In re Lea Fabrics, Inc., B-50-59.

• Decision Date: 29 January 1964
• Docket Number: No. B-50-59.,B-50-59.
• Citation: 226 F. Supp. 232
• Parties: In the Matter of LEA FABRICS, INC., a corporation of the State of Delaware, Bankrupt.
• Court: U.S. District Court — District of New Jersey

226 F. Supp. 232

In the Matter of LEA FABRICS, INC., a corporation of the State of Delaware, Bankrupt.

No. B-50-59.

United States District Court D. New Jersey.

January 29, 1964.

Samuel M. Coombs, Jr., Stanley Weiss, Furst, Furst & Feldman, by George Furst, Newark, N. J., for Max Mehler, Trustee.

Kleinberg, Moroney & Masterson, by James E. Masterson, Newark, N. J., for Ardisco, Ltd.

WORTENDYKE, District Judge.

This case is before the Court at this time on the respective cross-petitions by (1) Ardisco, Ltd., a turn-over claimant of proceeds of Receiver's sale of bankrupt's assets covered by claimant's chattel mortgages, and (2) bankrupt's Trustee, both for review of the Referee's order of June 28, 1963. That order denied the turn-over claim of Ardisco, directed Ardisco to repay to the Trustee, with interest, $75,000.00 previously paid to Ardisco out of the proceeds of the Receiver's sale, and denied certain relief sought by the Trustee in his counterclaim against Ardisco. Lea Fabrics, Inc., a Delaware corporation, having its principal place of business in New Jersey, was adjudicated a bankrupt and Max Mehler, Esq.,¹ was appointed and qualified as its Trustee on February 18, 1960.

The Referee's Findings of Fact and Conclusions of Law are quoted at length in Appendix A-I, hereto attached.

The Trustee contended before the Referee that (1) the transfer of bankrupt's collateral to Ardisco was null and void under N.J.S.A. 14:14-2; (2) the transfer of said collateral was fraudulent because made with actual intent to hinder, delay and defraud present and future creditors of the bankrupt, for an inadequate consideration, at a time when the bankrupt was insolvent, and left Lea with an inadequate capital with which to continue in business; (3) Ardisco, Reldan and Stratford were participants in and beneficiaries of the transfer of collateral which involved breaches of duty owed by the officers, directors and controlling stockholders of the bankrupt to the bankrupt and to its creditors and by the bankrupt to its creditors.

Ardisco contended before the Referee that (1) its loan transaction with the bankrupt did not violate the provisions of N.J.S.A. 14:14-2²; (2) there was a failure of proof that the bankrupt was insolvent when the loan was made; (3) the evidence failed to show that Ardisco was not a bona fide purchaser for value without notice of bankrupt's insolvency; (4) the transfers of collateral were not shown to have been fraudulent; (5) there was no evidence of Ardisco's participation in any wrong-doing; and (6) Ardisco's claim to the proceeds of the sale of the pledged assets of Lea is supported by the preponderance of the evidence.

The Trustee here seeks review of so much of the Referee's order of June 28, 1963 as denies the relief sought in his counterclaim, which seeks, inter alia, to void the transfers to Ardisco under N.J.S.A. 14:14-2, upon the following grounds: (a) the denial of such relief is inconsistent with the Referee's conclusion that the transfer of Lea's collateral having a situs in New Jersey to Ardisco on May 31, 1957 is void; (b) the Referee erroneously concluded that N.J.S.A. 14:14-2 must be limited to collateral having a situs in New Jersey; (c) even if New Jersey law is not applicable to a portion of the collateral assigned, a determination should have been made as to the propriety of the transaction under other applicable law; and (d) the Referee erroneously concluded that the pleadings did not encompass the Trustee's contentions that the transfer of collateral was (1) fraudulent and (2) violative of the fiduciary obligations owed by the officers, directors and controlling stockholders of Lea to Lea and its creditors and by Lea to its creditors.

Lea Fabrics, although incorporated in the State of Delaware in 1925, had from its inception conducted its business at and from its only plant at 768 Frelinghuysen Avenue, Newark, New Jersey. It conducted all of its manufacturing, purchasing, sales, research and development, office work and record keeping at that plant. Until the Ardisco "loan closing" in New York City, Lea did its banking with National Newark and Essex Banking Company in Newark; but, at the conclusion of the "closing" Lea opened an account in the New York Trust Company in New York City, in which it deposited the check which it took away from that "closing." A few days later Lea transferred most of that balance to the Newark bank to meet a charged overdraft on that account. The written agreement of May 31, 1957 (Appendix A-II) which sets forth the terms and conditions of the Ardisco "loan" provided that New York law should govern the transaction. It was the contention of the Trustee before the Referee, and before this Court that Lea's intangibles had a situs in New Jersey; that their disposition upon insolvency is subject to New Jersey law in any event, and that no other State has such an interest in the transaction here questioned as would preclude the application of New Jersey law thereto.

