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Costello v. Fazio - 256 F.2d 903 (9th Cir. 1958)


A court is required to accept the findings of a referee in bankruptcy, unless such findings are clearly erroneous. Where a finding of fact by a referee is based upon conflicting evidence, or where the credibility of witnesses is a factor, a court will seldom hold such a finding clearly erroneous. The same reluctance is not encountered with regard to a factual conclusion from given facts. In the latter case, the proper conclusion from given facts can be made by a judge as well as a referee. 


A partnership known as "Leonard Plumbing and Heating Supply Co." was organized in October 1948. The three partners, Fazio, Ambrose, and B. T. Leonard, made initial capital contributions to the business aggregating $44,806.40. Unfortunately after suffering continued losses, the corporation made an assignment to the San Francisco Board of Trade for the benefit of creditors and filed a voluntary petition in bankruptcy in October 1954. Creditors' claims against the bankrupt estate of Leonard Plumbing and Heating Supply, Inc., were filed by J. A. Fazio and Lawrence C. Ambrose. The trustee in bankruptcy objected to these claims and moved for an order subordinating them to the claims of general unsecured creditors. The referee in bankruptcy denied the motion, and his action was sustained by the district court. The trustee appealed challenging the order denying his motion to subordinate appellee creditors' claims against the bankrupt estate of a corporation to the claims of general, unsecured creditors.


Should the creditor’s claims be subordinated to the claims of the general and unsecured creditors?




The court reversed and remanded, finding that the lower court erred in denying appellant's motion. Appellees, as directors and officers of the corporation, actually withdrew capital already committed to the business, in the face of recent adverse financial experience. They stripped the business of 88 percent of its stated capital at a time when it had a minus working capital and had suffered substantial business losses. The court further found that such actions were done for personal gain, under circumstances that charged appellees with knowledge that the corporation and its creditors would be endangered. Taking advantage of their fiduciary positions, they sought to gain equality of treatment with general creditors. Accordingly, the court found that the factual conclusion of the lower court that appellees, in withdrawing capital, did not act for their own personal or private benefit and to the detriment of the corporation and creditors, was clearly erroneous.

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