Matter of S & W Exporters, Inc., Bankruptcy No. 75 B 1570
| Decision Date | 05 February 1982 |
| Docket Number | 75 B 1571.,Bankruptcy No. 75 B 1570 |
| Citation | 16 BR 941 |
| Parties | In the Matter of S & W EXPORTERS, INC., and Rondon Trading Corp., Bankrupts. Howard N. BELDOCK, as Trustee of S & W Exporters, Inc., and Rondon Trading Corp., Plaintiff, v. FABERGE, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Phillips, Nizer, Benjamin, Krim & Ballon, New York City, for Faberge, Inc.
Javits & Javits, New York City, for trustee.
The Trustee in Bankruptcy for Rondon Trading Corp., and S & W Exporters, Inc., ("Rondon") has filed claims against Faberge, Inc. ("Faberge") under sections 60(a)(1), 67(d)(2) and 70(e)(1) of the Bankruptcy Act, ("Act") and under sections 273, 274 and 275 of the Debtor and Creditor Law of New York. The Trustee alleges that Rondon's transfers of funds and property to Faberge from September 1974 to September 1975 were fraudulent and preferential within the meaning of the Act.
This Court now has before it two pre-trial motions: Faberge's motion for summary judgment on the issue of fraudulent transfer and the Trustee's cross-motion for summary judgment on preferential transfer, both brought under Rule 56 of the Federal Rules of Civil Procedure (F.R.C.P.) and Bankruptcy Rule 756. The Trustee also requests sanctions against Faberge under F.R.C.P. 56(g) for allegedly using the pre-trial motion to delay the proceedings. A hearing on the motions for summary judgment, was held before this Court on July 16, 1981.
This Court decides, after reviewing all of the evidence before it, that summary judgment cannot be awarded either on the issue of fraudulent transfer or on the issue of preferential transfer, since questions of fact remain which require a full hearing on the merits. See FLLI Moretti Cereali v. Continental Grain Co., 563 F.2d 563 (2d Cir. 1977). Additionally, the Court declines to impose sanctions on Faberge, without prejudice to the Trustee's right to renew such application upon the resolution of the claims of fraudulent and preferential transfers.
The facts before this Court demonstrate a complex series of transactions which were entered into by three independent corporations and which were governed by diverse oral and written agreements. A brief summary of the transactions and inter-relationships of the parties is important to an understanding of these issues.
The business dealings between the parties span the period from November 1973 until September 5, 1975, when Rondon filed a petition in bankruptcy. Rondon was adjudicated bankrupt on February 2, 1976. On October 14, 1975 Faberge filed a proof of claim before this Court for $1,505,800 based on promissory notes aggregating $1,405,800 and for damages in breach of contract of $900,000. In November 1973, Rondon, Faberge and, Lon United Biochemical Laboratories Ltd. ("Lon") entered into a tripartite agreement whereby Faberge would sell component parts for cosmetics (e.g. spray colognes and soaps) to Lon in Israel. Lon would manufacture finished cosmetic products from these component parts and sell them to Rondon. Rondon would distribute the cosmetics in the Far East. Some shipments of finished goods were shipped directly from Faberge to Rondon. Billing, theoretically, was done by Lon and Faberge independently for the goods each shipped to Rondon, and payment was due to Lon and Faberge separately. It is uncontested by the parties that each corporation is an unaffiliated and independent entity.
In August 1974, less than one year after making this agreement, Faberge became concerned with the size of the outstanding balance due it by both Rondon and Lon. It is alleged by Faberge that Rondon owed Lon approximately $1,386,769 (of which Lon owed Faberge a substantial sum) and owed Faberge directly approximately $438,769. Faberge subsequently undertook to collect its debt as well as Lon's debt to Faberge by securing direct payment from Rondon of both debts. These payments, made under a series of different oral and written agreements, form the subject of the motions for fraudulent and preferential transfers.
On September 31 and October 31, 1974, Rondon paid Faberge $460,000 pursuant to an oral agreement evidenced by promissory notes. Subsequently, under a written agreement of January 15, 1975, Rondon transferred $162,542 in cash and $355,044 in inventory to Faberge between January 15 and September 5, 1975. Of that cash and inventory, $160,000 was transferred within four months of filing a petition in bankruptcy.
