The opinion of the court was delivered by: ROSLING
The fraudulent intent of defendants to defeat the government's claim for unpaid income taxes, interest and penalties for the years 1955 and 1956 owing by Planet Plating Company, Inc. ("Planet") and the utter lack of business purpose in the transfer of Planet assets to Plastic Electro-Finishing Corp. ("Plastic") constituting such fraud are so manifest that the Court is at a loss to determine from the evidence whether the defendants' contest of so obviously valid a claim as plaintiff's is motivated by a bona fide myopia or by a less innocuous purpose to delay the creditor government while some civil or, possibly, criminal statute of limitations expires.
The Court will not long linger over the transaction which found in 1962 the predecessor Planet supplanted by the successor entity Plastic in the conduct of the selfsame business. The two closed corporations, the stock of which was held in equal ownership by two individuals, Sherman and Collin, who occupied the same official positions in both corporations and performed identical business functions for each, were successively engaged in the same business, at the same premises and with the same physical plant dealt with and supplied the needs of the same customers.
The point in time at which Planet was "abandoned" and Plastic took over was March 1, 1963. The method by which the transition was effected was a less than arms-length transaction under which Plastic paid Planet $9,033* and took over from Planet its accounts receivable, ($63,145), inventory, ($9,244), interest in Plye Ed Dor Realty Co. ($4,465), and machinery and equipment, ($8,553), and a few other miscellaneous items approximating $1,700. The transferee Plastic simultaneously assumed liabilities, of which the largest were accounts payable, ($41,559), and loans payable to the two principals in the corporations, (Collin, $15,603; Sherman, $15,259). Reserves for bad debts and trade allowances, ($5,398), and a note liability, ($246), comprised the remaining liabilities assumed.
The check given to Planet by Plastic to seal the transaction equalled the net difference, ($9,033), between the total assets ($87,098) taken over and the selected liabilities assumed, ($78,065).
It is at once noted that in this transfer not only does the asset value if realized upon at the amounts assigned in the Planet-Plastic agreement exceed by $9,033 the total of all liabilities assumed but if the Collin and Sherman loans payable by Planet were treated as capital investments in that company, which conceivably they were,
the transferred accounts receivable alone could easily satisfy in full all other obligations taken over, with a substantial surplus of assets remaining above the liabilities thus paid.
Left behind in Planet for payment by that company were some small bills totalling $342, and large unsatisfied claims for governmental taxes. These residual obligations of Planet, as evidenced by checks of Planet issued after March 1, 1963, presumably drawn against the $9,033 Plastic check to Planet were the Federal and New York State taxes, set forth below:
Manufacturers Hanover payroll
taxes for Planet $2,048
Social Security 64
Unemployment Insurance 690
Social Security and Withholding 948
Federal Income Tax -- 1961 584
Federal Income Tax on account
of year ended June 30, 1955 2,887
What had precipitated the Planet-Plastic metathesis was an overhanging liability for Federal income tax deficiencies against Planet for the taxable years ended June 30, 1955 and 1956. These liabilities included claims for civil fraud penalties and interest. As of March 1, 1963, review of the deficiencies at the instance of Planet as taxpayer was pending in the Tax Court, petition for review having been filed on July 2, 1962. A conference by Planet with the Internal Revenue Service respecting such liability was held on December 18, 1962, the month before the incorporation of Plastic. Further conferences were conducted on May 20, and June 7, 1963. The last two dates mentioned followed the commencement by Plastic of its business on March 1, 1963. Shortly thereafter on October 1, 1963, Planet stipulated in the Tax Court in the action it had brought, for a decision against it determining deficiencies, including an award of fraud penalties, and on November 8, 1963, assessments for unpaid balances for the years ending June 30, 1955 and 1956 were duly filed by the government. These totalled $64,712.
The assessments for deficiencies in income taxes for the years in question appear to have had some relationship to the indictment in 1958 and conviction in 1959 of Planet, Sherman and Collin in a joint indictment in this court of an offense under 50 U.S.C. App. Section 2073, in ordering or selling nickel anodes. All three defendants were fined in substantial amounts.
At all events, at the beginning of 1963, when the two individuals engaged in their Planet-Plastic metamorphosis, they knew full well that they had no defense to an imminent tax deficiency assessment against Planet of a sum in excess of $60,000 and interest.
Turning now to the mathematics of the transaction, it is at once apparent that if Planet had been permitted to go into bankruptcy, the government as a preferred creditor (Bankruptcy Act, § 64(a) (4), 11 U.S.C. § 104(a) (4); Rev.St. § 3466, 31 U.S.C. § 191. Cf. United States v. Key, 397 U.S. 322, 90 S. Ct. 1049, 25 L. Ed. 2d 340 (1970)), would have been enabled to collect its claim in full. If without bankruptcy and preference the government had shared pro rata in the assets of the company it would have been entitled to receive about 50% of its claim, with its aliquot share considerably enhanced if the Sherman and Collin claims for moneys "loaned" the corporation had been relegated to the status of a capital interest.
By their eclectic bookkeeping approach, however, these controlling stockholders have, hopefully, produced a situation which has preferred certain creditors, including themselves, who receive 100 cents on the dollar of their claims, whereas the United States, sitting below the salt, has realized from the abandoned Planet but $2,887 on its $80,000 plus fraud claim for deficiency in income tax payment, and has no prospect of ever collecting anything additional unless it prevails in this action.
The point need not be further labored by discussing the blatant circumstance that Sherman and Collin, prospering enormously since the successor Plastic was so solvently established, neglected to take into financial account that the purchase price bid for a going enterprise should, if the sale is fairly conducted, substantially exceed the market price of the assets when sold under the hammer at auction to be carted away.
It is the Court's conclusion that the transfer challenged by the United States is void for actual and intended fraud of creditors and was at most a paper transaction, accomplishing nothing.
Plaintiff is entitled to judgment against Plastic and Planet
in the sum of $81,563.52 plus interest to the date of entry of judgment at the rate of $8.01 per diem ...