Appendix — First Federal Savings & Loan Ass'n v. McNellis

P Nees

_ Memorandum Decision and. Order Granting Defendant

Summary Judgment mec aauinae: Piaintifis Com.”

‘oplaint (Jan. 14, 1966).

(SAME. TITLE)

- BRENNAN, Judge.

This litigation, brought “a8 two Trustees in Bankraptey, |

_ arises from the complicated and alleged interwoven finan-

cial affairs of the three bankrupts named in the ‘above’

caption, . .

The defendant, AP referred: to’ as “First Fed-

~ ‘eral’’, has moved before this court seeking several types of

_ Yelief, all of which have become academic except the motion —

to dismiss the complaint because same fails to state a claim

against the defendant upon‘which relief can be granted.

_ Upon the return day of the motion, voluminous supporting

_ affidavits, documents ete. were filed in behalf of the moving

‘party in in support of the motion. It developed therefrom that

a Similar action had. been brought by the same p

against the defendant in the State Supreme Court of Onon-.

daga County. At the time of the return day of the motion,

’ it appeared that there was pending, undetermined in the -

state court, defendant’s motion for a summary judgment.

dismissing the complaint therein. Under the circumstances

and upon the understanding that the actions were similar, :

- this court stayed proceedings in this action awaiting the

‘outcome of the pending motion in the state court. This court

is now furnished with a copy of the decision of Supreme <

Court Justice. Ringrose which granted the defendant’s mo-.

- tion for a summary judgment dismissing the complaint and.

denied some six applications for relief, only one of which is

pertinent here and which will be referred to below.. Copy. of -

an order in accordance with the decision is also, submitted

- ;

- to this court which + ‘is dated ia 9, ‘1964 and filed: in 1 the.

Nates Clerk’s office of Onondaga County on July 14, 1964. The

cee -~-—plaintiffs filed a notice of appeal to the Appellate Division

Fourth Department and ‘on motion of the defendant; same

‘was dismissed by order dated November 30, 1965, copy of

which has also been furnished this court. | oy

a An understanding of this decision requires a brief state- |

ment as to the background of and nature of the litigation

' instituted in both courts. The two corporations. and the

‘ ‘individual named in the caption, were adjudicated bank-

rupts.on February 11, 1963 and May 28,1963. The plaintiffs

were duly appointed trustees of their estates by the Bank-

ruptcy Court. Thereafter and about November 1963 -an

7 action was-brought by the present plaintiffs against the de-

_ fendant in the Supreme Court of Onondaga County. In that

action; the plaintiffs sought ta.Fecover g money judgment

in the amount of $248,000. with interest, based upon the

contention that a business transaction which ultimately re-

. sulted in a mortgage loan by the defendant to the. Randolph . —

House Motor Hotel Corporation was in fact in violation of

New York statutes. The asserted right to recover was

‘based upon the contention that the payment to the defend-

ant of $124,000. as an ‘‘origination”’ fee was in violation

thereof. The background of the contention appears tobe in _

. substance that the Potter Securities Corporation and the

‘Randolph Corporation were ‘“‘dummy” corporations actu-

ally used to facilitate the borrowing of monies by the indi-

viduals involved and'to conceal the alleged illegal mortgage ©

loan. The preliminary negotiations and the documents in-

' _ volved therein which led to the mortgage loan, referred aa

above and dated June 26, 1962, are’ somewhat complicated.

ee ne eerenry ih

3a

decision. It is sufficient to say that the defendant contend-

ed that the documents involved showed without contradic-

tion that its dealirigs were entirely with either of the two

' bankrupt corporations and that the ultimate transaction was

in effect the recast or consolidation of corporate indebted -

ness owed by said corporations toa Syracuse bank. In any \

- event, plaintiffs appear in no way to dispute but that the —

state court decision is a bar to the present action in this

court insofar as the right to recover upon the contention

-°* ° that the ‘‘origination’’ fee was tainted by the State ueary

: statute.

The controversy hére eitedasiaaly by plaintiffs’ assertion

submitted to this court in letter form that the present com-

plaint should not be dismissed ’in its entirety for the reason

that same presents a claim for relief i in addition to hers em- . -

' total amount of $55,144. It consists of three items: ‘alleged

to.represent payments by Donald 8S. Potter upon the mort-

- gage held by the defendant, said payments being made i in the

- months of August and September 1962.

If, as the state court has held, the usury statutes do not

apply, it is difficult to understand how the payments alleged

~ to have been made upon the valid mortgage instrument held

by the defendant would be invalidated." The alleged fact that _

the payments were made by Donald Potter might have some

relevancy to plaintiff’s principal contention that the cor- .

porations were mere dummies through which he acted but °

would seem to have no probative effect upon the validity of

. the instrument itself. The above is not the full measure of

plaintiff’s difficulty in regard to this contention.

A motion was made before Justice Ringrose i in the state

_® - court in which the plaintiffs a a4 permission to file a

LN IE TRENT ALORA I, TONE PERRY

siplinnsotal complaint j in which the plaintiffs acright to set

~ sap as a separate cause of action the identical three items of - }

payments made as above. In fact the allegations in the

‘ supplemental complaint relative to such payments are-sub-

‘stantially identical with those found in the present. com-

plaint. Justice Ringrose, on page 11 of his decision, spe-

cifically degjed: the requested permission . and such denial

. was repeated i in his order of. July 9, 1964. 3

A comparison of the complaint atid i ae

mental complaint in the state court action with the present’

complaint in this court shows that the allegations of same

are substantially similar and in most allegations the lan-

“guage used is identical. The right to recover, asserted by

the plaintiffs in the state court action,- rests upon. ee same

factual and legal-bases. ao:

_ The problem. is then further reduced to pi A a

_ whether or not the principle of res judicata is applicable to

._ the present motion which, since matters outside of.the plead-

ing, have been presented and not excluded by the court, may. — .

be considered as a motion. for summary judgment. Rule.

12 F. R. C. P.

No question is raised bat that the state court had.j juris- -

diction i in the matter of the cause of action above referred to,

as instituted and decided therein. Reported legal prece-

. dents appear to be unanimous in holding that an adjudica- —

see a tion of a controverted matter i,

forecloses- further litigation as to issues actually raised and

- as to relevant issues which could have been litigated therein.

a competent state eourt

This court does not understand that the above principle is

_-.“geriously” disputed. Same is discussed in the well known _

| - ease of Angel v. Bullington, 330 U..S. 183. The following

ote quotation, taken from ‘Heiser v. Woodruff, 327 U. S. 726 at -

738, Saag seems to be — appropriate. “Tt is well

]

Sere

ere Sa

b

litigates an issue outside the bankruptcy court’’, This latter

v. Atherton, 328. F. 2d 106 and the quotation, ‘appearing, at

page 108, taken from Heiser v. Woodruff, supra, is likewise

pertinent to the present motion,’ See also Walters v...

- settled that: where the trustee in bankruptcy saeeneesitclr ire

‘decision is cited in our own circuit i in the case of Masterson ‘i

Wilson, 142 F. 2d-59; Hobbs v: Franklin Jewelry Co. Inc,

- 181 F, 2d. 482; in re Epstein, 48 F. 8. 436. .

. The. above authorities applied to, the facts and cireum--

_ stances in this case are sufficient to conclude ‘that the prin--

_. ciple of res judicata applies and that defendant’s motion, -

_ treated as one for a summary judgment, dismissing the

complaint, must be-and is nted, and it i is: .

SO ORDERED. a

_ STEPHEN W. BRENNAN

Senior U. 8. ereeeeae :

R

J

a*

.

