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Clarkson Co. Ltd. v. Shaheen, 533 F. Supp. 905 (S.D.N.Y. 1982) :: Justia
Justia › US Law › Case Law › Federal Courts › District Courts › New York › Southern District of New York › 1982 › Clarkson Co. Ltd. v. Shaheen
Clarkson Co. Ltd. v. Shaheen, 533 F. Supp. 905 (S.D.N.Y. 1982)
US District Court for the Southern District of New York - 533 F. Supp. 905 (S.D.N.Y. 1982)
533 F. Supp. 905 (1982)
John M. SHAHEEN, Roy M. Furmark, Albin W. Smith, Peter L. Caras, Paul W. Rishell, Shaheen Natural Resources Company, Inc., Newfoundland Refining Company Ltd., U. S. A., and Founders Corporation, Defendants.
The CLARKSON COMPANY LIMITED, etc., Petitioner,
FOUNDERS CORPORATION, Macmillan Ring-Free Oil Co., Inc., Shaheen Natural Resources Company, Inc., and John M. Shaheen, Respondents.
SHAHEEN NATURAL RESOURCES COMPANY, INC., John M. Shaheen, Macmillan Ring-Free Oil Co., Inc., and Ian W. Outerbridge, Respondents.
Martin RUBIN and John M. Shaheen, Respondents.
John M. SHAHEEN, Brown Harris Stevens, Inc., and 642 Park Avenue Corp., Respondents,
Barbara T. Shaheen, Michael Shaheen, and Bradford Shaheen, Intervening Respondents.
*906 *907 *908 White & Case, New York City, for plaintiff/petitioner The Clarkson Co. Ltd.; Jeffrey Barist, Allan L. Gropper, Edna R. Sussman, Kevin Ashley, New York City, of counsel.
This opinion addresses itself to various recent attempts by the Clarkson Company Limited ("Clarkson") to realize on a $50 million judgment awarded by a jury in this Court in July of 1980 against John M. Shaheen and certain of his various corporations, including Shaheen Natural Resources Co., Inc., ("SNR"), and Founders Corporation ("Founders"). That judgment essentially was founded on frauds of Shaheen and his corporate associates and has been affirmed on appeal. The Clarkson Company Limited, etc. v. Shaheen, et al., 660 F.2d 506 (2d Cir. 1981). The assets sought in the instant proceedings are the following: 1) various stock owned by John M. Shaheen, which allegedly was pledged in 1977 to guarantee *909 the debts of several Shaheen corporations to another corporation which Shaheen controls and of which he is president and chief executive officer; 2) debts owed by one Shaheen corporation to Shaheen individually and to another of his corporations; 3) certain allegedly fraudulent conveyances among three Shaheen corporations; 4) Shaheen's half ownership of his Park Avenue cooperative apartment and 5) Shaheen's half ownership of his summer estate in Southampton, Long Island.[1]
In opposition to certain of Clarkson's instant turnover demands, Shaheen and his corporations assert various old and recent, allegedly bona fide transfers and pledges of all of these assets to others, which they claim place the assets beyond Clarkson's reach. Those are as follows:[2]
1. In April 1977 Shaheen placed all of his personal stock holdings in an escrow account, allegedly as a pledge to Macmillan;
2. Shaheen's right to $173,873 from Founders was allegedly pledged to Macmillan;
3. In October 1979 Shaheen transferred his interest in the Southampton estate to his wife;
4. Although in an 1980 affidavit Shaheen acknowledged half ownership of his New York City cooperative apartment, he later asserted, in response to Clarkson's turnover petition, that in 1965 he and his wife had in fact transferred the coop shares to their then-infant sons; and
5. Shaheen's claim on Founders for $360,420 to reimburse him for his liability to a third person, Harry Dean, was purportedly extinguished and turned into an obligation by Founders to pay Dean $75,000.
1) as to SNR's right to 23,517 shares of Macmillan preferred stock, issued as a stock dividend, worth $1,060,875, Macmillan claims to have seized this stock dividend as a setoff against SNR's unpaid debt to Macmillan, which Macmillan claims to be about $4 million;
2) as to three obligations of Founders to SNR aggregating more than $2 million, SNR and Founders claim that certain letters indefinitely extended the due *910 dates of the loans if Founders was unable to pay at the time the loans otherwise came due;
3) as to a demand obligation to Shaheen, Founders and Shaheen claim that the statute of limitations bars the claim.[3]
Macmillan, a public company, was thus faced with having to disclose publicly that several separate corporations owned or controlled by Shaheen, Macmillan's president and controlling shareholder, owed at least *911 $4 million to Macmillan, which those companies could not pay. Because it did not want to make such a disclosure, Macmillan delayed filing with the Securities and Exchange Commission ("SEC") its annual report on Form 10-K and its quarterly reports on Form 10-Q for the fiscal quarters ending March 31, June 30, and September 30, 1976. Instead, in July of 1976, Phillip Gandert, a Macmillan director, wrote to the SEC that the delay was the result of problems with the intercompany receivables, stating that "the manner of liquidating that indebtedness to [Macmillan] has not yet been determined." By February, 1977, however, the SEC had become so impatient that it commenced an action against Macmillan to compel it to file its long-overdue financial statements.
These debtors were all corporations controlled by Shaheen.[4] Shaheen owned 100 percent of SNR and, through it, 100 percent of New York Press, and he owned directly or indirectly at least a controlling share of the other corporate debtors.
