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BRUNSWICK CORP. v. WAXMAN

September 15, 1978

BRUNSWICK CORPORATION, Plaintiff,
v.
Harry WAXMAN and Evelyn Waxman, Harry Waxman, Benne Katz, Martin C. Barell, as Executors of the Estate of Sydney W. Waxman, Deceased, said Harry Waxman and Sydney W. Waxman being sued individually and as copartners doing business as Turnpike Lanes, Pike Lanes, Inc. and Waxman Construction Corp., Defendants (two cases)



The opinion of the court was delivered by: BARTELS

This is a diversity action instituted by the plaintiff to recover from the officers and shareholders of Waxman Construction Corp. the sum of $ 1,188,310.72 (minus unearned finance charges) plus interest. This amount represents the deficiency due under conditional sale contracts signed by Harry Waxman as president and Sydney W. Waxman as secretary of the Waxman Construction Corp., pursuant to which that corporation purchased certain bowling equipment from the plaintiff. Named as defendants were the individuals Harry Waxman and Sydney W. Waxman *fn1" (the "Waxmans"), who, although not individual signatories to the contracts, operated the bowling equipment under a partnership agreement. The gravamen of the complaint is that because the Waxmans operated the bowling equipment in their individual capacities, the corporate veil of Waxman Construction Corp. should be pierced and the Waxmans held personally liable.

The case was tried without a jury and after considering the testimony and the exhibits, the court has reached the conclusion set forth in the following opinion which contains its findings of fact and conclusions of law.

FACTS

 In 1960, Harry and Sydney W. Waxman were in business as general partners, owning and managing substantial real estate holdings in the New York area. This property, which the Waxmans held in the name of a number of partnerships and corporations, included a bowling alley, Seaview Lanes, in Brooklyn, New York. Encouraged by their success in operating Seaview Lanes, the Waxmans decided to expand their bowling operations, and in early 1960 contacted Brunswick Corporation to discuss the purchase of bowling equipment. During these discussions, in which Brunswick was represented by its local sales force, the Waxmans indicated that they were interested in making bowling equipment purchases through a no-asset corporation which would act as the purchaser and obligor on any conditional sale agreements. Negotiations between Brunswick and the Waxmans produced a tentative sale agreement, and in August 1960, the Waxmans formed a corporation with the name of "Waxman Construction Corp." (hereinafter "Construction Corp."), a no-asset New York corporation, to act as signatory on the sale contracts.

 Prior to completion of the equipment sales, the tentative sale agreement was referred to Brunswick's home office for review and approval. Because the agreement called for long-term payment of the contract sale price, an important aspect of the home office review was a determination of the creditworthiness of the prospective buyer. Recognizing that the buyer in this case was to be a no-asset corporation, the credit department looked to a number of factors other than the corporation's worth in deciding whether to approve the sales. Brunswick considered the credit of the corporation's principals, as a general indication of whether the principals behind the new corporation were likely to act responsibly towards the corporation's creditors. More important though, Brunswick carefully considered location, population, and the presence of competitors in the area of the proposed alleys, to determine whether the alleys themselves were likely to generate revenues sufficient to satisfy the contract obligations.

 Based on this evaluation, and aware that the Waxmans were successful businessmen who had heretofore successfully operated bowling lanes, Brunswick anticipated that the Waxmans would continue their initial success in the rapidly growing recreational bowling market, and knowingly accepted the no-asset Construction Corp. as obligor on a series of conditional sale contracts. Between December 1960 and August 1962, Brunswick and the Construction Corp. executed these conditional sale contracts, signed by the Waxmans not as individuals but as officers of the corporation, for the purchase of Brunswick's equipment to outfit five new bowling alleys. The sale contracts contained a statement indicating that the owners of the real property upon which the bowling equipment was to be located were Harry and Sydney W. Waxman. The five new alleys, of which only the last two concern us, were Cross Bay Bowling Lanes, Van Wyck Bowling Lanes, Gun Post Bowling Lanes, Bruckner Lanes, and Turnpike Lanes.

 Modus Operandi

 It was the modus operandi adopted by the Waxmans after the contracts were signed that is the focus of Brunswick's complaint. Although the Construction Corp. was signatory and obligor on the conditional sale contracts, the corporation did not actually operate the bowling alleys. Instead, operation of the five alleys, and their Brunswick equipment, was from the outset conducted by Harry and Sydney W. Waxman as partners. The Waxmans formed five separate partnerships, one corresponding to each alley, which operated the Brunswick equipment. In addition these partnerships (not the Construction Corp.) owned and operated the other non-Brunswick equipment and fixtures in the alleys, including a bar and restaurant at each alley, and owned or leased the real estate on which the alleys were located. All of the licenses and permits obtained in connection with the alleys, including liquor licenses, and licenses to maintain a bowling alley were obtained by the Waxmans in their individual and partnership names. The Waxmans and their partnerships paid no rent to the Construction Corp. for the use of the Brunswick equipment, and in turn charged the Construction Corp. no rent for use of the premises (which they owned) on which the alleys were run. It was abundantly clear that the Construction Corp. was not acting as agent for the Waxmans.

 Daily receipts from each of the five alleys were temporarily deposited in individual bowling alley accounts, then pooled in a central Waxman enterprises bank account (subsequently converted into the Great American Bowling Centers' account). Funds in this central bank account were then disbursed as necessary, to meet the operating expenses of the respective alleys. While daily operating expenses were paid directly from the central bank account, payments to Brunswick under the conditional sale contracts were made from checking accounts maintained in the name of the Construction Corp. Prior to each payment, the exact amount due on that installment was transferred from the central bank account to the Construction Corp. account and then withdrawn by a check payable to Brunswick. From time to time, when funds in the central bank account were insufficient to cover payments to Brunswick, the Waxmans would advance their own funds to the Construction Corp. account to meet the installment due.