*

RIN GROSE, Iu:

The plaintiffs herein ‘mowed for summary judgment o or

_ partial summary judgmént which niotion. was. withdrawn

pending examinations before trial.

°

The defendant and third-party plaintiff. cross moves

: pursuant to Rule 3212 C.P.L.RB. for ‘oummary a i

dismissing the complaint.

On April 27, 1962, the defendant. entered into a mre 2

Ae commitment agreement with Potter Securities Corporation

— loan the latter $3,100, 000.00 secured by a mortgage on

the property of Randolph House Motor Hotel Corp., the

-eapital stock of which was entirely owned by Potter Securi-

ties’ Corporation. af

The mortgage | commitment ain provided that

-Potter Securities Corporation was to pay a mortgage

origination fee in the total amount, of $124,000.00 payable

in two installments of $62, 000. 00 eac

‘The plaintiffs seek in this ‘action to recover from the

defendant the sum of $248,000.00 with interest on $62,-

-

&

. ?

~ * . . . .

¥

:

Sie Ta.

i

“000. 00 pate April 27, 1962, ‘snd with napa —s

- from June 21, 1962. : A

It is the contention of the plaintiffs that sh above. mae

‘action was in violation of the usury ‘statutes, 8, / panel

Business Law, Article 25 and Article 10 of the I Debtor pnd

_ Creditor Law.) In support of this contention and to evade” |

the‘ impact of applicable statutes and case law to the cor

aad in respect to corporate transactions, the ‘plai ti

_ allege in substance that the Potter Securities

was organized for the purpose of concealing the

" transaetions of Donald S. Potter, individually, nd that the

corporate entity, in vg and . 800d conscience, should

be‘disregarded.” , }

_ Potter Securities ieiaade’ was tle ineorpor- |

ated under the name of Potter Hotel Corporation accord-

ing to the Certificate of Incorporation filed ‘with the Sec-

retary of State on September 19th, 1946. (Exh.: “gy” ap-

pended to defendant’s moving papers.) ‘Thereafter, ‘and

on November 24, 1947 by certificate duly executed by Jack-

son M. Potter, and filed in the office of the Secretary of

State of New York on December 19, 1947, the name was

Berge) to Potter Securities Corporation. On the occasion —

of filing: the certificate -of the change of name, Shirley

. Feidinan certified that she (was secretary of Potter Hotel

Corporation and that Jackson M. Potter, in person or by

proxy, was the holder of all of the outstanding shares of | ae

' the corporation entitled to vote. on the change of name..

(Last two pages Ex. “@” of defendant’s moving affidavit.) 7

The Certificate of Incorporation’ of ‘Randolph Houee oe

_ Motor Hotel Corporation was filed with the Secretary of |

State on December 27, 1960, and in the Onondaga County eget

. Clerk’s Office on January 12, 1961, approximately, four-

_ teen years after. — Potter Hotel Corporation was incorpor-

ae

9

4

‘

«

Pegs yt me

nae yhoo

Seo es

2 | | ‘ ; ‘ : : me | «

ated. The total number of shares: of capital stock author-

ized was two hundred, all§f which were-to be issued with- |

out par value: ( Exhibit ‘‘H’’, defendant’s motion papers.) ©

Payment to the defendant of the mortgage indebtedness

‘was guaranteed by an agreement in ‘writing exeduted on.’

June 22, 1962, by Donald S. Potter #hd Jackson Potter.

fe tt Fy | be celles

_ On February 11, 7963, Randolph House Motor, Hotel

' Corp., was adjadica d a bankrupt and Eugene H. Klein,

_ 4 plaintiff herein, was appointed trustec"in bankruptcy. .

’ Thereafter and on May 28,.1963, Donald S. Potter was.

adjudicated a bankrupt and on. May 28, 1963, both Potter

Securities ‘Corporation and Jackson M. Potter were ad-

- Judicated bankrupt. ; — MA Re ;

On June, 25, 1963, Philip J : MeNellis was” appointed *

Trustee in Bankruptey ‘of Donald S. Potter and Potter

Securities Corporation. its

It is alleged in the complaint’ that according to the

[- schedules in : bankruptcy filed by Donald 8. Potter, the

claims of unsecured creditors totaled $1,301,362.62 and- a

that the time to file claims has not expired. Para hy

¢ - Pats Smeal St ue yi he !

z The plaintiff contends’ (Par: 19 of. the complaint) “that

‘‘At all timés -heteinafter mentioned, Potter Securities

} . Corporation was a ‘dummy’. corporation having no assets ;

. fue and accountable-.owner. df such properties, for the

_ purposé of concealing. usurious. transactions, particularly

| dmrespect to thé transaction with the defendant and-Potter ”

\ Securities Corpora tion”, ge OTR, 20 3

| doing no business ; keeping no books; and merely.from time

-

-.to, time, held record title of certain properties for:and on — :

behalf ‘of and as a cotivenience ‘to Donald G. Potter, the

\ wa =

‘

oi.

‘he

itis ‘alleged i in the complaint of the plaintiff that afl e .

the stock issued by Randolph House Motor Corp.,—(here- ~

after, Randolph) was “at all_ times owned by Donald. S. »

Pdiggr i and.that no capital was paid to. Randolph by Donald ee

_S. Potter for the i issuance of said stock.

It is alleged i in the following paragraphs of the verified

: complaint of the plaintiffs that:

‘*20.; On the 27th day of, January 1959, Donald -

S. Potter purchased premises briefly known as part

_ of farm lots 99 and 105 in-the Town of ae sseapels we :

of Randolph Motor Hotel.)

ae. F Without consideration on Marc 20,. 1959,

‘. Donald S. Potter executed and: delivered to, Potter ©

'. Sécurities Corporation a Deed to said premises dated, .

eH acknowledged and recorded.pn March 20, 1959.” _-

‘99. Without consideration, on J une 4, 1959, Pot-

ter Securities Corporation executed and delivered § a

Deed to Donald S. Potter. to said premises: dated,

_ acknowledged and recorded on June 4, 1959.”? -

“693, Without consideration, on February 24,1961,

% Donald S. Potter executed and delivered a Deed to

: said premises dated, acknowledged and recorded Feb-

ruary 24, 1961, to Potter. Securities Corporation,””

‘“‘O8. Without consideratiiie:’ Potter Securities

Corporation executed and delivered a Deed to prem-

. ises to Donald S. Potter dated, cinesinient and

recorded February 28,1961.” |. *

4695. - Without. consideration Donald 8. Potter ex-

‘ecuted and delivered a Deed’ to Potter Securities

_ + Corporation to said premises dated; acknowledged

and’ —_—— on the 17th med of April, 1961.”’

ed

Badd 2

» ; . 10a

4696, Without consideration. Pétter Securities

Corporation executed and delivered a Deed to said eee

‘premises to Randolph House .Motor Hotel Corp.

dated, acknowledged and recorded June 21, 1942.”

During the period within which the above’ mentioned

frequent: transfers occurred, the Randolph House Motor —

Hotel was completed and furnished.

If the allegations of the ‘complaint and averments in the

affidavits of the plaintiffs are correctly interpreted, the __

plaintiffs seek to establish, by the above mentioned trans-

fers, that the subject ‘mortgage loan to Randolph was in

- truth and i in fact knowingly made by the defendant for the

benefit of Donald S. Potter, an undisclosed principal | and

thus avoid the immunity of the usury statutes to transac- ah

tions between corporations, —

The applicable statute and case e law was aii salaiad

ively examined and correlated by Mr. J usticecSimons in

e®motion for summary judgment i in an-action by Philip. \

MeNs ellis as Trustee of Donald S. Potter and Jackson M.