The collateral was set forth on a Schedule B in a curious manner for a purportedly binding legal instrument memoralizing over $4,000,000 of assets supposedly pledged to Macmillan for its protection. The exact form of the said schedule minus the red and blue inks is as follows:[5]
The guaranty was signed by Shaheen on March 29, 1979 and recited that the stock already had been deposited and delivered to Macmillan. The testimony of Macmillan attorney Galpeer, however, made it clear that this declaration in the guaranty was false, for nothing was given to Rubin until a month later. Macmillan's willingness to accept the guaranty, despite this false statement about a critical fact the deposit of the pledged collateral is further substantial evidence of the lack of seriousness with which the parties regarded the guaranty. In addition, approximately a month after the purported pledge, Shaheen, in an affidavit stated that his 100 shares of SNR, which were all the outstanding shares, was not pledged to anyone. Shaheen upon being confronted with this before me testified that at the time of the affidavit, he did not have the fact that he had just pledged his 100% ownership in SNR "in mind."
Milton Hibdon, a director of both Macmillan and SNR and president and a director *913 of Founders, testified that it was the consistent goal of all the transfers challenged in these proceedings to keep control of Macmillan in Shaheen's hands. I credit Mr. Hibdon's testimony in this respect. Indeed, I find as a fact that, although the guaranty is made to appear to be for the benefit of Macmillan, it was intended to, and it did operate for the benefit of John M. Shaheen. I find it was not intended to, and did not make Macmillan any more secure as a creditor of the indebted companies. This latter finding is clear from the following.
Shaheen has been completely in control of Macmillan since at least 1974, directly and indirectly holding a controlling block of between forty-two percent and forty-seven percent of the common stock of Macmillan.[6] In addition to being the corporation's controlling shareholder, Shaheen has served as president and chief executive officer of Macmillan and has been a member of its board of directors from some time before 1977 until today. This has enabled him, as detailed below, to use the assets of Macmillan and all the related companies as he chose at any time regardless of pledges, escrows, public stockholders, or fellow directors.
Evidence of Shaheen's control of Macmillan can also be found in Macmillan's willingness to fund Shaheen's continuing business activities for other corporations, an activity which, arguably, amounts to corporate waste. For example, at the close of 1975, Shaheen companies owed Macmillan $1,399,421. Despite the fact that this sum was not paid up at year's end, as had been the prior practice of the parties, Macmillan *914 advanced an additional $2.6 million in 1976 and $368,000 in 1977.
Macmillan contends further that the expenditures were necessary to obtain financing for Macmillan's proposed West Coast refinery because Macmillan could obtain its financing only as part of a greater package which might be negotiated by John M. Shaheen. Valtec Associates, however, the consulting firm which the Macmillan Board retained for advice about the Company's relationship with Shaheen, saw no link between the financing of the proposed Macmillan refinery and Shaheen's other ventures. Indeed, Valtec expressed concern that Shaheen would succeed in obtaining financing only for his own projects and none for the refinery. Similarly, Hibdon testified that the efforts to obtain financing for the refinery and for Shaheen's other projects were entirely independent. The lack of serious value to Macmillan of Shaheen's activities may also be revealed by the fact that despite Macmillan's expenditure of nearly $2,000,000, or roughly 30% of its net income for 1977-1979, to support Shaheen's efforts to secure such financing, as of the date of trial, Collier, the chairman of the Macmillan board, did not even know whether Macmillan had obtained any commitments. Shaheen, himself, in describing his efforts to secure $280 million in financing for Macmillan, a company with a book value of only $10 million, blithely testified *915 that if he were successful, he would have accomplished an "act of levitation" and "a feat somewhat superior to anything Houdini ever achieved."[7]
Valtec was not the only Macmillan advisor to recommend that Macmillan declare Shaheen to be in default. In February 1980, Irving Galpeer, Macmillan's outside counsel for SEC matters, "strongly urged" the Macmillan board to give notice of default so that the company could terminate the escrow and apply the stock against the unpaid debt. The board rejected Galpeer's advice so that Shaheen could continue his activities. I note further in this connection that Galpeer testified that on more than one occasion Shaheen told the board that taking any action under the guaranty would harm his reputation, thereby impairing his ability to raise funds. In other words Shaheen informed the board of directors of the corporation of which he was president and controlling shareholder, that he opposed taking any action to enforce the guaranty agreement which he himself had made for the corporation's benefit. This advice to the board, quite obviously, was a directive that Macmillan act as though the guaranty never had been executed.[8]
In response to their president's "suggestion" that they not take any action that he thought would be injurious to his personal interests, the Macmillan board members in fact took no action. Macmillan, of course, had to act in order for Shaheen to be in default under the guaranty agreement and for Macmillan to be able to seize the escrowed stock and apply it against the unpaid debt. Specifically, Macmillan had to notify Shaheen in writing that he was in breach of the agreement. Default then occurred only if Shaheen failed to cure within thirty days.[9]
In fact, Shaheen had been in default on his obligations to make or cause to be made semi-annual payments under the guaranty since March 29, 1978. Yet, despite the advice of Galpeer and Valtec, the Macmillan board did not take the first step to enforce its "rights" under the guaranty agreement until September 30, 1980, two and one half months after the entry of Clarkson's multimillion *916 dollar judgment against Shaheen and SNR and eleven days after Clarkson attempted to levy on the shares which were the res of the putative escrow. Indeed, as both Galpeer and Collier testified, the only reason Macmillan declared a default even on that late date, after two and a half years of delinquency by Shaheen, was that Clarkson had obtained its judgment.
While certain of Macmillan's directors testified that Shaheen promised orally to use the assets of the companies only in the ordinary course of business, it is clear that this promise, even if it were made and I find that it was not was of no effect, for Shaheen, in one glaring incident, unrestrained by any pledge agreement, transferred to a Canadian lawyer without consideration and without informing Macmillan, most of the principal asset of SNR, one hundred percent of whose stock he had pledged to Macmillan. See note 2, supra. Indeed, Shaheen testified that, although the stock in question was SNR's "last bucket of stock," he felt he was under no obligation because he was under no obligation to seek the permission of or inform his fellow officers and directors before acting to cause the SNR stock in the alleged escrow account to become virtually worthless.
