Opinion
78 Civ. 2955 (CMM).
May 13, 1980
This action is brought by the New York Credit Men's Adjustment Bureau as Trustee in Bankruptcy (Trustee) of Felbar Fabrics, Inc. (Felbar) pursuant to Section 67(d) of the former Bankruptcy Act, 11 U.S.C. § 107(d) (repealed), and Sections 273 through 276 of the New York State Debtor and Creditor law to set aside certain allegedly fraudulent transfers from Felbar to Kojack Fabrics, Inc. (Kojack) and to Lizbar Fabrics, Inc. (Lizbar). The Trustee also asserts claims against the individual defendants Feldman and Bartfeld, as officers, directors and shareholders of Felbar, for waste of corporate assets and breach of fiduciary duties pursuant to Section 720 of the New York Business Corporations Law.
Felbar was formed in November 1970 as a converter of fabrics to be used in the manufacture of coats. Defendant Feldman was the president and a 50 per cent shareholder of Felbar. Defendant Bartfeld owned the other 50 per cent of the stock until June 24, 1976, at which time he sold out to Feldman and terminated his involvement in the firm. Both Feldman and Bartfeld managed the daily operations of Felbar.
In the fall of 1974 Feldman and Bartfeld decided to expand their business to include the conversion of fabrics for women's sportswear. Having no experience in that area, they sought the services of Kodack and Goldstein, allegedly knowledgeable in the sportswear trade. The latter two, however, wanted a share in the business. To avoid bringing new partners into Felbar, Bartfeld and Feldman formed a new corporation, Kojack, in which each owned 50 per cent of the stock. Kodack and Goldstein were initially employed by Kojack as salesmen, and the company did business for over one year with its own customers, salesmen and factor, although Kojack and Felbar shared the same ground floor premises. However, the plan to give Kodack and Goldstein an interest in the business was subsequently abandoned, and by January 1976 they had left Kojack's employ. The bulk of Kojack's business had terminated by February 1976.
Thereafter Felbar continued to use Kojack primarily as a means for securing additional or more favorable credit for Felbar's transactions. When Felbar's factor refused to extend a credit line or gave insufficient credit, Felbar would channel the same transaction through Kojack's more accommodating factor by transferring the goods to Kojack's books with a compensating credit to be entered in Felbar's books. Felbar would also make purchases for Kojack and enter the Felbar invoices in Kojack's purchase journal. However, 30 to 50 per cent of such invoices were nonetheless paid by Felbar, and there should have been a corresponding adjustment in Kojack's books.
Although each company maintained its own books and bank accounts, they used the same bookkeeper, who was unable to keep pace with the frequent transfers of goods and credits back and forth between the companies. Only one inventory book was kept for both companies and the inventories, which were stored at their suppliers' plants, were commingled, and not properly posted when sold. Loans were made freely and frequently back and forth between the companies, although attempts were made to record such transactions.
Felbar and Kojack shared the same equipment, the same telephone, the same employees, and ultimately, the same suppliers and customers. The lease and telephone were in Felbar's name, and Felbar made most of the payments of rent, bills, and employee salaries. When it had money on hand, Kojack made payments to Felbar for some of these expenses, but with no regularity, and the amount was usually an arbitrary estimate. Bartfeld and Feldman drew salaries of from $500 to $1,000 per week from whichever company happened to have cash on hand at the time. Goods were purchased almost exclusively by Felbar, but sales were made by both companies. Kojack was sometimes billed directly by fabric processors; at other times, Felbar was billed and would charge Kojack.
In the fall of 1975 Feldman and Sartfeld, along with two other partners, Seymour Berman and David Weissman, formed Lizbar. Each owned 25 per cent of the stock of the company until July 22, 1976, when Berman and Weissman bought Feldman and Bartfeld's stock. As will be seen below, the buying out of Feldman and Bartfeld occurred quite some time after Felbar became insolvent. Neither Feldman nor Bartfeld were officers of Lizbar and neither played an active role in its management or operations. Felbar made purchases on behalf of Lizbar and would be reimbursed by Lizbar. Also, Lizbar used Kojack to get credit lines when its factor (the same factor used by Felbar) refused approval. Lizbar would sell the goods to Kojack with an invoice, and then Kojack would sell to Lizbar's customer and invoice the transaction. Kojack also purchased and processed goods on Lizbar's order and then sold them to Lizbar.
On November 11, 1976, Felbar delivered a general assignment for the benefit of creditors to plaintiff which assignment plaintiff accepted and filed shortly thereafter. An involuntary petition in bankruptcy was filed against Felbar on April 29, 1977. On May 26, 1977, Felbar was adjudicated a bankrupt.
The defendants assert the threshold claim that Felbar and Kojack operated as a single entity and should be treated as such in this proceeding. The argument continues that since the two entities were in fact one, there could be no "transfer" or "conveyance" within the meaning of the applicable federal and state provisions. Defendant Lizbar further argues that if the companies are to be considered as a single entity, the extent of its liability is about $1,400. The court finds that Felbar and Kojack should be regarded as two distinct and separate entities.
