The opinion of the court was delivered by: GOETTEL
In June 1976, plaintiff Atlanta Shipping Corporation ("Atlanta"), a Liberian corporation then engaged principally in the business of shipping, entered into a shipping contract with International Modular Housing, Inc. ("IMH"), a Delaware corporation that was then engaged in the business of purchasing modular homes in the United States, shipping them to Saudi Arabia, and selling them there. Under the terms of the shipping contract, referred to in the trade as a Liner Booking Note, Atlanta agreed to carry 560 mobile homes from the United States to Saudi Arabia in four voyages. The Liner Booking Note provided for freight charges of $1.54 million per voyage.
The first of the four contracted voyages was completed and paid for as provided for in the Liner Booking Note. Problems began with the second voyage. IMH paid the first three installments for this voyage, but did not pay the fourth. At about the same time that IMH missed this installment, it also failed to pay the first installment of the third voyage.
By the spring of 1977, IMH owed Atlanta $2,222,393, in principal and interest. IMH gained a reprieve when, on February 22, 1977, it entered into a "Credit Agreement" with Atlanta, which restructured IMH's indebtedness to Atlanta and gave Atlanta title, possession, and a security interest in 141 homes then aboard an Atlanta ship. IMH also executed a promissory note reflecting its obligations to Atlanta. Atlanta then discharged the cargo and relinquished its possessory maritime lien.
The reprieve was short-lived, for, shortly thereafter, IMH brought an action in state court to enjoin enforcement of the credit agreement, claiming it had been entered into under economic duress. Atlanta removed that action to federal court, commenced an action against IMH in this Court to enforce collection of the promissory note, and served notice of arbitration upon IMH to enforce collection of the amounts due to Atlanta pursuant to the Liner Booking Note. On September 30, 1982, and March 14, 1983, after years of arbitration and litigation, this Court confirmed arbitration awards against IMH and in favor of Atlanta in the respective amounts of $2,012,500 and $1,753,572. Nearly the entire amount of these judgments remains unsatisfied.
This is one of several actions commenced by Atlanta in an effort to recover on its unsatisfied judgments.
The defendant, Chemical Bank ("Chemical"), was IMH's primary lender and creditor almost from IMH's formation.
A variety of motions are before the Court. The defendant first challenges the Court's subject matter jurisdiction. It also moves to dismiss a number of the causes of action in the plaintiff's thirteen count, blunderbuss amended complaint, or, in the alternative, for summary judgment on many of Atlanta's claims. Finally, it seeks an order requiring Atlanta to post security for costs. For the reasons stated below, these motions are granted in part and denied in part.
A. The Factual Background
The amended complaint relates the following pertinent facts, which we take as true, at least for purposes of evaluating the motions to dismiss. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
IMH was organized under the laws of the state of Delaware on March 15, 1976. At inception, it had four shareholders. Robert Waldron, its president and also a director, owned 35% of IMH's shares. Frank Visconti, its vice-president, owned 15% of IMH until 1978, when he transferred his shares to Waldron. DIC Concrete Corporation ("DIC"), and Underhill Construction Corporation ("Underhill"), both New York corporations, each owned 25% of IMH. DIC and Underhill and certain of their associated corporations and individuals were allegedly coventurers in a joint venture ("the joint venture").
On March 15, 1976, IMH established a bank account with Chemical Bank in New York. On the same day, the joint venture paid $125,000 into this account. In return, it received 50% of IMH's stock, 25% of which was issued to Underhill and 25% to DIC. Waldron was granted 50% of the stock without payment of any cash consideration. He then issued 15% to Visconti.
In October 1976, DIC and Underhill each borrowed $1.5 million from Chemical Bank, pledging their assets as security. DIC and Underhill then lent the $3 million to IMH. In exchange, each received notes and a chattel mortgage on 103 of IMH's modular homes. The amended complaint alleges that DIC and Underhill's loans, and its subsequent guarantees (discussed below) actually supplied IMH with equity.
By December 1976, IMH needed additional cash. To enable IMH to obtain the needed funds, DIC and Underhill guaranteed an additional $3 million in Chemical loans to IMH. Thus, as of the end of December 1976, Chemical had loaned $3 million and DIC and Underhill had each loaned $1.5 million to IMH.