At trial, Macmillan claimed that it refrained from foreclosing on the pledged collateral both because it wanted to protect Shaheen's reputation in the financial community and, as it argued in its post-trial brief, because it was unaware of the enormous personal liability Shaheen faced in the Clarkson lawsuit. The second contention, I find, is absurd and contradicted by the evidence.[10] I credit, however, the testimony *917 that Macmillan refrained from foreclosing to protect Shaheen. Undoubtedly, this, combined with the desire to avoid public disclosure of the financial machinations at Macmillan, is so. I conclude that the primary reason for deferring the foreclosure was that Shaheen did not want it to occur until it became a question of losing the res to Clarkson, at which point he chose to keep it for Macmillan and thus for himself.
Shaheen's own counsel on these hearingsnot Macmillan's revealed Shaheen's motivation in attempting to explain Macmillan's rationale for declaring a default after Clarkson's levy by stating that Shaheen had a "[personal] preference and intention that the stock go to Macmillan ... rather than [to] Clarkson." Obviously, Shaheen's personal preference would have been irrelevant were the pledge a valid pledge, rather than a sham which left him in complete control of the collateral. Faced with the choice between Clarkson and Macmillan taking title to his various corporations, Shaheen utilized the alleged pledge to turn the stock over to Macmillan, where he, Shaheen, was in control.[11]
Corporate securities are "instruments" under the definitions contained in §§ 8-102(1) (a) and 9-105(1) (g) (now 9-105(1) (i)) of the Uniform Commercial Code (the "UCC"). Section 9-304(1) of the UCC provides that a security interest in a corporate security arises only when the party to be secured takes possession of the instrument or instruments. The UCC enlarges the conventional meaning of possession to include possession by an agent acting on behalf of the party to be secured. Thus, viewed in strict isolation, the fact that the stock was delivered to an escrowee, Martin Rubinwhom I conclude was independent of John M. Shaheen rather than to Macmillan directly, would be the equivalent of Macmillan's perfection by possession of a security interest in the stock. There is no question that an escrow agent may serve as the secured party's agent in possession of the instruments, so long as the agent is not controlled by the debtor. In the Matter of Copeland, 531 F.2d 1195, 1204 (3d Cir. 1976).
Where a security interest can arise only by the pledgee's possession, however, that possession must be such as to prevent the debtor from having control of or access *918 to the res of the pledge. Thus, even assuming that, contrary to the facts here, Macmillan was truly in possession of the pledged stock by virtue of the Rubin escrow, if Shaheen were permitted to control the collateral, the security interest would be destroyed. As official Comment 6 of § 9-205 explains:
The foregoing makes it clear that unless a putative secured party's possession of pledged instruments rises to the level of "actual and exclusive possession" as required at common law, his security interest has not been perfected. The law has two requirements in this regard. First, "the pledgor [must] surrender his dominion over the property, and ... [second] any semblance of ostensible ownership in the pledgor [must] be negatived." 4B Collier, Bankruptcy, ¶ 70.86 at 982 (14th ed. 1978). This circuit has recognized and adopted these requirements. Gins v. Mauser Plumbing Supply Co., Inc., 148 F.2d 974 (2d Cir. 1945); Sammet v. Mayer, 108 F.2d 337 (2d Cir. 1939); In re Merz, 37 F.2d 1 (2d Cir.), cert. denied, 281 U.S. 738, 50 S. Ct. 333, 74 L. Ed. 1152 (1930).
Given the foregoing, I conclude as a matter of law that Macmillan never took possession of Shaheen's stock within the meaning of § 9-304(1) of the UCC and, consequently, never perfected its alleged security interest in the stock held by Martin Rubin.[12] There was, therefore, no valid pledge.
Clarkson, therefore, is entitled to a judgment directing Martin Rubin to deliver to the Sheriff of the City of New York, New York County Division, for the benefit of Clarkson, all property in his possession or control as escrow agent herein.[13]
It is appropriate at this point to consider stakeholder Martin Rubin's proposed order discharging him from the proceedings and awarding him costs and attorneys' fees. *919 His motion seeking this relief was granted on December 22, 1980. All parties have responded to the proposed order by written submissions to the Court.
Next, I turn to Clarkson's petition for an order requiring Shaheen to turn over for Clarkson's benefit his alleged interest in a cooperative apartment in New York City. In post-judgment answers to Clarkson's information subpoena dated October 20, 1980, *920 Shaheen stated under oath that he owned an interest in the cooperative apartment in which he lived at 640 Park Avenue, and that legal and equitable title to the apartment was in the name of John M. and Barbara T. Shaheen. Clarkson, by petition dated October 17, 1980, had just sought an order, pursuant to Fed.R.Civ.P. 60(a) and CPLR § 5225(a) and (c), requiring Shaheen to deliver to it that very interest.
However, in his subsequent answer to the petition and affidavit in opposition to the motion Shaheen suddenly changed position, and stated for the first time that his previous answer to the information subpoena was incorrect and that on July 26, 1965, fifteen years earlier Shaheen and his wife had in fact conveyed the apartment to their then-infant sons, Michael and Bradford Shaheen and that he, Shaheen, has had no proprietary interest in the coop since then. In March, 1981, Barbara Shaheen and Bradford Shaheen were granted leave to intervene as respondents.
1) The assignee of the lease (and transferee of the shares) must execute as part of the assignment a covenant to perform and comply with all obligations of the lease and deliver the assignment to the coop corporation (the "lessor").
2) The accompanying stock must be transferred to the assignee.
3) The legal expenses of the lessor and any sums due from the assignor must be paid to the lessor.
4) The assignment must be approved in writing by the board of directors of the coop corporation or by shareholders holding two-thirds of the corporation's capital stock, and the writing must be delivered to the lessor.
