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ROCKMORE v. SCHILLING

June 9, 1947

ROCKMORE
v.
SCHILLING



The opinion of the court was delivered by: MEANEY

This is an action brought by the trustee in bankruptcy of the Schilling Press, Inc., to set aside transfers of property made by the bankrupt to the defendant. The suit is brought in accordance with the provisions of the Bankruptcy Act, Sec. 70, sub. e, 11 U.S.C.A. § 110, sub. e, and with the provisions of Sec. 15 of the Stock Corporation Law of the State of New York, Consol.Laws, c. 59, and with the Debtor and Creditor Law of the State of New York, Consol.Laws, c. 12. Jurisdiction is based on the provision of the Bankruptcy Act, and on diversity of citizenship.

Counts 2 and 5 have been abandoned and only counts 1, 3 and 4 will be considered in this opinion. The action is brought by the plaintiff as trustee in bankruptcy of the Schilling Press, Inc., bankrupt, a New York corporation, which had been engaged in the printing business in New York City for over thirty years prior to August 21, 1942 when it filed its voluntary petition for reorganization. From that date until July 23, 1943 the business was operated by the trustees in such reorganization proceedings and on the latter date the business was adjudicated a bankrupt and the plaintiff herein appointed trustee in bankruptcy.

 Jacob H. Schilling, defendant herein, was the founder and chief stockholder of Schilling Press, Inc., and was as well its President and Treasurer until his resignation on January 3, 1933 due to the condition of his health. He was also a director of said corporation and has continued as such until the present date.

 It is for return of benefits which accrued to him through alleged preferences while acting as such director that this action is brought.

 Under the first count it is asserted that while the bankrupt was unable and refused to pay certain of its notes or other obligations when due and while it was insolvent or its insolvency imminent, and after defendant had resigned as president and treasurer, the bankrupt paid over and transferred to defendant certain sums of money, purporting to be in payment of salaries, amounting to $ 30,920.

 These payments, the receipt of which is not denied by the defendant, are claimed by the plaintiff to have in fact been transfers to the defendant in contravention of Section 15 of the New York Stock Corporation Law, the Debtor and Creditor Law of the State of New York, and the Bankruptcy Act, on the ground that while the payments were made in the guise of salaries, the defendant in fact rendered no services to the corporation, and the payments were illegal transfers, made for the purpose of reimbursing him for loans made to the Company.

 In the opinion of the court these allegations are not supported by the evidence before it. The defendant, Schilling, resigned as President and Treasurer of the Schilling Press, Inc., on January 3, 1933 and thereafter continued association with the company as a director and as consultant and advisor, reporting regularly at the company offices.

 The defendant was compensated for such services by weekly payments entered variously and, at times, inaccurately, on the books of the Company. The compensation so paid, in view of his comprehensive knowledge of the business, his familiarity with contacts to be maintained by the company, and his general experience, was not exorbitant nor otherwise indicative of fraudulent intent to effect a preference as against the rights of other creditors.

 The record of payment to Jacob Schilling and of his advances to the company, subsequent to his resignation as president and treasurer, negative the allegations that the monthly payments made were as a matter of fact repayments of loans made by him. Conversely, the record affirmatively indicates that the weekly payments in fact represented payments for services rendered to the company. As such, they may not now be set aside on the grounds that such payments constituted a preferential transfer within the meaning of any of the statutes cited.

 The third count charges that on or about February 28, 1938 the corporation transferred to the defendant 80 shares of the capital stock of Sales Management, Inc., which was then owned by the bankrupt and was of the reasonable value of $ 8,000 and that the transfer was made without consideration of the full value thereof received from the defendant.

 The fourth count alleges that on or about the 11th day of January, 1940 the bankrupt transferred 50 shares of the capital stock of Sales Management, Inc., which were then of the fair and reasonable value of $ 5,062.50 and that this transfer was made by the bankrupt to the defendant without consideration of the full value thereof paid to it by the defendant.

 The plaintiff has brought this action under Sec. 70, sub. e, of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. e, which gives a trustee in bankruptcy the right to recover, by suit, property transferred in violation of the law of a State, if a creditor could have avoided the transfer under that law, and gives to this court concurrent jurisdiction with the State Courts of such a suit.

 The plaintiff relies further on the New York Stock Corporation Law, Section 15 and on Section 273 of the Debtor and Creditor Law of the State of New York.


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