer was perhaps suspicious; all his stories were plausible. The referee had the only opportunity to observe the bankrupt as a witness; his acceptance of the bankrupt's story was surely not "clearly erroneous."
The most difficult question presented concerns the bankrupt's "false oaths." Most of his misstatements were on totally irrelevant points concerning the wife's business, i. e. the date he began working for the corporation and the address of same. His apparent inability to tell the same story twice running may be ascribed more to confusion than to any conscious fraudulent design. The untruthful answer on the schedule of his affairs, denying any transfers in the year before bankruptcy, is much more serious.
The decision of the court below is reversed.
"2. In that the bankrupt surrendered his property, consisting of a truck and a station wagon, without accounting therefor either in his Petition, Schedules or examinations before the Referee;
"7. In that the bankrupt testified falsely under oath before the Referee pertaining to his transactions relating to his ownership and transfer of his 1957 Plymouth Station-Wagon and his 1954 Chevrolet Panel truck.
"11. In that the bankrupt swore falsely in his petition and schedules under oath that the business formerly conducted by him prior to his fraudulent transfer to a corporation controlled by his wife was solely a personal service business, whereas the testimony under oath developed that the bankrupt bought and sold rugs at retail, in addition to conducting a personal carpet cleaning service; that bankrupt gave false testimony before the referee that his business transferred to the corporation was active whereas said business was discontinued since the first examination of bankrupt."