Mabel Geiger, Shaheen's current executive secretary, testified that for at least five years there has been nothing in the box except Shaheen's possessions. The box, of course, contained the coop stock certificate. Prior to that time, certain shares of stock of other corporations held under the endorsed title "John Shaheen, custodian under the Uniform Gift to Minors Act, ..." for Bradford *921 and Michael Shaheen, which had been kept in the box, were removed to be held by a bank custodian on behalf of the sons. The coop certificate was never removed.
On at least three recent occasions, Shaheen has described himself as the owner of the apartment. At a meeting of the board of directors of Macmillan on March 10, 1977, Shaheen told the board that he and his wife jointly owned a cooperative apartment in New York City.[14] More recently, in answering Clarkson's October 1980 information subpoena, Shaheen swore that he and his wife owned the apartment. Finally, in an attempt to use the apartment as collateral for a bank loan, Shaheen stated he owned the apartment. Shaheen now contends that these claims of ownership were "pure errors."
must be such as to vest the donee with control and dominion over the property.... "The delivery necessary to consummate a gift must be as perfect as the nature of the property and the circumstances *922 and surroundings of the parties will reasonably permit; there must be a change of dominion and ownership; intention or mere words cannot supply the place of an actual surrender of control and authority over the thing intended to be given." (citation omitted).
Any other result would sanction an arrangement by which Mr. Shaheen could suddenly reveal the purported assignment at such time as creditors asserted claims against the property, but could, otherwise, for the entire sixteen years, enjoy the benefits of unfettered ownership, including living in the apartment and attempting to use the shares as collateral for a personal loan.[15] Such an arrangement is inherently fraudulent, see Takacs v. Kapela, 264 A.D. 871, 35 N.Y.S.2d 502 (2d Dep't 1942), and must be set aside as a transfer effected with the intent to defraud creditors. N.Y.Debt. & Cred.Law § 276 (McKinney).
I turn next to Clarkson's petition concerning Shaheen's alleged interest in an estate in Southampton, Long Island, called "Old Trees." Until at least October 1, 1979, Shaheen owned "Old Trees" with his wife as tenants by the entirety. The estate consists of ten acres on eastern Long Island with a large main house, a garage, a separate, single-family house, and a cottage. *923 The property contains or fronts on a lake. The Shaheens use the main house primarily in the summers; Mrs. Shaheen spends much of her time between Memorial Day and October there, and Mr. Shaheen commutes between Southampton and Manhattan on weekends while his wife is in residence on Long Island.
Clarkson attacks the conveyance as fraudulent on two grounds. First, Clarkson alleges that the transfer was a fraud under New York Debtor and Creditor Law § 273-a because the conveyance was made without fair consideration at a time when Shaheen was a defendant in an action for money damages and Shaheen has since failed to satisfy the judgment in that action. Second, Clarkson contends that the gift violated section 276 of the law because it was a conveyance made with intent to defraud creditors.[16]
I find this asserted defense to Clarkson's petition to be utterly false. To begin with the Shaheens at all times publicly denominated the transfer a gift. In addition, the Shaheens produced no writing of any kind supporting this version of the transaction and the tax liability, which was some $40,000 less than the value of the alleged consideration, was in fact a liability of both Mr. and Mrs. Shaheen. Moreover, one Martin Gilmartin, Esq., a Southampton attorney who assisted Mrs. Shaheen with the transfer, reminded her, orally and in a letter which she told him she would discuss with husband that Mr. Shaheen would have to file a gift tax return reporting the gift and *924 that they should reduce the value of the gift by the amount of any consideration she had actually given in order to preserve, to the maximum extent possible, the exemption from taxation for inter vivos and testamentary gifts from one spouse to the other. Yet, despite this advice, Shaheen and his own lawyer, after telling Gilmartin that they would handle the gift tax return, reported no consideration for the transfer on the return Shaheen ultimately filed.
Clarkson contends that Shaheen's fraudulent conveyance has terminated the tenancy by the entirety by which the Shaheens owned "Old Trees" prior to Shaheen's gift of his interest to his wife and that the Court's equitable annulment of the gift will leave the Shaheens as tenants in common. Such a result would not follow from John Shaheen's fraud alone. Orbach v. Pappa, 482 F. Supp. 117, 120-1 (S.D.N.Y.1979); Hohenrath v. Wallach, supra. Here, however, Mrs. Shaheen was a partner in a fraudulent endeavor to retain the entire property for herself and gave false testimony as to consideration in furtherance of that fraud. I conclude that where the transferee tenant participates in the fraud, equity permits her to be stripped of her right of survivorship as against the creditor she tried to defraud. Were it otherwise, then that which she was unable to accomplish by fraud, she would be able to accomplish merely by outliving her husband. Such a result, I conclude, would offend justice. See Van Alstyne v. Tuffy, 103 Misc. 455, 169 N.Y.S. 173 (Sup.Ct.Monroe Co. 1918).
Finally, I turn to Clarkson's challenges to certain transactions and agreements between Founders and SNR, Shaheen, and Macmillan (the "Founders proceeding"). In this proceeding, Clarkson asks the Court to declare 1) that its rights to a certain block of 23,517 shares of Macmillan preferred *925 stock are superior to the rights of Macmillan; 2) that Founders' pledge to Macmillan of 343,758 shares of Macmillan common stock was a fraudulent conveyance; and, 3) that Clarkson is entitled to certain monies Founders owes to SNR and Shaheen.
As to the Macmillan preferred stock, I find as follows. During the latter part of 1979, the Macmillan board explored the merits of creating a class of preferred stock and then issuing a preferred stock dividend payable to the holders of its common stock. Subsequently, on January 10, 1980, after consultation with two outside advisors, the board approved the issuance of such a class of preferred stock and voted to distribute the 173,092 new shares as a dividend on its common stock.[17] An investment banker estimated the market value of the new stock at $45 per share, or ninety percent of the $50 liquidating preference of the stock. Thus, SNR, with thirteen and a half percent of the outstanding Macmillan common stock, was entitled to 23,517 shares of the new preferred issue, at the time worth approximately $1,060,000.
