Rubin v. Manufacturers Hanover Trust Co., Bankruptcy No. 79 Civ. 189 (MP).
| Decision Date | 05 May 1980 |
| Docket Number | Bankruptcy No. 79 Civ. 189 (MP). |
| Parties | Herbert RUBIN, as Trustee of U.S.N. Co., Inc., Bankrupt, and Eliot H. Lumbard, as Trustee of Universal Money Order Co., Bankrupt, Plaintiffs, v. MANUFACTURERS HANOVER TRUST COMPANY, John M. Trent and Eugene Skowron, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Herzfeld & Rubin, New York City, for plaintiffs; Terry Myers and Morrell I. Berkowitz, New York City, of counsel.
Simpson, Thacher & Bartlett, New York City, for defendant; Rolon W. Reed, John F. Cambria, New York City, of counsel.
The issues herein were tried to the Court at a Bench trial. Jurisdiction is posited on federal questions asserted under the Bankruptcy Act of July 1, 1898, former Title 11 U.S.C. section 1 et seq. The gist of the claims is that the defendant bank misapplied the monies and securities of the bankrupts in violation of bankruptcy law. For the reasons shown hereafter, plaintiffs are not entitled to recover on any of their claims.
Universal Money Order Co. ("UMO") and U.S.N. Co., Inc. ("USN") are affiliated corporations, both of which, up until 1977, were engaged in the business of selling money orders. Both UMO and USN are 100% owned by International Express Co. ("International"), which is in turn 89% owned by John M. Trent and Eugene Skowron.1 On January 12, 1977 UMO filed a petition for an arrangement under Chapter XI of the Bankruptcy Act. USN filed a petition in bankruptcy on January 21, 1977. Administration of both estates was assigned to the Honorable John J. Galgay, Bankruptcy Judge, who appointed plaintiffs, Herbert Rubin, Esq., as trustee of USN, and Eliot H. Lumbard, Esq., as trustee of UMO.
This suit was filed by both trustees about two years later, on January 12, 1979, seeking recoveries of assets or damages from the bankrupts' bankers, Manufacturers Hanover Trust Company ("MHT"), and from Messrs. Trent and Skowron, the principal owners of the bankrupts. The amended complaint asserted ten separate claims. Prior to trial, the plaintiffs' claims and the cross claim of defendant MHT against Trent and Skowron were severed from this action by consent of all parties; and the claims asserted against MHT by plaintiffs in Counts 3, 5, 7 and 9 were discontinued with prejudice by stipulation of said parties.
The remaining claims, Counts 2, 4 and 10 of the amended complaint, were those tried against MHT.
In Counts 2 and 10, plaintiffs seek to recover money and securities of the bankrupts deposited with MHT which MHT applied in 1977 and thereafter to debts arising from defaulted loans made to sales agents of the bankrupts. MHT applied those assets pursuant to guarantees and cross-guarantees by the bankrupts of the debts involved, which guarantees were part of an interlocking series executed by Messrs. Trent and Skowron in their personal and in their corporate capacities on behalf of UMO, USN and International.
Under this series of guarantees and cross-guarantees each element of the Trent/Skowron pyramid guaranteed loans extended by MHT to certain check cashers who acted as money order sales agents for the Trent/Skowron enterprises.
The trustees contend, however, that the bankrupts did not authorize and were not bound as guarantors of the loans extended by MHT to those check cashers referred to hereafter as "National" and "TWO"2 to which MHT allegedly applied the monies and securities of the bankrupts; that there was no fair consideration given to the bankrupts for the guarantees of the questioned loans; and, because the bankrupts were at all times allegedly insolvent, that MHT's application of the assets of the bankrupts towards satisfaction of said check cashers' debts to the bank resulted in a fraudulent conveyance under bankruptcy law.
In particular, in Count 2 plaintiffs assert that in December 1976 MHT impermissibly placed obligations of said New York City cashers (National and TWO) on UMO which were neither approved by UMO nor accepted with "fair consideration" to UMO. In Count 10, plaintiffs assert that in September 1976 MHT impermissibly imposed on USN and UMO certain food stamp obligations which National and TWO owed to the New York City Department of Social Services. The alleged financing by MHT of these food stamp obligations was neither authorized by USN or UMO nor accepted with "fair consideration" to the bankrupts, according to the trustees.