On May 31, 1957, Lea transferred the following collateral to Ardisco, which allegedly has realized the indicated respective amounts thereon:

                Chattel mortgage on machinery and equipment
                    at the Newark plant                                  $132,565.83
                Limited license rights to distribute
                    179 Lantz cartoons                                    350,000.00
                Receivables under contracts to exhibit
                    those cartoons                                        119,645.91
                Storm-Vulcan chattel and realty mortgages
                    securing indebtedness to Lea                          110,000.00
                Second realty mortgage on Lea's Newark plant             (No equity)
                Second preferred maritime mortgage on
                    S.S. HAROLD D. WHITEHEAD                             (No value)
                

The Trustee contends, and we believe with propriety, that the license rights in the Lantz cartoons, with their related accounts receivable, the Storm-Vulcan indebtedness to Lea, which was secured by chattel and realty mortgages, the second mortgage on the plant and the maritime mortgage, were intangible assets of the bankrupt, available to its creditors if transferred in violation of N.J.S.A. 14:14-2. The Trustee is apparently seeking the recovery of these intangible assets in his status as an ideal lien creditor under § 70, sub. c of the Bankruptcy Act, 11 U.S.C. § 110, sub. c. Under this section, the Trustee's status as an ideal creditor is created by the Federal statute, but state law determines what such a creditor is entitled to receive, In re Kravitz, 3 Cir. 1960, 278 F.2d 820; In re Consorto Construction Co., 3 Cir. 1954, 212 F.2d 676. In so looking to state law in the present case, the problem is one of a choice of applying New Jersey or New York law (the latter because of the stipulation in the loan agreement). In making such a choice of law, the question is whether this court should follow a Federal conflicts of law rule in applying the Bankruptcy Act or, as in diversity cases, the conflicts rule of the state. See 4 Collier on Bankruptcy, Para. 70.49, p. 1419; cf. In re Rosen, 3 Cir. 1946, 157 F.2d 997, 998-999, cert. den. Fisch v. Standard Factors Corp., 1946, 330 U.S. 835, 67 S.Ct. 972, 91 L.Ed. 1282. In the present case, the problem is academic because there appears to be no difference between the choice of law rules under Federal or New Jersey authorities.

Putting aside for the moment the stipulation in the loan agreement that New York law would control, the issue is what law governs the validity as to third parties of assignments and transfers of intangibles.³ This question cannot be decided on the basis of the situs of the property, as it can be with tangible movables, Restatement Conflict of Laws, § 257, because such intangibles do not have a physical situs, Ehrenzweig on Conflict of Laws, 1962, pp. 635-636. (The question of the situs of intangibles for the purpose of determining the jurisdiction of a court over them, Restatement Conflict of Laws § 51, Comment b, Harris v. Balk, 1905, 198 U.S. 215, 25 S.Ct. 625, 49 L.Ed. 1023, is not relevant to the choice of law question. Clearly the Bankruptcy Court had jurisdiction over the intangible collateral by virtue of the presence of both Lea and Ardisco before it.) Although the validity of an assignment of intangibles between the assignor and assignee would be governed by the law of the place of the assignment, Callwood v. Virgin Islands National Bank, 3 Cir. 1955, 221 F.2d 770, such a choice of law rule is inappropriate to the determination of the validity of the assignment as to creditors of the assignor or assignee, and the choice of law in such a case depends upon an analysis of each particular situation, Ehrenzweig on Conflict of Laws, 1962, § 242, pp. 636-637.

In the present case, Lea Fabrics from its incorporation, under Delaware law, conducted all its business at and from its only plant in New Jersey. It conducted all of its manufacturing, purchasing and sales from that plant where all of its machinery, equipment, inventory, offices and business records were located. All of its banking business was done in Newark (with the exception of the one temporary account opened in New York in connection with the Ardisco closing). As argued by the Trustee, Lea Fabrics' creditors, in doing business with Lea, would undoubtedly and reasonably assume that they would be subject to and protected by the laws of the State of New Jersey and no other state. Consequently, the law which should be applied to the validity of the assignment of the intangible collateral to Ardisco is that of New Jersey, and N.J.S.A. 14:14-2 therefore governs the validity of the transfer of these intangibles on May 31, 1957. Irving Trust Co. v. Maryland Casualty Co., 2 Cir. 1936, 83 F.2d 168; G. P. Farmer Coal & Supply Co. v. Albright, Ch. 1919, 90 N.J.Eq. 132, 137-138, 106 A. 545. There is no question that R.S. 14:14-2 governs the transfer of both tangible and intangible assets of a corporation, Sokol v. Fidelity...