Economy Refining & Service Co. v. Royal Nat. Bank of New York

• Decision Date: 06 October 1971
• Court: California Court of Appeals Court of Appeals
• Parties: , 49 A.L.R.3d 872 ECONOMY REFINING & SERVICE CO., Inc., a corporation, Plaintiff, Cross-Defendant and Respondent, v. ROYAL NATIONAL BANK OF NEW YORK, a corporation, Defendant, Cross-Complainant and Appellant. Michael D. Marcus, Cross-Defendant and Respondent. Civ. 28155.

Page 706

97 Cal.Rptr. 706

20 Cal.App.3d 434, 49 A.L.R.3d 872

ECONOMY REFINING & SERVICE CO., Inc., a corporation, Plaintiff, Cross-Defendant and Respondent, v. ROYAL NATIONAL BANK OF NEW YORK, a corporation, Defendant, Cross-Complainant and Appellant.

Michael D. Marcus, Cross-Defendant and Respondent.

Civ. 28155.

Court of Appeal, First District, Division 4, California.

Oct. 6, 1971.

As Modified on Denial of Rehearing Nov. 4, 1971.

Hearing Denied Dec. 29, 1971.

Cartwright, Saroyan, Martin & Sucherman, Inc., San Francisco, for appellant.

Stark, Stewart, Simon & Sparrowe, John F. Wells, Merrill J. Schwartz, Oakland, for respondents.

DEVINE, Presiding Justice.

Royal National Bank of New York appeals from a judgment which denies it as cross-complainant relief under its action against respondents on alleged fraudulent conveyances, and which quiets title in respondent Economy Refining & Service Co., Inc. (hereinafter, Economy) to the property allegedly fraudulently conveyed. The conveyances, to Michael D. Marcus, which purportedly became effective on July 30, 1965, were a quitclaim deed, a bill of sale, and certain assignments, all of which were made by Universal Petrochem Corporation (hereinafter, UPC). The conveyances completely stripped the corporation of its assets and made impossible the collection of a judgment which appellant bank had originally obtained in the State of New York, and later obtained by an action on the judgment ^* in California against UPC, and which was about to be recorded at the time of the effectuating of the conveyances.

The events leading to the transfers of July 30, 1965, may be narrated briefly. Marcus, an investment counselor, had obtained shares of stock of UPC in exchange for the release of judgments which he held against Irving Rill, majority stockholder of the company. The company was pressed for ready cash. Rill and Marcus discussed the subject of obtaining funds. Marcus was elected director of the company and chairman of the board, and chief executive officer at a meeting of stockholders in May 1964. Marcus agreed to attempt to raise at least $125,000. On May 5, 1964, UPC executed a loan agreement with Marcus on behalf of himself and undisclosed principals (the 'Marcus Group'), for sums up to $200,000, to be secured by a deed of trust covering all of UPC's real property, a pledge of the stock of Port Petroleum Corporation (a wholly owned subsidiary of UPC), a chattel mortgage covering all of the tangible assets of UPC and Port, and an assignment of their intangible assets. The agreement provided for broad foreclosure rights, including the right to foreclose in the event the value of the collateral, in Marcus' opinion, became impaired, and the right to foreclose by public or private sale at which Marcus could purchase the property. A promissory note in the sum of $125,000 was issued to Marcus in connection with the loan agreement. The agreement also provided that if and when money over and above the initial $125,000 was received, UPC and Port would execute additional notes 'payable to the order of persons designated by MICHAEL D. MARCUS, as the lenders of said sums.'

Pursuant to the terms of the loan agreement, UPC executed and recorded a deed of trust on its real property, and chattel mortgages were executed and recorded by UPC and Port. UPC and Port each executed notices of intention to chattel mortgage and these were published in the newspaper in compliance with the Bulk Sales Act.

On June 20, 1964, the board of directors of UPC passed a motion authorizing Marcus 'at any time within the next five years to convert the demand notes of the Company of approximately $125,000.00 to common stock of the Company, not to exceed book value of the Company as of April 30, 1964; subject to be adjusted downward on a per share basis on any assets later found to be worth less than their apparent worth on April 30, 1964.' On October 19, 1964, a letter was sent by UPC to Marcus which provided for the following: 'In the event of any judgment, lawsuits or other actions which may impair the operation of this company, we do hereby waive all notice and authorize you to take over all the assets of this company in lieu of foreclosure of your Chattel Mortgage and Deed of Trust.'