Potter, Bankrupts v Columbia University. That action, as |

is this, was based upon the usury statute and also involved |

_ the financing of the construction of ‘‘Randolph’’ and con-

_ , sequently. the issue of usury will not be considered at

length herein. (Philip J. MeNellis, as Trustee of Donald S. —

Potter and Jackson M. Potter, Bankrupts v Columbia Uni-

3 versity, —— Mise. ——, not yet reported. )-

* The’ defendant, First. Federal Savings and: tae dealin.

tion, challenged the sufficiency of the complaint on the

- ground that in. paragraph 29 of fhe complaint-which ‘is in-

, eorporated in paragraph 30 of the complaint for a second 7

cause of action and paragraphs 1, 2, 3, 4,12 and 14 of the . -

N oo.

.

Vig i)

notice of motion by the plaintiffs to strike and for summary

judgment base their demand for relief upon the payment

of the mortgage origination char ge by Donald S. Potter. |

This, in itself, would require a dismissal of: the plaintiffs’ Os}

' . motion for summary judgment, since usury, is only avail-

able to .a borrower. as a defense.- (Salvin v Myles Realty

Co., 227 N.Y. 51, p. 57; Edelman v Cymberg, 261 A.D. 698, -

699 ; Kahn v Sohmer, 12 -A.D. 2d 982; Del Rubio v. Duchesne,

. 284 App. Div. 89, 94.) .

This rule is succinctly stated in J enkins v Moyse a

N.Y. 319). Said-the Court; ‘** * To sustain the judgment -

there must be evidence * * * that the defendants agreed to

loan money to plaintiff, and did in fact make the loan to

him. * * * there must be proof, at least, that there was an

individual transaction which the parties might desire to

conceal’’,

__ Here the.loan, was made to Randolph and sit to an ‘indi.

vidual. Furthermore, it appears from the Loan :Settle- .

ment Statement (Exh. 6 of plaintiffs’ bill of particulars)

and paragraph 11 (b) of plaintiffs’ bill of particulars that

the payment of the: mortgage origination fee was made by |

Randolph. ' There is no allegation in the pleadings that

' Potter ‘Securities Corporation made any payment. More-

over, the modification and exterision agreement dated June

22,1962, was between defendant and Randolph (Exh A of

defendant’s moving affidavit and Exh. 6 p. 2 of plaintiffs’

bill of particulars) and which is admitted in paragraph 11 Lh

(b) of plaintiffs’ bill of particulars. The aceuracy of the

: forégoing contention! of the defendant is corroborated by

the affidavits of Eugene Bersani,. William E. Scheu and

_ Herbert A. Rogers, including the correspondence with the

latter. (Exhs. B, C, D & E of defendant’s affidavit and Exh. -

6 of erred bill of vga The documentary ae

12a

establishes beyond per adventure that no payments were

: made at any tithe by Donald S. Potter to the defendant. The

~ proceeds of the mortgage loan in the amount of $3,100,-

000.00 was used primarily in refinancing outstanding se-

cured loans-as indicated on Exh. 6 of plaintiffs’ bill of par-

ticulars and resulted in.the reduction of the interest rate to

six per cent (6%) and a 20-year extension of the mortgage

_ indebtedness. —

‘ Lastly, it is establishéd by documentary proof

- mitted on the motion that Randolph was solvent on June 21,

1962, when title of Randolph property was transferred to

-it according to plaintiffs’ bill of particulars, paragraph 6

(a) The plaintiffs further therein admit that a contract

. for a sale of the property to First Republic Building Corp.

was in existence, reciting a sale price of $5,250,000.00, and

- plaintiffs admit that the mortgagés ener the prop- |

erty did not exceed $5,057, 142.50. v

Omitting further specification: of diectabisicy: exhibits,

it is conclusively established that the negotiations.related

to a loan from the defendant to Randolph to be secured by a

first mortgage. There were no negotiations relating to a”

- loan to an individual or individuals.

Even assuming that the funds necessary to pay the origi- .

nation fee of $124,000.00 were borrowed by individuals and

loaned to the corporation liable for. the eciaination sis the

payment would: not be usurious. 3

- The authoritative law on this issue was fully correlated fe

and ennunciated i in Jenkins v Moyse (254 N.Y. 319).

| Lastly, the plaintiffs urge, in substance, that the corpora- ~

tions were formed for the sole purpose of. shielding the

usurious s transactions ‘of the individuals. and that i in the in-

ce Se

© ° .

terest of justice and good conscience, the corporate entity

should be disregarded to prevent fraud. (Jenkins ‘v Moyse, |

254 N.Y. 319, 324; International Aircraft. Trading Co. v

Manufacturers Trust Co., 297 N.Y. 285, 292.)

There are instances where corporations in the exclusive

ownership and control of individuals have been used for

their personal advantage, that the Courts have rejected the

corporate entity to prevent fraud and imposed liability on

the individual owning the outstanding shares of stock of —

the corporation: (Bartle v Finkelstein, 19 A.D. 2d 256.)

The authorities in which that contention has been success-

fully urged are rare and have been sustained only in those --

cases where the transactions have been between two or more

corporations, the stock of which have been exclusively

owned by the same individuals and the dual ownership has

been used to defeat the claims of innocent third parties.

(Berkey v Third Ave. Ry. Co., 244 N.Y. 84.)

The above authority is not applicable to the instant ac-

_ tion. The logical application of the equitable doctrine of .

piercing the corporate veil was admirably stated by the

. Court in Halsted v Globe Indemnity Co., (258 N.Y. 176)

wherein it was said: © - | -

. “‘Ir passing on this question no doubt can arise

that the corporation must be viewed as an entity, sep- -

_-afate and distinct from its stockholders. No rule of

common sense or common justice is thereby violated.

No wrong or fraud.is shielded by the corporate char-

ter. The corporation exists for the legitimate ‘con-

venience of the stockholders, not a mere mask for.the

personal_acts and responsibilities. It absorbs and

takes the place of the individuals who own, its stock.

- _ (Werner v Herst, 177 N.Y. 63; Brock v Poor, 216 N.Y.

387 ; Berkey v Third Ave. Ry. Co.; 244 N.Y. 84.) ??

Or

ates - de

The documentary proof submitted on this motion con-

clusively demonstrates that the refjnancing of the outstand-

ing mortgage indebtedness of Randolph by defendant was

exclusively a transaction between business —

and not subject to the usury statutes. -

} As was. pointed out by Justice Simons in McNellis. as.

Trustee, etc. vs Columbia University, which in the. interest.

of convenience is quoted : ‘“The New York General Business

Law: Section 374 provides that corporations shall not inter-

pose the defense of usury in any action. This Section ap-

plies not only to > corporations defending claims but also pre-

vents a corporation from suing affirmatively to set aside —

conveyances and contracts on the grounds of usury. (Curtis :

v Leavitt, 15 N. Y. 9, p 152; ‘Southern L & T Company v

- Packer, 17 N.Y. 51; Rosa v Butterfield, 33.N .Y. 665.) A cor-.

poration’s representative stands in no better position than

_ does the corporation itself, and is, likewise, prohibited from

_ asserting the claim of usury in an affirmative action. (But-

terworth v O’Brien, 23 N.Y. 275; Curtis v Leavitt, supra,

page 132) and this is so even if the corporation was formed

.* for the sole purpose of avoiding the usury statute. (Jenkins

v Moyse, 254 N.Y. 319; Union Dime spas. Bank of New |

York v Wilmot, 94 N.Y. 221. >”

“Where the corporation is the principal dhiigee the fact —

of incorporation is a defense to usury and the Courts may

‘~ not disregard the corporate entity. (Werger v Haines

- Corporation, 94 N.Y.S. 2d, 691, affd. 277 A.D. 1108, 101°

N.Y.S. 2d 361, affd. 302 N.Y. 930; Kings Mercantile Com-

pany, Inc. v. Cooper, 199 Misc. 381, 100 N.Y.S. 2d 754.)

