In re Vaniman Intern., Inc.

Decision Date13 July 1982
Docket NumberBankruptcy No. 180-03984-21,Adv. No. 180-0731-21.
PartiesIn re VANIMAN INTERNATIONAL, INC., Debtor. Joseph T. PIRRONE and James A. Martin, Plaintiffs, v. Leonard TOBOROFF, as Trustee of the Estate of Vaniman International, Inc., Debtor, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of New York

COPYRIGHT MATERIAL OMITTED

Pinks & Feldman, Melville, N.Y., for plaintiffs; Bernard S. Feldman, Melville, N.Y., of counsel.

Chester B. Salomon, New York City, for Trustee of the Estate of Vaniman International, Inc.

OPINION

CECELIA H. GOETZ, Bankruptcy Judge:

In this proceeding, the plaintiffs, Joseph T. Pirrone and James A. Martin, are seeking recognition of the validity of a mortgage held on realty formerly belonging to the debtor, Vaniman International, Inc. ("Vaniman"), claimed by Vaniman's trustee in bankruptcy to be voidable as a fraudulent conveyance and as a preference. On similar grounds the trustee challenges the transfer to them of certain life insurance policies. In addition, the trustee seeks to recover $35,000 from the plaintiffs as disbursed by them in breach of their fiduciary duty to the debtor corporation when the plaintiffs were in control of that corporation.

When Vaniman filed its voluntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., on July 11, 1980, a mortgage foreclosure proceeding brought by the plaintiffs in the Supreme Court of the State of New York, County of Suffolk, was automatically stayed under § 362(a) of the Code, 11 U.S.C. § 362(a). This proceeding was initiated by plaintiffs on September 9, 1980 to lift that stay so that they might proceed with their foreclosure proceeding. Alternatively, plaintiffs sought an order directing Vaniman to surrender possession of the real property, or an order under § 361, 11 U.S.C. § 361, for adequate protection in the event Vaniman was permitted to continue using this property.

On September 24, 1980, Vaniman served an answer and counterclaims which were adopted and expanded by Leonard Toboroff, trustee of the estate of Vaniman, subsequent to the conversion of Vaniman's bankruptcy proceeding to Chapter 7. 11 U.S.C. § 701 et seq. In essence, the counterclaims assert that the creation of the mortgage and the transfer to the plaintiffs of certain life insurance policies constitute a fraudulent conveyance which the trustee can avoid under §§ 544(a) and (b), and 548 of the Bankruptcy Code; that the transfers of the life insurance policies were preferences which the trustee can avoid under § 547 of the Bankruptcy Code; and that certain payments of monies by Vaniman in 1976 to an employee of Ford Motor Company-Export Division constituted a breach of the plaintiffs' fiduciary duty to Vaniman, for which they are liable to the trustee under § 541(a)(1) of the Bankruptcy Code and New York Business Corporation Law § 720(b).

On February 24, 1981, the property covered by the plaintiffs' mortgage was sold through the bankruptcy court with liens to attach to the proceeds, mooting plaintiffs' complaint insofar as it seeks relief from stay and converting it to a claim to a right to a portion of the proceeds of such sale now in the possession of the trustee.

At the close of the trial, the trustee moved to conform the pleadings to the proof, a motion which the Court has granted.

FINDINGS OF FACT
A. Description of Vaniman

1. Vaniman is a New York corporation, organized in 1953, which specialized in the manufacture, installation, and repair of truck bodies and related equipment (PXs-1-3; 53, 459). Its business was located at 30 Central Avenue, Farmingdale, New York (61).1

2. Joseph T. Pirrone joined Vaniman in 1956 after eleven years of employment in the Export Division of General Motors Corporation (289, 961, 993-94). At Vaniman, he was in charge of sales (288). The area of specialization of the plaintiff, James A. Martin ("James Martin" or "Martin"), was finance (198).

3. From 1970 to September 4, 1979, Joseph T. Pirrone and Martin held a majority of the outstanding stock of Vaniman (57-58) and on September 4, 1979 owned all the corporation's stock (60, 346). From January 1, 1977 to September 4, 1979, Joseph T. Pirrone was President of Vaniman and Martin was its Executive Vice President (58-59). From January, 1977 to September 4, 1979, the directors of Vaniman were Pirrone, Martin, and three other men, two of whom ceased being directors sometime prior to September 4, 1979 (59-60). Although Pirrone ceased to be President of Vaniman on September 4, 1979, he continued to be an officer of that company until sometime in 1980 (361).