Marcus obtained from friends and relatives various advances which by July 1965 amounted to $201,000. At the time of the transfer on July 30, 1965, the loans to the Marcus Group were subordinate to a loan of $250,000 which had been obtained from the Small Business Administration.

It is difficult to find what the net worth of UPC was on that date from financial statements. But Marcus testified that under no conditions could the corporation or its assets have been sold for enough to pay the outstanding mortgages; that he doubted that even the Small Business Administration debt could be paid; and that the only way to save any part of the Marcus Group investment was to transfer the business to a separate entity, keeping it running on the hope that the market would some day improve and the business would again have some value. We accept as true this testimony as that favorable to respondents. It was conceded, however, that the business made a profit in the year ending on June 30, 1965, and that profits of the business increased in later months of 1965 so that when Marcus was deposed in January 1966, he testified, the business had been 'extremely profitable' during the last several months. The loans to Small Business Administration and to the Marcus Group were not in default.

When Marcus learned that appellant's judgment against UPC in New York, which had been obtained in 1964, had not been satisfied, as he had thought it was, and that it was to be recorded in California, and when he considered a wage claim of $30,000 held by a former employee, he proceeded to make transfers of all of the assets of UPC to himself for the Marcus Group. The deed of trust was ignored; instead, by what amounts to strict foreclosure, a quitclaim deed of UPC's real property to Marcus was executed by UPC by its vice president, Charles R. Nelson. It recites 'consideration less than $100.00.' The chattel mortgage was not foreclosed; a bill of sale and two assignments transferred to Marcus all of the assets other than the real property.

Marcus then proceeded to form a corporation and transfer all the assets formerly held by UPC to the new corporation, Economy Refining & Service Co., Inc. The transfer of assets from Marcus to Economy was accomplished on October 31, 1965. There were issued to Marcus (for the Marcus Group) 100,000 shares of Economy stock, subject to the approval of the Commissioner of Corporations. The business, which was that of collecting, refining and marketing of petroleum products, was carried on following July 30, 1965, the date of recording and effectuating of the conveyances, until September 30, 1965, by UPC. On September 30, 1965, the books of UPC were closed and on the next day, October 1, 1965, the books of Economy were opened. On these books there appeared the assets formerly held by UPC and as liabilities the debts due to the Marcus Group and to certain other trade creditors. The debt to Royal National Bank and to one other set of creditors (who appealed but whose appeal was dismissed for failure to pay the filing fee) did not appear as liabilities on Economy's books. The business theretofore operated by UPC was carried on by Economy in the same place and manner as before, except that Marcus gave 'a lot more time' to it. As stated above, it was operated profitably, immediately, and it continued to be so operated to the time of trial.

The stockholders of UPC, Marcus testified, were 'automatically wiped out.' Throughout the testimony at the trial, Mr. Marcus shows that following the delivery to him from UPC of the various documents in 1964, he virtually alone decided on the course of events of the two companies. Appellant bank, by its cross-complaint to Economy's quiet title action, sought to have liability for its judgment imposed on the new corporation.

The trial judge made these findings: '1. The transfers by Universal Petrochem Corporation to Michael D. Marcus on or about July 30, 1965, were made without any actual intent to hinder, delay or defraud the creditors of Universal Petrochem Corporation. 2. The transfers by Universal Petrochem Corporation to Michael D. Marcus on or about July 30, 1965, (a) left Universal Petrochem insolvent, and (b) were made for a fair consideration.' Acting upon these findings, the court quieted title in Economy to the transferred property as against appellant and other defendants.

It is our holding that the transfer of assets from UPC to Economy by the conveyances to and from Marcus are a fraud upon appellant creditor; that the requisite intent to defraud is demonstrated by admission in the testimony of Mr. Marcus; and that UPC received no consideration for the transfer.

Transfers of all of the assets of a person or corporation in straitened circumstances, without fair consideration, to a corporation having substantially the same ownership, by which the just claims of creditors...