On January 10, 1977, DIC, Underhill, IMH, and Chemical agreed to realign their respective obligations. DIC and Underhill agreed to guarantee still another $3 million loan by Chemical to IMH. Chemical, DIC, and Underhill understood that IMH would use this $3 million to repay DIC and Underhill. DIC and Underhill would then repay Chemical. At the end of this realignment, IMH owed Chemical $6 million. Including its obligations to Chemical, IMH's total debt as of January 1977 was $14 million. Its equity was $125,000.
The amended complaint alleges that, at the time of these transactions, Chemical was intimately familiar with the financial history, and business workings of IMH, DIC, Underhill, and their principals. Thus, Chemical allegedly knew that it was lending to a severely undercapitalized or insolvent corporation.
Between January 1977 and March 1980 (during the ongoing dispute between IMH and Atlanta), IMH attempted, with some difficulty to sell its modular homes in Saudi Arabia. During that time, DIC and Underhill made loans to IMH to enable it to service its debt to Chemical. Chemical also accommodated IMH by continually renewing and extending the due dates of the promissory notes evidencing IMH's obligations to Chemical. Chemical monitored IMH's sales, assets, and general finances, conditioning its extensions on the receipt of the proceeds of IMH's sales. Whenever IMH's outstanding debt was reduced, Chemical would forward a renewal note to DIC or Underhill reflecting the reduction and further extending IMH's repayment schedule.
On February 7, 1980, Chemical forwarded a renewal note to IMH extending the loans for 60 days and requesting $205,381 to cover interest to that date. IMH did not make the requested payment. A little more than a month later, IMH sold all of its remaining inventory in Saudi Arabia for $2,450,000. IMH deposited the proceeds of that sale in its account at Chemical. On March 12, 1980, Chemical debited IMH's account $2,150,000 out of the proceeds of the sale. The next day, Chemical advised DIC and Underhill of this set-off and demanded payment under their guarantees of the $600,000 that IMH still owed it plus $247,510.07 in interest that had accrued as of March 12, 1980. On or about April 3, 1980, DIC and Underhill made the requested payment. Chemical then assigned them its interest and rights as a creditor of IMH.
B. History of this Action
On October 11, 1984, several of Atlanta's creditors filed an involuntary petition pursuant to 11 U.S.C. § 303 (1982) for relief against Atlanta under Chapter 7 of Title 11 of the Bankruptcy Code, 11 U.S.C. §§ 701-66 (1982) ("the Code"). Atlanta filed its original, eleven count complaint in this action on December 11, 1984. On December 20, 1984, Atlanta answered the involuntary petition by filing a voluntary petition thereby converting the case to a proceeding under Chapter 11 of the Code. See 11 U.S.C. § 706(a) (1982). After Chemical moved against the complaint in early-April 1985, Atlanta served and filed its thirteen count amended complaint. Chemical subsequently requested that the Court deem its motion to relate to the plaintiff's amended complaint.
The amended complaint purports to state thirteen causes of action. Some of these causes of action contain as many as five claims. Others are so confused as to defy comprehension. As best we can understand the amended complaint, it states the following claims.
The first, third, ninth, tenth, and eleventh causes of action allege, in whole or in part, that IMH fraudulently conveyed assets to Chemical in violation of sections 273, 273-a, 274, 275, and 276 of the New York Debtor and Creditor Law N.Y. Debt. & Cred. Law §§ 273, 273-a, 274, 275 & 276 (McKinney Supp. 1986) [hereinafter "D.C.L. § "], the common law of New York, and the law of admiralty. The first count cause of action asserts that Chemical, in exercising the $2.15 million set-off, in loaning $6 million to IMH, and in accepting each repayment of those loans, knowingly received a fraudulent conveyance. The third cause of action restates the claim that the set-off was a fraudulent conveyance. The ninth cause of action asserts that Chemical's loans to IMH were actually capital contributions. Thus, every repayment of those loans constituted a conveyance of IMH assets without fair consideration in violation of both the D.C.L. and sections of New York's Business Corporation Law referenced below. The tenth cause of action states that every renewal of the promissory notes and every payment pursuant to those renewals constituted fraudulent conveyances in violation of all of the aforementioned provisions. The eleventh cause of action states that should Chemical receive the proceeds from the sale of the 141 modular homes in which Atlanta had a security interest, that too will constitute a fraudulent conveyance. Moreover, according to the eleventh cause of action, the transfer of those proceeds violates Article 9 of the Uniform Commercial Code.