In the alternative, Act section 67(d)(2)(d) requires "actual intent . . . to hinder, delay, or defraud . . . creditors" (emphasis added) and excludes proof of fair consideration and insolvency.
The record indicates that Rondon's transfers of money and assets to Faberge occurred within one year of the filing of a petition in Bankruptcy and that there were then existing and future creditors who were thereby disadvantaged. Faberge, a large unsecured creditor, gained a decided advantage over other unsecured creditors by Rondon's pre-petition payments of approximately $982,586. Faberge has additionally admitted, for the purpose of their summary judgment motion,1 that it knew of Rondon's insolvency at the time of the transfers.
To prevail on summary judgment against the Trustee's claim of fraudulent transfer based on Act section 67(d)(2)(a), (b), and (c), Faberge must demonstrate beyond any factual controversy that fair consideration was given. To prevail on summary judgment on the trustee's claim based on Act section 67(d)(2)(d), Faberge must demonstrate beyond any factual controversy an absence of actual intent to defraud creditors. Based on the discussion following, this Court finds that Faberge has failed to demonstrate beyond factual controversy either presence of fair consideration or absence of actual intent.
Initially, this Court examines issues of fact concerning fair consideration which is defined by the Act section 67(d)(1)(e)(1) as "when, in good faith . . . and a fair equivalent therefore . . . and antecedent debt is satisfied . . ." Two components are considered: fair equivalent value and good faith. Misty Management Corp. v. Lockwood, 539 F.2d 1205 (9th Cir. 1976). Faberge's application of the Rondon payments of September 31 and October 31, 1974, raise substantial questions as to whether Rondon received fair consideration. In August of 1974, as a result of negotiations with Rondon, Faberge received promissory notes totalling $1,150,000 from Rondon. A Faberge memorandum dated November 7, 1974 (Exhibit P) states that Faberge was acting "as the collecting agent and bookkeeping service for Lon" and violated the prior agreement between the parties whereby Rondon was to pay Lon, and Lon to pay Faberge. Rondon transferred $210,000 in September 1974 and $259,000 in October 1974 to Faberge and subsequently defaulted on its remaining notes. These payments were initially applied to Faberge's debt (Exhibits I, K) owed by Rondon. As such, they satisfied Rondon's debt to Faberge in full with excess to be applied to Rondon's debt to Lon (Exhibit K). Faberge subsequently reapplied these Rondon payments in late December 1974 and January 1975, to satisfy Lon's debt to Faberge. In so doing, it is only logical to deduce that Faberge revived Rondon's debt to it and extended to Lon any credit given Rondon as a result of payment.
Fair equivalent value can be given in payment of an antecedent debt. Strongin v. International Acceptance Bank, Inc., 70 F.2d 248 (2d Cir.), cert. denied, 293 U.S. 575, 55 S.Ct. 86, 79 L.Ed. 673 (1934). It is an accepted principle of contract law that a debtor has the right to direct the application of payment by the creditor at the time of or prior to payment and in failing to do so, the creditor has the right to apply payment as he sees fit. Laney v. Whitaker, 91 Misc.2d 949, 398 N.Y.S.2d 839 (1977); 43 N.Y.Jur. Payment § 58 (1965). However, once application of payment has been made and the debtor notified, the debt is discharged. Rondon claims it received notice and Faberge's internal memoranda ordered such notice be given. Chief Justice Marshall in discussing a creditor's election to apply payment to one of two separate accounts, wrote Alexandria v. Patten, 4 Cranch 317,320, 2 L.Ed. 633 (1808). Only the assent of the parties can justify reapplication. Louis v. Bauer, 33 A.D. 287, 53 N.Y.S. 985 (1898); Allen v. Culver, 3 Denio 284 (N.Y.Sup.Ct.1846); 15 Williston on Contracts Discharge §§ 1798, 1800 (1972); See Wolf v. Aero Factors Corp., 126 F.Supp. 872 (S.D.N.Y.), aff'd, 221 F.2d 291 (2d Cir. 1954).
This Court has not found any evidence of the ratification of reapplication by the parties. The subsequent written agreement of January 15, 1975, between the parties dealt only...
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