Gafco, Inc. v. H.D.S. Mercantile Corp.

• Decision Date: 09 September 1965
• Citation: 47 Misc.2d 661,263 N.Y.S.2d 109
• Parties: GAFCO, INC., Petitioner, v. H.D.S. MERCANTILE CORP., Respondent.
• Court: New York City Court

Page 109

263 N.Y.S.2d 109

47 Misc.2d 661

GAFCO, INC., Petitioner, v. H.D.S. MERCANTILE CORP., Respondent.

Civil Court of the City of New York, New York County, Trial

Term, Part X.

Sept. 9, 1965.

Bendes, Stark & Amron, by Howard C. Amron, New York City, for petitioner.

Irving Fellerman, New York City, for intervenor.

PATRICK PICARIELLO, Judge.

Hearing on an application made by the Receiver herein (Morton Baum) for an order pursuant to CPLR Section 5227 directing the third party (Alvin Herman) to pay over to said Receiver a judgment recovered by the judgment debtor against said third party. During the pendency of this proceeding the receivership was extended to include another judgment allegedly assigned to the judgment creditor.

The judgment debtor, H.D.S. Mercantile Corp. (hereinafter referred to as HDS), defaulted on the application and on the hearing. The adverse claimant, Park Place Cleaners (hereinafter referred to as Park), a corporation organized in the State of New Jersey, was, by order of this court, granted leave to intervene in this proceeding. It contends that it is the legal and equitable owner of the aforesaid judgment against the third party by virtue of an assignment executed by HDS and delivered to it before the institution of these proceedings.

The Receiver places in issue the validity of said assignment, declaring it to be fraudulent with respect to HDS's creditors and designed in contravention of law to strip HDS of all of its assets so as to defeat the rights of creditors thereto.

This constitutes the only issue for determination, other issues created by the affidavits and pleadings filed and submitted on this application having been disposed of by order of this court dated October 16, 1964.

During the course of the hearing Park also contended that the issue of the validity of the assignment had been contested in the Bankruptcy Court and that its finding therein constitutes res adjudicata on this court.

The following constitutes a brief recital of the dispositive facts found by the Court.

HDS is a commercial factor. Specifically, it is engaged in the business of guaranteeing to third party vendors the payment for merchandise purchased by its customers, or accouns, for which it exacted a consideration. A vast majority of the claims against it, some of which have been reduced to judgments, represent unpaid for merchandise delivered by the vendor-claimants to HDS's customers, or accounts, and arise out of and by virtue of the aforementioned guarantees.

Seymour Schwartz, a certified public accountant, was the sole stockholder and president of HDS and with his wife, the secretary, constituted the Board of Directors.

In connection with its business, HDS entered into various agreements with third parties who advanced monies for participation with it in various specific accounts maintaned by it with its customers. The agreements created joint ventures between the third parties, as participants, and HDS in specifically named accounts. Each agreement contained a guarantee of performance and indemnification agreement by Schwartz individually. The total investment of the third parties in the separate ventures was $287,000.00.

Prior to October 19, 1960 the participants were pressing HDS and Schwartz for payment. Also prior to October 19, 1960, that is, on May 31, 1960, lawsuits arising out of the various aforementioned guarantees in the aggregate sum of $17,000 were pending against HDS. This amount was increased to approximately $70,000 by May 31, 1961, exclusive of contingent liabilities and judgments payable in the sum of approximately $22,000.

It became important therefore to Schwartz to relieve himself of his personal liability to the aforementioned participants, and the following machinations, solely and completely contrived by him, occurred.

There was in existence at said time another of Schwartz' corporations, known as Park Place Cleaners. Here, too, Schwartz was the sole stockholder and president, and with his wife, the secretary, constituted the Board of Directors. The office of Park was at the home of Schwartz. Park was also engaged in the financing business. On October 19, 1960 all of the participants entered into an agreement with HDS, Park and Schwartz, whereby they released and surrendered their interests in the accounts in which they participated with HDS and received in lieu thereof a note made by Park for their amounts invested and became general creditors of Park. HDS became indebted to Park in the sum of $287,000, the total amout advanced by the participants to HDS. In addition to becoming entitled to $287,000 from HDS, Park became the owner of the participants' interest in the accounts in return for the notes that it so delivered to the former participants. By virtue of this transaction Schwartz the total amount advanced by the based on his indemnification agreement.

