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BERMAN v. LE BEAU INTER-AMERICA

UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK


February 27, 1981

Michael BERMAN, as Trustee in Bankruptcy of Le Beau Tours, Inc., Plaintiff,
v.
LE BEAU INTER-AMERICA, INC., Robert S. Le Beau, Harry Le Beau, Winifred Le Beau, Doris A. Le Beau, S. T. Hui, Frank H. Seyer, H S Universal Tours, Inc. and Chemical Bank, Defendants

The opinion of the court was delivered by: LASKER

Robert S. Le Beau, Harry Le Beau, Winifred Le Beau and Doris A. Le Beau (the "Le Beaus") move pursuant to Fed.R.Civ.Pr. 12(b)(6) and 9(b) to dismiss the complaint against them on the ground that it fails to state a claim upon which relief can be granted and fails to plead the purported fraud with requisite particularity. The Le Beaus oppose Michael Berman's cross-motion to amend his complaint on the ground that the proposed amended complaint fails to cure the defects in the original complaint. Since matters outside the pleadings have been presented by both Berman and the Le Beaus, the Le Beau motion is treated as one for summary judgment. Fed.R.Civ.Pr. 12(b).

I. The Complaint

 On March 11, 1977, the Le Beaus sold the entire capital stock in their two companies, Le Beau Tours, Inc. and Le Beau Inter-America, Inc., to Universal Tours, Inc. ("Universal"). Pursuant to the written agreement between Universal and the Le Beaus, the total purchase price was $ 1,226,432. (Proposed Amended Complaint, para. 19). At the March 11, 1977 closing, Universal paid the Le Beaus $ 355,665.28, and delivered promissory notes and irrevocable letters of credit issued by Chemical Bank ("Chemical") in favor of the Le Beaus for the balance of $ 870,762.72. (Proposed Amended Complaint, paras. 25, 26). In the stock purchase agreement the Le Beaus represented and warranted that as of December 31, 1976 the total stockholders' equity of both corporations was not less than.$ 876,432, and that no material changes had occurred between December 31, 1976 and the closing date. (Proposed Amended Complaint, para. 16). After closing, Robert S. Le Beau was employed by Le Beau Tours, Inc. as president and a director, and Harry and Winifred were employed as regional sales managers. (Proposed Amended Complaint, paras. 28-34).

 Before the closing date, on March 7, 1977, Chemical and Universal entered into a written agreement by which Chemical agreed to furnish letters of credit in favor of the Le Beaus on condition that Universal provide security at least equal to the value of the letters of credit. (Proposed Amended Complaint, paras. 22, 23). At the time the letters of credit were issued, no security had been provided. (Proposed Amended Complaint, para. 27).

 Berman alleges that also prior to the closing date, the Le Beaus entered into an oral agreement with Universal and S.T. Hui and Frank H. Seyer (officers and directors of Universal) that the retained earnings of.$ 876,432 of Le Beau Tours and Le Beau Inter-America would be used to pay the balance Universal owed the Le Beaus after closing, and would be used as collateral security and payment for the issuance of the letters of credit by Chemical. *fn1" (Proposed Amended Complaint, para. 13). The purpose of this oral agreement, Berman claims, was to permit the Le Beaus to receive payment of the retained earnings of their two companies "by the subterfuge of a sale of capital stock." (Proposed Amended Complaint, para. 14).

 The proposed amended complaint recites a series of transactions between Le Beau Tours and Chemical resulting in allegedly fraudulent conveyances from the assets of Le Beau Tours. Le Beau Tours is alleged to have withdrawn funds from its accounts at Chemical and invested them in certificates of deposit, which were then assigned to Chemical to back the letters of credit. *fn2" The proceeds of the certificates were paid by Chemical to the Le Beaus on their letters of credit. In addition, Le Beau Tours gave Chemical a security interest in substantial portions of its property.

 Berman alleges that these conveyances by Le Beau Tours were made without consideration and that each conveyance was made with the active participation, knowledge and consent of the Le Beaus in accordance with their pre-existing oral agreement with Universal, Hui and Seyer. (Proposed Amended Complaint, paras. 29, 41, 44, 48, 49).

