Leventhal v. Spillman

• Decision Date: 29 September 1964
• Docket Number: No. 60 C 899.,60 C 899.
• Citation: 234 F. Supp. 207
• Parties: Leonard S. LEVENTHAL, Trustee in Bankruptcy of the Estate of Robert Spillman, Bankrupt, Plaintiff, v. Robert SPILLMAN, Selma Spillman and Safe-Tee Banisters, Ltd., Defendants.
• Court: U.S. District Court — Eastern District of New York

234 F. Supp. 207

Leonard S. LEVENTHAL, Trustee in Bankruptcy of the Estate of Robert Spillman, Bankrupt, Plaintiff, v. Robert SPILLMAN, Selma Spillman and Safe-Tee Banisters, Ltd., Defendants.

No. 60 C 899.

United States District Court E. D. New York.

September 29, 1964.

Solomon B. Terkeltoub, New York City, for plaintiff.

Eli Wager, Mineola, N. Y., for defendants.

DOOLING, District Judge.

The plaintiff trustee in bankruptcy sues to set aside as fraudulent the bankrupt's conveyance in bulk to a newly formed corporation, all the stock of which was acquired by his wife, of all his business assets in return for the corporation's agreement to pay the bankrupt's business debts but none of the bankrupt's numerous other creditors. The principal defenses are that the conveyance as a bulk "sale" was perfected in compliance with the Bulk Sales Act (former New York Personal Property Law, McKinney's Consol.Laws, c. 41, § 44) and that the transfer was not fraudulent in fact (as required by New York Debtor and Creditor Law, McKinney's Consol.Laws, c. 12, § 276) but, at worst, simply preferential of one class of creditors and unassailable because consummated more than four months before bankruptcy. It is concluded that the transfer was a fraudulent conveyance under Section 276 of the New York Debtor and Creditor Law and must be set aside.

The facts, separately found, disclose that in February 1956 the bankrupt was deeply insolvent. He was then in the business of making and selling ornamental railings; his business had shown a loss in 1955 of about $13,000 after deducting the bankrupt's "drawings" of $6,300, but his insolvency had arisen mainly from a dissociated and calamitous promotional venture. The ornamental railing business seemed worth saving and so a plan was developed among the bankrupt, his wife, and a committee of the creditors of the railing business to perpetuate that business for their benefit to the exclusion of the remaining creditors.

The plan was boldly simple. The bankrupt in February 1956 transferred all the assets of his railing business to a newly formed corporation in exchange for its promise to pay the $12,400 of the bankrupt's business debts at the rate of ten percent a month, starting December 1, 1956, and to pay, in addition, the bankrupt's withholding tax liabilities. The total indebtedness of the bankrupt at the time was about $125,000.

The transferee corporation had no assets other than those received from the bankrupt except $2,500 which the bankrupt's wife borrowed to put into it. The bankrupt's wife lent $2,000 of the borrowed money to the new company and, with the remaining $500, acquired all its capital stock. The consent of the business creditors to the transfer and to the deferment of their debts was conditioned on the payment of the $2,500 into the new company by the bankrupt's wife.

The transfer was a bulk sale and the new company complied with the Bulk Sales Act, former New York Personal Property Law, § 44. The new company gave advance notice of the sale to all the bankrupt's creditors and disclosed in the notice the terms of the proposed sale, giving the names and the amounts of the claims of the relatively few creditors who were being promised payment.

The bankrupt and his wife both were directors of the new company from its inception. The bankrupt's wife became its president; the bankrupt worked for it as a salesman. Husband and wife were each paid $75 weekly as salary. Starting in March 1956, the bankrupt's wife commenced repaying the loan of $2,500 at the rate of $100 a month; the funds to do so were derived from the salary the new company paid her. A part of the wife's salary was also used to maintain the couple's home; the indication of the evidence is that the couple's salaries from the new company were the support of their home.

Later on the new company by negotiation with the business creditors substantially scaled down its liability on the assumption of the bankrupt's debts. Meanwhile, in the balance of the year 1956 the new company about broke even in the railing business, after paying $7,850 in salary to the bankrupt and his wife. There is no indication in the evidence of how the new company fared later.