In Count 4, plaintiffs sue to recover 5,000 shares of Gulf Oil Common Stock which Trent had pledged with MHT many years ago as collateral security for his guarantees. The trustees contend that the stock in reality had been registered in the name of USN and was wrongfully transferred by Trent into his own name and wrongfully pledged by him. The stock was ultimately sold by MHT and the proceeds were applied toward satisfaction of Trent's obligations to MHT on loans furnished to money order sales agents.
Trent and Skowron started USN in 1962, incorporating it under the laws of the State of New York. Trent had previously been in charge of the money order operations of American Express in Los Angeles. The business of USN was to sell money orders through agents. Trent and Skowron found that licensed check cashers in New York were very desirable agencies through which to sell money orders; they were equipped with bullet-proof glass teller cages, and their check cashing service enabled purchasers of money orders to obtain, then and there, cash needed to buy the money orders.
USN opened a bank account with MHT in 1964 and thereafter arranged for its sales agents to become borrowers from the bank. The purpose of this arrangement was to enable USN's sales agents to repay USN once a week for money orders which they had sold instead of holding back on settlements and using the money in the agents' general business.3
The extent to which the interests of Trent and Skowron were wrapped up in and aligned with the interests of the check cashers is demonstrated by the testimony of Robert Sparago, an officer and general counsel of USN (and later also of UMO), that "the check cashers comprised the major part of the money order business of USN" and "without the check cashers there was no USN".
The business of the Trent/Skowron enterprise grew, and in 1970 they incorporated UMO in the State of New Jersey for the purpose of acquiring and assuming the money order business of a California corporation of the same name. According to Mr. Sparago, in order to be licensed for the sale of money orders in California, it was necessary to do business in more than one state. Consequently, Trent and Skowron allocated to UMO the business operations previously conducted by USN in New Jersey, Pennsylvania, Ohio, West Virginia, and later Colorado and Massachusetts. Thereafter, USN was utilized by Trent and Skowron in the sale of money orders primarily within the state of New York. The principal officers and directors of both UMO and USN were: Trent, president; Skowron, secretary-treasurer; Sparago, assistant secretary, director and general counsel.
Although there was this geographical division in the operations of USN and UMO, in the minds of their principals and in fact they were conducted as and existed as a combined single enterprise. Mr. Trent testified that "it was all one ball of wax" and that the funds of USN and UMO were pooled into a single bank account at the Colonial Bank and Trust Company in Waterbury, Connecticut, and were used interchangeably to meet the money order pay-outs of the two companies as they became due. Similarly, the companies obtained and had a single "transit number" from the Federal Reserve Bank.4 The number of money orders sold by each company in an average month could not even be stated separately because the accounts were "jumbled together", and because, as Mr. Sparago testified, "we dealt with them as one entity for an analysis point of view"; it was only possible to tell how many orders were sold by the two combined. (The business of the companies together reached a sales volume of 900,000 money orders a month, representing a daily average of $1,850,000. face amount of money orders.)
The check cashers through whom the Trent/Skowron enterprises sold their money orders required a steady supply of cash on hand for the cashing or purchase of checks. As already indicated, Trent and Skowron had a vital business interest in keeping them supplied with bank credit to obtain this ready supply of cash and, as far back as 1966, had agreed to personally guarantee and posted collateral for bank loans from MHT to their various money order outlets. Under the arrangement that evolved, MHT opened a loan line against which Messrs. Trent and Skowron would submit monthly schedules of requested loans to their check cashers. The amount of credit so made available by the bank was a variable multiple of the pledged collateral.
On November 13, 1970, these arrangements were formalized and expanded when Trent and Skowron executed a guarantee of "all obligations" owed the bank, "whether now existing or hereafter incurred" by "certain licensed check cashers as shall be listed and described in schedules sent from time to time to Bank by" Trent and Skowron. Under this agreement, as before, Trent and Skowron would submit monthly lists requesting MHT to make loans to check cashers who were acting as sales agents for the Trent/Skowron enterprises. To the extent that the loans were approved and made by MHT, they would be covered by the guarantee.5
After the 1970 guarantee was signed, check cashers selling UMO money orders outside New York obtained benefits directly under the loan line. To implement the overall arrangements, and to reflect the fact that the interests, benefits and burdens of the arrangements were shared by one and all of the incorporated pocketbooks comprising the Trent/Skowron enterprises, Trent and...
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