 On April 5, 1978, an involuntary petition in bankruptcy was filed against Le Beau Tours. Berman, the trustee in bankruptcy, seeks in this action to recover $ 870,766.72 paid to the Le Beaus under the letters of credit on the grounds that (1) the payments made from the funds of Le Beau Tours to collateralize the letters of credit constituted fraudulent conveyances under § 67(d)(2) of the Bankruptcy Act *fn3" and §§ 273-76 of the New York Debtor and Creditor Law, *fn4" (2) the payments constituted payment of a dividend to the Le Beaus in violation of §§ 510(a) *fn5" and 719 *fn6" of the New York Business Corporation Law, and (3) the payments resulted in a waste of corporate assets in violation of defendants' duties as officers and directors of Le Beau Tours under § 720 of the New York Business Corporation Law. *fn7" In addition, Berman seeks to recover a series of payments made by the defendants as officers and directors of Le Beau Tours between March 11, 1977 and June 5, 1978, on the ground that the payments were made in gross disregard of their duties to the corporation.

 II. Fraudulent Conveyances

 The Le Beaus argue that the complaint fails to state a claim against them under either the Bankruptcy Act or the New York Debtor and Creditor Law for the recovery of the allegedly fraudulent conveyances made to collateralize the letters of credit because the complaint does not allege that the Le Beaus did anything improper in connection with the letters of credit transaction. *fn8"

 The Le Beaus deny the existence of the oral agreement upon which Berman relies to implicate them in the allegedly fraudulent conveyances and, in any event, maintain that even if they had agreed with Universal, as Berman alleges, that the retained earnings of Le Beau Tours and Le Beau Inter-America would be used to collateralize the letters of credit, such an agreement would not render them liable for the later conveyances. The Le Beaus emphasize that Berman has alleged that the oral agreement referred to the retained earnings of both Le Beau Tours and Le Beau Inter-America. Since there is no allegation that the combined retained earnings of the two companies was less than.$ 876,432, the balance owed the Le Beaus, execution of the oral agreement need not have rendered either company insolvent. The Le Beaus argue that they cannot be held responsible for the fact that Universal, in breach of the alleged oral agreement, transferred the funds solely from Le Beau Tours rather than from both companies.

 Finally, the Le Beaus contend that the fact that Robert S. Le Beau continued as an officer and director of Le Beau Tours and that other Le Beaus were employed by the company after the sale of the company to Universal is insufficient to establish their liability for the acts of the company. In support of this contention, the Le Beaus have presented the affidavit of Robert Le Beau that after the business had been sold, he was not permitted by Universal to participate in any of the financial dealings of the company.

 Berman contends that the proposed amended complaint states a claim against the Le Beaus by setting forth the manner in which the retained earnings of Le Beau Tours were used to pay Universal's debt to the Le Beaus and to collateralize the letters of credit issued by Chemical to the Le Beaus pursuant to the oral agreement between Universal, Hui, Seyer and the Le Beaus. In addition, Berman contends that Robert S. Le Beau must be held responsible for the conduct of Le Beau Tours because he was president during the relevant period. He concludes that summary judgment is inappropriate because material questions exist as to the time of the conveyances, the insolvency of the bankrupt, the consideration for the conveyances, and the various parties' intent with respect to the conveyances.

 Berman's arguments are without merit. As the Le Beaus state, the complaint itself alleges that the oral agreement pertained to the retained earnings of both Le Beau Tours and Le Beau Inter-America. Berman concedes that on March 11, 1977, the retained earnings of both companies amounted to.$ 876,432. (Affidavit of Michael Berman, p. 5). Thus, it is clear that compliance with the alleged oral agreement need not have rendered Le Beau Tours insolvent and that Berman's claim that the Le Beaus participated in a continuing fraud originating in the oral agreement and consummating in the transfer of funds to Chemical is inconsistent with the allegations of the complaint itself with respect to the oral agreement. *fn9"

 Furthermore, there is no basis for recovering the allegedly fraudulent conveyances from the Le Beaus because there is no allegation that the Le Beaus received any property from Le Beau Tours in connection with the sale of their businesses. According to the proposed amended complaint, the Le Beaus received the money which Universal owed to them from Chemical, not Le Beau Tours. Pursuant to their independent contract with Chemical under the letters of credit, Chemical had an irrevocable obligation to pay the Le Beaus as the letters of credit came due, regardless of what later transpired between Chemical and Universal. See Foreign Venture Ltd. Partnership v. Chemical Bank, 59 A.D.2d 352, 399 N.Y.S.2d 114 (1st Dep't 1977). The allegation that Universal, the new owner of the companies, used the funds of Le Beau Tours to pay Universal's obligation to Chemical to provide security for the letters of credit does not establish a basis for recovering from the Le Beaus. Even if Universal had reneged in its obligation to Chemical, the Le Beaus would have still received the money owed to them because Chemical, under the letters of credit, already had an irrevocable obligation to pay them. Thus, even assuming that the conveyances made from Le Beau Tours to Chemical to collateralize the letters of credit constituted fraudulent conveyances under either the Bankruptcy Act or the New York Debtor and Creditor Law (a proposition on which we make no ruling), the proposed amended complaint sets forth no basis for holding the Le Beaus liable, since they neither agreed that the payments would be made solely from the funds of Le Beau Tours nor received the payments from the funds of Le Beau Tours.