4. Pirrone has known Martin since 1955, and they have been partners in Vaniman since the late 1950s (196). Between 1975 and September 4, 1979, Pirrone discussed with Martin major policy issues, advised him of large orders, and Martin, in some instances, assisted Pirrone in arriving at the prices that Vaniman quoted for jobs (197-98). Martin and Pirrone shared responsibility for the operations of Vaniman's business: Martin had an "equal say-so" with Pirrone (198). When a large piece of equipment would be required, Pirrone consulted with Martin before undertaking the commitment (198-99). On matters of importance, there was an understanding between them that there would be agreement before the corporation would undertake a particular course of action (199).

5. Although Martin, unlike Pirrone, was not present at the premises of Vaniman on a daily basis, going there only 30 or 40 times per year prior to the sale of his stock on September 4, 1979 (1230-31), Martin, up to that date, was equally responsible with Pirrone for the operation of the business of Vaniman.

B. 1975-1978

6. In 1975-76, Pirrone, as an officer of Vaniman, negotiated with the Ford Motor Company-Export Division for a contract to install truck bodies on a shipment of 680 vehicles intended for the Nigerian Army (214, 300-302). After Vaniman submitted a bid of $2,390 per vehicle (302), which would have yielded a profit of $378-$380 per vehicle (304), or about $260,000 in all (214, 304), the general manager of the Ford Division, Michael Colletti, requested Pirrone to meet him in Fort Lauderdale, Florida (307-310). At that meeting, Colletti told Pirrone that Vaniman would not receive the order unless it paid Colletti a "commission" of $100 per truck (214-15, 313-15).

7. Present also at the meeting with Colletti and Pirrone was the President of Aacon Contracting Co. which Colletti suggested carry out the actual work required to complete the contract (312).

8. Pirrone objected to payment of the commission, but Colletti made it plain that otherwise Vaniman would lose the contract (314-15). On Pirrone's return from Florida, he advised Martin of Colletti's demand, and Martin, although he was not pleased, authorized the transaction (225-33).

9. Vaniman was awarded the Ford contract in November, 1975, eight weeks after the Florida meeting (316). It was the largest order in Vaniman's two-decade history, amounting to $1,625,000 (214, 318, 1204).

10. During the months of September, October, and December, 1976, Vaniman, at the direction of Colletti, paid $35,000 in four or five checks to CP&T Sales Co., a corporation designated by Colletti to receive the agreed-upon commission (216-17, 236-39, 320; Ex. L). Pirrone made the payments until he was told by Colletti to stop because a problem had developed (319-23).

11. Vaniman itself did no work on the contract. The work was performed by Aacon Contracting Co. Vaniman's role was evidently limited to checking daily on the progress of the work so that it could bill for it (316), as the following colloquy established: "THE COURT: * * * You did absolutely nothing more than collect the money? THE WITNESS James Martin: That was the delightful part of it." (1234).

12. As a result of the Ford contract, Vaniman realized a profit of $220,000 in 1976 (325, 382-83, 385). Its total net income for that year was $50,580.55 (383) on gross sales of $2,877,605.39, of which the Ford order represented more than 50 percent (381-82).

13. There is no evidence that Martin or Pirrone received any benefit from the payments made by Vaniman to CP&T Sales Co., nor that either derived any personal benefit directly or indirectly from the Ford contract, except in their capacity as stockholders of the Vaniman corporation. But for the money collected from Ford in connection with Colletti's misconduct, Vaniman would have operated at a loss, indicating that its regular operations were no longer profitable.

14. 1976, the year of the Ford order, was the last year on which Vaniman showed a profit. Neither that year, nor in any subsequent year, was any money spent by Vaniman for new equipment (DXs-A, C, D, L).

C. 1977-78

15. The American automobile industry began declining some time in the 1970s along with the economy, and Vaniman's sales reflected the difficult time the industry was experiencing (63-64).

16. During 1977, Vaniman lost $92,000 on sales of nearly $1.4-million (Schedule 3 to DX-A). At the close of that year, its current liabilities exceeded its current assets by over $100,000 (DX-A, at schedules 1, 2).

17. In 1978, Pirrone requested a real estate expert to place a value on Vaniman's realty and received a letter dated March 1, 1978 from William E. Greiner of the firm of Greiner Maltz Co., Inc., a real estate broker, which appraised the property in which Vaniman carried on its business — the building and the plot on which it was located — as having a current market value "for a truck repair operation" of $380,000 (DX-A). John T. Brady included this letter in Vaniman's financial statement for 1977 which showed $380,000 as the market value of the Vaniman realty (DX-A, at Schedule 1).

18. On May 16, 1978, when Vaniman applied to the Farmingdale branch of the Hempstead Bank for credit, that bank, after examining Vaniman's financial statements, refused to lend it money without collateral. In order...

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