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Hartwell v. Hartwell Co.

Decided: March 12, 1979.

JACK HARTWELL AND JENNIFER HARTWELL, PLAINTIFFS, IANTHA, INC., A NEW JERSEY CORPORATION, PLAINTIFF-INTERVENOR,
v.
HARTWELL CO., INC. AND JAMES LAING AND MARILYN LAING, DEFENDANTS



Wiley, J.s.c.

Wiley

[167 NJSuper Page 94] On or about September 29, 1975 Iantha, Inc. (Iantha) and Hartwell Co., Inc. (Hartwell Co.) entered into a lease of premises owned by Iantha, located in the Township of Dover. The lease was for a term of ten years commencing November 1, 1975 and expiring October 31, 1985. On or about September 2, 1977 James Laing and Marian Laing purchased all the shares of stock of Hartwell Co., Inc., of which Jack Hartwell and Jennifer Hartwell were the sole shareholders. The written agreement of sale provided that the sellers had a right to proceed to exercise their rights under a security agreement attached to the contract if the buyers defaulted on the weekly installment payments of $100. The security agreement gave the sellers a security interest in basically all the collateral utilized in the business to secure a sum of $25,000, which was the principal purchase price. The named debtor in the security agreement was Hartwell Co., Inc. and James Laing executed the security agreement on behalf of Hartwell Co., Inc. in his

capacity as president. On or about September 16, 1977 a sufficient financing statement was filed in the office of the Secretary of State in Trenton, N.J.S.A. 12A:9-401(1)(c), perfecting the security interest. N.J.S.A. 12A:9-301(1)(b); Shaw Mudge & Co. v. Sher-Mart Mfg. Co., Inc. , 132 N.J. Super. 517, 521 (App. Div. 1975).

The buyers' failure to make regular payments commenced in November 1977. In May 1978 the sellers' attorney mailed a notice to the buyers demanding monies owed and accelerating the entire balance due in accordance with the terms and provisions of the sales contract. In June 1978 the sellers filed a complaint requesting, among other things, that the buyers be compelled to turn over to the sellers all assets listed in the security agreement. On July 19, 1978 the judge ordered the buyers to immediately pay $600 to plaintiffs and to conform with the terms of the contract by paying $100 weekly to plaintiffs. The order also provided that in the event defendants defaulted in regard to these payments, plaintiffs could obtain "immediate possession and other relief sought in the complaint" upon filing an ex parte affidavit setting forth such default.

In October 1978 plaintiffs filed an affidavit stating that there had been a default. Upon motion by the landlord, Iantha, Inc., it was allowed to intervene in the suit for purposes of enforcing a landlord's lien. In December 1978 a limited hearing concerning the priority dispute between the landlord and the secured creditor was held. It was decided that the parties would file briefs, affidavits and other papers with the court within two weeks and that the court would determine the issues without further oral argument. The judge requested and received additional affidavits and materials from the secured creditors in February 1979.

Iantha's lien arises from N.J.S.A. 2A:42-1, which provides that no goods upon leased real estate may be taken by virtue of any process unless the party suing out the process pays the landlord all unpaid rent up to one year's rent. Hartwell Co., Inc. has not paid its rent for some time.

Validity of the Security Agreement

In the instant case the shareholders sold all the stock of the corporation to the Laings, who, as the new officers, gave back a security agreement of the corporation to the sellers.

The first issue to be addressed is whether such a security agreement is valid. It is generally held that the transaction is valid as between the debtor-corporation and the secured party who sold the stock. Heidler v. Werner & Co. , 97 N.J. Eq. 505, 508 (E. & A. 1925); Roxbury State Bank v. Clarendon , 129 N.J. Super. 358, 370 (App. Div.), certif. den. 66 N.J. 316 (1974); Futurity Realty Corp. v. Passaic Nat'l Bank & Trust Co. , 2 N.J. Super. 175, 180 (Ch. Div. 1948); Annotation, "Validity of obligation given by corporation incident to purchase of entire stock by sole shareholder," 71 A.L.R. 3d 639, 646 (1976). But the validity of the transaction as against creditors of the corporation is questionable. Cases prior to Roxbury State Bank, supra , stated that a corporation may not lawfully execute an obligation for the payment of money or create a security interest in its assets as an accommodation for one of its officers. Heidler v. Werner Co. , 97 N.J. Eq. at 507-08; Futurity Realty Corp. v. Passaic Nat'l Bank & Trust Co. , 2 N.J. Super. at 179.

Roxbury State Bank, supra , noted that a predominant object of the 1968 New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to 16-4, was to expand the powers of corporations in light of modern business practices. 129 N.J. Super. at 368. The court also noted that the 1968 revision included provisions regulating fraudulent conveyances. Id. On the basis of these facts, the court held that the validity of a mortgage upon the property of a corporation is controlled by the fraudulent conveyance sections of the statute. N.J.S.A. 14A-14-1 to 14-27. The factual situation in the instant case is similar to that present in Roxbury State Bank.

The particular section controlling, N.J.S.A. 14A:14-10, contains several subsections. ...


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