The fourth cause of action states three separate aiding and abetting claims. It charges Chemical with aiding and abetting (1) fraudulent conveyances by various IMH directors and/or stockholders, (2) improper transfers of assets by directors of IMH in violation of section 720 of New York's business corporation law, N.Y. Bus. Corp. Law § 720 (McKinney 1963) [hereinafter "B.C.L. § "], and (3) distributions to stockholders in violation of sections 510 and 719 of the same law.
The second, third, and seventh causes of action all appear to allege claims against Chemical for receiving preferential transfers. The second reads, "each and every payment of principal and interest made by IMH on the aforementioned $6 million in loan obligations to Chemical Bank was in violation of the . . . common law of the State of New York, which prohibits [sic] preferential transfers by insolvent corporations." Amended Complaint para. 104. The third cause of action contains a similar allegation about the set-off. The seventh cause of action states that the set-off and IMH's other payments of principal and interest violated "the Admiralty Laws of the United States and the common law of the State of New York which prohibits preferential transfers by an insolvent corporation to or [sic] the benefit of insider beneficiaries." Amended Complaint para. 126.
The fifth, sixth, and eighth causes of action defy easy characterization. The fifth charges that Chemical breached a duty of fair dealing to IMH's other creditors by exercising the set-off. The sixth cause of action alleges that Chemical so controlled IMH, DIC, and Underhill that it had a fiduciary duty to IMH's creditors. By recovering payments of principal and interest, including the set-off, Chemical allegedly breached that duty. The eighth cause of action alleges that Chemical is liable as a coventurer of DIC and Underhill and/or IMH for the debts of the latter. The twelfth cause of action seeks punitive damages and attorney's fees, while the thirteenth requests a variety of equitable remedies. Chemical moves to dismiss or, in the alternative, for summary judgment on each of these claims.
II. Discussion - Part I : Motion to Dismiss for Lack of Subject Matter Jurisdiction
Atlanta asks this Court to entertain this action pursuant to its admiralty and diversity jurisdiction. Chemical argues that the Court has neither. Although we find that this matter is not within this Court's admiralty jurisdiction, the plaintiff has convinced us that we have diversity jurisdiction. The defendant's motion to dismiss for lack of subject matter jurisdiction is, therefore, denied.
A. Admiralty Jurisdiction
Section 1333 of Title 28 of the United States Code establishes the admiralty jurisdiction of the federal courts. That section provides, in pertinent part, that "the district courts shall have original jurisdiction, exclusive of the courts of the States, of: (1) Any civil case of admiralty or maritime jurisdiction, saving to suitors in all cases all other remedies to which they are otherwise entitled." 28 U.S.C. § 1333 (1982).
Although the admiralty jurisdiction has been generally limited to cases involving "the primary operational and service concerns of the shipping industry," G. Gilmore & C. Black, The Law of Admiralty 22 (2d ed. 1975), a more expansive line of cases appears to invest the admiralty courts with jurisdiction over some actions that seek to enforce judgments obtained in admiralty. Id. at 41-43. The plaintiff relies on Lee v. Thompson, 15 F. Cas. 233 (C.C.D. La. 1878) (No. 8,202) (" Lee "), which it believes is the strongest of this expansive line, to support its argument that this action is within the Court's admiralty jurisdiction. Neither Lee, nor the other cited cases, justify the Court's invoking its admiralty jurisdiction in this case.
After the libelant (plaintiff) in Lee unsuccessfully attempted to execute against the defendant on a judgment in admiralty, he brought a supplementary action against two of the defendant's judgment debtors. They, in turn, claimed that the defendant had assigned their debts to another. The libelant challenged the purported transfer whereupon the district court found the transfer fraudulent and void and directed the plaintiff to recover from the two judgment debtors. The transferee appealed, contesting the district court's admiralty jurisdiction over the dispute. Affirming, the Court of Appeals stated that absent jurisdiction to hear the plaintiff's claim, "its jurisdiction would often be defeated." Id. at 235. The Court elaborated,
the power of the court to entertain such contestations upon all seizures made under its authority would seem to be indispensable. . . . It seems to me that the proposition can hardly be questioned. Without power to try the validity of conflicting claims, the court could not enforce its judgments for the payment of money. They could always be defeated by fraudulent and simulated transfers.