 Finally, Berman's contention that Robert S. Le Beau must be held responsible for the conduct of Le Beau Tours during the time he served as president following the sale to Universal is impugned by the uncontradicted evidence that, during this period, Robert S. Le Beau did not participate in the financial dealings of the company. According to his affidavit supporting the Le Beau's motion, following the sale of the company, he was treated as a "virtual figurehead" (Le Beau Affidavit, p. 2), he had no access to the company's books and records, he had no knowledge of the financial workings of the company, and he had no knowledge of the relationship between Chemical and Universal with respect to the letters of credit. (Le Beau Affidavit, p. 5). Berman has not contested this evidence. In sum, there is no basis for holding Robert S. Le Beau liable for payments made by Le Beau Tours during the critical period.

 III. Illegal Dividends or Distributions

 Berman alleges that the purpose of the alleged oral agreement between the Le Beaus and Universal, Hui and Seyer was to enable the Le Beaus to receive the retained earnings of Le Beau Tours and Le Beau Inter-America "by the subterfuge of a sale of capital stock." (Proposed Amended Complaint, para. 14). The effect of this agreement, Berman argues, was the declaration of a dividend or distribution in violation of § 510(a) of the New York Business Corporation Law, which makes the declaration or payment of a dividend or distribution illegal if it is made when the corporation is insolvent or if it would render the corporation insolvent. *fn10"

 The Le Beaus argue that Berman has not stated a cause of action under § 510 because, at the time of the alleged dividend payments, the Le Beaus were not shareholders of the corporation and, therefore, the payments were not dividends or distributions within the ambit of § 510. This proposition is unpersuasive. Berman alleges that the oral agreement was made before the sale to Universal, at a time when the Le Beaus were officers and shareholders, and that the agreement constituted a declaration of a dividend or distribution. The fact that the Le Beaus were not shareholders when the payments were actually made is not dispositive since § 510 makes the declaration as well as the payment of a dividend or distribution illegal in the specified circumstances.

 Be that as it may, Berman has failed to state a claim under § 510 for the same reasons that he failed to state a claim to recover the allegedly fraudulent conveyances from the Le Beaus. As discussed above, the alleged oral agreement pertained to the retained earnings of both Le Beau Tours and Le Beau Inter-America, and Berman concedes that the retained earnings of both companies amounted to.$ 876,432. Therefore, even assuming that the oral agreement was made and that it constituted the declaration of a dividend or distribution under § 510, it was not made at a time when either company was insolvent nor would it have rendered either company insolvent as required by § 510.

 IV. Corporate Waste

 Berman alleges that the payments from Le Beau Tours used to collateralize the letters of credit constituted a waste of corporate assets in violation of the defendants' duties as officers and directors of the corporation. *fn11" However, of the Le Beaus, only Robert S. Le Beau was a director and officer of the corporation during the time these payments were made and, as discussed above, he cannot be held liable because he did not participate in the financial workings of the company. Moreover, Berman cannot rely on the alleged oral agreement as an act of waste for which the Le Beaus can be held liable (as officers and directors of Le Beau Tours prior to the sale) because, as the complaint itself reveals, the alleged agreement was not complied with once Universal took control of Le Beau Tours.

 V. Gross Disregard of Corporate Duties

 Berman also alleges that a series of payments made between March 11, 1977 and April 5, 1978 were made in gross disregard of defendants' duties as officers and directors. Since of the Le Beaus only Robert S. Le Beau was an officer and director during this period and he was not permitted to participate in the financial workings of the company, he cannot be held liable for the payments.

 * * * *

 Berman's motion to amend his complaint as to the Le Beaus and Chemical is granted. *fn12"

 Summary judgment is granted to the Le Beaus with respect to each claim against them in the amended complaint.

 It is so ordered.


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