The evidence is not adequate to support any definite finding about the value of the property transferred to the new company or the total enterprise value that the business represented viewed not as properties only but as a going concern. The book value of the properties (with the tangibles at cost before depreciation) was about $11,300 but that figure excludes any values for good will, trade names and marks, and going concern value, and no evidence of their value was presented. The evidence of record, in consequence, does not establish that the assumption of the business debts by the new company was not a fair consideration.

The compliance with the Bulk Sales Act is quite beside the point of the action. The conveyance is challenged as a fraudulent conveyance, not as a transfer in disregard of the Bulk Sales Act. An arrant fraudulent conveyance can be carried out in full compliance with the Bulk Sales Act for the Act requires only that, in advance of consummating the sale, the seller supply the buyer with a detailed inventory at cost of the property and a complete list of creditors and that the buyer notify each listed and known creditor of the proposed sale and its price, terms and conditions. The Act contains no substantive requirements at all: the consideration may be inadequate, the seller insolvent, the terms of sale such as to delay all creditors in the collection of their claims, and yet the Act may be fully complied with, simply by making the statutory disclosures; it is a notice statute and the creditors are expected, when notified, to attack the transfer for what it is by their appropriate remedy if the transfer, substantively, violates their rights as creditors. 1 Glenn, Fraudulent Conveyances (Rev. Ed.1940) 547; Gross v. Grossman, 5th Cir. 1924, 2 F.2d 458; In re Baker, S. D.Cal.1926, 13 F.2d 413, 414. Here, for example, the transfer was a studied preference and, by that fact, an act of bankruptcy (Bankruptcy Act, § 3, sub. a(2), 11 U.S.C.A. § 21, sub. a(2)) and an avoidable preference if bankruptcy came within four months (Bankruptcy Act, § 60, 11 U.S.C.A. § 96). In consequence the cases reflect repeated and emphatic statements that compliance with the Bulk Sales Act does not purge a fraudulent conveyance and that a bulk sale cannot be used as if it were a substantively competent species of insolvency procedure. Sterling National Bank & Trust Co. v. Complex Dresses, Inc., 1st Dept. 1934, 240 App.Div. 57, 269 N.Y.S. 110; Lubinsky v. Hoffman, Bronx Co., 1934, 158 Misc. 261, 284 N.Y.S. 549, aff'd, 1st Dept. 1936, 246 App.Div. 803, 285 N.Y.S. 1074; Delta Trading Corp. v. Kohn & Son, Inc., N.Y.Co.1961, 28 Misc. 2d 894, 215 N.Y.S.2d 607.

The transfer is attacked under sections 273 and 276 of the New York Debtor and Creditor Law (Sections 4 and 7 of the Uniform Fraudulent Conveyance Act). The transaction is invulnerable to attack under Section 273 because, although the bankrupt was insolvent when the transfer was made, the transfer has not been shown to have been made without a fair consideration. There was not here free transfer of an equity in encumbered property; the assumption of debt was express, the face amount of debt assumed exceeded the book value of the property and the new money, although borrowed, was real enough and added something of substance to the assumption. On such facts, in the absence of countervailing evidence of value, inadequacy of consideration is not shown.

The transfer was, however, fraudulent in fact under § 276 for it was made with actual intent to hinder, delay or defraud the bankrupt's creditors. The term "fraudulent conveyance" embraces much more than unreal, seeming transfers that leave the transferor in covert but real possession of his property. Greenwald v. Wales, 1903, 174 N.Y. 140, 143-145, 66 N.E. 665. If the dicta in Cooper v. Maurer, Sup., N.Y.Co.1942, 37 N.Y.S.2d 992 are read as requiring a transaction to be sham or fictitious if it is to fall under the denunciation of Section 276, the dicta do not express New York or general law.

The transfer hindered and delayed, and was meant to hinder and delay, all the creditors of the bankrupt whose debts were not assumed. The bankrupt's assets were removed from their reach irrecoverably. The transfer was, characteristically, a calculatedly preferential transfer. Every preference to some extent hinders, delays and defrauds creditors (Irving Trust Co. v. Chase Nat. Bank, 2d Cir. 1933, 65 F.2d 409, 410-411) but, because of the supposed "right" of a debtor to prefer his...