. It follows that the motion of the defendant for summary

judgment ooert the complaint. with costs should be

granted.

So Ne et gt .

‘2.

ke or partial summary judgment.

lia -

In view of the decision above announced, the following.

motions concurrently or subsequently argued or submitted

by the plaintiffs in this action are denied without costs:

FIRST: Pursuant to Section 3042 C.P.LR. to strike in,

part the demand of the defendant for a bill of particulars.

SECOND: Pacveent to Section 3211 C. P. LR. to strike

_ affirmative defenses.

THIRD: - Pursuant to Section 3212 (g) ©. P LR. to limit 3

questions of fact.

| FOURTH: To strike answering affidavits of Mitchell T..

Williams i in opposition to ne ai “motion to strike affir-

mative defenses.

FIFTH: To strike the affidavit of Mitchell ya Williams

: and Cortland L. Brovitz in support of defendant’s motion

*

pursuant to Section 3212 C.P.L.R. for ‘summary judgment :

Rc

. SEXTH: Permitting plaintiffs to file and serve a sup-

* pleenental complaint. :

ORDERED ACCORDINGLY. . |

Ks /s/ &. H. RINGROSE

Dated: Rome,New York, ©

ae...

Justice Supreme Court |

: e. ,

16a

At a term of the Appellate. Division of the Su-

_ preme. Court of the State of New York in and for

the Fourth Judicial Department, at the City of

Rochester, N.Y., commencing on the 30th day of .

November, 1965. 7

. -Present—Hon. Alger A. Williams, Presiding Justice. Hon.

Harry D. Goldman, Hon. Frederic T. Henry, Hon. Frank

Del sdb irageess Hon. J _ S. Marsh, Associate Justices.

PHILLIP J. MeN ELLIS AS TRUSTEE OF DONALD. S,

POTTER, BANKRUPT, AND POTTER SECURITIES |

CORPORATION, BANKRUPT, EUGENE H. KLEIN

AS TRUSTEE OF RANDOLPH HOUSE MOTOR HO-

TEL CORP., BANKRUPT, Appellants,

- v8

. FIRST FEDERAL SAVINGS AND LOAN ASSOCTA-

TION OF sles lama mopar re

i

‘

: vs. sal,

ae MYRON s. secs et al., Thira Party. Defendants, etc...

A motion having been made on the part of the respondent

to dismiss the appeal to this Court takeg in the above en-

titled action, from an order of the Supreme Court, entered _

in the office of the Clerk of the County of Onondaga on the

14th day of July, 1964, for the failure of the appellants to

' ~ file and serve the papers on the appeal,

‘Now, upon reading and filing the affidavit of Mitchell a

Williams, sworn to the 10th day of November, 1965,.the no-

\. 17a Bane,

tine of said motion, together with proof of. due service upon

the attorneys for said appellants, the affidavit of Laurence 5

Sovik, sworn to the 23rd day of November, 1965, in opposi-

tion thereto, and the reply affidavit of Mitchell T. Williams,

sworn to the 29th day of N ovember, 1965, and: ‘due delibera-

tion having been had thereon, | :

It is hereby ORDERED, That, said motion be, and the

/same hereby is granted, and the anosal So ‘taken is hereby |

_ dismissed without costs. See Caira v. v. McKenna, 23 A D 2d

' 325.

; a et \ ‘ - ig

Eniter. \at Giese 4

eh ee LESTER A. PANNING G

Matias 2nd aay of. December, 1965.

Lester A. Fannixe tes ? Sa \

Clerk. | te rig Naas:

__ ORDER OF JUSTICE RINGROSE GRANTING

APPELLEE’S MOTION FOR.SUMMARY JUDGMENT —

| "IN THE STATE COURT ACTION |

PRESENT: How. E. Howarp Ruvonose, Justice. aces.

: The plaintiffs in. the above entitled action, having. made.

- @ motion to strike affirmative defenses of defendant, First

Federal Savings and Loan Association of Rochester, | pur-

suant to Rule 3211 of the Civil Practice Law and Rules, .

to limit questions of fact pursuant to Rule 3212(g) of the

Civil Practice Law and Rules, and a motion for summary

judgment or, in the alternative, partial summary judg-

ment, pursuant te Rule 3212 of the Civil Practice Law and

Rules;. the plaintiffs in: the ‘above entitled action, having

_ also, by order to show cause, having made a moticn for an

order aia) to Rule 3025 of the Civil Practice Law and

@

a

a

Rules for permission to file and serve a supplemental com-

" plaint ; and the plaintiffs in the above entitled action hav-

ing made a motion to strike the answering affidavit of

Mitchell T, Williams, sworn to February .18, 1964, in op--

position to plaintiffs’, motions. to strike affirmative de- -

fenses, for summary judgment or partial summary judg-

ment, and to limit questions of fact, and to strike affidavits -

of Mitchell T. Williams and Cortland L. Brovitz, sworn _

» ‘to February 18, 1964 in support of defendant’s motion for _

-. summary judgnient or, in the alternative, partial summary: ,

judgment, and plaintiffs having withdrawn the aforemen-

tioned motion by plaintiffs for summary judgment or, in the

alternative, partial summary judgment, pursuant to Rule

3212 of. the Civil Practice: Law and Rules, and plaintiffs

‘ having requested that the papers submitted by plaintiffs in

support of their’ motions for summary judgment or, in the

alternative, .partial summary judgment, be considered by

the Court in opposition to the hereinafter mentioned motion

3 by defendant for summary judgment. .

Defendant, First Federal Savings and Loan Association

of Rochester in the above entitled action having made.a

‘motion for an order pursuant to Rule 3212 of the Civil

* Practice Law and Rules directing that judgment be entered

a)

herein in favor of the defendant on the grounds more

particularly set forth in defendant’s moving papers, the

cause of action set forth in the’ complaint having no merit,

‘and the defendant ‘inthe above entitled action having duly

‘ * - ‘moved for an order directing plaintiffs to furnish defend-

ant. with ‘a further bill of particulars or to preclude, .

Now, on reading and filing the following:

B® The plaintiffs’ complaint herein verified November 21,

1963 and the exhibit thereto, and the answer of defendant,

198

First Federal Savings and Loan Association of Rochester,

verified December 30, 1963, and Schedules .A through E,

thereto, inclusive; Way ae ms

“2. The four (4) third-party sutmmonses and complaints ‘-

by defendant, First Federal Savings and Loan Association

of Rochester, against (a) Myron 8, Melvin,. Crandall, Mel-

-vin, Raymond O. Campbell, Lawson: Barnes, Louis Young,

Edmund H., Easter, Dominic A. Mazza, George W. Cregg,

Charles H. Thompson, Raymond J. Barth, Russell —

Egleston, Edward Brown, Jr., James M. Graham, Eugene

_F. Bersani, Crandall’ Melvin, Jr., Joseph S.. McMahon, |

Richard D. Kharas, LaVerne F. ©’Dell and Merle D. Mel-.

vin, d/b/a Melvin and Melvin of Syracuse, New York; (b)

The Bersani Construction Corporation of Syracuse, New.

