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MCNELLIS v. RAYMOND

July 8, 1968

Phillip J. McNELLIS, Trustee of Donald S. Potter and Jackson M. Potter, Bankrupts, Plaintiff,
v.
Isadore RAYMOND, Defendant



The opinion of the court was delivered by: TIMBERS

TIMBERS, District Judge.

QUESTION PRESENTED

 In this action brought pursuant to the N.Y. Debtor and Creditor Law §§ 271-273, 278 (McKinney 1945), the N.Y.Gen. Obligations Law § 5-513 (McKinney 1964), and Sections 67d(2) and 70e of the Bankruptcy Act, 11 U.S.C. §§ 107(d)(2), 110(e) (1964), the question presented is whether plaintiff trustee in bankruptcy may recover from defendant Raymond, a money lender, certain payments of principal and interest made to Raymond by the bankrupt, Donald S. Potter, in repayment of earlier loans from Raymond to Potter Securities Corporation, on the ground that such payments were made without consideration and therefore were transfers in fraud of the bankrupt's creditors.

 After a six day trial at Syracuse, the Court holds that, Donald S. Potter having directly benefited from the loans, there was valuable consideration for his payments to Raymond and the transfers therefore were not fraudulent. Defendant is entitled to judgment dismissing the second cause of action alleged in the complaint - the only one pressed at the trial.

 It appears, however, that plaintiff did not pursue at the trial his first cause of action, based upon the alleged usurious character of the loans, in reliance upon defendant's representation that his transactions were solely with Potter Securities Corporation and not with the bankrupt, Donald S. Potter, or Potter Real Estate Company, his sole proprietorship. Contrary to defendant's answers to certain of plaintiff's interrogatories, defendant produced at the trial checks drawn by him to the order of Donald S. Potter and Potter Real Estate Company. Since plaintiff's abandonment of his usury cause of action appears to have been induced by defendant's failure to disclose prior to trial that he had had such transactions with Donald S. Potter or Potter Real Estate Company, plaintiff is granted leave within 20 days from the date of this decision to move for trial upon his first cause of action, in which event the Clerk is directed to assign the first cause of action for a prompt trial.

 The Court makes the following findings of fact and conclusions of law pursuant to Rule 52, Fed.R.Civ.P.

 FINDINGS OF FACT

 (1) On May 28, 1963, Donald S. Potter, Jackson M. Potter and Potter Securities Corporation, having filed separate voluntary petitions in bankruptcy, were adjudicated bankrupts in this Court. The cases were referred to Honorable David J. Goldstein as referee. The referee on June 25, 1963 appointed Phillip J. McNellis as trustee in each case.

 (2) During the period here involved - from January 1958 to the date of bankruptcy - Donald did business as a real estate broker under the name of Potter Real Estate Company, a sole proprietorship. Donald's father, Jackson, acted as real estate consultant and manager of finances of Potter Real Estate; not being a licensed real estate broker, Jackson did not engage in buying or selling real estate for others.

 (3) Jackson also was president and treasurer of Potter Securities Corporation, a New York corporation; he owned 49 of its 50 shares of stock, the other share being owned by Arlene Hoppe, the secretary. Donald was neither an officer, director or shareholder of Potter Securities.

 (4) Potter Securities was an "in and out corporation". It was a conduit for the transfer of securities and property to Potter Real Estate and Donald. The standard practice was to take title to real estate in the name of Potter Securities and then to transfer it to Potter Real Estate and sometimes to Donald. Donald's name appeared, on behalf of Potter Real Estate, on all bonds and mortgages and often as guarantor of notes, Potter Real Estate being a sole proprietorship. No money ever passed from Donald to Potter Securities when property was transferred from Potter Securities to Potter Real Estate or Donald.

 (5) Potter Securities and Potter Real Estate both operated from the same office located in the Denison Building in Syracuse. Jackson ran both enterprises, making all business decisions and representing the interests of both in borrowing money. The records of all Potter interests were kept by Potter Real Estate. All money obtained from the Potter enterprises was funneled into Potter Real Estate which had the only bank account in the Potter organization.

