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December 29, 1959

William OTTE, as Trustee in Bankruptcy of Personal Typewriter Co., Inc., Plaintiff,
FRANKLIN NATIONAL BANK OF FRANKLIN SQUARE, N.Y., Commercial State Bank & Trust Company of New York, Murray J. Levy and Robert Siegel, Defendants. FRANKLIN NATIONAL BANK OF LONG ISLAND, Third-Party Plaintiff, v. FUNDS FOR BUSINESS, INC., Third-Party Defendant

The opinion of the court was delivered by: BYERS

These cases were consolidated for trial (Pre-Trial Order, May 14, 1959) which proceeded on October 21, 22 and 23. Final briefs were filed on November 17, 1959.

The court has not been provided with the minutes of the trial. There are eleven so-called briefs and memoranda before the court, none of which contains a concise chronological statement of all the facts.

 In the first action (complaint filed April 4, 1958) the trustee seeks to recover from the two banks, to be called Franklin and Commercial, respectively, the sums of $ 9,747.20 and and $ 11,382.90, as asserted in the fourth and fifth causes of action pleaded in the complaint. As to the Franklin, judgment is also sought against the individual defendants Levy and Siegel jointly with the bank.

 There is also a complaint (filed June 27, 1958) and answer (filed Sept. 15, 1958), No. 18826 (the second cause) wherein the trustee seeks judgment against Funds to recover $ 9,682.74 said to constitute a preferential payment under the Bankruptcy Act, 11 U.S.C.A. § 1 et seq.

 In No. 18608 the Franklin Bank has filed its third-party complaint (Feb. 5, 1959) against Funds, seeking relief against it, in the event of being held liable to the plaintiff.

 The plaintiff's main theory is understood to be that these banks permitted the bankrupt and Northern (later described) to operate their accounts without exact compliance with certain formal requisites such as resolutions of the directors, etc., as a result of which the checks deposited in Franklin were used to meet a corporate check drawn to the order of Funds for Business, Inc., to be called Funds, and collected by it. as to the Commercial account, that the checks drawn cannot now be shown to have been applied to the corporate purposes of Personal. This will be discussed below.

 As to neither account is there an assertion that the bank itself benefited in any way from the criticized handling of corporate deposits; this means that there was no transfer to either bank which could be attacked under the Bankruptcy Law.

 The depositor, as to Franklin, was Personal Typewriter Co., Inc., to be called Personal.

 That was a New York corporation as to which a certificate of incorporation under another name was filed on August 30, 1956 and thereby corporate existence was created. The capital stock was said to consist of 200 shares of no par stock; the original name was changed to Personal on or about September 14, 1956. There were organization minutes prepared but never signed. Directors' minutes dated September 10, 1956 were like-wise prepared but also not signed, which recite the election of Hyman Gardner as president and John O'Rourke as secretary-treasurer. No stock certificates were issued, but as of about the last mentioned date Gardner and O'Rourke acted as the only two officers and stockholders of this incompletely organized corporation. They may be regarded as de facto officers for the purposes of this case, but they were not careful in signing corporate papers to distinguish between the offices of president, vice-president, or secretary and treasurer.

 They were the officers and probably the principal stockholders also of Midland Commercial Corporation of Newark, New Jersey, to be called Midland, which among other things was financing several enterprises, one being Northern Appliance Stores, Inc., to be called Northern. That was a subsidiary of Midland, marketing Underwood typewriter machines and similar devices. Its store was in Great Neck, Queens County, and nearby was the store of Personal.

 The purpose of creating Personal was to sell Remington Rand typewriters which Northern was not supposed to do since it was an Underwood machine distributor.

 The organization of Personal was in the nature of a subterfuge and these two enterprises were really operated jointly at the separate addresses, and it is difficult to believe that in the practical sense Remington Rand was unaware of the true facts. There if testimony to the contrary.

 An understanding of this situation, which has not been too clearly brought to light, is the necessary basis of an approach to the somewhat casual attention given by the banks to their handling of these two accounts. The period of time involved in these transactions comprises the months of December 1956 and January and February, 1957 and it was during that interval that the individual defendants, Siegel and Levy, took over the stockholdings of Gardner and O'Rourke in Midland and management and control of that corporation, but the approximate effective date cannot be stated; as an incident thereto, Siegel and Levy took over the practical operations of Northern and Personal, which it is to be remembered was a mere adjunct of Northern. There is no doubt that this is what took place, but there is a deficiency in records from which the time could be established.