York; (c) The Merchants National Bank and Trust Com:

pany of Syracuse of Syracuse, New York; and (d) McKay

_ Construction, Inc. of: Syracuse, New York; together with —

_ Schedules A through D, A through D, A through F, and A

through C, inclusive, thereto, respectively; — ae eat

' 8...The third-party summons and complaint by third-~—-——

_. party defendant, The Merchants National Bank and ‘Trust eee

Company of Syracuse, against third-party defendant, Man- _

ufacturers Hanover Trust Company, New York, verified

April 21,1964 and Schedules A through C, thereto, in-

_¢Clusive; RL RE OAR Bel

4, The demand for a bill of ‘particulars by defendant, ~

_ First Federal Savings and Loan Association of Rochester,

__ dated December 30,1963; , sips oath Ses lane:

coe The four (4) answers to the third-party complaints

. brought by defendant, First Federal Savings and Loan

* Association, of Rochester by (a) Myron S. Melvin, Cran-. :

dall- Melvin, Raymond O. Campbell, Lawson Barnes, Louis

*

¢ ‘

F ‘ s..*

J c~

,

"* «

. ! 3

. be :

&y

7. yee pe going: Edmund H. aster, Dei, Mazza, Cesees W.

Be - Crégg, “Charles N. Thompson, Raymond J. Barth, Crgn-

4 pte | LaVerne F.-Q*Del{ and Merle D. Melvin, d/b/a Melvin and..

cases Malta verified Fébruary 14, 1964; (b) The Bersani Con- _-

5 once ee! - Btruction Corporation, verified January 24,1964; (c) "Bre

: a aia -., Merchants. National Bank and Trust Company of Syra-

\ ee ‘New- -York, verified February 14, 1964; and (d) Mc-.

[ae Kay. Construction, ‘Inc., verified January 24, 19645:

(> s." \ Ge: Plaintiffs’ bill of particulars. verified Januaty-3, 1963.|

‘a . and with Exhibits \through 6 thereto, inclusive ; plaintiffs’ peewee:

a ie furthier- bill: of partienlars verified February 22;.1964;

ae Te Plnintifis?- order to show cause dated ‘February 26; ——

| roe "1964; ana the affidavit of Laurence Sovik : sworn to February Sg

‘4 ; yo 26; 1964, and. “unverified. ee: ee annexed «

‘i a x thereto; Joneses i Ty - na, *

mS a cae: - Paint iffs’ ‘adhe of tion strike affirmative de

arr fenses putsbant to.Rale 3211 of the Oivil Practice Law and. 4,

Neda ‘Rules; ‘Plaintiffs’ ‘motive of motion’ for summary judgment : ae, Oo

| F 3 Y ite y or, ii in. the. alternative, partial summary judgment pursuant ~ ° i,

fe Rule 3212 of the Civil Practice Law and Rules; atid plain.

| i ~ tiff? notice of. motion to limit, questions of fact pursuant: |

Ni . ~to Bule 3212(g) of the’Civil Practice Law-and Rules dated’

i a anuary: 8; 1964, the. affidavit of Laurence Sovik sworn to'. |

Me ,

SS aee sie 0, | ye Bshibits 7 eure’ 11, thereto, ‘inelu-

ae ‘sive; ie 3

Lan ‘ taand*of defendarit, First Federal Savings and Loan. Asso- —

Hel Hen ce % 2 "“diation of: Rochester, for a bill of particulars pursuant to

aes fe -, Tamuaty 2, 190632 8 v

bs feos ~ 10. Plaintiffe? notice of dilion to strike the anoworing

ae affidavit cof Mitghett, T. seccamea eworn to + Hebpeary 1 18,

e 2 : . aoe Be = ae i : tae

ie 2: ge x <e :

- dall Melvin, Jr., Joseph §. McMahon, Richard D. Kharas;.

ee oS Plaintiffs’ pos of anit ‘to attike i in part: the de es :

, Séetion 3042-0f he Civil eee Law and read dated s,

_ _

2a

>

| i964, in opposition to plaintiffs’ motion to strike affirmative

defenses, for summary judgment or partial summary judg-

. . nent, and to limit questions of fact and plaintiffs’«notice

of motion to. strike affidavits of Mitchell. T. Williams and. -

Cortland L. Brovitz, sworn to February 18, 1964, i in ‘support |

of defendant’s motion - for summary judgment or, in the:

salternative, a summary judgment, dated penal 20,

1964. .

pF Notice of Motion by defendant, First Federal as

| ings and Loan: Association of’ Rochester for summary _

judgment or, in the alternative, p partial summary judgment

3 pursuant to Section -3212 of -the Civil Practice Law and ne se

Rules dated February 18, 1964, the affidavit of Mitchell RE

- Williams sworn to February 18, 1964, annexed thereto,

_ and Exhibits A through P, thereto, inclusive; .

SO. é7 d

- 12; Notice of motion by deferidant, First Federal Sav-

iy : ings and Loan Association of Rodhestér,’ to direct fa further ©

._ bill of particulars or to precludé dated February 18, 1964,

~ and the affidavit of Mitchell T. Williams sworn to Febra-

ary. 18; 1964, annexed thereto; ‘oe

13. The answering. affidavit of Mitchell T. Williams:

-. sworn to February 18, 1964 for'defendant, First Federal

_- . Sayings ard Loan Association of Rochester, in reply to

- ~pilaintiffs’ motion to strike: affirmative defenses, summary

judgment or partial summary judgment, and to limit ques- — |

~~ tions of fact, pursuant to Section oy of the Civil Practice ra

- Law and Rules; ; ¢

/

“14. The supplemental affidavit, ¢ for defendant First Fed- 3

‘eral Savings and Loan Association of apse: of Cort.

* . land L, Brovitz sworn to March 19, 1964;

16. "The affidavit, for defendant First nae Soc

. and Loan ‘Association: of. Rochester, * Herbert A. om

sworn to March 19, 1964;

oe . én at oy

: %?e ‘ x ‘

va cca ac cl ins ile Daaliaideal mea iaacamaaea aes

; 7

is sworn to March 16, 1964; oe ; "pe

fendant,

16, The affidavit, for defendant First Federal Savings —

and Loan Association of Rochester, of ora F. Perna

17. The affidavit, for. defendant First Federal ae

and Loan -Association of Rochester, of Mitchell T. Wil-

hams’ sworn te March 19, 1964, Exhibits od shreggh: U-2,

inclusive, annexed: thereto; ;

18. Reply affidavit, for plaintiffs, of Robert N. Smith

‘sworn to February 27, 1964;

19. Affidavit, for plaintiffs, i in opposition to defendant’s

motion for summary sapoent by Laurence Sovik sworn

. to May 12, 1964. ; :

S |

Plaintiffs’ ‘iption for summary judgment having been

withdrawn, those papers hereinabove mentioned submitted -

_by the plaintiffs herein having been considered by the

Court’ as requested by plaintiffs, ‘in opposition to the de- :

~ fendant’s motion for summary judgment, aid after hear-

ing Robinson, Williams, Brown, Robinson, and Angeloff,

” attorneys. for the defendant, First Federal Savings and ©

Loan Association of Rochester, Mitchell T. Williams, Esq.

of counsel, in support of the motion by. defendant, First

‘Federal. Savings and Loan Association of. Rochester, for

summary judgment and Smith, Sovik, Terry, Kendrick, ,:

McAuliffe and Schwarzer for the plaintiffs, Laurence Sovik,

‘Esq., in: opposition thereto, and due deliberation having-

been had, it is upon motion of Robinson, Williams, Brown,

Robinson and Angeloff, attorneys for the defendant, First -

Federal Savings and Loan Association of Rochester, Mit-

chell T. Williams, Esq. of counsel, for the aforesaid de-

ORDERED, that said motion for summary judgment by

the defendant, First Federal Savings and Loan Association _

of Rochester be and it hereby is in all respects granted, and

it is IX ‘ e.