 (6) The reasons for conducting the Potter real estate business in this manner, according to Jackson's testimony, were: (i) Jackson had no real estate broker's license, but Donald did; and (ii) a tax advantage was believed to accrue to Potter Real Estate because of tax losses carried forward.

 (7) Raymond is a 77 year old money lender. He has had no formal schooling and claims he cannot read or write in any language; but he can sign his name and "can read figures." He has known Jackson for 20 years and has had business transactions with him for 15 years. Raymond claims that his transactions were exclusively with Jackson or Potter Securities - never with Donald or Potter Real Estate. Raymond knew, however, that Potter Real Estate had the only bank account in the Potter organization. Checks drawn to the order of Raymond, after being endorsed by him, frequently were deposited either by Jackson or Potter Securities in Raymond's bank account, reflecting Raymond's trust to that extent in Jackson and Potter Securities.

 (8) Between January 10, 1958 and March 1, 1962, the proceeds of 294 checks totalling $582,637.90, drawn on the bank account of Potter Real Estate, were paid to and received for the benefit of Raymond in payment of the principal ($527,205.78) and interest ($55,432.12) on loans Raymond had made to Potter Securities.

 (9) During the entire period of the payments to Raymond referred to in paragraph (8), supra, Donald was insolvent.

 (10) One or more creditors with provable claims against the bankrupt's estate were creditors of Donald during the period from January 1, 1958 to May 28, 1963.

 (11) Donald received the full benefit of the loans made by Raymond to Potter Securities, referred to in paragraph (8), supra.

 (12) Despite Raymond's contention throughout that he had dealt exclusively with Jackson or Potter Securities, never with Donald or Potter Real Estate, Raymond offered in evidence late in the trial certain checks drawn by him to the order of Donald S. Potter and Potter Real Estate. These checks and the information they disclosed were not produced pursuant to timely pre-trial disclosure demands by the trustee for the production of photostatic copies of all checks representing money loaned by Raymond to the Potter interests.

 (13) Upon receipt of Raymond's answers to the trustee's interrogatories, the trustee abandoned his first cause of action based on usury and relied exclusively on his second cause of action that Donald's payments to Raymond were made without consideration and therefore were transfers in fraud of Donald's creditors.

 (14) The trustee's abandonment of his usury cause of action having been induced by Raymond's failure to disclose what he was duty-bound to disclose, the trustee is entitled to his day in Court on his first cause of action.

 CONCLUSIONS OF LAW

 (1) This Court has jurisdiction over the subject matter of, and the parties to, this action, pursuant to 28 U.S.C. § 1334 (1964) and Section 23 of the Bankruptcy Act, 11 U.S.C. § 46 (1964).

 (2) The bankrupt, Donald S. Potter, having directly benefited from Raymond's loans to Potter Securities, there was valuable consideration for Donald's payments to Raymond.

 (3) There is no proof that Donald's payments to Raymond were made with fraudulent intent.

 (4) Fraud will not be presumed with respect to such payments under the N.Y. Debtor and Creditor Law or the Bankruptcy Act.

 (5) Donald's payments to Raymond were not transfers in fraud of creditors.

 (6) Raymond is entitled to judgment dismissing the second cause of action alleged in the complaint.

 (7) The trustee is entitled to a prompt trial on the first cause of action, provided he files a motion for such trial within 20 days from the date of this decision.

 This is another in the series of cases in recent years which have been before this Court and the Court of Appeals for this Circuit *fn1" in which the trustee in bankruptcy, Phillip J. McNellis, has been attempting to recover moneys paid out by the bankrupt, Donald S. Potter, on allegedly usurious loans. The bankruptcy estate is now in its sixth year.

 The trustee's basic claim in the instant action, similar to, but with noteworthy variations from, his claims made in other cases, is that Donald S. Potter, the bankrupt, made payments of interest and principal to Raymond on loans which Raymond had made to a corporation, Potter Securities Corporation.

 The complaint alleges two causes of action. Each seeks recovery from Raymond of payments made to him by the bankrupt on account of principal and ...


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