The accounting treatment of the alleged setoff posed a problem, however, because, as noted above, Macmillan had already written off the SNR debt, leaving nothing on the balance sheet to be reduced to reflect the setoff.[18] In order to take ownership of the stock, therefore, Macmillan would have had to treat its value as income in 1980. Coopers & Lybrand, however, objected to recognizing the retained stock as income because were SNR to have gone bankrupt within one year of the setoff, the transaction could have been set aside as a voidable preference benefiting an insider. Consequently, Macmillan recorded the stock on its books as an asset and made a corresponding entry in a liability account to reflect a debt to SNR for unpaid dividends.[19]
Clarkson's first objection to this setoff is that it was never completed because of Macmillan's failure or inability to credit and thereby reduce SNR's debt account by the value of the preferred stock retained. Clarkson contends that a creditor's failure to reflect a proposed setoff by properly reducing the debt account of the debtor on the books of the creditor results in the creditor's waiver of its setoff right. The applicable law is well-stated in Baker v. National City Bank of Cleveland, 511 F.2d 1016, 1018 (6th Cir. 1975): "the act of setoff is ... complete ... [when] three steps have been taken: (1) the decision to exercise the right, (2) some action which accomplishes the setoff and (3) some record which evidences that the right of setoff has been exercised." See also, Aspen Industries, Inc. *926 v. Marine Midland Bank, 74 A.D.2d 59, 62, 426 N.Y.S.2d 620, 622 (4th Dep't 1980), rev'd on other grounds, 52 N.Y.2d 575, 439 N.Y.S.2d 316, 421 N.E.2d 808 (1981).
What is troublesome here is the fact that whatever Macmillan intended to do or had a right to do, its perfection of that right is somewhat clouded by the fact that it carried, and still carries, the SNR preferred stock on its books as an asset for which it is liable to SNR. The continued treatment of this property in a manner permitting later turnover to Shaheen's SNR, if that should suit the parties' purposes, is wholly consistent with Macmillan's utter failure to try to collect the SNR debt or to foreclose on Shaheen's stock in the Rubin escrow, which was purportedly to guarantee that debt. Indeed, in the prior year, 1979, Macmillan helpfully engineered a series of related company transactions in the fall of 1979 which 1) enabled SNR to make payments to its other creditors sufficient to stave off probable bankruptcy and ultimate collapse; and 2) protected the Macmillan stock owned by SNR. First, Macmillan, the only liquid corporation, bought 100,000 shares of Macmillan common from Shaheen's Founders Corporation at $4.75 per share. Founders then took the cash and bought 95,000 shares of Macmillan common from SNR at $5.00 per share. These two transactions put nearly $500,000 in cash in SNR's hands, which it promptly used to pay off its most persistent creditors,[20] and put the Macmillan shares in Founders. These payments apparently prevented the filing of an involuntary bankruptcy petition and enabled SNR to maintain its position without seriously affecting Shaheen's control of Macmillan. One must note, however, that Macmillan, the facilitator of the SNR bailout, received nothing in repayment of SNR's $4,000,000 debt to it.
Apparently still concerned about SNR's stability as holder of additional Macmillan shares, the Shaheen group also arranged for an additional 100,000 shares of Macmillan common to be moved from SNR to the safer haven of Founders. Rather than pay for that stock, however, which would have made cash available to pay claims of SNR's creditors including part of Macmillan's $4,000,000 claim, and notwithstanding that Founders already owed SNR more than $1,500,000 in open advances or on account, see infra, Founders simply gave SNR a note for $500,000 which, while reciting a due date of November 1, 1981, was accompanied by a letter from Founders to SNR stating that Founders could take an additional four years to pay if it did not have the money on November 1, 1981.[21]
The foregoing is recited in some detail to make manifest the fact that Macmillan's intent throughout these recent years has been first and foremost to maximize its freedom of action by promoting the welfare of such of the Shaheen companies as needed assistance at any given time. In this situation that meant that Macmillan would carry the preferred stock on its books as a liability to SNR while at the same time denominating it a setoff in the narrative portions of its annual statements. However, while it is clear that as with all these transactions, this one was structured to perpetuate Shaheen's control of Macmillan,[22] I conclude that here Macmillan would have gone the final step to make the stock its own but for the opposition of Coopers & Lybrand. Faced with the approximately $4,000,000 bad debt of SNR and Shaheen's directive *927 that they not foreclose on his guarantee of that debt, not even the Macmillan directors, notwithstanding their utter subservience to Shaheen, could have taken this newly-created asset in their hands, and done other than apply it against the theretofore-abandoned obligation of SNR.
I therefore conclude that by retaining the stock and declaring a setoff in its annual reports, Macmillan satisfied the essential requirements of Baker v. National City Bank of Cleveland, supra.[23] Consequently, Clarkson's petition for a turnover of this stock is denied.
Upon inquiry from Founders, Macmillan agreed to act as indemnitor without fee if Founders deposited with Macmillan a block of Founders' Macmillan stock worth twice the amount of the indemnification obligation.[24] Founders thereupon delivered to Macmillan as a pledge 343,758 shares of Macmillan common stock, which at the time was worth approximately twice Macmillan's proposed obligation. Founders also agreed to idemnify Macmillan for any loss Macmillan might incur. After receiving the security, Macmillan executed the guarantee with Union Indemnity, Founders deposited ten percent in cash, and the bond issued.
