Stone v. Eacho, 4894.

• Decision Date: 13 April 1942
• Docket Number: No. 4894.,4894.
• Citation: 127 F.2d 284
• Parties: STONE et al. v. EACHO. In re TIP TOP TAILORS, Inc.
• Court: U.S. Court of Appeals — Fourth Circuit

127 F.2d 284 (1942)

STONE et al. v. EACHO. In re TIP TOP TAILORS, Inc.

No. 4894.

Circuit Court of Appeals, Fourth Circuit.

April 13, 1942.

Bernard Hellring, of Newark, N. J., and Reuben Golin, of New York City (Bilder, Bilder & Kaufman and Albert Freeman, all of Newark, N. J., Hahn & Golin, of New York City, and Steingold & Steingold, of Richmond, Va., on the brief), for appellants.

R. Hugh Rudd, of Richmond, Va., for appellee.

Before PARKER, and DOBIE, Circuit Judges, and WARING, District Judge.

PARKER, Circuit Judge.

This is an appeal in the bankruptcy proceedings of the Tip Top Tailors, a Virginia corporation, from an order subordinating a claim of the trustee in bankruptcy of the Tip Top Tailors, a Delaware corporation, to the claims of other creditors of the Virginia corporation and refusing a motion to consolidate the bankruptcy proceedings of the Virginia corporation with those of the Delaware corporation pending in the District of New Jersey.

The Tip Top Tailors was incorporated under the laws of Delaware on January 23, 1939. Its principal place of business was in Newark, N. J., and it operated nine retail stores in various cities of the United States, one of these being located at Richmond, Va. On July 12, 1939 it secured a corporate charter from the State of Virginia for a corporation of the same name as that under which it was operating and caused three shares of stock, of the par value of $1 each, to be issued to its nominees to be held by them for its use and benefit. The officers of the two corporations were the same and no separate corporate activity of any sort on the part of the Virginia corporation is shown to have taken place. No money was paid into its treasury, no contracts were executed by it, no salaries were paid by it, unless the payment of wages to employees of the Richmond store from cash on hand be so regarded, and the only records kept for it were records kept in the office of the Delaware corporation at Newark, N. J., by an employee of that corporation. These records consisted of nothing more than transcriptions from the books of the Delaware corporation made by employees of that corporation at infrequent intervals.

Except for these book entries, and except for the fact that the Virginia charter was obtained, the Delaware corporation dealt with its Richmond, Va., store precisely in the same way as it dealt with the other stores that it was operating, as to which there was no pretense of separate incorporation. The manner of dealing with the Richmond store is thus described in the report of the special master approved by the court below, viz.:

"Sample bolts of goods and styles of suits were furnished the Richmond store by the parent corporation. A customer in Richmond, after selecting the style of suit and kind of cloth, was measured and the order was then sent from Richmond to Newark. In Newark the parent corporation then had the suit made up according to order, and shipped it back to the Richmond store, which made delivery to the customer and collected the price. At the end of each day the Richmond store would make out a complete and detailed report and send it by mail to Newark. Out of cash collected by the Richmond store salaries of the local store personnel were paid and petty items taken care of, and the balance of the money was deposited in a Richmond bank. This bank then forwarded these funds to the National City Bank of New York to the credit of the account of the Delaware corporation.

"In furnishing the Richmond store with cloth and their processing the suits for the local customers, the parent corporation made no profit. It furnished materials and labor at cost and debited the Richmond store with these amounts.

"Out of the cash collected in Richmond, the local store did not have authority to pay any bills over $10.00, with the exception of salaries. These petty cash items paid direct at Richmond in the course of a year's time would amount to not over $1,000.00. All other expenses incident to the operation and maintenance of the Richmond store were paid directly by the Delaware corporation by its own check, and then debited on its books to the Richmond Store. In this way the parent corporation paid direct all expenses incident to the operation of the Richmond store, such as rent, insurance, stationery and supplies, telephone bills, delivery charges, express charges, taxes, light, heat, and power bills, unemployment insurance, payroll, etc.

