In re Pearl-Wick Corp., 81 Civ. 7017 (RWS).
| Decision Date | 22 February 1982 |
| Docket Number | No. 81 Civ. 7017 (RWS).,81 Civ. 7017 (RWS). |
| Citation | 26 BR 604 |
| Parties | In re PEARL-WICK CORPORATION, Debtor. PEARL-WICK CORPORATION, Plaintiff-Appellee, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant-Appellee. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant and Interpleading Plaintiff-Appellee, v. SUSWOL HOLDING CORPORATION and Masada Industries, Inc., Interpleaded Defendants-Appellees, and Sandra Rand, Carol Sussberg, Careal Realty Co., Inc., Sandra Rand, as Custodian of Stacey Wolfe, Sandra Rand, as Custodian for Even Wolfe, Sherri Wolfe, Lawrence Sussberg, Ronald Sussberg, Milton Sussberg and Gleitsman's Inc., Interpleaded Defendants-Appellants. |
| Court | U.S. District Court — Southern District of New York |
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Angel & Frankel, P.C., New York City, for plaintiff-appellee; Joshua J. Angel, Bruce Frankel, Eric S. Brown, New York City, of counsel.
Shapiro, Shiff, Billy, Rosenberg & Fox, New York City, for interpleaded defendants-appellants; Abraham L. Shapiro, Roy Karlin, New York City, of counsel.
Certain preferred shareholders1 (the "preferred shareholders" or the "interpleaded defendants") of Suswol Holding Corporation ("Suswol") have appealed from an order filed October 30, 1981 by the Honorable Burton R. Lifland and have moved for summary judgment directing John Hancock Mutual Life Insurance Company ("Hancock") to pay over to Suswol the $500,000 proceeds of a life insurance policy. The preferred shareholders seek the proceeds as does the trustee in bankruptcy of the Pearl-Wick Corporation ("Pearl-Wick"), the named beneficiary of the policy. The facts set forth below raise the question whether or not an equitable assignment of the policy was effected. Judge Lifland held that no assignment took place, and his decision is affirmed, 15 B.R. 143 (Bkrtcy.1981), despite seeming equities in favor of the interpleaded defendants.
No issue has been raised with respect to the following facts. In 1964 Hancock issued an insurance policy in the face amount of $500,000 on the life of Darwin R. Sussberg, a director and officer of Pearl-Wick. During 1977, Pearl-Wick was indebted to Bankers Trust Co. ("Bankers") in the approximate amount of $118,000. This debt was secured by an assignment of the policy and, in 1977 was satisfied by at least two cash loans against the policy. In 1977 Suswol held all the outstanding stock of Pearl-Wick and on April 15 of that year a stock purchase agreement ("the agreement") was entered into between Suswol, its shareholders and Masada, pursuant to which Masada acquired from the Suswol stockholders the common stock of Suswol in exchange for cash, notes and certain cumulative preferred stock of Suswol to be issued pursuant to the agreement. The individual parties to this appeal are the interpleaded defendants, those who hold the preferred shares of Suswol issued pursuant to the agreement.
The clause in the agreement which gives rise to the claim of the interpleaded defendants is as follows:
No further formal action was taken pursuant to this clause by Masada, Suswol or Pearl-Wick and none of the parties to the agreement sought to have any formal assignments made or change of beneficiary form executed. On January 23, 1980 Sussberg died. The interpleaded defendants filed a notice of claim with Hancock on May 7, 1980, and on January 7, 1981 initiated an action in the Supreme Court of the State of New York, County of New York. Hancock served a counterclaim, interpleading Pearl-Wick, Suswol and Masada. On February 9, 1981 Pearl-Wick filed a voluntary petition under Chapter 11 and started proceedings to recover the proceeds of the policy. The claims of the Pearl-Wick creditors and the rights of the defendants under the agreement both exceeded the proceeds of the policy.
The interpleaded defendants seek to enforce this agreement maintaining that the intention of the parties to the agreement was clearly expressed and that therefore the agreement served to constitute an equitable assignment of the proceeds of the policy effective in 1977 thereby removing the proceeds from the reach of Pearl-Wick and consequently the trustee in bankruptcy. Pearl-Wick seeks to enforce its rights as the designated beneficiary under the policy.
New York law applies as to the efficacy of the purported transfer. See generally Strubbe v. Sonnenschein, 299 F.2d 185 (2d Cir.1962); G.A. Thompson & Co. v. Wendell J. Miller Mortg. Co., 457 F.Supp. 996 (S.D.N.Y.1978); Restatement (Second) of Conflict of Laws § 208 (1971); 97 A.L.R.2d § 1399 (1964).