Clarkson also challenges the pledge as a fraudulent conveyance, pursuant to *928 section 273-a of the New York Debtor and Creditor Law, on the ground that it was made without fair consideration. Clarkson contends that because the value of the stock pledged was twice the amount of Macmillan's obligation, Founders did not receive a "fair equivalent" for the property it conveyed. The appropriate inquiry, however, is not whether the pledged stock and Macmillan's obligation were fair equivalents, but rather, whether the obligation was "not disproportionately small" compared to the collateral pledged. N.Y.Debt. & Cred.Law § 272(b).[25]
Clarkson also contends that fair consideration for the pledge is lacking because the conveyance was made in the absence of good faith. I am constrained to observe that it is likely that Founders was quite satisfied to obtain its bond in this fashion in order to park its Macmillan shares with the one remaining viable corporation controlled by Shaheen, rather than pledge them to an insurance company. In this way, Founders might have reasoned, if Union Indemnity were required to pay the judgment, it would seek indemnity from Macmillan in cash, rather than by selling control stock of Macmillan to the highest bidder. In the end, therefore, if Founders' liability were upheld on appeal it has been and if Founders were unable to pay, Macmillan and the Shaheen group might well be able to retain control of this stock.
(1) Founders was "obligated to SNR for open advances of $1,148,603" (paid down to $999,547 prior to garnishment);
(2) Founders was "obligated on a long-standing note payable to ... [SNR] in the amount of $451,270;"
(3) "In December of 1979 the company purchased from SNR 100,000 shares of *929 Macmillan common stock for which they (sic) issued an additional note payable of $500,000" due November 1, 1981;
(4) Founders "is obligated to its principal stockholder [Shaheen] in the amount of $534,293. Of this sum, $360,420 is represented by a note due to John M. Shaheen, in connection with a third party transaction in which the principal stockholder acted as nominee for the company. ... The balance of $173,873 represents an open advance made by ... [Shaheen] to the company."
Founders contends that a subsequent, similar letter from Shaheen on behalf of both himself and SNR to Founders on May 2, 1979, granted an eight-year moratorium on repayment of all of Founders' debts to SNR and Shaheen personally. This new moratorium it obviously did not apply to the $500,000 note, which was executed six months later allegedly was conditioned on Founders obtaining a mortgage loan from the Onondaga County Carpenters Pension Fund and on Founders' promise to prepay the loans to SNR and Shaheen if it was financially able. That letter, in pertinent part, reads as follows:
Finally, Founders claims that a third letter from Shaheen as president of SNR, on November 1, 1979, the very day on which Founders gave the $500,000 note to SNR, *930 extended the November 1, 1981 due date of that note for an additional four years if Founders could not pay on November 1, 1981. That letter, in pertinent part, is as follows:
In connection with the $500,000 you owe SNR for the purchase of Macmillan stock, the same condition regarding extension of due dates will prevail as contained in our letter to you dated January 19, 1977 attached hereto.
Therefore the November 1, 1981 due date will, upon your request, if you do not have the money to pay, be extended to November 1, 1985. (Emphasis supplied.)
Clarkson attacks these purported extensions on three grounds: (1) they are "illusory" because they are conditioned only on inability to pay and because Shaheen, as sole stockholder and president of creditor SNR and as majority stockholder of debtor Founders, had complete discretion to decide when, if ever, to pay, in effect, himself; (2) the extensions amount to fraudulent conveyances because they were granted without consideration at times that SNR and Shaheen were defendants in the Clarkson action for damages, and they have since failed to satisfy the judgments against them in that action, N.Y.Debt. & Cred.Law § 273-a, and/or were made at times that they were insolvent, N.Y.Debt. & Cred.Law § 273; and (3) the extensions are fraudulent conveyances because they were made with actual intent to delay, hinder, or defraud creditors, N.Y.Debt. & Cred.Law § 276. Because I agree that the relevant extensions[26] were fraudulent conveyances made without consideration while SNR and Shaheen were defendants in an action for damages, I need not pass on Clarkson's other attacks on the extensions.
*931 In addition, I conclude that neither of these extensions of Founders' obligations was for fair consideration. Founders contends that the extension of May 2, 1979 was given in consideration of Founders bolstering its financial position by obtaining the mortgage loan from the Carpenters Pension Fund, thereby better enabling Founders to repay its obligations to SNR and Shaheen. I find, however, that the May 2, 1979 extensions had nothing to do with the Carpenters' loan. Significantly, while Hibdon, in an April 7, 1981 affidavit, stated that the Carpenters Fund had refused to make the loan unless SNR granted Founders a moratorium on payment and that Shaheen's May 2, 1979 letter was thereupon forwarded to the prospective lender, on his May 14, 1981 deposition by Clarkson, taken just five weeks later, Hibdon testified that he did not know whether obtaining the moratorium was a condition of the loan or whether Shaheen's letter was ever even shown to the lender. On this latter point, Shaheen himself testified, "I doubt we would circulate this stuff [the May 2, 1979 letter]."
I turn next to Clarkson's effort to garnish $451,270 due from Founders to SNR, and find as follows. Until the commencement of this garnishment effort in 1981 and a review of the files by its counsel, Founders never contested that the debt was and is due on demand. Indeed, Founders' annual report, dated May 30, 1980 and signed by its president, Hibdon, recites that Founders *932 was "obligated on a longstanding note payable to ... [SNR] in the amount of $451,270." As recently as March 20, 1981, the debt was carried on Founders' books as an open advance, and it has been carried in its trial balances for at least 1978, 1979 and 1980.
Clarkson acknowledges that six years is the applicable limitations period, but argues that the obligation if it ever became stale has been revived, pursuant to § 17-101 of the New York General Obligations Law, because Founders has executed a writing or writings acknowledging the debt.[27]
Clarkson contends that this settlement violated both the restraining notice and execution with notice to garnishee that Clarkson caused to be served on Founders on December 12, and December 19, 1980, respectively. The restraining notice and garnishment *933 forbade Founders to sell, assign, transfer, interfere with, pay over, or dispose of any debt it owed to Shaheen. N.Y.C.P. L.R. §§ 5222(b), 5232(a). Clarkson asserts that Founders' promise to assume Shaheen's obligation to Dean, in the event that such obligation ever arose, was a contingent debt subject to garnishment pursuant to C.P.L.R. § 5201. Cf. Abkco Industries, Inc. v. Apple Films, Inc., 39 N.Y.2d 670, 385 N.Y.S.2d 511, 350 N.E.2d 899 (1976).
