In re Golden Distributors, Ltd.
| Decision Date | 27 December 1991 |
| Docket Number | Bankruptcy No. 90 B 21146 to 90 B 21149 and 91 Adv. 6127. |
| Citation | 134 BR 770 |
| Parties | In re GOLDEN DISTRIBUTORS, LTD., and Capital Cigar and Tobacco Company, Incorporated, et al., Debtors. GOLDEN DISTRIBUTORS, LTD., Plaintiff, v. SAVE ALL TOBACCO, INC. and Bob Keller, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Summit Solomon & Feldesman, New York City, for debtors.
Spota, O'Rourke & Ammerman, Hauppauge, N.Y., for defendants.
DECISION ON COMPLAINT TO RECOVER PROPERTY OF ESTATE
Golden Distributors, Ltd. ("Golden"), the debtor in this voluntary Chapter 11 case, has commenced this adversary proceeding to collect $301,803.59 from the defendants for goods it sold and delivered to the defendants. A default judgment has been entered against the corporate defendant, Save All Tobacco, Inc. ("Save All"), for $301,803.59 and interest. Golden seeks to have the defendant, Bob Keller ("Keller"), held personally liable for the entire debt because it alleges that Keller is a shareholder of Save All and that the facts establish a basis to pierce the corporate veil. Golden also asserts that Keller is personally liable for twelve corporate checks totaling $138,584.40 that he drew on the Save All's account in payment for the goods. Several checks were returned to Golden by Save All's bank because the account lacked sufficient funds to cover them. Other checks were returned because Golden negotiated them after Save All's account was closed. Golden argues that New York's U.C.C. § 3-403(2) imposes personal liability on a person who signs his own name to a corporate check without indicating that he is signing in a representative capacity.
Keller contends that he is not personally liable for Save All's entire indebtedness for the reason that there is no basis to pierce the corporate veil. Keller also argues that he is not personally liable as the maker of the checks in question for two reasons. First, Keller asserts that it was implicit in the course of conduct established between Golden and himself that liability would be imposed only on the corporation. This course of conduct, Keller argues, constitutes an exception to N.Y.U.C.C. § 3-403(2). Keller also argues that Golden is not entitled to the protection of N.Y.U.C.C. § 3-403(2) because it is not a holder in due course of a negotiable instrument pursuant to N.Y.U.C.C. § 3-305(2) for the reason that some of the checks were post-dated. In his answer, Keller asserts a counterclaim against Golden for damages based on prima facie tort. The court dismissed this claim from the bench at the conclusion of the trial. Golden seeks sanctions against Mr. Keller's attorney under Rule 11 of the Federal Rules of Civil Procedure, alleging that the counterclaim was frivolous.
1. On November 13, 1990, the debtor and its affiliated corporations, filed with this court petitions for reorganizational relief under Chapter 11 of the Bankruptcy Code and continued in possession and management of their businesses and properties pursuant to 11 U.S.C. §§ 1107 and 1108. The separate cases were consolidated for purposes of administration by an order of this court.
2. Golden is a wholesale distributor of cigarettes, candy, and other sundry products. A principal place of the debtor's business is located in Port Chester, New York.
3. Save All is a New York corporation with an office at 150 Morris Avenue, Holtsville, New York. Save All was in the business of distributing cigarettes, candy, and other items that it purchased from Golden, to convenience and other stores. Save All ceased operations in March, 1991.
4. Keller was an employee of Save All who was authorized to sign corporate checks. Keller testified that he ordered goods for Save All from Golden and drew corporate checks. His wife, Eileen Keller, is the President of the corporation and owns all of the outstanding shares of stock.
5. Save All had formerly been buying goods from Valley Stream, a distributorship that Golden acquired. After Golden acquired the Valley Stream business, Save All purchased merchandise from Golden on a regular basis pursuant to specific credit terms.
6. On various occasions in 1990 and 1991, Golden delivered goods to Save All on credit for which it has not been paid. The parties have stipulated that the amount of principle indebtedness is $301,803.59. A default judgment of $322,052.04 reflecting this amount plus costs and interest was entered against Save All and Keller on November 22, 1991. On December 10, 1990, the default judgment against Keller was vacated by this court and on December 20, 1991, a trial was held before this court on the merits of the case.
