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May 23, 1969

Glenn D. BARTLE, Trustee of Markson Bros., Inc., now known as M B H, Inc., Plaintiff,
Asher S. MARKSON, Defendant

Ryan, District Judge.

The opinion of the court was delivered by: RYAN


RYAN, District Judge.

 This action came to me for trial during my designation to sit in the Northern District of New York. Trial had been had before the late Judge Brennan, decision had been reserved, briefs had been submitted and the issues were being considered by the Judge, when he died. The attorneys for both parties stipulated that I might sit as trial judge and render decision on the trial record already made. I have read the trial transcript, exhibits, and briefs, and have heard counsel in oral argument. I am grateful to the attorneys for their assistance. It is but one of many occasions when, confronted with a situation testing the efficiency of our judicial system, members of the Bar recognize the responsibility we all share and give complete cooperation to the Court.

 This opinion shall constitute my findings of fact and conclusions of law.

 The action arises out of the sale of all of the capital stock of Markson Bros., Inc. (the corporation), a retailer of furniture and house furnishings which operated a chain of stores, to Son-Mark Industries, Inc. (Son-Mark) on November 6, 1959 for $1,350,000.00 and the subsequent bankruptcies of both the corporation and Son-Mark.

 Plaintiff, Glenn D. Bartle, as Trustee in Bankruptcy of the corporation now known as M B H, Inc., filed this action on February 18, 1965, one day after his election as Trustee.

 The corporation on March 31, 1961 filed a petition for arrangement under Chapter XI of the Bankruptcy Act in this District and a Plan of Arrangement to pay general creditors 47 1/2% in cash, but objections were made on the ground that defendant and other officers and directors had failed to explain shrinkage in assets of $1,964,794. The plan was confirmed by the Referee and by the District Court, but the confirmation was reversed by the Court of Appeals which remanded the matter to require that inquiry be made into the lost assets, the Court stating (314 F.2d 303, 306, March 5, 1963):

"Here Markson's sudden and unexplained riches-to-rags descent from its position as one of the financially strongest concerns in the central New York area to that of a bankrupt company amply makes out the prima facie case required by the statute to shift the burden to Markson to explain the loss of nearly $2 million in a loan to its corporate parent - whose assumption of control of the debtor marked the start of the subsidiary's financial decline."

 Following that decision, the creditors discovered that the assets of the corporation had been transferred to Solways Furniture Co. in December, 1961. In settlement of their claim that this was illegal, the Referee on October 28, 1963 approved a compromise providing for payment to all the creditors of an additional 25% on the balance of their claims and reserving to the creditors all causes of action against the officers, directors, and stockholders of the corporation. At that date, a class action was pending on behalf of all creditors in the New York State Supreme Court against the defendant; a second class action was commenced shortly thereafter by another creditor against the corporation, Son-Mark and officers and directors other than Asher S. Markson. When defendant challenged the use of the class action device and contended that each creditor must establish his individual claim, certain creditors moved this Court to reopen the Chapter XI proceedings and to appoint a Receiver to represent all the creditors. Judge Brennan on March 3, 1964 granted the relief sought, and the Receiver so appointed, after being denied intervention in the State Court, filed an action against defendant in this Court in April, 1964. The complaint was dismissed by Judge Brennan for lack of capacity to sue, and on appeal to the Court of Appeals, Second Circuit, the dismissal was affirmed (340 F.2d 30, 1965). The Court held that there was no basis to support prosecution of creditors' claims by a Receiver appointed under Chapter XI of the Bankruptcy Act, particularly where there were no assets and where all rights had been reserved to the creditors, and thus gaining admission to the federal courts, but that it did not consider "whether some alternative procedure might render a federal forum available * * *." (p. 33).

 It was following this decision that, at a meeting of creditors called on February 17, 1965 by the Referee, the plaintiff Bartle was elected Trustee and filed this action the next day. On May 18, 1965, summary judgment was granted on defendant's motion dismissing the complaint for lack of capacity to sue in the Trustee. From the appeal which followed, the Court held (357 F.2d 517, 1966) that the District Court had federal jurisdiction to entertain this action under Section 70(e) of the Bankruptcy Act which declares that the Trustee can avoid any transfer of property that is fraudulent or voidable under any Federal or State law applicable thereto.

 It read the complaint to alleged conveyances condemned as fraudulent by Sections 273-276 of the New York Debtor and Creditor Law, McKinney's Consol.Laws, c. 12, and transfers of corporate property violating Section 15 of the Stock Corporation Law, McKinney's Consol.Laws, c. 59. It noted that the complaint did not sufficiently charge a preference avoidable under Section 60 of the Bankruptcy Act in that it lacked any allegation of a debtor-creditor relationship between the corporation and Son-Mark; and that it stated a very questionable claim under Section 67 of the Bankruptcy Act for most of the transactions alleged, even if within the definition of fraudulent conveyances, had not occurred within a year prior to the filing of the petition as Section 67 requires. However, the Court found that, although the suit was against Markson and not Son-Mark, the transferee, it was maintainable and there was a basis for jurisdiction under Section 70(e):

"To the extent that Markson has received the benefit of a conveyance allegedly fraudulent against creditors, he is the proper defendant in a suit to avoid the transfer and ┬ž 70(e) is applicable even on the most literal reading." (p. 522)

 With respect to the other transactions charging Markson with having consented to or caused a fraudulent transfer (General Corporation Law, McKinney's Consol.Laws, c. 23, Sec. 60(1) and (2)) rather than with having received its fruits, the Court sustained jurisdiction under the pendent jurisdiction doctrine, since the transfer of corporate assets to Son-Mark, and thence to Markson, was "the source from which all else flowed" (522).

 The following are the statutory provisions relevant to plaintiff's claims.

 Section 70(e)(1) of the Bankruptcy Act provides that a transfer which, under any federal or state law applicable thereto, is fraudulent as against, or voidable for any other reason by any creditor of the debtor "shall be null and void against the trustee of such debtor."

 Section 15 of the New York Stock Corporation Law prohibits the transfer of property by any corporation which shall have refused to pay any of its obligations to any of its officers, directors or stockholders other ...

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