Source: http://openjurist.org/296/f2d/670/fried-v-margolis-l-mck-a-weinstein-j
Timestamp: 2016-10-21 20:35:57
Document Index: 232624930

Matched Legal Cases: ['§ 167', '§ 567', '§ 7', '§ 2852', '§ 22', '§ 322', '§ 8', '§ 8']

296 F2d 670 Fried v. Margolis L McK a Weinstein J | OpenJurist
296 F. 2d 670 - Fried v. Margolis L McK a Weinstein J HomeFederal Reporter, Second Series 296 F.2d.
296 F2d 670 Fried v. Margolis L McK a Weinstein J 296 F.2d 670
Jerome FRIED and Nazareth Fairgrounds & Farmers Market, Inc., Appellants,v.Benjamin MARGOLIS, Ida Mae Margolis, Sarah Kason, Bernard L. Ungar and William McK. Shongut, Appellees.Arnold A. WEINSTEIN, Jerome Fried and Irving J. Wolf, et al., Appellants,v.NAZARETH FAIRGROUNDS & FARMERS MARKET, INC., et al., Appellees.
Docket 26962.
Docket 27000.
Alex L. Rosen, New York City, for appellant-appellee Nazareth Fairgrounds & Farmers Market, Inc.
Harold Harper, New York City (Harper & Matthews, New York City, Vincent P. Uihlein, New York City, of counsel), for appellant Jerome Fried.
Armende Lesser, New York City, for appellee William McK. Shongut.
Melvin Lloyd Robbins, New York City, for appellants Wolf and others.
Leonard Franklin, New York City, for appellees Herbert Danciger and Melvin S. Danciger.
Between April 1, 1951, and February 15, 1952, Malakoff received from investors in the Nazareth venture $79,025 and paid to the Philadelphia Group $77,010.84; the latter figure includes $11,032.84 received in payment of an insurance claim for windstorm damage. However, at no time did the amount that John Malakoff paid to the Philadelphia Group exceed the amount which he had already collected from investors. Until he became insolvent in June, 1953, Malakoff paid monthly "dividends" to the investors based on a 20% annual return on their original investments. These "dividends" were paid in Ponzi-like1 manner out of new money received from investors in the Nazareth Market. The corporation did not have a profit from which dividends could have been paid during this period. Shares of stock were issued to the claimants herein on and after February 2, 1953, and none can be said to have been issued in a regular manner, that is, upon receipt of consideration passing directly to the Debtor. Moreover, the consideration for which the stock in Nazareth was issued was not the same in all cases: some investors gave Malakoff cash or checks; others received their interest in Nazareth by releasing funds which Malakoff held for them as proceeds from other ventures; others accepted Nazareth stock from Malakoff in exchange for stock in other Malakoff ventures that had proved worthless; and some of the claimants received interests in Nazareth in satisfaction of Malakoff's personal debts to them. In substantially all cases the certificates were not issued to the stock claimants at or about the time they allegedly gave consideration to Malakoff as an investment in Nazareth. Altogether 316 shares were issued, 116 more than were authorized, to the 41 claimants herein. On September 28, 1953, the Debtor filed a voluntary petition for reorganization under Chapter X of the Bankruptcy Act. To achieve a reorganization of the Debtor which, insofar as stock issuance and ownership are concerned, never had been properly organized, the trial court had to determine as a basic issue: who, if any, were entitled to participate in the stock of the reorganized Debtor. The Court referred the task of making this investigation to an Examiner (Bankruptcy Act of 1898, §§ 167, 168; 11 U.S.C.A. §§ 567, 568). Testimony (some 10,000 pages) was taken concerning the circumstances under which the stock claimants had purportedly invested in the Nazareth Market or claimed to be entitled to participate as stockholders of the Debtor. In a detailed and painstaking report (236 pages), the Examiner carefully sifted the issues fundamental to the resolution of stock participation.
Since the problem for the reorganization court is to decide upon the capitalization necessary to do equity in the light of the various claims before it, this court need pass only upon the immediate question of who should be stockholders of the reorganized debtor and in what proportions. With these basic principles determined, the solution becomes more clearly defined. One group of investors paid Malakoff by check, credit or cash various sums to purchase an interest in the Nazareth Market. The money was solicited for this purpose by Malakoff as the promoter of the enterprise and was not intended to be loans to Malakoff personally or to be used generally by him in his many business operations. The funds should have reached the Debtor's treasury and have been the consideration required by Pennsylvania law2 to support the valid issuance of the Debtor's shares. The other group consists of persons to whom Malakoff issued shares for antecedent personal debts, in exchange or substitution for shares of other ventures or for other obligations personal to Malakoff. From these persons the Debtor did not receive and was not intended to receive anything of value, either from them or from Malakoff. These shares as a matter of Pennsylvania law could have had no validity as an original issue. In many instances, however, Malakoff gave by assignment to persons in this group shares purportedly issued to him. Had these shares been validly issued to Malakoff then, but only then, would the principles of the Uniform Stock Transfer Act3 in force in Pennsylvania at the time of the transactions here involved as to consideration and "value" apply. But no such shares were ever validly issued to Malakoff. The 20 shares originally issued to Zoloth and Soble, although subsequently assigned to Malakoff and still later by him to the Debtor, did not come into the hands of any claimant. After the shares had been issued to the claimants from and after February 2, 1953, corporate minutes in May or June, 1953, were fraudulently prepared and pre-dated as of July 2, 1952 (or post-dated as of July 2, 1953) purporting to evidence the issuance of the remaining 180 shares to Malakoff for $75 a share. There is no proof that Malakoff ever paid for these shares or that they were legally issued. Thus no claimant can derive any rights by assignment from Malakoff on the theory that he was the owner of the Debtor's stock. The purported issuance was both fraudulent and invalid.