7. Golden alleges that Keller is personally liable for all of Save All's outstanding obligations because there are sufficient grounds to pierce the corporate veil. Keller argues that the corporate veil should not be pierced because it is clear from the facts of the case that, as an individual employed by Save All, he is distinct from the corporation.
8. Keller testified that he did not know whether Save All maintained corporate books. He stated that Save All never held any shareholder meetings nor did the corporation pay out dividends. Keller also testified that neither he nor his wife contributed any money to Save All when the corporation was formed.
9. Golden also seeks to hold Keller personally liable under U.C.C. § 3-403(2) for checks that he drew on Save All's account which were dishonored by Save All's bank. Golden had been delivering merchandise to Save All on credit on various occasions in 1990. Beginning in January of 1991 Golden required Save All to pay for its shipments on delivery by cash or check because Save All had violated its credit terms. At this point, Save All owed Golden approximately $163,219.29.
10. Keller gave Golden's drivers, on various deliveries, a series of twelve checks which he signed and were drawn on a corporate checking account maintained by Save All at Marine Midland Bank, N.A. ("Marine Midland"). The checks totaled $138,584.40. Eight checks totaling $86,836.11 were returned to Golden by Marine Midland because the account lacked sufficient funds. The bank returned four checks totaling $51,748.29 which were tendered by Keller in February, 1991, because Save All's account had already been closed. Golden presented these checks to its bank, Citibank, N.A., on April 24, 1991, more than thirty days after the checks were dated. Eileen Keller closed Save All's Marine Midland account on June 6, 1991.
11. Golden argues that Keller is personally liable for these dishonored checks under U.C.C. § 3-403(2) because he did not indicate that he was signing the instruments as a representative of Save All. Keller asserts that he is not personally liable as the maker of the checks because it was implicit in the course of conduct established between Golden and himself that liability would be imposed solely on the corporation. This course of conduct, Keller asserts, is an exception to U.C.C. § 3-403(2). Keller testified that it was understood between Valley Stream and himself that he signed Save All's checks in a representative capacity. This understanding, Keller argues, was carried over to Golden when Golden acquired Valley Stream.
12. Ira Gaffarian ("Gaffarian"), a salesman employed by Valley Stream and then by Golden, handled the Save All account for both distributorships. Gaffarian testified that both Valley Stream and Golden maintained an account on their books under the corporate name Save All. He further testified that at both Valley Stream and Golden, Save All was the customer and it was that it was understood between Keller and each distributorship that Keller would not be personally liable for Save All's obligations. Presently, Gaffarian works for a competitor of Golden.
13. Jeffrey Horn ("Horn"), formerly a credit manager at Golden, testified that Golden carried on its books an account under Save All's name and that no account existed under Keller's name. Horn also testified that there was no express agreement that Keller would not be personally liable for corporate checks. However, Horn acknowledged that he had no personal knowledge of the status of Save All's account during a large part of the relevant period of time because his responsibilities in the credit department expanded and he no longer directly supervised Save All's account. Horn is presently a vice president of Golden.
14. Keller asserted a counterclaim against Golden alleging that Golden committed a prima facie tort by maliciously serving a complaint on him in this action. The counterclaim was dismissed at the conclusion of the trial. Golden seeks to sanction Keller's attorney under Rule 11 of the Federal Rules of Civil Procedure for bringing a frivolous claim.
Golden cannot pierce Save All's corporate veil and hold Keller personally liable for Save All's debts. Courts are reluctant to overlook the corporate form and the burden of proof rests with the party seeking to disregard the formally incorporated entity. DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976); Establissement Tomis v. Shearson Hayden Stone, 459 F.Supp. 1355, 1365 (S.D.N.Y.1978); In re G & L Packing Co., Inc., 20 B.R. 789, 804, 805 (Bankr.N.D.N.Y.1982) aff'd, 41 B.R. 903 (N.D.N.Y.1984); Matter of Typhoon Industries, Inc., 6 B.R. 886, 890 (Bankr. E.D.N.Y.1980). Thus, in this case, Golden has the burden of showing that Save All's corporate veil should be pierced. Golden has failed to sustain this burden.
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