Although Clarkson is clearly correct in characterizing Founders' obligation to Shaheen as a contingent obligation, a debt is subject to garnishment under C.P.L.R. § 5201(a) only if it is past due, due on demand, or certain to become due.[28] Here, Founders' obligation to hold Shaheen harmless was contingent upon Shaheen becoming obligated to Dean under the note Shaheen gave Dean in 1965. Such an obligation is not a debt that is past due, due on demand, or certain to become due. I conclude, therefore, that it is not a debt subject to garnishment under C.P.L.R. § 5201(a). E.g., Glassman v. Hyder, 23 N.Y.2d 354, 296 N.Y.S.2d 783, 244 N.E.2d 259 (1968). Nor is the obligation herein subject to attachment as a property interest, as was held in the Abkco case, supra. N.Y.C.P.L.R. § 5201(b). In Abkco, the existence of the obligation was not in question, but rather whether any positive balance ultimately would be due under the obligation. Consequently, § 5201(a) did not bar attachment there. Here, however, Clarkson's garnishment occurred at a time when Founders was not yet obligated to Shaheen under its agreement to hold him harmless because the contingency had not arisen. Thus, when Clarkson served its notices, attachment was precluded under § 5201(a). See Katz v. Umansky, 92 Misc.2d 285, 399 N.Y.S.2d 412 (Sup.Ct. Kings Co. 1977); Donawitz v. Danek, 42 N.Y.2d 138, 397 N.Y.S.2d 592, 366 N.E.2d 253 (1977) (Jasen, J., concurring); cf. Abkco Industries, Inc. v. Apple Films, Inc., supra; Bata Shoe Co., Inc. v. Silvestre Segarra E Hijos, S. A., 58 A.D.2d 133, 396 N.Y.S.2d 369 (1st Dep't 1977). Accordingly, Clarkson's petition for damages arising from Founders' conduct in the Dean matter is denied.
[1] The extensive factual background of this action is set forth in The Clarkson Company Limited, etc. v. Shaheen, et al., 660 F.2d 506 (2d Cir. 1981) and The Clarkson Company Limited, etc. v. Shaheen, et al., 525 F. Supp. 625 (S.D.N. Y.1981).
[2] I have already ruled on such a transfer. At the time of the judgment in this case, SNR owned 235,175 shares of common stock in Macmillan. In response to Clarkson's turnover proceeding, SNR revealed for the first time that, on July 31, 1980, after the judgment, it had turned over 185,723 of its shares of Macmillan common stock to Ian Outerbridge, a Canadian lawyer for Shaheen, and that Outerbridge had taken the shares out of the country. By opinion and order of October 27, 1981, The Clarkson Company Limited, etc. v. Shaheen, et al., 525 F. Supp. 625 (S.D.N.Y.1981), I found this transfer to have been a fraudulent conveyance and granted Clarkson's motion for a turnover of the shares. The stock is now in the custody of the Court pending appeal.
[3] Perhaps anticipating skepticism on the part of the Court to the claim of a moratorium on payment of Founders' debts to Shaheen and SNR and the statute of limitations defense to Clarkson's attempt to garnish Founders's debt to Shaheen, Founders recently attempted to structure and assert a third defense to the garnishment of its debts. It appears that on November 30, 1981, Grace Gandert, a minority shareholder of Founders, and the widow of a defendant in the main action who died prior to trial, asked leave to intervene in the so-called Founders proceeding, allegedly to protect the interests of the company's shareholders. Mrs. Gandert contended that Founders' alleged debts to Shaheen and SNR were not debts at all, but were actually capital contributions by Shaheen to Founders. Thus, she argued, there existed no debt which Clarkson could garnish. Her intervention was denied for lack of standing. Founders thereupon represented to the Court that Founders itself had decided to assert Mrs. Gandert's position. Thus, although Founders had all along offered sworn testimony that the SNR and Shaheen payments to Founders were loans that were either 1) not yet due or 2) were time-barred, it suddenly contended that the loans were not loans at all, but were capital contributions. It even offered to the Court recent minutes of a meeting of the Board where this changed status of the transactions was belatedly recognized. Founders' motion to amend its pleading to assert this last-minute defense was, however, denied.
[4] Clarkson contends that the debts owed to Macmillan by Shaheen's companies were the obligations only of the companies, not of Shaheen personally and that, therefore, Shaheen's guarantee of the debts was a pledge without fair consideration. In view of my conclusions below, I need not determine whether the debts of the corporations Shaheen owned and/or controlled were antecedent obligations of John M. Shaheen for which he was personally liable.
[5] Rubin holds an additional sixty-seven shares of Macmillan common stock and 142 shares of Macmillan preferred stock, all of which he received subsequent to the initial pledge. At trial, the parties stipulated that this stock constituted stock dividends earned by pledged stock and paid by Macmillan after the stock was delivered to Rubin. These additional shares are thus also part of the res in issue in this proceeding.
[6] SNR, one-hundred-percent of which is owned by Shaheen, owns approximately thirteen and a half percent of Macmillan common. Founders, fifty-five-percent of which is owned by Shaheen, owns more than twenty-eight percent of Macmillan. Shaheen individually owns 1,421 shares of Macmillan common.
[7] To date, Shaheen has obtained no written commitment for financing the West Coast refinery or any other venture.
[8] The Board also deferred to Shaheen on decisions concerning his companies whose stock was pledged under the Guaranty. For example, White said he looked to Shaheen for approval of certain action in connection with the sale of some oil leases owned by Can-Amera Export Refining Company, Ltd., because Shaheen was the chief executive of Macmillan.