FURTHER ORDERED, that the complaint be and the

same hereby is dismissed and summary judgment granted

_ defendant, First Federal Savings and Loan Association of .

Rochester, with $25.00 cost : of-this motion, arid it is

FURTHER ORDERED, that the aforesaid motions. by

__ the plaintiffs to strike in part the demand of the defendant _

for a bill of particulars pursuant to Section 3042 of the

Civil Practice Law and Rules, to strike affirmative defenses :

pursuant to Section 3211 of the Civil Practice Law and i

Rules, to limit questions of fact ‘pursuant to Section ~ _

3212(g), to strike. answering affidavits of Mitchell T. Wil-

-liams in opposition to plaintiffs’ motion to strike affirma-.

tive defenses, to strike the affidavit of Mitchell T. Williams |

and! Cortland L. ‘Brovitz in support of defendant’s motion

_ pursuant to Section 3212 of the Civil Practice Law. and .

Rules for summary judgment ot partial summary judg-

~ ment; and to permit plaintiffs to file and serve a supplemen-

_. tal complaint, be and they hereby are in all respects denied,

- without costs, and since the granting herein of summary

judgment to defendant, First Federal Savings and Loan

, Association of Rochester, renders a further bill of particu- —

lars or preclusion unnecessary, the motion by defendant

for an order directing plaintiffs to furnish defendant with

a further bill of particulars or to preclude be and is also

hereby.denied without costs, and itis _ cis

- FURTHER ORDERED, that judgment be entered here-

in by the Clerk of: this Court in favor of the defendant,

First Federal Savings and Loan Association of Rochester,

and against the plaintiffs, Phillip J. MeNellis, as Trustee of»

Donald §. Potter, Bankrupt, and Potter Securities Corpora-

S

tion, Bankrupt, and Eugene, H. Klein, as Trustee of Ran- |

’ doph House Motor Hotel.Corp., Bankrupt, for‘the costs and —

_ disbursements of this action to be taxed by the Clerk of the —

Court and $25 .00, cost of this motion.

Signed this 9th day of J uly, 1964, at Rome, New York.

_ Enter: ,

y 8/. E. H. RINGROSE

KE. Howarp Rincrose

Justice, Supreme Court

Onondaga County.

pina Rca Clb PELL ERIE IED

. s dl .

. . .!

’ - « ‘ a

paatecinetetcnsommnypasihionaesicpenaioncnniaereconary came Sinden incepepintrimniatpeanbeniiniat . PE SS.

= 5. ei Ee a:

* UNITED STATES COURT OF APPEALS

= For THE Szconp (Crtcurr |

| _ No. 357—September Term, 1965.° es

(Argued May 2,1966 === Deeided July 27, 1966.)

Docket No. 30327 |

Pumur J. McNewus as Trustee of Donatp S. Porrer, .

nat ite He - Bankrupt e¢ ai., © JF hanes,

| 3 . Plaintiffs-A ppellants,

; ; Re f . .

- First Feperan Savings anp Loan ASSOCIATION or Rc

320 E. Main Street, Rochester, New York, =

Eee 7 Lace Defendant-Appeliee. ois)

Before:

r | : Lumnanp, Chief Judge, be se

Moors and Femprne, Circuit Judges.

aes oe ; —¢ : oh a 4 K

Appeal from an order of the United States District Court.

for the Northern District of New York, Brennan, J., grant-

ing a motion for summary judgment: dismissing the com-

plaint on the ground of res judicata. Reversed.

Hee pth TS Ah wena so in

_°) Laurence Sovix, New York (Smith,

* Sevik, - Terry, Kendrick, McAuliffe p Sea

Schwarzer, on the brief), for Plaintiffs. — .

.

Cart .Ancstorr} Rochester, New York (Robin-

‘son, Williams, Brown, Robinson and An-

geloff; Frank Aloi, on the brief), for ave

et eas

.@ | ~

s

.

| -Pamamne, Circuit Judge: ei

_ Appellants, two trustees in bashreiivy, fecal from an’ :

order of the District Court for the Northern. District of - | °

New York, which granted appellee’s. metion for summary

"judgment and dismissed the complaint. In a memorandum

opinion, Judge Brennan held that the principles\ of res

judicata compelled this result. For reasons set forth below,

we reverse. _-_ =

In November 1963, sippellants sued defendant-appeliee

|. First ‘Federal Savings 'ahd'Loan Association of Rochester

(“First Federal”) in the New York: Supreme Court, Onon-

leged that plaintiffs were the ,trustees in bankruptcy of

- Randolph House Motor Hotel Corp. (“Randolph”), Donald

S. Potter, Jackson M. Potter, and Potter Securities Cor-

poration (“Potter ‘Corp.”), all adjudicated bankrupt in

June 1963; that at all relevant times Donald Potter was

?

‘daga County, in a two-count complaint. The first count al-

insolvent and owned all the stock of Randolph, which was é

_ also insolvent; that Potter Corp. was a “dummy” organized -

by the Potters to hold title to certain properties for Donald

to certain premises passed without cimaidération back and

- Potter in order to conceal usurious transactions; that title —

forth from Donald Potter to Potter Corp. several times ..

and finally from that corporation to Randolph ; that Donald

Potter paid for the construction of a motor hotel on the

premises ; that a substantial portion of the materials and

services for the construction was furnished by unsecured

ereditors of Donald Potter and Randolph; that on or about |

| ee 3

3 Aptil’ 27, 1962, First Federal entered into a sich com- .

- mitment agreement with Potter Corp. on behalf of Donald

Potter, under which Donald Potter paid First Federal

$62,000 on April 27, 1962 and again on June 21, 1962; and

that each payment, although characterized as a “mortgage |

origination fee,” was actually intended to be interest on

mortgage indebtedness i in excess of that authorized by ‘the

ze, New York General Business Law and federal statutes re-

lating to banks and banking. The second count of the com-

" plaint alleged that the two payments of $62,000 were fraudu-

‘s lent dispositions of the’ bankrupts’ property; that the

payments were made without fair consideration and in

‘violation’ of the New York Debtor and Creditor Law; and ©

that they were ‘made when defendant knew or should ‘have

ae _. known the bankrupts were insolvent and unable to pay. their

liabilities as they” would mature. The: ae sought

é judgment for $248,000, with interest.’ :

_ Both sides moved ‘for summary judgment in the state .

- court action ; ; plaintiffs’ motion was. later withdrawn. ‘While ©

the motions were pending, plaintiffs moved for permission . -

"to file and-serve a supplemental complaint as “a third sepa- »

rate and distinct cause of action.” After. incorporating the

original complaint, the supplemental complaint alleged that —

Donald Potter. paid a total of $55,144 to First Federal on

. the mortgage ($3,100 on August 2, 1962, $26,022 on Septem- _

ber 6, 1962, and $26,022 on September 21, 1962); that these ;

payments were in violation of New York. Debt. & Cred. Law

§§273-76, New York Banking Law §380-e, and section 67d

(2) of the Bankruptcy Act; and that defendant knew at the

: time of ‘the Lay berg? that the bankrupts were insolvent

-®?

1 esl ci psi bss al che emia

Law $3802. : peor ae 5 eae

—,

and unable to pay their Jiabilities. The atiditional relief

prayed for was a judgment of $110,288? and attorneys’ fees.