Id. The federal courts remain free to assert their admiralty jurisdiction in order to safeguard the integrity of their judgments in admiralty. Olav Ringdals Tankrederi v. Ocean Carriers Corp., 1964 Am. Mar. Cas. 1581, 1582 (S.D.N.Y. 1964). Thus, for example, "the jurisdiction of a court of admiralty to determine [whether a defendant is the] alter ego [of a judgment debtor] is 'undoubted.'" North East Shipping Corp. v. Government of Pakistan, 1974 Am. Mar. Cas. 900, 904 (S.D.N.Y.) (Magistrate's report), aff'd, 1974 Am. Mar. Cas. 908 (S.D.N.Y. 1974). See also Swift & Co. Packers v. Compania Colombiana Del Caribe, 339 U.S. 684, 94 L. Ed. 1206, 70 S. Ct. 861 (1950) (admiralty court could decide whether transferee of a ship that was attached in admiralty was the alter ego of the transferor). We expect that the power of an admiralty court extends to adjudicating whether a judgment debtor fraudulently conveyed assets to avoid an admiralty judgment.
Lee, Swift & Co., and their progeny expand the admiralty jurisdiction to include actions involving calculated attempts to avoid the judgments or jurisdiction of the admiralty courts. They do not invite the expansion of the admiralty jurisdiction into a blanket means to adjudicate every lawsuit that relates to an admiralty claim or judgment. See Swift & Co., supra, 339 U.S. at 690 ("Unquestionably a court of admiralty will not enforce an independent equitable claim merely because it pertains to maritime property."). In determining whether this is an appropriate instance for exercising our admiralty jurisdiction, we must consider both the need to protect the jurisdiction of the admiralty courts and the obvious necessity of preventing its unwarranted expansion.
In this case, the balance falls convincingly on the side of limiting the unwarranted expansion of the admiralty jurisdiction. The amended complaint does not and can not allege that IMH's allegedly fraudulent transfers to Chemical were an attempt to avoid an admiralty judgment. Indeed, when Atlanta finally obtained a judgment against IMH, Chemical had long since ceased doing business with IMH. The plaintiffs have not alleged that IMH's transfers to Chemical were a calculated attempt to avoid our admiralty jurisdiction. Indeed, such an allegation would amount to little more than speculation, not the stuff upon which this Court may rest its admiralty jurisdiction. Nor does the plaintiff allege that Chemical is the alter ego of IMH. The cases involving claims against the alter ego of a defendant in admiralty do not control. In short, this Court need not exercise jurisdiction over this action in order to preserve its admiralty jurisdiction against fraud. By contrast, were we to entertain this action, an admittedly calculated effort to recover on unsatisfied judgments from a deep-pocket defendant, pursuant to our admiralty jurisdiction, we would set a dangerous precedent for hopelessly expanding the admiralty jurisdiction.
Even a court possessed with admiralty jurisdiction, may refrain from its exercise when no federal statutory tort claims are raised. Swift & Co., supra, 339 U.S. at 695. Had we admiralty jurisdiction, we would, nevertheless, decline its exercise.
B. Diversity Jurisdiction
The defendant, a New York corporation, also contends that the Court lacks diversity jurisdiction under 28 U.S.C. § 1332(a) (1982). It rests this contention on 28 U.S.C. § 1332(c) (1982), which states, that for purposes of section 1332, "a corporation shall be deemed a citizen of any State by which it has been incorporated and of the State where it has its principal place of business. . . ." Chemical asserts that section 1332(c) applies to alien corporations like Atlanta, a Liberian corporation. Atlanta is also alleged to have its principal place of business in New York. Atlanta vigorously contests the applicability of § 1332(c) to alien corporations, and the defendant's assertion that New York is Atlanta's principal place of business.