 Thus it was that these two men succeeded to whatever official status attached to Gardner and O'Rourke as de facto officers of Personal, but the steps by which that result was accomplished are not clearly stated.

 The relationship between Personal and Funds is presented in the first case, and requires decision in the second, because the theory of Franklin as third-party plaintiff is that if liability is to be visited upon it because of the way in which the account was handled, that liability must ultimately be visited upon Funds.

 Franklin Bank Matter

 Funds was the factor of Personal by reason of arrangements to that end initiated by the said Hyman Gardner, in the course of which he represented that Personal was a wholly owned subsidiary of Midland, and that the latter was a publicly held corporation whose stock was traded 'over the counter,' and of which corporation he was secretary and O'Rourke president; also that he and O'Rourke would personally guarantee the payment of any loans made by Funds to Personal.

 A Dun and Bradstreet report procured by Funds, indicated that Midland had a net worth of over $ 460,000, upon which showing a factoring agreement dated December 6, 1956 was entered into between Funds and Personal, and the personal guarantees of Gardner and O'Rourke and Midland were endorsed thereon.

 Between December 10, 1956 and January 17, 1957 Personal, by the terms of a factoring agreement in evidence, assigned to Funds its accounts, namely, its receivables from Remington Rand for sales commissions above referred to, the total of the assigned accounts being $ 51,917.61, and against these assignments Funds advanced to Personal during the same period, a total of $ 31,150.

 Of the customer contracts under which Personal had earned the selling commission, Remington Rand had accepted by about February 1, 1957 a total of $ 9,731.90, and forwarded checks for that amount to Personal. Those checks were deposited in the Personal account and against that total Personal drew its check for $ 9,682.74 in favor of Funds for application to the advances above described of $ 31,150.

 It is this transaction to which the trustee objects and as to which he seeks to hold the bank liable. This account was opened February 6, 1957 and the signature card bears the names of Murray J. Levy as president and Robert Siegel as secretary-treasurer of Personal. Seemingly but two deposits were made: February 6, 1957 $9,408.62 February 7, 1957 49.16 274.12 $9,731.90.

 The said pre-trial order lists the contested issues of law against this bank as follows:

 1. The legal effect of the resolution pursuant to which this account was opened and the payment of the said check of February 13, 1957 to the order of Funds which was signed by the defendant Siegel as secretary of the bankrupt.

 The signature card is regular on its face and there was no special circumstance to cause the bank to challenge the capacity of Levy and Siegel so to open the account. Siegel had been known to the bank for a considerable period of time so that it was not dealing with a stranger, and nothing is shown in the evidence to justify special inquiry on the part of the bank as to Siegel's status as an officer of Personal.

 It is to be remembered that the check to Funds was not an instrumentality for diverting corporate funds for the benefit of either Siegal or Levy, as was true as to certain individuals in the cases of Wen Kroy Realty Co. v. Public National Bank, etc., 260 N.Y. 84, 183 N.E. 73; Wagner Trading Co. v. Battery Park Nat. Bank, 228 N.Y. 37, 126 N.E. 347, 9 A.L.R. 340; Fidelity & Deposit Co. of Maryland v. Queens County Trust Co., 226 N.Y. 225, 123 N.E. 370; Susquehanna Line, Inc. v. Auditore, 223 App. Div. 585, 229 N.Y.S. 181.

 The use that was made of this check was payment of a corporate indebtedness of Personal, and that result could well have come about even though the bank had insisted upon the holding of a directors' meeting of Personal in the bank's offices and the proper adoption of a resolution by the directors. In other words, the lapse, if such it was, in failing to exact from Personal a completely formal corporate proceeding was of no benefit to the bank, nor did it result in other than a conventional application of Personal funds to the payment of a Personal debt.

 The answer to the first question is that the legal effect of the reliance of the bank upon the certificate filed by Levy and Siegel on the part of Personal on February 6, 1957, for the purposes of this case, is found to have been sufficient to justify the bank in opening the account and in paying the said check to Funds.

 2. Were Siegel and Levy de facto officers of the bankrupt and duly qualified to execute the resolution?

 The evidence is not clear enough to answer this question categorically; they acted as and are deemed to have been de facto officers, and the bank was justified in relying upon their ...

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