Generally, a corporate entity will be disregarded only to prevent fraud or illegality or to achieve equity. Walkouszky v. Carlton, 18 N.Y.2d 414, 223 N.E.2d 6 (1966); Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930); Guptill Holding Corp. v. State of New York, 33 A.D.2d 362 (3d Dept. 1970). A bankruptcy court may pierce the corporate veil where the corporation was organized to defraud or hinder creditors, or where preserving the corporate form would prevent equitable treatment of creditors. Soviero v. Franklin National Bank of Long Island, 328 F.2d 446, 449 (2d Cir. 1964); Cregg v. Electri-Craft Corp., 175 Misc. 964, 25 N.Y.S.2d 920, 923 (Sup. Ct. Onondage Cty. 1941). Furthermore, "`the corporate veil is never pierced for the benefit of the corporation or its stockholders. The procedure is only permissible against a purported stockholder who is using the corporate veil to defraud.'" Boise Cascade Corp. v. Wheeler, 419 F. Supp. 98, 102 (S.D.N.Y. 1976), aff'd, 556 F.2d 554 (2d Cir. 1977), quotingColin v. Altman, 39 A.D.2d 200, 202 (1st Dept. 1972).
In the instant case, by contrast, Feldman and Bartfeld would have the court disregard the corporate form of Kojack for the purpose of defeating the rights of creditors. Such a result would contravene the very purpose of the Bankruptcy Act. Thus, inSprogell v. Philadelphia Lodge of Perfection 14°, 57 F. Supp. 592 (E.D. Pa.), aff'd, 145 F.2d 469 (3d Cir. 1943), the virtual identity of the bankrupt association with its subordinate association did not prevent the court from finding a conveyance to the subordinate association to be a "fraudulent transfer" within the meaning of Section 107(d) (2).
These defendants chose to retain Kojack as a distinct entity after its original corporate purpose failed, and they exploited its corporate separateness to obtain otherwise unavailable or less favorable credit in the conduct of their business. By channeling transactions through Kojack's factor, they obtained an advantage otherwise unavailable to them doing business solely under the Felber name. They cannot now abandon that choice merely to defeat the claims of creditors. See Schenley Corp. v. United States, 326 U.S. 432 (1946); Commissioner v. Schaefer, 240 F.2d 361, 383 (2d Cir. 1957).
All the defendants contend that plaintiff failed in its proof because its claims are based entirely on the unverified and unaudited books of Felber and Kojack, which books were incomplete and lacked year-end adjustments for 1976. This argument has no merit.
With respect to defendants Bartfeld, Feldman and Kojack, plaintiff relies on their own books and records in fashioning its claims against them. Those books are presumptively accurate, and in the absence of proof refuting their accuracy, they are sufficient to support plaintiff's case. Moreover, plaintiff made adjustments in its figures to reflect reductions in payments and increases in credits not reflected on the books of Felbar, but proved by defendants during a conference conducted in the course of the trial. These corrected figures are binding upon the defendants.
Defendant Lizbar claims that it cannot be bound by the indebtedness shown on Felbar's and Kojack's books. However, Lizbar has failed to adduce any evidence refuting the accuracy of those books and therefore it, too, is bound by them.
The complaint should be dismissed as to Bartfeld because Felbar's indebtedness to him as acknowledged by plaintiff at trial is greater than his liability. The Auditor's Report submitted by plaintiff at trial shows a total indebtedness of Felbar to Bartfeld of $92,718.59. That figure was reduced by a payment of $7,500, leaving a remaining debt of $85,218.59. That amount exceeds the $59,672.44 claimed by plaintiff to be Kojack's outstanding indebtedness to Felbar.
Turning now to plaintiff's claims against Feldman and Kojack under 11 U.S.C. § 107(d) (2). Plaintiff established at trial that after April 30, 1976, one year prior to the initiation of the bankruptcy proceeding, a total of $53,295.97 was transferred to Kojack from Felbar, while only $48,391.89 was repaid. Said repayments are not the "fair equivalent" of the sum transferred, and hence those transfers were "without fair consideration" within the meaning of Section 107(d) (2) (a) and (b).
The court also finds that insolvency occurred by April 30, 1976. Therefore, the transfers in question were made when Felbar was insolvent and a fortiori when the property remaining in its hands was an unreasonably small capital.
Plaintiff has established that the transfers were fraudulent under the requirements of subsections (a) and (b) of Section 107(d) (2).
With respect to plaintiff's state law claims against Kojack and Feldman, I find that Felbar was operating with insufficient capital as of January 1, 1976. Therefore, plaintiff's recovery is extended to include transfers made after January 1, 1976, and totalling $104,765.83. That amount is offset by proven credits or repayments during that period of $84,960.42, leaving a net liability under Sections 273 and 274 of the Debtor and Creditor Law of $19,805.41.
With respect to plaintiff's claims against Lizbar, plaintiff has proved transfers to Lizbar from Felbar after January 1, 1976 totalling $33,431.79, and corresponding credits of $10,488.35. For the reasons already discussed, these transfers are fraudulent under federal and state law. Lizbar shall pay to the trustee its net liability of $22,943.44.
Plaintiff's causes of action under subsections (c) and (d) of Section 107(d) (2) and New York Debtor and Creditor Law §§ 275 and 276 are dismissed for failure to show intent to defraud. The facts in the instant case do not lead us "to the irresistible conclusion that the transferor's conduct was motivated by such intent." Cf. Prisbrey v. Noble, 505 F.2d 170 (10th Cir. 1974) (transfers obtained by false pretenses). See also Collier on Bankruptcy ¶ 67.37[3].
Similarly, plaintiff has filed to prove waste of corporate assets or breach of fiduciary duties and thus the causes of action based on those theories are dismissed.
The above constitutes the court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.
So ordered.