merely an alter ego of the Bankrupt, that the subsidiaries were
thinly capitalized, had no assets, no separate financial records
and books, identical directors and officers; and that the
day-to-day operation of the subsidiaries was directed by the
parent corporation. Plaintiff asserts that the Defendants knew,
or had reason to know, of this relationship between the
subsidiaries and the Bankrupt.
Plaintiff further alleges that the transfers were made within
four months of the filing of the involuntary petition for
Bankruptcy, while the Bankrupt was insolvent; that at the time of
the transfer the creditors had reasonable cause to believe that
the Bankrupt was insolvent, and that the effect of these
transfers was to give such creditors a greater percentage of
their debts than would another creditor of the same class. These
latter allegations are necessary to establish a voidable transfer
under § 60 of the Bankruptcy Act.
In their motion Defendants claim that since the subsidiaries
were legal entities separate from the Bankrupt, the payments were
not in fact transfers "of any of the property of" the Bankrupt,
and thus cannot be voidable transfers under § 60.
Thus the issue to be decided is whether the doctrine of
"piercing the corporate veil" may be applied to the subsidiary
transferors, so as to attribute such transfers to the Bankrupt
itself, where the transferees have actual or constructive
knowledge of the true relationship between the corporations.
Clearly, the Plaintiff has the burden of proving that the
transfers were made out of the assets of the Bankrupt's estate.
Remington on Bankruptcy; Vol. 4, § 1661.5.
It is well-established that the corporate status of a
subsidiary can be disregarded in bankruptcy proceedings if the
subsidiary is found to be a mere "alter ego" of the Bankrupt
parent corporation. The trustee of a bankrupt company has been
permitted to take over the assets of corporate subsidiaries upon
a finding that the subsidiaries were organized to perpetrate
fraud on creditors, In re Clark Supply Co., 172 F.2d 248 (7th
Cir., 1949); Hudson v. Wylie, 242 F.2d 435 (9th Cir., 1957); or
that the subsidiaries amounted to mere agents or
instrumentalities of the bankrupt parent, In re Plymouth Dyeing
Co., 323 F.2d 134 (3d Cir., 1963); Soviero v. Franklin,
328 F.2d 446 (2d Cir., 1964); In re Cintra Realty Corp., 413 F.2d 302 (2d
Cir., 1969). The trustee has the burden of showing that such a
relationship exists, and where piercing the corporate veil of a
subsidiary would work an injustice to the creditors, equity will
not do so. Maule Industries, Inc. v. Gerstel, 232 F.2d 294 (5th
Cir., 1956); In re Security Products Co., 310 F. Supp. 110
Here the Plaintiff has pleaded a number of facts, outlined
above, which if true would support a finding that the
subsidiaries were mere instrumentalities of the Bankrupt. Under
the above cited authorities, such a showing would entitle the
trustee to assume the assets of the subsidiaries as part of the
Bankrupt's estate. It follows that payments made from these
assets by the subsidiaries to the Defendants can be deemed to
have come out of the assets of the Bankrupt itself. Once the
corporate veils have been pierced, the acts of the subsidiaries
can be attributed to the Bankrupt parent. Allied Chemical Corp.
v. Randall, 321 F.2d 320 (7th Cir., 1963). In a § 60 proceeding
to recover a voidable transfer, courts look to the substance and
not the form of the transfer. Mere circuity of payment does not
prevent a voidable transfer from being found, if the effect of
the transfer is to diminute the Bankrupt's estate and to favor
the transferee creditors, Jackson v. Flohr, 227 F.2d 607 (9th
Cir., 1956). The case most nearly on point is I-T-E Circuit
Breaker Co. v. Holzman, 354 F.2d 102 (9th Cir., 1965). There the
trustee in bankruptcy sought to recover an alleged preference
made in fact by an individual proprietor, whom the trustee
alleged was merely the alter ego of the bankrupt corporation.
While the trustee's efforts were frustrated on procedural
grounds, the Court made it clear
that he should have an opportunity to show that the individual's
transfer could be attributed to the bankrupt corporation.
Thus from the authorities and the better reasoning, it appears
that the Plaintiff has pleaded facts sufficient to support a
finding that, as a matter of law, the transfers in issue were
made out of the property of the Bankrupt. The complaint states a
cause of action under § 60 of the Bankruptcy Act, 11 U.S.C. § 96.
Therefore, Defendants' motion to dismiss the complaint is
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