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Clarkson Co. v. Shaheen

decided: September 15, 1981.

THE CLARKSON COMPANY LIMITED, AS TRUSTEE IN BANKRUPTCY, APPOINTED BY THE SUPREME COURT OF THE PROVINCE OF NEWFOUNDLAND, OF THE PROPERTY OF NEWFOUNDLAND REFINING COMPANY LIMITED AND PROVINCIAL REFINING COMPANY LIMITED, PLAINTIFF-APPELLEE,
v.
JOHN M. SHAHEEN, ROY M. FURMARK, ALBIN W. SMITH, PETER L. CARAS, PAUL W. RISHELL, SHAHEEN NATURAL RESOURCES COMPANY, INC., NEWFOUNDLAND REFINING COMPANY LTD., U.S.A. AND FOUNDERS CORPORATION, DEFENDANTS-APPELLANTS, PHILIP GANDERT, WILLIAM J. SHERIDAN, DEFENDANTS .



Appeal from a judgment of the United States District Court for the Southern District of New York, Owen, J ., ordering corporate defendants to repay loans to the trustee in bankruptcy and awarding damages against director defendants for breach of their fiduciary duty to the creditors. Affirmed; judgment amended.

Before Lumbard and Meskill, Circuit Judges, and MacMAHON,*fn* District Judge.

Author: Lumbard

This is an appeal from a judgment won in the Southern District of New York by The Clarkson Company Limited, the Newfoundland trustee in bankruptcy of Newfoundland Refining Company Limited (NRC), suing in diversity jurisdiction to recover monies advanced or loaned by NRC to John Shaheen and companies controlled by him (the Shaheen group), and to recover damages from five individual directors of NRC for causing such loans to be made. At trial, the jury found that Shaheen and his companies owed a total of $50 million to NRC; of this, $30 million, consisting of loans made by NRC to the Shaheen group during 1974 and 1975, was advanced when NRC was insolvent, without fair consideration, and hence was fraudulent to creditors and in violation of sections 273 and 274 of the New York Debtor and Creditor Law. A Promissory Note and Letter Agreement executed in October, 1975 was found fraudulent for the same reasons. The judgment ordered the Shaheen group to repay the $50 million in loans; held the five directors jointly and severally liable with the Shaheen group for the $30 million fraudulently loaned in 1974 and 1975; held the five directors jointly and severally liable for the $23 million in damages caused by entering into the Promissory Note; and declared the Promissory Note null and void. The $30 million sum assessed against the directors for breach of the fiduciary duty owed to creditors was apportioned according to the percentage amounts assigned by the jury against each.*fn1

The defendants allege numerous errors, chiefly the insufficiency of the evidence to support the verdict, and numerous rulings by the district court in the exclusion of evidence and the charge to the jury. Most of these contentions are disposed of by a consideration of the evidence, which we find amply supported the verdicts. However, we find unjustified on this record the unapportioned liability of the individual directors for the $23 million damages on the Promissory Note. We hold that that amount must also be apportioned in the same percentages as determined by the jury for the $30 million advanced during 1974 and 1975. In all other respects, the judgment is affirmed.

In 1968, Newfoundland Refining Company Limited was organized under the laws of the Province of Newfoundland to build and operate an oil refinery at Come-By-Chance, Newfoundland. Title to the refinery was in Provincial Refining Company, Ltd. (PRC), a joint venture of NRC and the Newfoundland Government, and NRC was to construct and operate the refinery. NRC was part of a complex of corporations directly or indirectly controlled by John Shaheen; its books and records were kept in Shaheen's New York City headquarters.

On March 12, 1976, NRC and PRC were found to be bankrupt by the Chief Justice of Newfoundland, who presided over a week-long hearing. During that hearing, the Shaheen group contested the bankruptcy petition filed by an assignee of Ataka America, Inc., the Japanese controlled organization that had advanced to NRC part of the money to build and operate the refinery.*fn2 The Clarkson Company was appointed trustee and the Supreme Court of Canada affirmed. Both during and after this proceeding, the Shaheen group sued in the federal and state courts in New York attacking the Canadian bankruptcy adjudication and, later, Clarkson's performance as trustee. These suits were all dismissed.*fn3

When Shaheen denied Clarkson access to, and possession of, the records of the bankrupt companies, Clarkson brought suit in the Southern District to compel delivery of the records. Judge Owen granted Clarkson a preliminary injunction and we affirmed. 544 F.2d 624 (1976). As to Shaheen's attack on the Canadian proceedings, we found that Shaheen had "not shown enough at this stage to cast doubt on the Canadian judgment." Clarkson then moved to amend its complaint to add the claims regarding monies advanced to the Shaheen group and to add as defendants three additional recipients of monies advanced by the bankrupts.

The district court granted Clarkson's motion to amend the complaint, and granted a permanent injunction giving Clarkson the NRC and PRC records. It also denied the Shaheen motion to amend the answer to include charges of fraud in the procurement of the Newfoundland bankruptcy. Judge Owen held that the proposed amended answer, asserting allegations of wrong-doing "on information and belief" without stating any factual basis for the allegation, did not conform to the pleading requirements of Fed.R.Civ.P. 9(b), and that the acts alleged as constituting the "fraud" had either been "rejected time and time again" or related to Clarkson's conduct as trustee and were irrelevant to the claim of a fraudulent appointment. Later, Judge Owen struck from the Shaheen answer to Clarkson's amended complaint similar allegations of fraud asserted to contest Clarkson's standing. The Shaheen defendants attack these orders on this appeal.

At the trial in June, 1980, the evidence regarding moneys advanced to the Shaheen group was virtually undisputed. From 1972 until bankruptcy in March, 1976, NRC's books showed that it loaned over $51 million to Shaheen and Shaheen controlled corporations.

John M. Shaheen $501,231

Shaheen National Resources

Company, Inc. (SNR) 46,049,040

Newfoundland Refining Company,

Ltd., U.S.A. (NRC, Ltd. U.S.A.) 2,344,268

Founders 548,392

Newfoundland Pulp & Chemical

Co. Limited 2,156,951

Canadian Caribbean Oil Co.

Limited ...


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