 The transfer of funds into and out of its bank account for payments to Brunswick was for all intents and purposes the Construction Corp.'s only corporate activity. The Construction Corp., whose minutes books, stock certificate books, and stock ledgers are blank, elected no directors, held no stockholders' or directors' meetings, adopted no by-laws, and issued no stock. The Construction Corp. passed no resolutions authorizing the conditional sale contracts or authorizing the operation of its bowling equipment, by the Waxman partnerships. The Construction Corp. did file corporate income tax returns with the Internal Revenue Service, and filed New York State Corporation Franchise Tax Reports. However, all these returns show the Construction Corp. as inactive, with no income and only nominal assets and liabilities. None of these returns reports the Brunswick equipment as a corporate asset, and none reports the conditional sale contracts as corporate liabilities.

 1963 Extension Agreements

 Between 1961 and 1963, funds were transferred from the central bank account to the Construction Corp. account to make payments to Brunswick. In January 1963, the central banking function was assumed by a newly formed no-asset corporation, Great American Bowling Centers, Inc. ("GABC"), which continued to make transfers to the Construction Corp. account. Initially, these transfers were sufficient to meet installments due Brunswick. However, the bowling alleys had begun to experience cash flow difficulties in late 1962 and by the end of the first quarter of 1963 the GABC account lacked sufficient funds to meet the installments. As a result, the Construction Corp. became delinquent in making payments to Brunswick.

 To avoid forfeiture of the bowling equipment, Sydney W. Waxman, as secretary of the Construction Corp., contacted Brunswick, and initiated negotiations regarding an extension of the schedule of payments due under the conditional sale contracts. During these negotiations, Brunswick became aware, for the first time, of GABC (which it believed to be a trade name for the Construction Corp.'s bowling operations). After examining GABC's pro forma balance sheets Brunswick realized that there was a substantial cash flow shortage in the Construction Corp.'s bowling operations. Brunswick agreed that an extension of the payment schedule would ease the cash flow deficiency, but concluded that the Construction Corp.'s assets, consisting entirely of Brunswick's own equipment, were insufficient collateral to secure an extension of the conditional sale contracts. Consequently, Brunswick offered to grant an extension, but only on condition that additional security be provided. The security which Brunswick sought was the formation of a new corporation, with assets of two to three million dollars, which would guarantee the Construction Corp.'s obligation. The Waxmans declined to form such a corporation, and as alternative security offered to form five separate corporations, one corresponding to each of the five bowling alleys, with a combined net worth of one million dollars. Although these five corporations were to have assets of one million dollars, most of this actually consisted of bowling equipment on which Brunswick already had a lien, and in effect the proposed agreement gave Brunswick only $ 375,000 in additional non-Brunswick equipment as security for all five lanes.

 Brunswick reviewed and approved the Waxmans' offer as the basis for an extension agreement. Accordingly, in June 1963, the Waxmans formed five new no-asset corporations, one corresponding to each alley. Brunswick then approved the transfer by the Construction Corp. of its equity in each alley's Brunswick equipment to the corresponding newly formed corporation. Under these transfers of equity and accompanying extension agreements, all executed in June 1963 and signed by the Waxmans as officers, each corporation assumed the payment obligations on the Brunswick equipment in its alley.

 Although the Construction Corp. remained nominally liable under the original contracts, Brunswick, by approving the transfers of equity in the bowling equipment, permitted the Construction Corp. to divest itself of the only asset it had with which to satisfy that liability. The five new corporations did receive title to the Brunswick equipment, but did not receive the $ 375,000 of non-Brunswick assets which were to be included in their one million dollar net worth. Title to these assets was held by the partnerships, and contrary to the Waxmans' promise, was never transferred to the newly formed corporations. *fn2"

 Shortly after the transfers of equity and extension agreements had been completed, Brunswick abandoned the protection it had in the cross-default provisions in the original conditional sale contracts subjecting each alley's equipment to the obligations of all the other alleys. This release was predicated upon a representation by the Waxmans' controller, Sydney Mazur, that the alleys' liquor licenses would be in jeopardy under state law if the corporations remained subject to cross-default liability. Mazur did not reveal, however, that the liquor licenses were not, as he implied, in the names of the corporations, but were in fact held by the partnerships.

 Default of Bruckner and Pike Lanes

 Following execution of the 1963 extension agreements and transfers of equity, operation of the bowling alleys continued as it had previously. The five Waxman partnerships which had run the five alleys continued to do so, forwarding the proceeds of operations to GABC. The only change in GABC's procedures was in making transfers to accounts in the names of the five individual corporations, rather than to the Construction Corp. account, for payments to Brunswick. All five corporations formed by the Waxmans were operated in exactly the same manner. Three of these new corporations were able to satisfy their obligations under the extension agreements, but two, Bruckner Lanes, Inc. and Pike Lanes, Inc., were not, and it is their defaults which form the basis for this action.

 All five lanes, including Bruckner Lanes, Inc. and Pike Lanes, Inc., were as inactive as the Construction Corp. had been. There is no record in the corporate minute books of either corporation that directors were ever elected or that meetings of shareholders or directors were ever held. Nor is there any evidence that by-laws were ever adopted or that stock was actually issued in either corporation. In the same manner as the Construction Corp. tax returns, Bruckner Lanes' and Pike Lanes' federal and state corporate tax returns indicate that the corporations were inactive. These tax returns report no income, no expenditures other than payments of New York State ...


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