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January 29, 1964

In the Matter of LEA FABRICS, INC., a corporation of the State of Delaware, Bankrupt

The opinion of the court was delivered by: WORTENDYKE

This case is before the Court at this time on the respective cross-petitions by (1) Ardisco, Ltd., a turn-over claimant of proceeds of Receiver's sale of bankrupt's assets covered by claimant's chattel mortgages, and (2) bankrupt's Trustee, both for review of the Referee's order of June 28, 1963. That order denied the turn-over claim of Ardisco, directed Ardisco to repay to the Trustee, with interest, $ 75,000.00 previously paid to Ardisco out of the proceeds of the Receiver's sale, and denied certain relief sought by the Trustee in his counterclaim against Ardisco. Lea Fabrics, Inc., a Delaware corporation, having its principal place of business in New Jersey, was adjudicated a bankrupt and Max Mehler, Esq., *fn1" was appointed and qualified as its Trustee on February 18, 1960.

The Referee's Findings of Fact and Conclusions of Law are quoted at length in Appendix A-I, hereto attached.

 The Trustee contended before the Referee that (1) the transfer of bankrupt's collateral to Ardisco was null and void under N.J.S.A. 14:14-2; (2) the transfer of said collateral was fraudulent because made with actual intent to hinder, delay and defraud present and future creditors of the bankrupt, for an inadequate consideration, at a time when the bankrupt was insolvent, and left Lea with an inadequate capital with which to continue in business; (3) Ardisco, Reldan and Stratford were participants in and beneficiaries of the transfer of collateral which involved breaches of duty owed by the officers, directors and controlling stockholders of the bankrupt to the bankrupt and to its creditors and by the bankrupt to its creditors.

 Ardisco contended before the Referee that (1) its loan transaction with the bankrupt did not violate the provisions of N.J.S.A. 14:14-2; *fn2" (2) there was a failure of proof that the bankrupt was insolvent when the loan was made; (3) the evidence failed to show that Ardisco was not a bona fide purchaser for value without notice of bankrupt's insolvency; (4) the transfers of collateral were not shown to have been fraudulent; (5) there was no evidence of Ardisco's participation in any wrong-doing; and (6) Ardisco's claim to the proceeds of the sale of the pledged assets of Lea is supported by the preponderance of the evidence.

 The Trustee here seeks review of so much of the Referee's order of June 28, 1963 as denies the relief sought in his counterclaim, which seeks, inter alia, to void the transfers to Ardisco under N.J.S.A. 14:14-2, upon the following grounds: (a) the denial of such relief is inconsistent with the Referee's conclusion that the transfer of Lea's collateral having a situs in New Jersey to Ardisco on May 31, 1957 is void; (b) the Referee erroneously concluded that N.J.S.A. 14:14-2 must be limited to collateral having a situs in New Jersey; (c) even if New Jersey law is not applicable to a portion of the collateral assigned, a determination should have been made as to the propriety of the transaction under other applicable law; and (d) the Referee erroneously concluded that the pleadings did not encompass the Trustee's contentions that the transfer of collateral was (1) fraudulent and (2) violative of the fiduciary obligations owed by the officers, directors and controlling stockholders of Lea to Lea and its creditors and by Lea to its creditors.

  Lea Fabrics, although incorporated in the State of Delaware in 1925, had from its inception conducted its business at and from its only plant at 768 Frelinghuysen Avenue, Newark, New Jersey. It conducted all of its manufacturing, purchasing, sales, research and development, office work and record keeping at that plant. Until the Ardisco 'loan closing' in New York City, Lea did its banking with National Newark and Essex Banking Company in Newark; but, at the conclusion of the 'closing' Lea opened an account in the New York Trust Company in New York City, in which it deposited the check which it took away from that 'closing.' A few days later Lea transferred most of that balance to the Newark bank to meet a charged overdraft on that account. The written agreement of May 31, 1957 (Appendix A-II) which sets forth the terms and conditions of the Ardisco 'loan' provided that New York law should govern the transaction. It was the contention of the Trustee before the Referee, and before this Court that Lea's intangibles had a situs in New Jersey; that their disposition upon insolvency is subject to New Jersey law in any event, and that no other State has such an interest in the transaction here questioned as would preclude the application of New Jersey law thereto. On May 31, 1957, Lea transferred the following collateral to Ardisco, which allegedly has realized the indicated respective amounts thereon: Chattel mortgage on machinery and equipment at Newark plant $ 132,565.83 Limited license rights to distribute 179 Lantz cartoons 350,000.00 Receivables under contracts to exhibit those cartoons 119,645.91 Storm-Vulcan chattel and realty mortgages securing indebtedness to Lea 110,000.00 Second realty mortgage on Lea's Newark plant (No equity) Second preferred maritime mortgage on S.S. HAROLD D. WHITEHEAD (No value)


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