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MCNELLIS v. RAYMOND

January 19, 1971

Philip J. McNELLIS1 et al., Plaintiffs,
v.
Isadore RAYMOND,1 Defendant


Port, District Judge.


The opinion of the court was delivered by: PORT

MEMORANDUM-DECISION and ORDER

PORT, District Judge.

 This is one of a number of proceedings instituted in the state and federal courts by the Trustee in Bankruptcy of Donald Potter to recover payments made by Donald Potter to various lenders of money to Donald, his father, Jackson M. Potter, and to Potter Securities Corporation, each having been adjudicated a bankrupt on May 28, 1963. Recovery is sought in some instances of interest paid in excess of the legal rate (excess interest), and in others for all principal, legal and excess interest. This action centers on substantial sums loaned by the defendant Raymond to Donald Potter, Jackson Potter, and to Potter Securities.

 The history of the case, and for the most part the pertinent facts, are set forth in McNellis v. Raymond. *fn2"

 The action was originally tried to the court before Hon. William H. Timbers, Chief Judge of the District of Connecticut, sitting by designation in this district. Judge Timbers, in effect, afforded the plaintiff separate trials for the recovery of money repaid on loans made to Potter Securities *fn3" and for those made to Donald Potter. *fn4" He referred to the first trial (loans to Potter Securities) as an action based upon "the ground that such payments were made without consideration and therefore were transfers in fraud of the bankrupt's creditors;" *fn5" he designated the second (loans to Donald) as the "trial on the usury cause of action." *fn6"

 Judge Timbers dismissed the claim based on loans to Potter Securities, *fn7" holding that usury did not apply to loans to the corporation, and that there was sufficient nexus between Donald and Potter Securities to infer that "Donald was not a volunteer in making the payments in question to Raymond" *fn8" and to conclude that the transfers were not in defraud of creditors since they were supported by "valuable consideration." *fn9" The dismissal of this claim was affirmed. *fn10"

 Without reaching the merits, Judge Timbers dismissed the claims based on repayments of allegedly usurious loans to Donald *fn11" as time-barred under the one year statute of limitations for claims to recover usurious interest. *fn12"

 Confining its holding only to the statute of limitations, the Court of Appeals reversed *fn13" and remanded for further proceedings, leaving it "to the district court to determine whether a new trial is called for on those actions or whether additional findings, with or without the further taking of evidence, will suffice." *fn14" On remand, the trial judge was instructed that the "[findings] should include just how much money was in fact loaned by Raymond directly to Donald Potter individually or to Potter Real Estate, how much interest was charged, and how much of that interest, if any, was usurious." *fn15"

 Under date of July 13, 1970, a pretrial order was filed incorporating a stipulation of the parties that the proceedings on remand be heard and decided by me "upon the transcript of and the exhibits received on the trials in this case held before Hon. William H. Timbers, * * and without the further taking of testimony." *fn16"

 Having examined the transcript and exhibits received on the trials before Judge Timbers, I conclude that the plaintiff is entitled to judgment in the sum of $15,601.70 with interest from February 8, 1965. See Ruderman v. United States, 355 F.2d 995 (2d Cir. 1966).

 This decision and the appendix hereto constitute the findings of fact and conclusions of law. All the findings and conclusions in Judge Timbers' *fn17" decisions are adopted and incorporated herein except those inconsistent with any in this decision or with the opinion of the Court of Appeals in McNellis v. Raymond. *fn18"

 The plaintiff is entitled to a judgment in his favor in the sum of $15,601.70 with interest from February 8, 1965 and costs upon the findings set forth in the appendix hereto.

 BACKGROUND

 This remand is concerned solely with loans from Raymond to Donald and to the Potter Real Estate Company. *fn19" Loans to Potter Securities were disposed of as not in defraud of creditors by that part of Judge Timbers' judgment which was affirmed. Loans to Jackson Potter formed no part of the plaintiff's complaint. To put the evidence in focus, it will probably help to backtrack.

 Upon an examination of the Bankrupt's records by the Trustee, it appeared that 294 checks in the total sum of $582,637.90, had been drawn on the accounts of Potter Real Estate Company and made payable to Raymond. Using this as a jumping off point, the Trustee initiated his original action. Raymond, in his answer and in his answer to interrogatories, claimed that the loans were made to Potter Securities Corporation or to other corporations controlled by Potter, and consequently, usury would not avoid them.

