King v. National Industries, Inc.

• Decision Date: 06 March 1975
• Docket Number: No. 74-1625,74-1625
• Citation: 512 F.2d 29
• Parties: John L. KING, Trustee, Plaintiff-Appellant, v. NATIONAL INDUSTRIES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 29

512 F.2d 29

John L. KING, Trustee, Plaintiff-Appellant, v. NATIONAL INDUSTRIES, INC., Defendant-Appellee.

No. 74-1625.

United States Court of Appeals, Sixth Circuit.

March 6, 1975.

Linda N. Coffee, Philip Palmer, Jr., Dallas, Tex., Glenn L. Schilling, Louisville, Ky., for plaintiff-appellant.

Paul N. Kiel, Boyce F. Martin, Jr., Barnett, Greenebaum, Martin & McConnell, Louisville, Ky., for defendant-appellee.

Before MILLER and LIVELY, Circuit Judges, and McALLISTER, Senior Circuit Judge.

WILLIAM E. MILLER, Circuit Judge.

Plaintiff as a Trustee in Reorganization instituted the present action in the court below to set aside an alleged transfer of property by the debtor occurring within one year prior to the filing of a petition under Chapter X of the Bankruptcy Act. ¹ Summary judgment having been granted for defendant, plaintiff perfected an appeal to this Court.

The pertinent facts are undisputed and may be summarized as follows:

The Institute for Financial Planning, Incorporated (I.F.P.), a New YOrk Corporation, purchased from defendant, National Industries, Inc. (National), a Kentucky Corporation, and RIC International Industries, Inc. (RIC) certain shares of Hamilton Life Insurance Company of New York. At this time and until September 26, 1966, National was RIC's parent, owning 38.8% of RIC's common stock. In payment for the shares, I.F.P. issued two promissory notes, one payable to the order of RIC and one to the order of National. Both notes were guaranteed by one Phillip Goldberg who controlled I.F.P.

On September 26, 1966, pursuant to a purchase agreement between National and South Atlantic Co. (SAC), SAC acquired the 38.8% of the outstanding shares of the capital stock of RIC. Section 2.03 of Article II of the 1966 agreement reads as follows:

National shall be liable for 38.8 percent of any deficiency in the payment by Phillip Goldberg of his indebtedness to RIC.

Goldberg and I.F.P. subsequently defaulted in the payment of their obligations to National and RIC and a judgment against Goldberg was entered in the Supreme Court of New York in favor of National in the amount of $754,604.58 and in favor of RIC in the amount of $596,458.20. Efforts to collect on these judgments were unsuccessful.

On May 27, 1970, National, SAC and RIC executed an agreement which, in pertinent part, provided:

National, coincident with the execution of this Agreement, shall pay to RIC the sum of $110,000 as settlement and in full payment and satisfaction of all obligations of National to SAC and/or to RIC arising out of said Agreement of September 26, 1966, above described, and out of the transactions set forth in such agreement, and National shall have no further liability or obligation to SAC or RIC whatsoever with respect to such agreement and transactions.

Pursuant to this agreement, National gave its check to RIC for $110,000.00 in satisfaction of the settlement. ²

On September 16, 1970 RIC filed a voluntary petition for reorganization under Chapter X of the Bankruptcy Act. The present action was commenced on September 15, 1972 by the plaintiff as Trustee in Reorganization of RIC. The gravaman of plaintiff's complaint is that the release by RIC of National from the balance of its guaranty obligation as evidenced by the 1970 agreement constituted a transfer of property belonging to RIC under the 1966 agreement within one year of prior to the filing of the Chapter X petition, without fair consideration and while RIC was insolvent. Plaintiff thus claimed that the said release or transfer is voidable under 67d and 70e of the Bankruptcy Act. ³ The complaint sought judgment setting aside or voiding the release and granting the plaintiff a recovery on National's guaranty.

On November 15, 1973, defendant National moved, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure to dismiss plaintiff's complaint for failure to state a claim upon which relief could be granted. This motion was accompanied by an affidavit of National's vice president, Solomon, who had executed the 1966 agreement and the 1970 agreement on its behalf. ⁴ This affidavit stated that Section 2.03 of the 1966 agreement was included "in order to provide SAC with a reduction in its purchase price of RIC as a result of a possible reduction in value of the RIC stock resulting from a potential failure by Goldberg to pay his indebtedness to RIC" and that "(t)he liability of National under Section 2.03 was an obligation to run only to SAC and existed solely for the purpose of protecting SAC's investment in the RIC shares to the extent indicated and for no other reason."

