The opinion of the court was delivered by: HAIGHT
Defendants move pursuant to Rule 64 of the Federal Rules of Civil Procedure and New York Civil Practice Law and Rules ("CPLR") § 6223 for an order vacating a writ of attachment which this Court issued June 29, 1976 upon plaintiffs' ex parte application. The main action, charging defendants with breach of contract, monies owing for goods sold and delivered, and fraudulent inducement was initiated June 9, 1976, and the application averred that the writ was authorized by CPLR §§ 6201(4), (5) or (8)
in that defendants intended to defraud their creditors, including plaintiffs, through the concealment or improper disposition of their assets and/or because the underlying obligation was incurred through the misrepresentations of the defendants. After the issuance of the writ, the bank accounts of the corporate and individual defendants were attached.
On July 9, a hearing was held pursuant to defendants' motion to vacate, and further papers and evidence submitted. Based upon the record now before the Court, the writ of attachment is vacated for the reasons set forth below.
Plaintiffs Trigo Hnos., Inc. ("Trigo") and Casera Foods, Inc. ("Casera") are Puerto Rican corporations engaged in the business of packaging and canning of foodstuffs. Subsequent to discussions with Alberto Baez Herrero ("Baez") and Luis Romanach del Valle ("Romanach") in October, 1975, plaintiffs in November, 1975 retained Premium Wholesale Groceries, Inc. ("Premium"), a New York corporation of which Messrs. Baez and Romanach were and continue to be the principal shareholders, directors and operating officers, to distribute its products in the metropolitan area. Premium appears to have successfully marketed a modest shipment of plaintiffs' goods following these initial contacts, and accordingly, it seems that an expansion of the relationship was contemplated. Thus, a contract of exclusive distribution was drafted, though never formally executed, and in December, 1975, plaintiffs extended to Premium $50,000 of unsecured credit.
In January, 1976, plaintiffs' representatives, including a major executive officer, Mr. Dionisio Trigo, met in New York with Messrs. Baez and Romanach, and initiated discussion of plaintiffs' possible acquisition of 50% of Premium's stock. Additionally, according to the undisputed statement of Mr. Romanach, plaintiffs on January 19 "decided to send a massive shipment of goods to Premium in New York" (Romanach Afft. [*] 11), although it is unclear from the present record at what time this merchandise was actually shipped to and received by the defendants.
It is the concededly unpaid purchase price of these goods, approximately $150,000, which is the subject of the main suit; defendants do not contend that the product was not as warranted, but rather aver that the consignment was intended either as an installment in plaintiffs' purchase of half the outstanding shares of Premium, and as such, an investment in that company, or else as a step aimed at bolstering Premium's financial stature, and maintaining it as a viable entity pending the stock acquisition.
Returning to Puerto Rico, Mr. Trigo contacted his bank, a branch office of The Banco Popular, and requested their aid in ascertaining the financial status of Premium. During a February 3 visit to said bank, he was shown a financial statement of Premium dated June, 1975, together with a covering letter from a C.P.A., certain unaudited financial statements from prior periods, and a memorandum from the United Americas Bank indicating that Premium had outstanding from it a $250,000 long-term loan, and a $75,000 line of credit "for the purpose of letters of credit and acceptance financing."
(Trigo Afft. [*] 6(c)). Mr. Trigo states that copies of these documents, or fair summaries of them, were transmitted to him by the bank, but were lost during his next trip to New York when his briefcase and its contents were allegedly stolen.
Defendants assert that the revelation of such information violated federal and state banking regulations. Cf. New York General Business Law §§ 370 et seq. However that may be, plaintiffs aver that the effect of this data was to lead them to believe that Premium was in a sound financial position, and to entice them into extending "credit" to Premium, as a result of which they were damaged in an amount equal to the purchase price of the goods previously shipped to Premium. Moreover, plaintiffs contend that the misrepresentations persuaded them to pursue further the proposed partial acquisition of the corporate defendant, as is evidenced by a letter of intent dated February 27, 1976, and signed by both parties. Plaintiffs claim that the favorable impression created by this data was reinforced by direct statements made to its representatives by Mr. Romanach in a meeting between the parties on February 23. Despite plaintiffs' averred belief in the financial health of Premium, it appears that a joint and several guarantee of up to $100,000 was given Casera by Messrs. Baez and Romanach on March 2, covering Premium's debts and obligations.
On May 3, 1976, Mr. Trigo and other employees of plaintiffs arrived in New York to conclude the final negotiations for the sale of Premium stock. Plaintiffs aver that during a May 4 meeting, Mr. Romanach "admitted" that the financial information set forth in the documents shown to Mr. Trigo by his banker were false (Trigo Afft. [*] 6), and after a review of Premium's books, voluntarily produced by defendants to plaintiffs' accountants, concluded that Premium was in fact insolvent, with a negative net worth of approximately $200,000. Consequently, plaintiffs ceased the acquisition discussions and instead, produced an instrument which, if signed, would have required defendants to pay for the goods previously provided them by plaintiffs before the end of the month. Defendants refused to sign said agreement, and after several fruitless attempts to resolve these matters, plaintiffs initiated the instant action by filing on June 9, 1976 a complaint containing causes of action based on breach of contract, the personal guarantee and fraudulent inducement. On June 29, this Court issued upon plaintiffs' ex parte application the writ of attachment, which has since been served upon Premium's bank along with the banks utilized by the individual defendants for their personal accounts. By way of an Order to Show Cause dated July 8, defendants brought on the motion to vacate; the parties were heard on July 9, and additional evidence and papers adduced.
Plaintiffs have predicated their attachment upon CPLR § 6201(4) (intent to defraud creditors through concealment or removal of assets), § 6201(5) (fraudulent inducement of contract) or § 6201(8) (action for fraud or deceit). With regard to § 6201(4), it is more specifically averred that defendants are paying certain "preferred" creditors with the design of excluding plaintiffs from their just compensation, and that such behavior is tantamount to a secretion or improper disposition of assets. Additionally, plaintiffs assert that attachment is warranted under either § 6201(5) or (8) because the underlying contract was fraudulently induced by defendants' false financial statements and because Premium, after having secured credit from the plaintiffs, pledged virtually all its assets to its bank (The United Americas Bank) in exchange for additional financing which would create the appearance that it was a feasible operation, thereby luring unsecured trade creditors such as plaintiffs into dealing with them.
There has been, it is fair to say, a good deal of confusion concerning the question of what burden must be borne by a party seeking to vacate a writ of attachment. In Sugar v. Curtis Circulation Co., 383 F. Supp. 643 (S.D.N.Y.1974), a three judge statutory court found that New York's statutory scheme provided for vacation only when defendant could prove that the provisional remedy was unnecessary to the security of the plaintiff (i.e., defendant's assets were substantial and permanent enough to insure plaintiff of payment in the event of a judgment favorable to him), or else that the plaintiff's underlying cause of action could not ultimately prevail. The court in Sugar held that these requirements placed a burden so heavy upon the party seeking to dissolve the writ that it rendered the necessary post-seizure hearing meaningless, and thus violated the defendant's 14th Amendment right to due process.
Upon review by the Supreme Court, sub nom. Carey v. Sugar, 425 U.S. 73, 96 S. Ct. 1208, 47 L. Ed. 2d 587 (1976) (44 U.S.L.W. 4416), the New York standards for vacating attachments were held to be sufficiently ambiguous to require that the matter be remanded with instructions to the ...