On the same date, all of the accounts and notes receivable held by HDS, comprising practically all of its assets, in the approximate sum of $470,000, were assigned to Park under a factoring agreement which provided that Park was to pay HDS eighty per cent of the net amount thereof and to charge one-twentieth of one per cent per day on the average purchase monies advanced and outstanding under the agreement. The agreement also provided that all accounts receivable, whether then in existence or arising in the future, were deemed to have been assigned immediately upon their coming into existence as collateral security for any and all obligations due Park whether then in existence or thereafter incurred with the same force and effect as if in each instance HDS had specifically assigned each individual account to Park.

No cash or other consideration passed from Park to HDS at that time. There was no normal business purpose of HDS served by this transfer. The monies thereafter paid by Park to HDS represented collections on the assigned accounts receivable, but the new accounts receivable created by HDS with funds received by it from Park were deemed assigned to Park. HDS paid Park interest at the rate of eighteen per cent per annum on such monies received from Park, which in turn paid the former participants now note holders, interest at the rate of twelve per cent per annum. Subsequent to the assignment HDS remained in business and judgments were obtained against it on account of obligations existing prior to the assignment and on obligations thereafter incurred. These judgments remain unpaid.

An examination of the above ascertained facts and circumstances surrounding the execution and delivery of the subject assignment reveals the latter to be sui generis, a genius of uniqueness. Consequently, it behooves this Court not to apply to such ascertained facts rigidly defined legal formulae definitely prescribed as such or exactly deduced from authoritatively presented premises.

Ordinarily, the question of fraud involves the element of intent. Since it is impossible to look into Schwartz' mind for the purpose of ascertaining his intent, it is necessary to consider the circumstances surrounding the assignment and determine the intent from what he did or failed to do. And, by reason of its nature, fraud is usually very difficult to prove by direct evidence, and such proof is unnecessary. See, Pergrem v. Smith, Ky., 255 S.W.2d 42, 44; Battjes v. United States, 6 Cir., 172 F.2d 1, 5. The issue of fraud is commonly determined by certain recognized indicia, denominated 'badges of fraud,' which are circumstances so frequently attending fraudulent transfers that an inference of fraud arises from them. (Pergrem, supra; also Leonardo v. Leonardo, 102 U.S.App.D.C. 119, 251 F.2d 22, 27; Bentley v. Caille, 289 Mich. 74, 78, 286 N.W. 163, 164.) Inadequacy of consideration, secret or hurred transactions not in the usual mode of doing business, and the use of dummies or fictitious parties are common examples of 'badges of fraud.' As was said in the Bentley case, supra: 'No effort to hinder or delay creditors is more severely condemned by the law than an attempt by a debtor to place his property where he can still enjoy it and at the same time require his creditors to remain unsatisfied.' Although 'badges of fraud' are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, "a concurrence of several badges will always make out a strong case." See Timmer v. Pietrzyk, 272 Mich. 238, 242, 261 N.W. 313, 314; Aiken v. United States, 4 Cir., 108 F.2d 182, 183; Battjes, supra.

So that, mere adroitness of technique should not be permitted to obscure the real facts. Whether a transaction constitutes a fraudulent transfer must be determined from its intent and effect and not from its form; a court will look at the results and not at the devious ways by which they were accomplished. Brown Packing Co. v. Lewis, 185 Misc. 445, 58 N.Y.S.2d 443; Leifer v. Murphy, 149 Misc. 455, 267 N.Y.S. 701.

There can be no question but that this assignment was voluntary. And a voluntary assignment made when the evidence shows that there are existing indebtednesses is presumptively fraudulent. See Collier, Bankruptcy 13th Ed., p. 1772(b); Am.B.R.Digest, Section 564.

And since the record reflects that at the time of the making of the voluntary assignment there were indebtednesses of HDS then in existence, the burden is on HDS to rebut the presumption of fraud. See Collier, supra, p. 1783(6); Am.B.R.Digest, Sec. 679; also Smith v. Reid, 134 N.Y. 568, 31 N.E. 1082; Kerker v. Levy, 206 N.Y. 109, 99 N.E. 181; Ga Nun v. Palmer, 216 N.Y. 603, 111 N.E. 223; also, Klinger v. Hyman, C.C.A., 2d Circ., 223 F. 257, 34 Am.Bankr.Rep. 338.

As was stated by Judge Cardozo in the case of Ga Nun v. Palmer (supra, p. 611): '[A] transfer without consideration by one who is then a debtor raises a presumption of fraud. The creditor may stand upon that presumption until it is repelled.'

That there...