In the course of extensive briefing of the question and in response to the Solomon affidavit, plaintiff submitted the affidavit of his lawyer, Phillip I. Palmer, Jr. This affidavit stated that while plaintiff was unable at that time to offer countervailing affidavits from persons having personal knowledge of the circumstances surrounding the execution of the 1966 agreement, he could point to evidence which would be available to him at trial to support his position. This evidence was to show that 38.8% of the Goldberg debt was approved by RIC's accountants to be carried as an asset on RIC's books, and perhaps that this was done after consultation with National. Palmer explained his failure to obtain depositions or affidavits by stating that he was surprised at the position taken by National.

After the trial court had granted summary judgment for the defendant, plaintiff filed a motion to reconsider the entry of summary judgment and alternatively for leave to file amended pleadings. With this motion was submitted a supplemental affidavit of plaintiff's attorney further outlining his efforts to obtain affidavits to rebut the Solomon affidavit. This motion was denied by the district court.

To prevail in the present case plaintiff must show that there was a "transfer" of certain "property" of RIC. This requirement of the Bankruptcy Act has as its purpose the preclusion of fraudulent conveyances of property of an insolvent debtor to the prejudice of the debtor's creditors.

The Act defines a transfer as

the sale and every other and different mode, direct or indirect, of disposing of or of parting with property or with an interest therein or with the possession thereof or of fixing a lien upon property or upon an interest therein, absolutely or conditionally, voluntarily or involuntarily, by or without judicial proceedings, as a conveyance, sale, assignment, payment, pledge, mortgage, lien, encumbrance, gift, security, or otherwise; the retention of a security title to property delivered to a debtor shall be deemed a transfer suffered by such debtor. 11 U.S.C. § 1(30).

To satisfy this definition plaintiff attempts to show that RIC is a third-party beneficiary entitled to sue under Section 2.03 of the 1966 agreement. It is thus theorized that the 1970 agreement, by relieving defendant of part of an obligation to RIC under the 1966 agreement, in effect "transferred property" or a cause of action from RIC to defendant by cancelling a possible indebtedness without fair consideration. Unless RIC is a third-party beneficiary, under the 1966 agreement plaintiff is unable to show that the transaction in question transferred any property to defendant National.

Plaintiff was required to show that the 1966 agreement was for the "direct benefit" of RIC before he could claim any rights under it. As the Supreme Court recognized in German Alliance Insurance Co. v. Home Water Supply Co., 226 U.S. 220, 230, 33 S.Ct. 32, 35, 57 L.Ed. 195 (1912):

(E)ven where the right is most liberally granted it is recognized as an exception to the general principle, which proceeds on the legal and natural presumption, that a contract is only intended for the benefit of those who made it. Before a stranger can avail himself of the exceptional privilege of suing for a breach of an agreement to which he is not a party, he must, at least, show that it was intended for his direct benefit.

This view has been generally endorsed by the leading commentators. See, e. g., 2 S. Williston, Contracts, § 356A at 836 (3d ed. 1959), 4 A. Corbin, Contracts, § 773 at 4 (1951).

It clearly represents the law of Kentucky: ⁵

Louisville & Nashville R. R. v. Dry Branch Coal Co., 252 Ky. 124, 65 S.W.2d 1008, 1011 (1933). DC The Kentucky courts have further held that "(i)t must appear, in order that a third person may derive a benefit from a contract between two other parties, that the contract was made and entered into directly or primarily for the benefit of such third person." Long v. Reiss, 290 Ky. 198, 160 S.W.2d 668, 674 (1942).

To determine whether the presumption that the contracting parties did not intend to benefit a third party has been overcome, we must look first to the 1966 agreement itself. An examination of the agreement reveals no indication of an intent on the part of the promisee (SAC) to benefit RIC. A contrary intention is indicated by Section 7.02 of the agreement which provides that "(t)he terms, provisions and conditions of this agreement shall bind and benefit the parties hereto and their respective successors, legal representatives and assigns," making no reference to RIC.

It would require a strained interpretation of contractual languade to support a finding that SAC intended to benefit RIC. It has been stated that such an

attempt by a third party to become a beneficiary by strained and unusual interpretation, expanding the terms of the promise and increasing the extent of the promised performance, should always fail. Such third persons are not even "incidental" beneficiaries; they are merely "would-be" beneficiaries.

4 A. Corbin, Contracts, § 779C at 42 (1951) citing Kentucky Rock Asphalt Co. v. Fidelity and Casualty...