The first issue is whether, as the interpleaded defendants claim, Masada could exercise dominion over the policy by allegedly changing the beneficiary under the policy and by giving the interpleaded defendants an equitable lien over it. Generally under New York law a corporation's property rights are entirely separate and distinct from those of its shareholders. Boise Cascade Corp. v. Wheeler, 419 F.Supp. 98, 101-02 (S.D.N.Y.1976), aff'd without opinion, 556 F.2d 554 (2d Cir.1977); Connecticut General Life Ins. Co. v. Superintendent of Ins., 10 N.Y.2d 42, 50, 217 N.Y.S.2d 39, 43-44, 176 N.E.2d 63, 67 (1961); People v. American Bell Tel. Co., 117 N.Y. 241, 251-57, 22 N.E. 1057 (1889). Even complete ownership of all outstanding stock of a corporation is not the equivalent of the ownership of a subsidiary's property or assets. In re Beck Industries, Inc., 479 F.2d 410, 415 (2d Cir.), cert. denied, 414 U.S. 858, 94 S.Ct. 163, 38 L.Ed.2d 108 (1973); Torrey Delivery, Inc. v. Chautauqua Truck Sales & Service, Inc., 47 A.D.2d 279, 366 N.Y.S.2d 506, 510 (4th Dep't 1975), quoting, Brock v. Poor, 216 N.Y. 387, 401, 111 N.E. 229 (1915).
Citing Zurlin v. Hotel Levitt, Inc., 5 A.D.2d 945, 172 N.Y.S.2d 427 (3d Dep't 1958), the interpleaded defendants contend that Masada in the agreement with these defendants could, without restriction, transfer or assign the policy to Suswol and a collateral security interest to the interpleaded defendants. In Zurlin a sister bought out her brother's share in their jointly owned corporation thus becoming the sole shareholder. The purchase was consumated with a corporation bond secured by a properly executed mortgage on the corporation's property. Although the mortgage was given without consideration to the corporation and would thus under normal circumstances be an ultra vires act the court held that the sister could complete such an act and that the corporation could not challenge the transfer.
While ordinarily such a defense would be available, here the mortgage was consented to and executed by the sole stockholder. No rights of then existing creditors were involved. The sole stockholder was the equitable owner of the corporate property, and, under the undisputed circumstances present here, was free to dispose of or encumber it as she saw fit.
5 A.D.2d at 946, 172 N.Y.S.2d at 429. See also Field v. Lew, 184 F.Supp. 23, 27 (E.D.N.Y.1960); Pine v. Hyed Realty Corp., 145 N.Y.S.2d 548, 549 (Sup.Ct.1955), aff'd, 1 A.D.2d 952, 151 N.Y.S.2d 610 (1st Dep't 1956). Katsoris v. Durham House, Inc., 280 A.D. 718, 721, 117 N.Y.S.2d 156, 159 (3d Dep't 1953). For such a transfer to be validly ratified, however, the transfer cannot impair the rights of then existing creditors. Zurlin v. Hotel Levitt, Inc., 5 A.D.2d at 946, 172 N.Y.S.2d at 429; Pine v. Hyed Realty Corp., 145 N.Y.S.2d at 549; cf: Ward v. City Trust Co., 192 N.Y. 61, 84 N.E. 585 (1908); E. Moch Co. v. Security Bank, 176 A.D. 842, 848-49, 163 N.Y.S. 277, 282 (1st Dep't 1917), aff'd, 225 N.Y. 723, 122 N.E. 879 (1919), Martindale v. DeKay, 101 Misc. 728, 166 N.Y.S. 405, 407-08 (Sup.Ct.), aff'd, 180 A.D. 926, 167 N.Y.S. 1113 (1917), aff'd, 224 N.Y. 585, 120 N.E. 869 (1918). Modern New York law limits distributions if the corporation is insolvent or if the distribution would render the corporation insolvent. N.Y.Bus.Corp.Law §§ 510, 203.
Financial information on the record for Pearl-Wick is limited to financial statements of Suswol dated June 30, 1976 including separate accounts for Pearl-Wick. The balance sheet figures do not reflect intercompany transfers. Naturally these reports do not reflect the complete financial status of Pearl-Wick on the date of the closing of the agreement. The balance sheet, however, indicates a substantial stockholder equity deficit for Pearl-Wick. Were this the case any transfers by the "sole shareholders" were improper since Pearl-Wick's solvency was doubtful at that time and creditors can effectively challenge the "ratification" of the transfers by Masada. Consequently it appears that the interpleaded defendants' contention that assignments to Suswol and the interpleaded defendants were ratified by the "sole shareholders" of Pearl-Wick has not been proven and appears, at this point, without merit. Contrary to the interpleaded defendants' assertions, Pearl-Wick cannot be deemed to have made a transfer of its property as against its creditors so that summary...
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