Cross appeals from a judgment of the United States District Court for the Southern District of New York, following a jury trial before Ward, J ., in an action brought by the trustee for the liquidation of the business of JNT Investors, Inc., under the Securities Investor Protection Act of 1970. Judgment in favor of the plaintiff on the second and fourth causes of action reversed and new trial ordered. Judgment in favor of the defendants on the ninth cause of action affirmed.
Before Van Graafeiland and Newman,*fn* Circuit Judges, and Bonsal, District Judge.*fn**
Jay N. Tabatchnick and S. Wolfe Emmer appeal from a $73,750 judgment recovered against them by Jerry B. Klein, trustee for the liquidation of the business of JNT Investors, Inc., under the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa-78Lll. Klein cross appeals from that portion of the judgment dismissing other claims for relief. The parties' differences have been much too extensively briefed and argued, both in this Court and in the court below. There are, however, several issues of substance that require discussion.
The Grant of Summary Judgment
JNT, a small securities broker and dealer with its office in New York City, was organized by defendant Tabatchnick in 1970. Tabatchnick was president of the company and owned 43 percent of its stock. Defendant Emmer owned 42 percent of the stock and maintained a trading account with the company. In October 1970 Tabatchnick obtained from the First National City Bank a personal loan of $50,000 payable on demand and secured by collateral owned by one Joseph Taub. Tabatchnick then loaned the $50,000 to JNT under a subordinated loan agreement maturing November 1, 1971.
When Tabatchnick decided to extend the subordinated loan for another year, Emmer supplied collateral for the bank loan to replace that of Mr. Taub. With Emmer's authorization, Tabatchnick used 7,000 shares of common stock of Commonwealth Silver Industries, Ltd., from Emmer's account at JNT for this purpose. To give Emmer some protection against loss, Tabatchnick delivered to him certain portfolio securities of JNT. The receipt signed by Emmer stated that the securities were "assigned to (Emmer) as additional collateral until which time your 7,000 shares of Commonwealth Silver Ind. common stock will no longer be needed as collateral for Mr. Tabatchnick's personal loan of $50,000 (from) First National City which was subordinated to JNT Investors, Inc."
On February 15, 1972, the United States District Court for the Southern District of New York determined that JNT's customers were in need of protection under 15 U.S.C. § 78eee and appointed plaintiff trustee for the liquidation of the company's business. This liquidation was to be conducted generally "in accordance with, and as though it were being conducted under," Chapter X of the Bankruptcy Act, 15 U.S.C. § 78fff(c)(1). Following his appointment, plaintiff contended that the transfer of JNT's portfolio securities to Emmer was a fraudulent conveyance under section 67(d) of the Bankruptcy Act, 11 U.S.C. § 107(d),*fn1 and demanded their return, which was refused. In the suit that ensued, the district court granted plaintiff's motion for summary judgment on the cause of action alleging a section 67(d) violation, reserving only the question of damages for jury determination. See Klein v. Tabatchnick, 418 F. Supp. 1368 (S.D.N.Y.1976). Damages subsequently were fixed by a jury at $73,750. For the following reasons, we believe that summary judgment should not have been granted.
In granting plaintiff's motion, the district court made several factual findings. He found (1) that the transfer of JNT securities to Emmer occurred on December 13, 1971, (2) that the transfer was without fair consideration to JNT, and (3) that JNT was insolvent at the time of transfer. We believe that the making of these findings should have awaited trial.
Fixing the date of transfer was important in this case because of the extreme fluctuations in the value of the volatile securities involved and because it was the date as of which insolvency had to be determined. Although the receipt for the transferred securities was dated December 13, 1971, there was strong indication in the motion papers that the transfer actually occurred in February 1972 and the receipt was either delivered before transfer or was back-dated by some unidentified person. JNT's inventory records show that the securities were in its vault as late as the end of January 1972, and there is deposition testimony that they were removed by Tabatchnick in early February. We have examined the voluminous affidavits submitted to the district court and are unable to determine when the transfer occurred. We conclude that the district judge erred in making that determination on plaintiff's application for summary judgment.
Fairness of consideration is generally a question of fact. McNellis v. Raymond, 287 F. Supp. 232, 238 (N.D.N.Y.1968), Rev'd on other grounds, 420 F.2d 51 (2d Cir. 1970); See Roth v. Fabrikant Bros., Inc., 175 F.2d 665, 668 (2d Cir. 1949); Seligson v. New York Produce Exchange, 394 F. Supp. 125, 132-34 (S.D.N.Y.1975). The district court determined it as a question of law. See 418 F. Supp. at 1372. We do not believe the facts were so clearly established in plaintiff's favor that they warranted disposition in this manner.
The district judge focused on the fact that Emmer's written authorization for the use of his securities as replacement collateral was not executed until December 11, 1971, while the extension of Tabatchnick's subordinated loan agreement was executed on November 1st. From this, he concluded that the December 11 authorization was of no value to JNT. In so doing, the district judge overlooked Tabatchnick's sworn statement that he would not have extended the subordination agreement on November 1 if he had not obtained a prior commitment from Emmer that he would furnish replacement collateral.
Although the district judge was clearly correct in holding that transfers solely for the benefit of third parties do not furnish fair consideration under section 67(d)(2)(a), that statement may not be applicable to the transaction at issue. Benefit to a debtor need not be direct; it may come indirectly through benefit to a third person. See Williams v. Twin City Co., 251 F.2d 678, 681 (9th Cir. 1958); Mandel v. Scanlon, 426 F. Supp. 519, 523-24 (W.D.Pa.1977); McNellis v. Raymond, supra, 287 F. Supp. at 239; Hofler v. Marion Lumber Co., 233 F. Supp. 540, 543 (E.D.S.C.1964). Tabatchnick was the majority shareholder of JNT, and everything he owned was in the firm. It appears from the motion papers that he operated the company as if it were his private domain. Emmer, the other substantial shareholder, denied that he participated in any way in company management. As he put it, "This whole company, JNT, was in fact Mr. Tabatchnick as far as I was concerned." The $50,000 that Tabatchnick borrowed from the bank was loaned to the company, and that loan, Tabatchnick says, would not have been renewed without the use of Emmer's collateral.
Construing the motion papers most favorably to the defendants, as we are required to do, Adickes v. S. H. Kress & Co., 398 U.S. 144, 157, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970), we cannot say that JNT received no benefit from Tabatchnick's use of Emmer's collateral. Whether this furnished fair consideration for the transfer of JNT's own securities to Emmer depended among other things on JNT's need for the $50,000, its availability from some source other than Tabatchnick, and the value of the securities transferred to Emmer. JNT was a new underwriting firm which started in business with little or no capital and no financial track record. The motion papers show that withdrawal of Tabatchnick's $50,000 would have created a severe cash and capital problem in the company and that Emmer "provided a substantial benefit to JNT when he furnished the replacement collateral for the loan." Moreover, there was substantial dispute ...