In May 1964, while these motions were pending’ in the

state court, appellants. commenced: the action in the court

below. The federal complaint alleged virtually everything

in the state complaints and a few more details of the trans-

actions in question. were. provided. . The complaint alleged -

that ‘the two $62,000 payments represented illegal interest -

' in violation of New York’ Banking Law 4380-e and Article

10 of the New York Debtor and Creditor Law, and that the

~ second $62,000 payment and the three subsequent payments

totalling $55,144 were in violation of section Y 67d of the

Bankruptcy. Act and Article 10 of the New York Debtor and

Creditor Law. * The complaint. sought double damages

| ($248,000) on the claims arising out. of the two $62,000 pay-

~ ments and single darmagep ($55,144) on the later three pay-

ments.

First Federal moved below for summary judgment or

a stay of proceedings on the ground that a state court action

for the same relief was pending; J udge Brennan granted —

‘_ a-stay pending, deterfnination of the state action.’ In June |

. 1964, First Federal’s motion for summary judgment in the

|. New York Supreme Court was granted by Justice Ringrose.

The judge viewed the state court action as ‘one to recover

- $248,000 for ‘violation of the usury statutes, requiring a

piercing of the corporate veil to overcome the exception for

corporate borrowers. He held that there had to be proof

that there was a loan in fact to an’ individual (Donald

' Potter), which the parties might wish to conceal, hut that

the loan had actually been made to Randolph; which also

| paid the “mortgage origination fee” of $124,000. He stated —

"that the documentary proof established that no payments |

2 Bee note 1, supra

oe?

had been made by Donald Potter to defendant First Fed-

eral. For a number of reasons which need not concern us

here, the state court refused to pierce the corporate veil

to hold usurious the two payments of $62,000. The opinion* —

focussed on those two payments, which, as indicated above, —

were the subjéct of the two counts of the original state

court complaint ; the opinion did not mention the three later

payments, totalling $55,144, which were the subject of the

_ proposed supplemental state court complaint. At the end

of the épinion, Justice Ringrose alluded to six pending

motions in the’ case and denied them all without discussion, ah

He stated, inter alia, . Ty Races @ shes

In view of the decision: above anndunced, the follow-

ing motions concurrently or subsequently argued or

submitted by the plaintiffs in this action are denied

without costs: : : 7

aac e © ee ee Eee Ue

‘Srxtu: Permitting plaintiffs io file and serve a sup-

plemental complaint. = : ieee

An appeal. was taken from this decision but was later‘ dis- ,

missed in’ Decémber 1965.2 = Selgte i

At this point, First Federal understandably. renewed its

Motion in the court bélow for summary judgment. Ap-

parently, plaintiffs did not dispute ‘below that the state

court decision barred their federal ‘action insofar as it

_- sought relief because of'a usurious “origination fee.” Plain.

tiffs did insist, however, that the claim for $55,144 based on.

> ‘8 = First Federal’s motion to dismiss the appeal for failure of appellants :

to file and -serve the papers .on appeal ‘was granted by the Appelate

Division of the Supreme Court, Fourth. Department ‘on December 2,

* 1965. | rye EA 2 z : bi y ee

~ the three subsequent payments on the mortgage in August ci

and September 1962 was not barred. Judge Brennan held 7}

that since the state court determined that. usury “rules

were inapplicable, the August and ‘September payments

.+ made on a valid mortgage could hardly’ be invalidated.

J udge Brennan also relied on the state court denial of

z permission to file the supplemental complaint, and the iden-

tity between the proposed third cause of action contained

therein and the relevant portion of the instant complaint..

‘He concluded that “the principle of res judicata” required

. granting defendant’s motion for summary judgment...

Appellants” only contention here is that the court misap-

7 " plied the principles of, res judicata." What those principles |

are in general i is Rot! ‘difficult. to state; applying them to a

specific situations is sometimes’ another matter. Briefiy,

where a judgment has been rendered in an action between

two parties for a sum of money and there is subsequently —

another action between the same parties, the first judgment

has varying conclusive effect. If the second action i Is, based

_ upon the same cause of action as the first,’ the’ prior a

Tia ment i is conclusive as to all matters which were litigat

might have been litigated in the first action.. Howev Pie .

the second action is based upon a different cause of sttion,

the prior judgment is conclusive between the parties only .

as to matters actually litigated and determined by the first

; judgment; that judgment is not conclusive as to matters

which might have jee but which were not, litiga

4 Doses: vii cd idle: inleet' eh South Sus aamacsbac te

. the effect of the prior judgment; appellants do not sateen Wectees

to this point. Cf, Comment, Res Judioata in the Federal Courts: Appli-_

cation of Federal or State Law: Possible Differences Between the Two,

51 Cornell L. Q. 96 (1965). In any event, we do not feel that the state

and federal law differ sufficiently in the area crucial in this cage to

Se ae Ree ee Re ae oe ae pore.

¢

4

‘y~*

vy

_ determined in the prior-action. Cromwell v. County of Sac; ;

94 U.S. 351, 352-53 (1877) ; Restatement, Judgments, 158-59

(1942). The obvious beginning for an inquiry into res

judicata is a determination of ‘what was claimed and de-

Ss _ cided in the first action. The state court complaint alleged -

“sthat payments of $62,000, in April and June 1962, repre- Cee

_’. sented usurious interest (count one). and were a fraud on —

.. ¢reditors (count two). The state court held that a corporate-

‘borrower could not avail itself of usury rules. The only

reference to the fraudulent transfer aspects, of the com-- ~-— -~

plaint was that Randolph was solvent on June 21, 1962 (the

date of the second $62,000 payment and of transfer of title -

to Randolph, from Potter Corp.)." The court also denied

|, without, dischssion’ permission’ to file a supplemental com-

ely plaint: substantis y identical to. the. portion involved here _

‘|’ of the complaint below. 8 ae +e

Putting the supplemental complaint to one side for the -

moment, we cannot see how the dismissal of counts one and

two of the state court complaint, based on payments in |

. April and June 1962, bars the action here to-recover other

types'of payments:in August and September. Although |

analysis is rendered ‘sorhewhat difficult by the jumble of

theories and allegations in the complaints and briefs, it is -

quite clear that the federal complaint is now reduced only

"to recovery of a fraudulent transfer. In fact, plaintiffs use

to their advantage the state court determination thafDon- _

ald Potter was not the “real borrower.” They assert that

if this is so, then payments by Potter. of $55,144 on a mort- -

gage incurred by someone else (Randolph) were without MF

consideration ; since ‘the payments were made within one

_ Sell. the ‘property: for $5,250,000 was in existence and the encumbering- -

mortgages did not exceed $5,057,142.50. === ibe

~

| year prior to bankruptcy at a time when he : was s insolvent, af,

they were fraudulent’ transfers. The claim that appellants

*". now press has nothing to do with usury or the “origination

” fee”. and the fact that: the later three payments may have

? * represented interest is irrelevant. ‘Therefore, the action

‘now presented i in its truncated form in the federal court is

clearly a different cause of action from the action presented

in count one of the original state complaint. It-is true that

- count.two of that complaint did contain a theory of fraudu-

lent transfer to justify. recovery of the $62,000 payments.

But this theory depended upon establishing insolvency on -

_ April ¢ 27 or on June 21, 1962—the dates of the two payments

—-and ‘eoneerned only these two payments. A cause of ac-

‘ion for a fraudulent transfer i in June-is not the same as

S cause of action for a fraudulent transfer in. August or

: =. September. Restatement, -J udgments. $61, comment c

(1942). Appellee emphasizes that all payments grew out of -

. the same mortg&ge and that. the mortgage, as pointed out.

