Home/E.D. New York/Duberstein v. Werner

Duberstein v. Werner

256 F. Supp. 515, 1966 U.S. Dist. LEXIS 10486
CourtDistrict Court, E.D. New York
DecidedJuly 8, 1966
Docket64-C-522
StatusPublished
Cited by28 cases

This text of 256 F. Supp. 515 (Duberstein v. Werner) is published on Counsel Stack Legal Research, covering District Court, E.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Duberstein v. Werner, 256 F. Supp. 515, 1966 U.S. Dist. LEXIS 10486 (E.D.N.Y. 1966).

Opinion

BARTELS, District Judge.

Plaintiff as Trustee in Bankruptcy of Raywal, Inc. (Raywal), a corporation engaged in the business of manufacturing trophies, institutes this action to invalidate a chattel mortgage given by Raywal to the defendant Raymond G. Werner (Werner), an officer, director and stockholder of Raywal, covering all of the equipment and machinery of Raywal and to set aside the foreclosure sale of said equipment and machinery. The Trustee claims (i) that the mortgage was a fraudulent conveyance under Sections 270-276 of the New York Debtor and Creditor Law, McKinney’s Consol.Laws, c. 12, and Section 67(d) of the Bankruptcy Act, 11 U.S.C.A. § 107(d), and (ii) that it was executed in violation of Section 15 of the New York Stock Corporation Law, McKinney’s Consol.Laws, c. 59.

Prior to the incorporation of Raywal, Werner conducted the business of manufacturing and selling trophies as an independent proprietor, under the name of “Raywal”, and, in connection therewith, employed one Walter Soltow (Soltow) at a fixed salary. At that time the business was conducted in the same building where Werner also operated a bowling alley, which building was owned by Werner’s father, Alexander Werner. On August 1, 1958, Werner incorporated Raywal and caused the corporation to issue one-third of its shares to himself, one-third of its shares to Soltow, and one-third of its shares to his father, Alexander. At the outset, the officers were Alexander Werner, president; defendant Werner, secretary-treasurer; and Soltow, apparently vice-president. Later Alexander Werner became vice-president and Soltow became president.

*517 Werner claims that he loaned Raywal, from its inception in August, 1958 to March, 1962, the sum of $56,200, and that the initial loans in the amount of $17,100 took the form of “purchases, salaries and all expenses necessary to set up this corporation”, and that the salaries were advanced “prior to the formation” of the corporation.

Apparently what happened was, that with minor changes, all of the entries existing on August 1, 1958 with respect to the operation of the business by Werner individually were simply transferred to Raywal as a corporation. The journal entries on Raywal’s books (Exhibit 6 attached hereto) graphically depict this transfer. In reality, the entries indicate *518 that the so-called “assets” of Raywal, against which Werner credits himself with a loan payable, include not only equipment but also purchases and expenses including telephone, travel expenses, promotion expenses and consulting fees, all incurred by Werner in the operation of his business before incorporation. These entries state that two shares of stock were issued to Werner for $2,000 in capital, represented by inventory purchased from Werner, and that one share of stock was issued to Soltow for $1,000 in capital, represented by prepaid consulting fees. The description and value of the inventory allocated to these shares, do not appear. The validity of the issuance of both Werner’s and Soltow’s shares might be seriously questioned. The debit side of Raywal's books shows a debit of $31,092.32, which is explained on Raywal’s books as “monies spent through the books of Lindenhurst Recreational Center by cash to August 1, 1958”. Lindenhurst Recreational Center was operated by Werner. There is deducted from said sum of $31,092.32 the sales attributable to Raywal for the same period prior to August 1, 1958, amounting to $16,092.32. Werner is then credited with the balance of $15,000 as a loan payable plus the sum of $2,100 for inventory allegedly sold by him to the corporation, totalling $17,100 of loans payable. It is obvious from the books of the corporation that sums totalling $10,-872.87, debited against the corporation and included in the assets of the corporation totalling $31,092.32, were not assets but expenses incurred or paid in the operation of the business prior to incorporation. Morever, the sales amount of $16,092.32, which is reported on the books as a credit, does not represent actual cash or accounts receivable. It is difficult to understand exactly what it represents. Nevertheless, this sum as well as the expenses aggregating $10,872.87 were used as a basis in calculating the total of loans payable to Werner on the date of incorporation. The Court does not believe that such unorthodox bookkeeping entries are sufficient without more to establish a bona fide loan by Werner in the amount claimed of $17,100 on the date of incorporation.

*517

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Bluebook (online)
256 F. Supp. 515, 1966 U.S. Dist. LEXIS 10486, Counsel Stack Legal Research, https://law.counselstack.com/opinion/duberstein-v-werner-nyed-1966.