The opinion of the court was delivered by: OWEN
This opinion addresses itself to various recent attempts by the Clarkson Company Limited ("Clarkson") to realize on a $ 50 million judgment awarded by a jury in this Court in July of 1980 against John M. Shaheen and certain of his various corporations, including Shaheen Natural Resources Co., Inc., ("SNR"), and Founders Corporation ("Founders"). That judgment essentially was founded on frauds of Shaheen and his corporate associates and has been affirmed on appeal. The Clarkson Company Limited, etc. v. Shaheen, et al., 660 F.2d 506 (2d Cir. 1981). The assets sought in the instant proceedings are the following: 1) various stock owned by John M. Shaheen, which allegedly was pledged in 1977 to guarantee the debts of several Shaheen corporations to another corporation which Shaheen controls and of which he is president and chief executive officer; 2) debts owed by one Shaheen corporation to Shaheen individually and to another of his corporations; 3) certain allegedly fraudulent conveyances among three Shaheen corporations; 4) Shaheen's half ownership of his Park Avenue cooperative apartment and 5) Shaheen's half ownership of his summer estate in Southampton, Long Island.
I observe at the outset that Macmillan Ring-Free Oil Company, Inc. ("Macmillan"), SNR, and Founders, the three principal corporate actors in these supplementary proceedings, are affiliated corporations operating out of the same offices in New York City and are all elements of Shaheen's empire. The boards of directors of Macmillan, Founders, and SNR interlock extensively. Messrs. Peter Caras, Robert Collier, Milton Hibdon, Paul Rishell, Jesse Taub, Homer White, and Shaheen, all directors of Macmillan, are also directors of SNR. Messrs. Collier, Hibdon, Shaheen, and Taub, are four of the six directors of Founders. At all relevant times, Shaheen owned all of the shares of SNR and fifty-five percent of the shares of Founders. He also owned 1,421 shares of Macmillan common stock, which, combined with the substantial ownership of Macmillan stock by SNR and Founders, gave Shaheen control of more than forty percent of the outstanding Macmillan common stock.
In opposition to certain of Clarkson's instant turnover demands, Shaheen and his corporations assert various old and recent, allegedly bona fide transfers and pledges of all of these assets to others, which they claim place the assets beyond Clarkson's reach. Those are as follows:
1. In April 1977 Shaheen placed all of his personal stock holdings in an escrow account, allegedly as a pledge to Macmillan;
2. Shaheen's right to $ 173,873 from Founders was allegedly pledged to Macmillan;
3. In October 1979 Shaheen transferred his interest in the Southampton estate to his wife;
4. Although in an 1980 affidavit Shaheen acknowledged half ownership of his New York City cooperative apartment, he later asserted, in response to Clarkson's turnover petition, that in 1965 he and his wife had in fact transferred the coop shares to their then-infant sons; and
5. Shaheen's claim on Founders for $ 360,420 to reimburse him for his liability to a third person, Harry Dean, was purportedly extinguished and turned into an obligation by Founders to pay Dean $ 75,000.
In response to other collection efforts by Clarkson before me, Shaheen and others assert that the "facts" defeat such efforts. Those are:
1) as to SNR's right to 23,517 shares of Macmillan preferred stock, issued as a stock dividend, worth $ 1,060,875, Macmillan claims to have seized this stock dividend as a setoff against SNR's unpaid debt to Macmillan, which Macmillan claims to be about $ 4 million;
2) as to three obligations of Founders to SNR aggregating more than $ 2 million, SNR and Founders claim that certain letters indefinitely extended the due dates of the loans if Founders was unable to pay at the time the loans otherwise came due;
3) as to a demand obligation to Shaheen, Founders and Shaheen claim that the statute of limitations bars the claim.
Turning first to Shaheen's alleged pledge of stock to guarantee the debts of his various companies to Macmillan, I find as follows:
After entry of judgment, Clarkson served information subpoenas on Shaheen in an effort to locate his assets. In response thereto Shaheen stated that he owned stock in various companies, but that the stock certificates were in the custody of one Martin Rubin, a New York lawyer, who was holding the stock as an escrowee. On about September 18, 1980, the Sheriff served an execution with notice of levy on Rubin with respect to that stock. The execution was not satisfied. Accordingly, on October 21, 1980, Clarkson petitioned for a turnover order, pursuant to Fed.R.Civ.P. 69(a) and C.P.L.R. § 5225(b) and (c), against Shaheen and Rubin directing that Shaheen's stock be turned over to Clarkson.
Shaheen answered the Rubin turnover petition on October 24, 1980, alleging that the stock had been pledged to Macmillan. On October 30, 1980, Rubin filed an interpleader complaint bringing Macmillan in as a potential claimant.