 The Trustee, assuming that these allegations of the defendant made his claim based upon a fraudulent transfer practically invulnerable, embraced the allegations, seemingly without regard to their genuineness, and on the first trial before Judge Timbers, he did not offer proof of loans to Donald. *fn20"

 On the second trial before Judge Timbers and on the remand, the Trustee was obliged to do an about-face, since lack of such proof would be fatal to his remaining claims. It is against this background that the record on which it has been stipulated I am to decide the case was built.

 While it was not essential to Judge Timbers' decision to find any facts going to the merits of the remanded claims, because his dismissal was based on the statute of limitations, he nevertheless, was obliged to and did find facts with reference to the elements of a fraudulent transfer on the first trial. He found all the essential elements of a fraudulent conveyance claim to have been established by the plaintiff except the fourth designated essential element, i.e. "[that] the transfers were made without fair consideration." *fn21" Since the part of the judgment based on these Findings and Conclusions was affirmed, *fn22" I feel bound by them. To eliminate any doubt, however, that I intend these Findings and Conclusions to apply herein, I also specifically find and conclude that all the elements of a fraudulent transfer, except fair consideration which will be treated later, existed.

 The only factual issues to be determined on the remand relate to alleged loans from Raymond to Donald -- whether they were usurious and if so, the effect of the usury on the question of fair consideration.

 THE LOANS

 The defendant Raymond advanced money to Donald, Potter Real Estate Company, Jackson Potter, and Potter Securities Corporation over a number of years. Transactions took the form of unsecured loans, mortgage loans, the purchase at a discount of real estate commissions earned but not paid, and in at least one instance the purchase at a discount of payment due Potter Securities Corporation under an agreement cancelling a lease.

 The unsecured loans were evidenced by notes or more generally by a postdated check or a series of postdated checks.

 The money was advanced by Raymond in the form of a check or checks drawn on one of his personal checking accounts, by cash, or by checks to his order, received by him in the course of his business and endorsed by him to the borrower, or by a combination of these.

 Most loan transactions were entered in Potter's books and records and recorded the amount actually received from Raymond, plus an additional amount recorded as "deferred interest;" as indicated, a note or postdated check or series of postdated checks totalling the sum of these figures was given to Raymond as evidence of the loan. As the note or checks were paid, the amount was properly credited to the payment of the "deferred interest" or principal of the loan. The "deferred interest" was the amount agreed upon by Jackson Potter and Raymond as interest for the use of the money. The amount of interest agreed to be paid varied depending upon the circumstances existing at the time the loan was made. In some instances, in the event the loan was not paid when due, or where there was no "deferred interest" recorded at the time of the advance, an additional bonus or interest charge was made. The interest charge was not computed in percentages but was determined in dollar amounts. In every instance in which a recovery is permitted, the amounts of interest agreed upon and collected far exceed the legal rate of interest.

 All transactions relating to Donald Potter, Potter Real Estate Company, Jackson Potter, or Potter Securities Corporation were recorded in one set of books maintained by Potter Real Estate Company. Potter Real Estate Company was the only entity maintaining a bank account. The transactions were shown on the books insofar as they related to loans by Raymond without any distinction as to whether the loans were made to Potter Securities Corporation, Jackson, Donald, or Potter Real Estate Company. Under the circumstances, it was necessary in most instances to look elsewhere to determine to whom a loan was made or with whom Raymond had conducted the particular transaction.

 Except for mortgage transactions, which form no part of this case, the loans were initiated by Jackson, generally through a phone call to Raymond. The amounts to be loaned, together with the amount of interest or bonus, and the duration of the loan were determined in that conversation. The money was advanced by Raymond as previously indicated. When a Raymond check was given to cover the advance in whole or in part, the check was prepared by Jackson Potter or one of his bookkeepers and signed by Raymond, who professed an inability to read, except figures.

 The name of the payee was filled in in accordance with the particular need at the time. That is, if Potter Securities Corporation was in need of the money, or if Jackson Potter was in need of the money, the payee would be either of them. Otherwise, ...


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