"The parent corporation operated the Richmond store on the same basis as it did the other eight stores and charged the Richmond store with its proportionate share of the main office expense. The said expense being allotted to each of the stores in the proportion that the sales of the respective stores bore to the total sales. The only corporate record pertaining to the Virginia corporation consisted of a general ledger and a general journal. Entries in these books were only made once a year when certain items were taken off the records of the parent corporation and entered for the whole year on the ledger and journal of the Virginia corporation. All books and records of both corporations, during the entire term of the operation of the Richmond store, were kept under the supervision and control of one Henry Wegener, regular bookkeeper for the Delaware corporation, at its Newark offices acting under the instructions of the comptroller of the Delaware corporation."

To this should be added the fact that contracts with dealers in hats, shirts, etc., were made by the Delaware corporation authorizing such dealers to operate in the Richmond store, just as they operated in the other stores of the corporation, and that the Richmond store was charged and credited with respect to transactions arising out of these contracts, just as were the other stores.

With the exception of the three shares of the par value of $1 each, nothing was subscribed to the capital stock of the Virginia corporation; and, so far as the record shows, it owned no property of any sort. Fixtures, it is true, were placed in the Richmond store by the Delaware corporation and $900 was furnished it to take care of initial expenses; but these were charged to the Virginia corporation on the books of the Delaware corporation just as similar items were charged to its other stores and just as the goods furnished to the Richmond store were charged. By the time of the closing of the store, the excess of these charges over credits amounted to $39,069.67. Other debts of the Richmond store amounted to only about $12,000, included in which was a claim for rent, subject to reduction or adjustment.

On November 20, 1940, the Delaware corporation was adjudged bankrupt and appellant Stone was appointed its receiver. Two days later, two creditors attached the property in the Richmond store as property of the Virginia corporation; and on the following day an involuntary petition in bankruptcy was filed against the Virginia corporation by Stone as receiver of the Delaware corporation. The Virginia corporation was adjudged bankrupt on this petition and Stone, as receiver, thereupon filed claim for the sum of $39,069.67 as the amount owing by the Virginia corporation to the Delaware corporation. The trustee in bankruptcy of the Virginia corporation resisted the allowance of this claim and asked that, at all events, it be postponed to the claims of other creditors on the ground that the Virginia corporation was not a separate entity, but a mere instrumentality or department of the Delaware corporation, and that the amount claimed was not a true indebtedness arising out of loans and advancements but represented a mere advancement of operating capital.

The issues thus arising on the objection to the claim were referred to a special master, who filed a report finding that the Virginia corporation was a "mere shell without reality" and a "mere agency or corporate pocket" of the Delaware corporation, and recommending that the claim be postponed to the claims of other general creditors of the Virginia corporation. Appellant duly excepted to this report and filed a petition asking, as alternative relief, that the corporate entity of the Virginia corporation be entirely disregarded and that the bankruptcy proceedings relating to that corporation be consolidated with the bankruptcy proceedings of the Delaware corporation, to the end that all creditors of the last-named corporation, including those who had proved claims in the Virginia proceedings, share pari passu in the distribution of the consolidated assets. Three creditors of the Delaware corporation filed intervening petitions praying this relief. The District Judge entered order denying this motion and affirming the report of the special master; and from this order the trustee of the Delaware corporation and the three intervening creditors have appealed.

There is nothing in the record before us to show that any of the creditors who filed claims in the bankruptcy proceedings of the Virginia corporation intended to extend credit particularly to that corporation; and the fact that the bills of the Richmond store were paid by the Delaware corporation from its Newark office would indicate that it must have been generally known to the creditors of the Richmond store that it was the Delaware corporation that was there engaged in business. There is no reason apparent from the record why all creditors of that corporation should not be treated in exactly the same way; and the fact...