Macmillan thereafter answered and cross-claimed against Clarkson, alleging that Rubin was holding the stock as an escrow agent under an instrument dated March 29, 1977, pursuant to which the subject stock had been pledged by Shaheen in his individual capacity as collateral for loans made by Macmillan to various Shaheen corporations whose debts were guaranteed by Shaheen. Macmillan therefore claimed that it had a security interest in the stock "prior in time and senior to any interest of Clarkson and the Sheriff ...." Clarkson's answer to Macmillan's counterclaim denied any interest of Macmillan in the stock and alleged that any pledge to Macmillan by Shaheen was a fraudulent conveyance.
I find that the guaranty arose in the following manner. Over the years, Macmillan and the other Shaheen companies engaged in a continuous practice of paying each other's expenses. Ordinarily, they contend, accounts were settled at the close of each year. In 1975 and 1976, Macmillan made advances to and/or paid certain operating expenses of six Shaheen companies. These expenditures, totalling nearly.$ 4.1 million and extending over two years, however, were not repaid by the end of 1976 because the Newfoundland Refining Company, the Shaheen company which had been providing the other companies with cash, went bankrupt, leaving the others unable to cover their debts to Macmillan.
Macmillan, a public company, was thus faced with having to disclose publicly that several separate corporations owned or controlled by Shaheen, Macmillan's president and controlling shareholder, owed at least $ 4 million to Macmillan, which those companies could not pay. Because it did not want to make such a disclosure, Macmillan delayed filing with the Securities and Exchange Commission ("SEC") its annual report on Form 10-K and its quarterly reports on Form 10-Q for the fiscal quarters ending March 31, June 30, and September 30, 1976. Instead, in July of 1976, Phillip Gandert, a Macmillan director, wrote to the SEC that the delay was the result of problems with the intercompany receivables, stating that "the manner of liquidating that indebtedness to (Macmillan) has not yet been determined." By February, 1977, however, the SEC had become so impatient that it commenced an action against Macmillan to compel it to file its long-overdue financial statements.
Irving Galpeer, Esq., a former attorney on the staff of the SEC, was retained to deal with this problem. He advised the Macmillan directors that they might be personally liable for the unpaid advances. Galpeer recommended that Shaheen give a guaranty collateralized by his personal assets in an effort to prevent potential investigations and litigation involving Shaheen and Macmillan and, perhaps, the entire board of Macmillan. As Homer White, Macmillan's executive vice president and a board member directly involved in consideration of the guaranty at the time it was entered into, testified, the guaranty "had to be done because we couldn't go out and report to the public that we had taken no action." Shaheen himself agreed to enter into the proposed guaranty agreement only reluctantly; he testified that he did so only because of the fear of action by the SEC.
By the terms of the guaranty, John M. Shaheen as "Guarantor" guaranteed the debts of certain corporations to Macmillan. The guaranty provides:
"Guarantor hereby guarantees the Indebtedness owed by each Debtor to Macmillan totaling $ 4,086,206 as of December 31, 1976, as set forth on annexed Schedule A, together with any additional Indebtedness of such Debtors to Macmillan thereafter incurred."
Schedule A of the guaranty lists the "Debtors" and the amounts owing by them:
Debtors December 31, 1976
Shaheen Natural Resources Co., Inc. $ 2,054,656
Newfoundland Refining Co., Limited 114,943
Founders Corporation 26,212
New York Press Publishing Co., Inc. 1,530,351
Provincial Refining Co., Limited 28,113
Syracuse T.V. 331,931
Total $ 4,086,206
These debtors were all corporations controlled by Shaheen.
Shaheen owned 100 percent of SNR and, through it, 100 percent of New York Press, and he owned directly or indirectly at least a controlling share of the other corporate debtors.
The guaranty also provided:
To further secure payment of the obligations herein referred to, Guarantor has deposited, pledged, given a security interest in and delivered to Macmillan the property set forth on annexed Schedule B, hereinafter called the "Collateral", to be held by the Escrowee as more fully set forth hereinafter.
The collateral was set forth on a Schedule B in a curious manner for a purportedly binding legal instrument memoralizing over $ 4,000,000 of assets supposedly pledged to Macmillan for its protection. The exact form of the said schedule-minus the red and blue inks-is as follows:
(SEE ILLUSTRATION IN ORIGINAL)
The guaranty was signed by Shaheen on March 29, 1979 and recited that the stock already had been deposited and delivered to Macmillan. The testimony of Macmillan attorney Galpeer, however, made it clear that this declaration in the guaranty was false, for nothing was given to Rubin until a month later. Macmillan's willingness to accept the guaranty, despite this false statement about a critical fact-the deposit of the pledged collateral-is further substantial evidence of the lack of seriousness with which the parties regarded the guaranty. In addition, approximately a month after the purported pledge, Shaheen, in an affidavit stated that his 100 shares of SNR, which were all the outstanding shares, was not pledged to anyone. Shaheen upon being confronted with this before me testified that at the time of the affidavit, he did not have the fact that he had just pledged his 100% ownership in SNR "in mind."