__ by the court bélow, has been held valid. However, appel-

- . lants are not now relitigating the legality of the mortgage ;

they: assume it i is valid, but questict the propriety of pay- .

_ ments on it by an alleged stranger to the transaction, —

- Donald Potter. We conclude that. the cause of action now

pressed is ‘not the same as. ‘tat originally presentet to the.

. state court.

We do not view any of the cases cited by appelled? on

' determining what is the satne “cause of action” as com- °

pelling a contrary result. Cf. Developments in the Law— -

‘Res J«licata, 65 Harv. LL. Rev. 818, 824-25 (1952). William- »

_ son v. Columbia Gas’ é Elec. Corp., 186 F. 2d 464 (3d Cir.

. 1950), cert. denied, 341 U.S. 921 (1951), involved two civil

. |. antitrust suits, one based upon the Sherman Act, the other

cee the Clayton Act. The court concluded that the’ same _

San

operative facta were peoatiel: in rac and that different 7

| . theories of recovery did not necessarily mean different

c causes of action, a proposition we do not dispute. Of course, —

the i issue then i is what are the “operative facts” ; ; here, unlike % %

' Williamson, significantly different evidence is : “required,

see Restatement, Judgments $61 ( 1942), different. time

periods: are involved a and different amounts are sought.

~ Kaufman v. Shoenberg, 154 F. Supp. 64 (D. Del. 1954), is

similarly distinguishable, Smith v. Kirkpatrick, 305 N. Y. .

» 66 (1953), and Schuylkill Fuel Corp. v. B.- & C. Nieberg |

Realty Corp., 250 N. Yi. 304. (1929),, if anything, support:

- the conclusion we reach here. In the latter. case, the court —

said at, 250 N . Y. 3087 “The decisive test is this, whether. —~

the substance of the rights or interests established in the :

first action will be destroyed. or impaired by the prosecu-

tion of the second. ” As indicated above, the ‘state action

- here determined, that the two $62,000 payments could not )

be recovered by the trustees ; success in the action new be- es

” fore ous could not “destroy or impair” that determination. .

that res judicata*bars the trustees. =

“XN . The present action might still be et eoegi if-it--

3 could be fairly said that the issues still present had. been

- litigated: and decided in the state court action; but such is.

@, not the case. Appellants did claim in the state court that

_ » Donald Potter made the two $62,000 payments, and the state

court held he did not. But that court did. not have before it

in the original state complaint the question whether Potter.

‘individually’ made the August and September payments. .

. While Justice Ringrose stated that “no payments were

* made at any time by, Donald S. Potter to the defendant,”

_it is obvious that he was. Bena only on rea iad sto

a une 21, 1962.

6 .

- Appellee’s other casés similarly do not. Fequire ms to- hold ben

5

‘Therefore, since the cause of action still pressed hy the a8

trustees in: this court is a different one from-the cause of |

action originally presented to the Rate c court in counts one

_and two of the state court complaint and since the key

__ issnes flow presented were not there litigated and decided,

_ normally principlés of rés judicata would not bar the action..

However, there must still be considered the effect ‘of: the -

me ambiguous. disposition in the state court of the proposed

= supplemental ¢ complaint; i.c., was there a judgment on the

merits of that coniplaint sufficient to justify application of.

re? judicata rules. If that proposed third cause of: action ;

_ had been inelvded in ‘the ‘original state court complaint and

_ defendant’s motion for: summary judgment had also been ©

: addressed to it, it may be conceded. that plaintiffs would

“now be barred; identity both of parties and cause of action

_ would present a classic ease for applying the salutary poli-

cies behind the res judicata doctrine. However, the count

was not included in. the. original complaint ; according to: —

the frustees, the reason it-was not was that they did not

- find out about the August and September payments uutil

“after the state complaint had been filed.*. Therefore, count

2 three was never filed and technically was not before the

state court; morecver, granting that this formality shouk!

-not control, it is «'so qaite clear that count three was never

before-the couri iu a realistic sense either. Plaintiffs’ mo-

tion to file a sapplemental pleading was brought under ie

N. Y. Civ. Prac. &. 3025(b),- which provides that. “leave rat

_shal] be freely given:” Déspite this statement of a liberal —

policy, the cursory reason given for denial of leave was “in |

pre

- 6 Phillip J. McNellte was eppointed bankruptey trestes of the estates

—_________ _of Donald 8. Potter and Potter Corp. on June 25, 1963. The state

court suit was brought on November 21, 1963; the motion to file a

supplemental — was brought on February 26, 1964.

" view of the decision above announced.” That decision did

not discuss: the fraudulent conveyance theory of the first

‘complaint and focussed almost e tirely on the usury aspects’

' of that complaint; moreover, it dealt only with the issues-

. arising out of the two payments of $62,000. We also note

that N. Y. Civ. Prac. R. 5013 provides: . oa

A judgment’ dismissing a cause of action before the

‘s¢lose of the proponent’s evidence is not a dismissal on

the merits unless it specifies otherwise, but a judgment

_ dismissing a cause of action after the-close of the pro-

- ponent’s evidence is a dismissal on the merits unless. it

specifies otherwise. , Re athena

Q.

Since no motion for suminary judgment with respect to the —

cause of action pleaded, in-the supplemental complaint was

ever brought, there was no evidence at all adduced in plain-: —

tiffs’ favor. And, as the proposed third cause of action

. was not even “dismissed,” this would seem to be an a.

_\ fortioré case: for concluding that disposal of the supple-

mental:complaint was not, on the merits. Finally, although

the principles of res judicata should not be frugally: applied,

ef. United States v. Munsingwear, Inc., 340 U. 8. 36, 38 ©.

: (1950), a reasonable doubt as. to what was ‘decided ‘in the _

—____first_actionshould preclude the drastic remedy of fore-

. *, ¢losing a party from litigating an essentfal issue.” Cf...

| Cleary, Res Judicata Reexamined, 57 Yale L. J. 339 (1948). -

Under these circumstances, while, it is conceivable that in

denying leave to file the supplemental complaint, Justice —

Ringrose decided on the merits that the three payments in.

°9

ee _ This would dispoge of appeliee’s contention’ that Aagel v. Bullington,

~ |g 330 U. 8. 183 (1947), controlf here; the case is also inapposite because

we do ot have here, in any event, the closing of the door by the state

to an entire class of suits. ~~

ei

Aveo and Replens r 1962 were not fraudulent transfers,

' the proposition is no persuasive.* |

+ ‘In summary, we conclude that there is no res judicata

ee bar to the trustees” action on grounds other than usury

ue. - based on the three payments: which baa cia ie a

_ Andement ——

. - \ = ss - ° $ zs .*

i kog { , oe

, ; 7° ‘ °

. . » ! : . +

= - = ° . P . ag . s

Z «

: )

Y

- :

a

*-

Fes i \, a ¢ \

=, oS +

as ; 4

e

*

*. X

‘ 2

Y ~ . -

t \

ae

ye *

s ;

tenet a ees *

\

«

Y +

\ .

MK >

of S

. ¥

: Y e— ee ee

; : a

2 . ——aaeee

<<

a ;

a a ° ‘ -

“eae .

%,

¢ °

é .

e °

.

4 eo

2 ‘. d : © get I at ;

ee ~ eT

ee a “ie tain, st Mauka) the pnaing 40 tho Sintin ataiania i

; on the party asserting the bar of res judicata. Hyslop v. United States,

¢ 261 F. 2d 786 (8th Cir. 1958); Peckham v. Family Loan.Co., 196 F.

. = Drage o yatiiganer aghondl gatamnenegnigee doves creat at

Mack, ayy a ne ne 1912). eta a