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Smith v. Whitman

Decided: June 27, 1962.

RANDALL E. SMITH, ET AL., PLAINTIFFS-RESPONDENTS,
v.
CLIFFORD L. WHITMAN, DEFENDANT-APPELLANT, V. PAUL A. VIVERS, DEFENDANT



Goldmann, Freund and Foley. The opinion of the court was delivered by Goldmann, S.j.a.d.

Goldmann

Defendant-crossclaimant, Dr. Whitman, appeals from a Chancery Division judgment setting aside certain transfers of property from defendant Vivers to him. Plaintiffs, in their several complaints, attacked these transfers as being a fraud on Vivers' creditors and sought the appointment of a receiver for his assets. The trial court held that the transfers should be set aside as the product of duress.

I.

Vivers was an attorney-at-law of New Jersey, the magistrate for two municipalities, and a member of the Bergen County Board of Elections. The several plaintiffs are acknowledged to be creditors of Vivers, who, while acting as their attorney, embezzled funds from them in the claimed total amount of $57,983.

Vivers' dealings with Dr. Whitman were complex, and carried out on an attorney-client basis. They may be summarized as follows:

Dr. Whitman, an orthodontist and Professor of Orthodontistry at Columbia University, consulted Vivers in March of 1956. Although Vivers was his uncle, there had been no close relationship between the two for 20 to 30 years. Dr. Whitman wanted to purchase a home in Ho-Ho-Kus, N.J. He was, however, at that time having marital difficulties, later resolved. He also planned to build an office building, both as an investment and to house his professional offices. Vivers suggested that a corporation be formed which would take title to the new home and be used to tax advantage as a vehicle for accumulating capital for Dr. Whitman's prospective building investment.

The doctor advanced $59,000 to Vivers for the purchase of the house free and clear. Vivers, with Dr. Whitman's consent, took title in his own name pending the formation of the corporation. To reassure Dr. Whitman, Vivers gave him an unrecorded deed to the property and promised that as soon as the corporation was formed a deed to it would be executed and recorded.

The corporation, CLW, Inc. (hereafter CLW), came into legal existence early in May 1956. During the month which followed, Dr. Whitman asked Vivers several times whether he had executed the Ho-Ho-Kus property deed to the corporation. Finally, in mid-June 1956 Vivers exhibited an executed deed from himself to CLW. Although he represented that he would record the deed, he failed to do so.

In the course of the next four years Dr. Whitman contributed large sums of money and property to CLW. For example, during the corporation's first year Dr. Whitman contributed his former residence in Teaneck -- soon after sold by CLW for $30,000 and almost $20,000 cash for the purchase of stock. As of 1957, the doctor's contribution to CLW, including the $59,000 for the purchase of

the Ho-Ho-Kus house, was just under $109,000. Dr. Whitman thereafter contributed further sums from time to time, and retained in the corporation substantially all of his profits from stock transactions. In addition, two properties he owned in Hackensack, N.J., were transferred to the corporation, and the rental income, including the $500 paid by Dr. Whitman monthly for his offices, was retained by CLW.

Dr. Whitman appears to have taken only $6,000 out of the corporation between 1956 and 1960. After the sale of the Teaneck house in 1957 he had asked that the proceeds be turned over to him. Vivers told him that the $30,000 realized from that sale had been loaned out on a 6% three-year mortgage. Although Dr. Whitman never saw the mortgage, he had no reason at that time to suspect Vivers' integrity. Accordingly, he did not press the issue.

The investments of CLW were controlled by Dr. Whitman, although the corporate officers were Vivers, his secretary (who has since disappeared) and Dr. Whitman's sister. The latter two had no business experience. Vivers kept the corporate books, but Dr. Whitman received duplicate slips from the brokerage house as stock was bought and sold by CLW. About a year after the corporation was formed, Vivers persuaded Dr. Whitman to have the certificates representing stock bought by CLW sent to the corporation office, i.e. , Vivers' office, rather than have them held by the brokerage house in its street name.