The conclusion is inescapable, therefore, that the guaranty was designed only to placate the SEC and enable Shaheen to remain president of Macmillan and to continue pursuing his various efforts to secure financing for not only Macmillan but also his other corporations. Indeed, Homer White, a Macmillan director, testified that, although the agreement was silent on this point, everyone involved understood that Macmillan would continue to finance Shaheen's operations.
Milton Hibdon, a director of both Macmillan and SNR and president and a director of Founders, testified that it was the consistent goal of all the transfers challenged in these proceedings to keep control of Macmillan in Shaheen's hands. I credit Mr. Hibdon's testimony in this respect. Indeed, I find as a fact that, although the guaranty is made to appear to be for the benefit of Macmillan, it was intended to, and it did operate for the benefit of John M. Shaheen. I find it was not intended to, and did not make Macmillan any more secure as a creditor of the indebted companies. This latter finding is clear from the following.
Shaheen has been completely in control of Macmillan since at least 1974, directly and indirectly holding a controlling block of between forty-two percent and forty-seven percent of the common stock of Macmillan.
In addition to being the corporation's controlling shareholder, Shaheen has served as president and chief executive officer of Macmillan and has been a member of its board of directors from some time before 1977 until today. This has enabled him, as detailed below, to use the assets of Macmillan and all the related companies as he chose at any time regardless of pledges, escrows, public stockholders, or fellow directors.
Macmillan's Annual Report for 1979 explains Shaheen's relationship with Macmillan and describes the interlocking nature of the boards of Macmillan and other Shaheen companies. It states that Shaheen "may be deemed to be in control of the Company." Similar statements are found in the Macmillan annual reports for the years 1976, 1977, and 1978.
Of the ten directors who served on the board of Macmillan in early 1977, seven were also on the boards of other Shaheen companies, including SNR, Founders, and NRC. Macmillan identified only three of its eleven directors as "outside directors," Messrs. Collier, Thomas Chuhak and J. Raymond Bell. Of these three "outside directors," however, Collier clearly was under Shaheen's control, and Chuhak was heavily influenced by Shaheen. Indeed, Collier, the chairman of the Macmillan board, was a member of numerous other Shaheen company boards, including SNR and Founders. Moreover, Collier described himself at trial as "working for" Shaheen.
Thus it is beyond question that Shaheen controls Macmillan, that his control arose before March 29, 1977 (the date the guaranty was signed), and that his control of the company has continued to date.
Further evidence of this abounds. For example, as stated earlier, one result of the NRC bankruptcy was that NRC was no longer able to funnel cash to SNR. This made it difficult for SNR to pay Shaheen's salary. Accordingly, Shaheen testified, in 1976 Macmillan more than doubled his salary, raising it from $ 53,000 to $ 114,000. In his own words, "... I was deliberately bumped up (by Macmillan) because SNR was cramped." Macmillan essentially assumed an expense of another Shaheen company for no reason other than the other company's inability to pay. Macmillan again raised Shaheen's salary in March, 1980, from $ 114,000 to $ 164,000 per year, retroactive to July 1979. The purpose of this was to enable Shaheen to liquidate an outstanding "debt" for unsubstantiated expenses which Macmillan had earlier paid for him. Had Macmillan not engineered this so-called repayment to itself by raising Shaheen's salary by $ 50,000, it would have had to disclose the payment of the unsupported expenses in its financial statement.
Evidence of Shaheen's control of Macmillan can also be found in Macmillan's willingness to fund Shaheen's continuing business activities for other corporations, an activity which, arguably, amounts to corporate waste. For example, at the close of 1975, Shaheen companies owed Macmillan $ 1,399,421. Despite the fact that this sum was not paid up at year's end, as had been the prior practice of the parties, Macmillan advanced an additional $ 2.6 million in 1976 and $ 368,000 in 1977.
Macmillan admitted in its 1979 Annual Report that it continued to advance hundreds of thousands of dollars for Shaheen's other companies in 1977, 1978, and 1979. That report states,
during the years 1977 and 1978, the Company (Macmillan) paid approximately $ 300,000 and $ 465,000, respectively, to cover the cost of certain travel expenses for Shaheen and others and to cover various consulting fees. In addition, officers and employees of the Company performed services for and used the premises and facilities of the Company for related companies of Shaheen. The value of such services and use, estimated at the rate of approximately $ 350,000 per year, has not been allocated to such companies .... The travel expenses and consulting fees approximated $ 351,000 from January 1 through September 29, 1979 .... The services of officers and employees and use of premises has continued and is continuing .... at the rate of approximately $ 350,000 per annum.
