B.W. Photo Utilities, Inc. v. Republic Eng. Corp., 30 A.D.2d 576 (N.Y. App. Div. 1968)

An insolvent corporation’s pro rata distribution of assets to its creditors is neither a preferential nor a fraudulent transfer if the distribution treats all creditors with similar interests equally, and no creditor sustains a compensable loss compared to what they would have received in a fair distribution.

Summary

B.W. Photo Utilities (Plaintiff) sued Republic Engineering Corp. (Defendant) and its interlocking directorates, alleging a fraudulent transfer because the insolvent Trionics corporation made a pro rata distribution of its remaining assets to Republic and Plaintiff (its two sole creditors). The court reversed the lower courts’ decision, holding that the pro rata distribution was permissible because Plaintiff, lacking a perfected lien on Trionics’ Wisconsin assets, was an unsecured creditor entitled only to a pro rata share. The distribution ensured fairness, and Plaintiff suffered no loss compared to a fair distribution scenario.

Facts

Trionics, an Illinois corporation, was largely owned by Republic Engineering (Nautec), a New York corporation. Plaintiff owned the remainder. By mid-1963, Trionics was insolvent and had ceased operations. It owed money to Republic via a debenture bond and to Plaintiff via short-term notes. Plaintiff sued Trionics in Illinois and obtained judgments. Attempts to execute these judgments in Illinois were unsuccessful. Trionics then made a pro rata distribution of its remaining funds to Republic and Plaintiff. Plaintiff then alleged the pro rata distribution was a fraudulent transfer.

Procedural History

Plaintiff sued in New York Supreme Court, alleging a fraudulent transfer. The Supreme Court granted summary judgment for Plaintiff. The Appellate Division affirmed. The New York Court of Appeals reversed, granting summary judgment for Defendants.

Issue(s)

Whether an insolvent corporation’s pro rata distribution of assets to its two sole remaining creditors, without any creditor having a perfected lien, constitutes a prohibited preferential or fraudulent transfer under New York law.

Holding

No, because the plaintiff, lacking a lien on the Wisconsin assets of the Illinois corporation, was an unsecured creditor entitled only to a pro rata share, and thus suffered no loss due to the equitable distribution.

Court’s Reasoning

The court reasoned that under Section 15 of the Stock Corporation Law, a preferential transfer occurs when a transfer to one creditor results in the nonpayment or disproportionate payment of creditors with similar interests. The critical inquiry is whether the creditor sustained a loss by comparing what it received to what it would have received absent the transfer. Here, both Plaintiff and Republic were unsecured creditors entitled only to a pro rata share.

The court emphasized that Plaintiff did not have a lien on Trionics’ Wisconsin assets; the Illinois judgments had not been domesticated in Wisconsin. The court rejected Plaintiff’s argument that it should be considered as if it had a lien, stating that the validity of the transfer must be determined at the time of the transfer, and any potential lien was speculative.

The court noted that even if Plaintiff had obtained a judgment lien, it might have been vulnerable as a preference under bankruptcy laws. The court quoted the dissenting Justice at the Appellate Division, who pointed out that the pro rata payments mirrored what would occur in bankruptcy proceedings. The court concluded that because each creditor received what it was entitled to, there was neither a preference nor a fraudulent transfer. As the court stated, “Each creditor received the sum of money to which it was entitled, and, therefore, there was neither a preference nor a fraudulent transfer.”