Despite the cloud of illegality obscuring any stock issuance, the Debtor came into corporate being and did acquire a valuable property which it still holds. The Market property is sufficient to support a valid stock issue to those entitled thereto. The sellers (Philadelphia group) have been paid for that property by Malakoff. Malakoff in turn obtained the money for this purpose from those who thought that they were to receive an interest in the Nazareth Market. Malakoff as the promoter must be regarded as a trustee, fiduciary, agent, promoter or syndicator (the terminology is unimportant — the facts create the rights) for those who gave him their funds for investment in the project. They should in equity receive that for which they paid.
Although the findings of fact of the Examiner may be accepted almost in their entirety, his conclusions are at variance with the equitable principles applicable here. The Examiner treated Malakoff as the owner and operator of the Debtor and each claimant as having purchased his interest from Malakoff. This erroneous assumption made it possible for the Examiner to accept the stock claims of all claimants who had received stock from Malakoff on the theory that stock transfers from Malakoff rested upon adequate consideration if the Stock Transfer Act's definition of "value" were satisfied. This, however, is not the problem. The Debtor's stock for all practical purposes has never been legally issued. Such stock as is to be issued in the reorganization should be based upon the requirements of Pennsylvania law with respect to the issuance of stock.4
Charles Kanter ...........  $ 4,000.00
Morton Samet .............    2,000.00
Gertrude Klein ...........   14,000.00
Dorothy Holober Clark ....    3,000.00
Barry Clark ..............    4,000.00
Harold Q. Masur ..........    4,000.00
Louis Como ...............    6,000.00
Frank Como ...............    6,000.00
Patsy Como ...............    8,000.00
Anne Bikales .............    5,000.00
Lawrence Treat ...........    2,000.00
Dorothy Kane .............    3,000.00
Miriam Klein .............    3,350.00
Ruth Spielholz ...........    3,000.00
Mae Bluestone ............    2,000.00
Gussie Schwartz ..........    2,000.00
Harold B. Schwartz .......    4,000.00
Lazar Karapantso .........    2,000.00
Ernest Pollak ............    9,000.00
H. Lawrence Laupheimer ...    7,750.00
Arnold A. Weinstein ......    7,000.00
Aaron Fried ..............    3,000.00
George Bond ..............    1,000.00
Tess J. Schwartz .........    3,000.00
Cydney Grosman ...........    2,000.00
Rose Kaplan ..............    1,000.00
Robert A. Noire ..........    5,000.00
Richard S. Hull ..........    3,600.00
Leslie Saul ..............    3,000.00
Jerome Fried .............    2,000.00
Ann Rosen ................    6,000.00
The claim for 10 shares involves two certificates for 5 shares each dated March 13, 1953, and April 23, 1953, respectively. The Examiner found that "At that time there were no open transactions between Forman and Malakoff and neither one owed the other any money"; that Forman delivered a check for $5,000 dated April 23, 1953, payable to Malakoff to cover Forman's agreement to buy 5 shares in the Nazareth project; that "It is perfectly plain that the transaction Forman had with Malakoff on or about the 17th day of March, 1953, was a security transaction so far as the Nazareth stock was concerned"; and that the second certificate "likewise seems to have been a security transaction despite Forman's testimony to the contrary." The April, 1953, payment of $5,000 for 5 shares is claimed to have been for an investment in Nazareth. However, the Examiner has found to the contrary on conflicting evidence and no showing has been made that such a finding is clearly erroneous. As a result, these facts place this claim in the second category and it must be disallowed.
Another group (the Margolis group) involved in a separate appeal (No. 26962) must be considered as potential participants. The Referee in Bankruptcy found no equity in favor of any claimant in this group, i. e., Benjamin Margolis (17 shares), William McK. Shongut (10 shares), Bernard Ungar (2 shares), Ida Margolis (15 shares) and Sarah Kason (10 shares).
Appellants' contention in No. 26,962 that the district court could not open the petition for review and receive new evidence, including the minutes of the hearings on the stock claims involved in appeal No. 27,000, is without merit. General Order No. 47, 11 U.S.C. A. following section 53, gives the district court the right to receive further evidence after receipt of a referee's report.5 The necessity for such a rule is demonstrated by the facts presented in this case. The Referee's decision, that none of the claimants could recover because none of them gave consideration which passed directly to the corporation, was wrong. In order to make an equitable determination of the claims presented by these five claimants, the district court deemed it necessary (probably for comparative purposes) to consider the factual basis for the allowance of the claims of the other claimants. In view of our disposition of the claims in Docket No. 27,000 and our views as to the claims in Docket No. 26,962 further evidence beyond that already available to the court would seem to be unnecessary.
See Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924)
"No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void." Pa.Const. art. XVI, § 7, P.S., implemented in 15 Purdon's Pa. Stat. § 2852-603, subd. A (1958)
"`Value' is any consideration sufficient to support a simple contract. An antecedent or pre-existing obligation, whether for money or not, constitutes value where a certificate is taken either in satisfaction or as security therefor." Uniform Stock Transfer Act § 22(1), 15 Purdon's Pa. Stat. § 322, now covered by Uniform Commercial Code § 8-303, 12A Purdon's Pa.Stat. § 8-303 (1958)
See footnote "2," supra
In the Matter of Kaufhold, 3rd Cir., 1958, 256 F.2d 181; Powell v. Wumkes, 3rd Cir., 1942, 142 F.2d 4