[9] This "protective" mechanism, according to Calpeer, had been carefully negotiated over thirty days and written into the agreement in order to protect Shaheen.
[10] Macmillan states that the entry of judgment against Shaheen and SNR on July 22, 1980, suddenly revealed to it the magnitude of Shaheen's liability and that at that point it concluded that Shaheen was "extremely unlikely" to pay or cause to be paid any of the debt he had guaranteed. For this reason, Macmillan contends, it finally declared a default under the guaranty and moved against the pledged stock. Yet, one notes, not even this spurred Macmillan to foreclose immediately. It was not until three months after the jury's verdict that Macmillan first set the wheels in motion by notifying Shaheen of his non-compliance. It is obvious that the event that triggered the "foreclosure" by Macmillan was neither the jury's verdict nor the entry of judgment. Rather, it was Clarkson's levy on September 19, 1980 on the pledged stock that caused Macmillan to move eleven days later.
[11] The fact that Macmillan has public shareholders does not affect the result here. Those shareholders have had no control over Macmillan. The only effect of their existence has been to create a concern for cosmetics.
[12] I reject Macmillan's suggestion that disclosure of the pledge in SEC filings may alone be adequate to perfect its security interest in the collateral. This contention ignores the express language of the UCC, which requires possession to perfect a security interest in securities.
[13] The hand-written notation, apparently by Shaheen, on Schedule B of the guaranty, see p. 912 supra, purported to include in the alleged pledge "monies owing by Founders" to Shaheen. Having concluded that no real pledge existed, I need not determine as a matter of law whether this scrawl, whenever made, suffices to pledge or assign the debt owed Shaheen. Note the further consideration of this debt, at p. 931 infra.
[14] This representation by Shaheen as to his ownership was reaffirmed at the meeting of the Board of the following week on March 17. At that meeting, the board elected not to seek a security interest in the cooperative apartment, which Irving Galpeer described, in Shaheen's presence, as jointly owned by Shaheen and his wife.
[15] One cannot help but observe the parallel between this transaction and the putative guaranty in the Rubin proceeding. In both cases, Shaheen claims to have alienated his interest in some way, but in each instance he in fact retained the property and exercised full ownership and control over it.
[16] Clarkson also alleges a third ground for undoing the transaction under the Debtor and Creditor Law, namely, that the conveyance was made without fair consideration at a time when Shaheen was insolvent, in violation of section 273 of that law. In view of my disposition of Clarkson's claims under sections 273-a and 276, I need not reach the question of Shaheen's solvency on October 1, 1979.
[17] The dividend was one share of preferred for every ten shares of common.
[18] Macmillan has, however, reported in the notes to its various financial statements that it has offset the retained dividends against the SNR debt, but that pending a determination of the legality of the setoff it has not recognized the dividends as income or treated the retained preferred shares as treasury shares for purposes of its financial statements.
[19] Macmillan has also retained cash dividends on its common stock which would be payable to SNR and has treated them similarly for accounting purposes, i.e., it has claimed a setoff against the SNR debt and has recorded the retained dividends in both an asset and a liability account.
[20] Actually, SNR never had possession of the entire $500,000. Rather than passing the cash to Founders which would then pass it on to SNR at the consumation of the stock transfers, Macmillan took approximately $100,000 of its own cash and paid some of the SNR creditors immediately. Accounts among Macmillan, SNR, and Founders were settled upon the execution of the stock sale agreements.
[21] The letter, written by Shaheen on behalf of SNR to Founders, states, in relevant part, "the November 1, 1981 due date will, upon your request, be extended to November 1, 1985."
[22] The cross-examination of Macmillan vice-president Hibdon on this issue culminated in the following question and answer:
Q. And it was the consistent goal [of Macmillan] to keep control of Macmillan in Mr. Shaheen's hands through his control of Founders and SNR?
A. It might appear that way. But yes.
[23] The reasoning which leads me to this conclusion is equally applicable to Clarkson's claim that the retention of this stock was in some way a fraudulent conveyance as to creditors of SNR other than Macmillan. I do not perceive such motivation in this transaction.
[24] Galpeer recommended that Macmillan obtain security equal to twice the amount of the obligation because Federal Reserve Board regulations governing margin stock transactions requires stock collateral to be equal to double the amount of the loan. He also said that the value of the Founders holdings should be discounted by ten to twenty percent in calculating the amount of security offered, because the sale of the stock owned by Founders, a control person of Macmillan under SEC regulations, was restricted.
[25] Section 272 provides:
Fair consideration is given for property or obligation, ...
[26] Only the two extensions granted in the May 2, 1979 and the November 1, 1979 letters are relevant. The letter of January 19, 1977, written before SNR became a defendant in Clarkson's action for money damages, granted a moratorium on the demand debts for only four years, or until January 19, 1981, a date which obviously has passed. Thus, even if the January 19, 1977 extension was valid as against creditors, Founders' indebtedness to SNR for open advances came due on January 19, 1981 and is, therefore, subject to Clarkson's garnishment in this proceeding. The validity of the further extension of this obligation in the May 2, 1979 letter is discussed in the body of the opinion.
[27] General Obligations Law, § 17-101 reads in pertinent part:
An acknowledgment or promise contained in a writing signed by the party to be charged thereby is the only competent evidence of a new or continuing contract whereby to take an action out of the operation of the provisions of limitations of time for commencing actions under the civil practice law and rules ....
[28] Section 5201(a), in pertinent part, reads as follows:
(a) Debt against which a money judgment may be enforced. A money judgment may be enforced against any debt, which is past due or which is yet to become due, certainly or upon demand of the judgment debtor, whether it was incurred within or without the state, to or from a resident or non-resident, unless it is exempt from application to the satisfaction of the judgment.