On March 7, 1960 Dr. Whitman received a letter from a nearby bank asking him to secure a loan to CLW by hypothecating 50 shares of stock issued in his name. His broker had mistakenly sent the stock to Vivers. Thus, by sheer accident, Dr. Whitman discovered that Vivers had been using the CLW name to borrow on the security of stocks the doctor had bought in the company name. Vivers had manipulated the CLW loan account by withdrawing stocks as they were sold by Dr. Whitman, and replacing them with the new purchases. He had overlooked the fact

that the 50 shares about which the bank wrote Dr. Whitman, bore the doctor's name. The CLW bank loan stood at $45,000 when Dr. Whitman discovered what had been going on. He at once spoke to Vivers, who assured him that everything was in order. However, the doctor demanded that they meet to go over the corporate books, and they agreed to do so on March 17. Vivers cancelled the appointment; he was in Florida, or supposed to be, from March 17 to 23. The meeting was then set for March 23, but Vivers again cancelled the appointment. Dr. Whitman nonetheless went to Vivers' office, found him there and asked for an accounting. Vivers again said that everything was in order and, if given time, he could "straighten the whole thing out" by May 1. He promised to meet Dr. Whitman the next day to go over the CLW accounts.

The men met as planned. Vivers said that he did not have the corporate records with him, but offered to show his good faith by giving Dr. Whitman $20,000 in New Jersey Port Authority bonds to hold. The offer was accepted, and the bonds, which Vivers had with him, turned over to Dr. Whitman. It later developed that the bonds had been embezzled from another of Vivers' clients, and Dr. Whitman had to return them to their rightful owner.

On March 24 Dr. Whitman's broker notified him that the $45,000 CLW loan was in default, that the bank was about to resort to the stock collateral, and that a bank officer was coming to the broker's office the next day. Dr. Whitman met the bank representative there and learned for the first time that Vivers had encumbered the Ho-Ho-Kus property with a $25,000 mortgage, on which $18,930.59 was still due. (It will be remembered that Vivers had never recorded the deed to CLW.) Dr. Whitman thereupon immediately recorded the deed Vivers had given him when the house was bought.

On March 25 Dr. Whitman accompanied Vivers to Florida where their wives had been vacationing together. He did

not, however, question him about the loans or the mortgage; his explanation at the trial was that he wanted to investigate further. They returned on the 29th, and the next morning Dr. Whitman engaged another attorney.

Dr. Whitman and the attorney confronted Vivers at his offices on March 30 and demanded an accounting. Vivers attempted to explain the mortgage and the loan in the same way he had explained his failure to turn over the proceeds from the sale of the Teaneck property: he said he had invested in mortgages in CLW's name. However, he could not produce them. Dr. Whitman then demanded that Vivers turn over any property he had -- even his wife's jewelry. He also demanded the corporation's accounts, but Vivers said the accountant had them and was on a cruise. Dr. Whitman called the accountant at his home that evening and immediately picked up the corporate tax reports.

Dr. Whitman and his attorney again went to Vivers' office on April 1. Informed that he was not in, they proceeded to the offices of General Packaging Company, a corporation in which Vivers had an interest. They found Vivers there and returned with him to his office where they demanded a complete accounting and that Vivers turn over to Dr. Whitman all the stock he held in General Packaging Company. The endorsed stock certificates, together with certain voting trust certificates, were delivered that afternoon. A few days later Vivers also transferred his 1958 Cadillac to Dr. Whitman. When the doctor and his attorney took the General Packaging certificates to the transfer agent on April 11, they were informed that the new certificates to be issued would require the signatures of two other persons, one being Vivers.

There was another meeting between the parties on April 27 at which Vivers was represented by counsel. Vivers acknowledged all of Dr. Whitman's claims and asked for time to straighten everything out. At this meeting he also admitted that the Port Authority bonds he had given Dr. Whitman belonged to another client. Vivers claimed, however,

that he owed no one else any money, except for a secured ...


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