It is undisputed that this sum of $ 1,050,000 spent in 1977, 1978 and 1979, and the continuing expenditures in 1980 were not for Macmillan functions, and were not even treated on Macmillan's books as advances to Shaheen's various companies.
Coopers & Lybrand, the public accounting firm, reviewed the expenditures for Shaheen's and others' travel expenses and consulting fees which aggregated about $ 1,116,000 for 1977 through 1979 and determined that a large percentage of those amounts "related directly to Mr. Shaheen's efforts to secure financing for non-Macmillan ventures." (emphasis supplied). Of the $ 1.1 million paid to cover Shaheen's expenses in 1977, 1978, and 1979, Coopers and Lybrand found that 75% could not be shown to benefit Macmillan in any way and that, therefore, they could not be recognized as deductible expenses from Macmillan's income.
Macmillan nonetheless continued to pay expenditures for travel expenses after September 1979 in connection with Shaheen's other ventures. Macmillan attempted to explain to the Court that the expenditures for Shaheen's non-Macmillan activities were "necessary and advisable" to protect the value of the Shaheen collateral and to enable the debtor companies to repay their debts to Macmillan. I do not credit this. It seems hardly advisable for a company with an aggregate net income for 1977, 1978 and 1979 of some $ 6 million to spend close to $ 2 million to protect repayment of some $ 4 million from insolvent affiliates. Moreover, in light of the affiliates' desperate financial condition, these expenditures of $ 2 million for their benefit was no more than a gamble that Shaheen, in the words of Macmillan's attorney Galpeer, could try to "pull a rabbit out of the hat ...."
Macmillan contends further that the expenditures were necessary to obtain financing for Macmillan's proposed West Coast refinery because Macmillan could obtain its financing only as part of a greater package which might be negotiated by John M. Shaheen. Valtec Associates, however, the consulting firm which the Macmillan Board retained for advice about the Company's relationship with Shaheen, saw no link between the financing of the proposed Macmillan refinery and Shaheen's other ventures. Indeed, Valtec expressed concern that Shaheen would succeed in obtaining financing only for his own projects and none for the refinery. Similarly, Hibdon testified that the efforts to obtain financing for the refinery and for Shaheen's other projects were entirely independent. The lack of serious value to Macmillan of Shaheen's activities may also be revealed by the fact that despite Macmillan's expenditure of nearly $ 2,000,000, or roughly 30% of its net income for 1977-1979, to support Shaheen's efforts to secure such financing, as of the date of trial, Collier, the chairman of the Macmillan board, did not even know whether Macmillan had obtained any commitments. Shaheen, himself, in describing his efforts to secure $ 280 million in financing for Macmillan, a company with a book value of only $ 10 million, blithely testified that if he were successful, he would have accomplished an "act of levitation" and "a feat somewhat superior to anything Houdini ever achieved."
It is clear, furthermore, from the minutes of the Macmillan board meetings that the board was prepared to advance Shaheen substantial expense money whenever he asked for it and on the apparently unsupported representation by Shaheen that although "nothing tangible" had come of his efforts to secure financing for Macmillan's proposed refinery, those efforts "seem(ed) to have a chance of coming through."
I find, therefore, that Macmillan's continued willingness to fund Shaheen's activities and its implausible explanations therefor serve clearly to demonstrate Shaheen's control and domination of the Macmillan board and corporate conduct.
Interestingly, Macmillan's contention that its retention of Valtec was proof that Shaheen did not control the board, on closer examination demonstrates the contrary. Valtec's report on the debt was based on no independent investigation. Rather, Valtec merely interviewed Shaheen, his lawyer, and some company personnel and reviewed company documents. And even given the limited nature of this so-called investigation, Valtec nevertheless advised Macmillan to seize the collateral in Rubin's escrow pursuant to the guaranty unless Shaheen corrected the delinquencies within six months, i.e., by the end of September 1979. Shaheen's corporations did not pay by that date, yet Macmillan ignored this advice and made no effort to foreclose on Shaheen's assets to satisfy the debt.
Valtec was not the only Macmillan advisor to recommend that Macmillan declare Shaheen to be in default. In February 1980, Irving Galpeer, Macmillan's outside counsel for SEC matters, "strongly urged" the Macmillan board to give notice of default so that the company could terminate the escrow and apply the stock against the unpaid debt. The board rejected Galpeer's advice so that Shaheen could continue his activities. I note further in this connection that Galpeer testified that on more than one occasion Shaheen told the board that taking any action under the guaranty would harm his reputation, thereby impairing his ability to raise funds. In other words Shaheen informed the board of directors of the corporation of which he was president and controlling shareholder, that he opposed taking any action to enforce the guaranty agreement which he himself had made ...