Whether section 1332(c) applies to alien corporations is a matter of considerable dispute within this circuit. See Rubinfeld v. Bahama Cruise Line, Inc., 613 F. Supp. 300 (S.D.N.Y. 1985) (surveying the case law).
In any event, the courts only apply section 1332(c) to alien corporations whose principal place of business world-wide is one of the United States. Arab International Bank & Trust Co. v. National Westminster Bank Ltd., 463 F. Supp. 1145, 1147 (S.D.N.Y. 1979). Atlanta is not such a corporation. Section 1332(c) does not, therefore, apply.
In its original complaint, Atlanta alleged that it was a Liberian corporation with a principal place of business in Monte Carlo, Monaco. The defendant asserts that by maintaining a document storage center in New York, and by actively litigating its claims against IMH here, Atlanta made New York its world-wide, principal place of business. In our view, a litigation warehouse does not a principal place of business make. If it did, Atlanta could have created diversity by moving its storage facility across the river to New Jersey. Such obvious irrelevancies should not be conclusive as to the court's subject matter jurisdiction. Atlanta's litigation is also inconsequential. Although a law firm might litigate its way into citizenship, two or three lawsuits cannot do the trick. Moreover, since Atlanta has brought actions in courts throughout the United States, we would have to measure the size of each litigation before determining Atlanta's principal place of business. The absurdity of such a calculation negates the contention that a business enterprise may litigate its way into citizenship.
As of December 1984,
Atlanta had ceased its operations in the shipping business. Its primary activity was the litigation of its outstanding claims, including those against IMH. (It had yet to file for bankruptcy.) Atlanta's president, J.G. Wulfers, continued to work out of Atlanta's Monte Carlo office. From there, he supervised Atlanta's litigation, helping, among other things, to respond to discovery requests. Atlanta paid for this office space, as well as for telephones, and the part-time accounting services of Jan Van Langen, Atlanta's former controller. Although Atlanta was admittedly doing little if any business, Monaco was the focus of its activity.
"Where a corporation is engaged in far-flung and varied activities . . . its principal place of business is the nerve center . . . from which its officers direct, control and coordinate all activities without regard to locale, in the furtherance of the corporate objective." Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865 (S.D.N.Y. 1959) (Weinfeld, J.). Although, Atlanta was by no means a far-flung enterprise at the commencement of this suit, its only activity, litigation, was directed and coordinated by Wulfers from Atlanta's office in Monaco.
Although novel, these facts indicate that Monaco was Atlanta's principal place of business world-wide. There is simply not enough authority in these circumstances for deeming Atlanta a citizen of New York under section 1332(c).
Even if Atlanta did no business in Monaco, we would hesitate to deem New York its world-wide principal place of business. Instead, we might hold, as some have suggested, that no principal place of business existed. See J. Friedenthal, New Limitations on Federal Jurisdiction, 11 Stan. L. Rev. 213, 225 (1959) quoted in, 13B C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3264 n.28 (2d Ed. 1984) ("It would be feasible and desirable for the courts to hold in appropriate cases that no principal place of business exists. What evidence we do have, however, would seem to command the courts to find a principal place of business in every situation.")
The defendant contends that testimony of Atlanta's representatives at a January 31, 1985 creditors meeting constitutes a judicial admission that, as of the commencement of this suit, New York was Atlanta's world-wide principal place of business. Alternatively, the defendant contends that the testimony judicially estops Atlanta from claiming that its principal place of business was elsewhere. Neither contention stands up to scrutiny.
The bankruptcy judge did not preside at the creditors meeting, which was held pursuant to 11 U.S.C. § 341(c) (1982). J.G. Wulfers; Cyndy Korman, Atlanta's bankruptcy counsel; and Michael Arra, Atlanta's special litigation counsel, testified as follows:
"THE PRESIDING OFFICER: . . . Can you tell me on what basis [Atlanta's petition] was filed in the Southern District of New York?
MS. KORMAN: For the reason that the debtor's assets, the principal assets, have been in New York for the 90 days preceding the petition.
THE PRESIDING OFFICER: And what principal assets are those?
MS. KORMAN: Litigations, several outstanding litigations.
THE PRESIDING OFFICER: So you are saying the only principal assets that were in this ...