Irving Trust Co. v. Maryland Casualty Co.
1936 U.S. App. LEXIS 2474, 83 F.2d 168, 111 A.L.R. 781 (1936)
Rule of Law:
A state statute prohibiting preferential transfers by foreign corporations doing business in the state can render such transfers 'illegal,' allowing a trustee in bankruptcy to seek recovery from transferees, even for property located outside the state, through an in personam decree of reconveyance.
Facts:
- A Delaware company, licensed to do business in New York, was indebted to four surety companies.
- On January 6, 1932, the company entered into two contracts promising to transfer certain personal property to the surety companies or their nominees in payment of its debts.
- The contracts also required three of the company's subsidiaries to transfer other real and personal property to the surety companies' nominees.
- Most of the real property was in New York, but other parcels and chattels were in Missouri, Florida, and New Jersey.
- At the time of these contracts, the company was insolvent or in imminent danger of insolvency.
- The transfers were intended to prefer the surety companies, who knew or had cause to know of the company's financial condition.
- The subsidiaries and the company performed the contracts by conveying the specified properties.
- These transfers occurred more than four months before an involuntary bankruptcy petition was filed against the company on October 13, 1932.
Procedural Posture:
- An involuntary bankruptcy petition was filed against the Delaware company (bankrupt) on October 13, 1932.
- The company was adjudicated bankrupt, and the plaintiff (Irving Trust Co.) was appointed its trustee in the following December.
- The trustee in bankruptcy filed a bill in equity in the federal district court against the surety companies (grantees and transferees) and their nominees, seeking to recover preferential transfers under Section 114 of the New York Stock Corporation Law.
- The district court dismissed the bill for lack of equity, ruling that Section 114 only applied to the liability of officers, directors, and stockholders of foreign companies and did not make the transfers themselves unlawful.
- The plaintiff, Irving Trust Co., appealed the district court's decision.
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Issue:
Does New York Stock Corporation Law § 114, which imposes liabilities on officers, directors, and stockholders of foreign corporations for "illegal transfers," also invalidate the transfers themselves and permit a New York court to order the reconveyance of property located outside New York?
Opinions:
Majority - L. Hand, Circuit Judge
Yes, New York Stock Corporation Law § 114 invalidates preferential transfers made by foreign corporations, and a New York court can order the reconveyance of property located outside the state through an in personam decree. The court reasoned that Section 114 was enacted to address a "gap" in New York law, specifically to subject foreign corporations to the same limitations on preferential transfers as domestic corporations, following Vanderpoel v. Gorman. Although the statute literally imposes liability only on officers, directors, and stockholders for "illegal transfers," the use of the word "illegal" in describing such transfers signifies that the transfers themselves are unlawful. To hold otherwise would leave "guilty transferees" secure, which would defeat the legislative intent to equalize the position of foreign and domestic companies in New York. The court asserted that once a transfer is deemed "illegal," courts can devise remedies, similar to how they did under the Statute of Elizabeth, which merely declared transfers void. Regarding property located outside New York, the court held that while the law of the situs (lex rei sitae) generally determines the validity of a conveyance, New York law can still deem the receipt of a deed (occurring in New York) a wrong and impose liability on the grantee. This does not infringe upon the sovereignty of the situs state because the court is not voiding the transfer in rem (against the property itself) but rather compelling the grantee in personam (against the person) to perform an act, such as reconveyance. The court cited precedents like Lord Cranstown v. Johnson and Polson v. Stewart to support the principle that a court can compel a tortfeasor to restore property specifically, regardless of its location, provided the lex rei sitae would recognize a conveyance made under the duress of a decree. Therefore, the plaintiff could seek a decree directing the defendants to reconvey the property.
Analysis:
This case is significant for its expansive interpretation of state corporate preference statutes to cover foreign corporations and its application of conflict of laws principles. It reinforces the power of a court with in personam jurisdiction over a defendant to order actions affecting out-of-state property, provided the decree does not directly contravene the lex rei sitae. This decision effectively broadens the reach of state insolvency laws and provides a powerful tool for creditors and trustees to recover assets in complex, multi-jurisdictional insolvency cases, even when transfers predate federal bankruptcy voidance periods.
