On January 28, 1975, Yardney, acting on Hol-Gar's mid-1974 default, took possession of the property covered by its security interest, seizing all Hol-Gar assets in accordance with the security agreement. At the same time Yardney exercised its rights in the stock pledged by the principals. Notices of the seizure of the Hol-Gar assets were placed on the premises, the locks were changed, the Hol-Gar officers were asked to resign and sign proxies for their stock, and Yardney personnel took inventory of all assets. On February 24, 1975, Yardney informed Hol-Gar of its intention to sell the collateral to International Fastener Research Corporation (Fastener). The agreement of sale to Fastener was signed on March 26, 1975, although Yardney retained possession for an additional two months. The sale price, $475,000, did not fully compensate Yardney for the balance remaining due on the note.
In the meantime, Hol-Gar had defaulted on the $140,000 initial payment due on March 15, 1975 under its settlement agreement with GE. Two days later, GE instituted the instant action by entering a confession of judgment against Hol-Gar in the amount of $140,000. On April 4, 1975, GE obtained judgment by default in the replevin suit (Civil Action No. 74-2469) in the amount of $310,913.85, i.e., the value of the goods originally claimed by GE in that action minus the $140,000 judgment by confession awarded GE in this action. Also on April 4, GE obtained a writ of execution directing the United States Marshal to levy on "[all] property, real and personal, of Hol-Gar Manufacturing Corporation" on Hol-Gar's premises and to attach all of Hol-Gar's property in the possession of Yardney as garnishee. In accordance with Pennsylvania rules on enforcement of money judgments, GE served Yardney with "Interrogatories in Attachment."
On April 11, a United States Marshal levied on the Hol-Gar property and attached the property in Yardney's possession.
On May 14, 1975, GE and Yardney entered into an agreement under which GE released its claims to the Yardney collateral, thus allowing it to be sold, with the understanding that the parties would litigate who had superior rights to the collateral.
Yardney agreed to post a bond in the amount of $475,000 to cover payment to GE of any amount to which GE might be adjudged entitled. On May 23, 1975, Yardney delivered the collateral to Fastener in consummation of the March 26 sale.
Yardney answered GE's Interrogatories in Attachment on November 10, 1975, stating that it did not have any Hol-Gar property in its possession, pleading as "New Matter" that the attachment should be dissolved because of Yardney's superior rights to the collateral by reason of the security agreement.
GE replied to the New Matter on December 10, denying "knowledge or information sufficient to form a belief" as to Yardney's averments. Yardney then moved for summary judgment on the record consisting of affidavits and depositions submitted by GE and Yardney.
To prevail on a motion for summary judgment, Yardney must establish "that there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The motion "may not be granted where there is the slightest doubt as to the facts." Tomalewski v. State Farm Life Ins. Co., 494 F.2d 882, 884 (3d Cir. 1974). The facts must be viewed in a light most favorable to the party opposing the motion. United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962) (per curiam); Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir. 1976), cert. denied, 429 U.S. 1038, 97 S. Ct. 732, 50 L. Ed. 2d 748, 45 U.S.L.W. 3463 (1977). However, when the motion is supported by affidavits, the opposing party must respond with evidence setting forth specific facts showing that there is a genuine issue for trial; he may not rely on the allegations in his pleading. Fed. R. Civ. P. 56(e); Sound Ship Building Corp. v. Bethlehem Steel Co., 533 F.2d 96, 99 (3d Cir.), cert. denied, 429 U.S. 860, 97 S. Ct. 161, 50 L. Ed. 2d 137, 45 U.S.L.W. 3253 (1976).
The uncontradicted evidence in the affidavits and depositions establishes that Yardney perfected its security interest in most8 of Hol-Gar's assets by filing financing statements with the Delaware County Prothonotary and the Secretary of the Commonwealth on April 3, 1972, and in all of the Hol-Gar assets by taking possession thereof on January 28, 1975. See Uniform Commercial Code (UCC) §§ 9-302, 9-305, 9-401 et seq., 12A P.S. §§ 9-302, 9-305, 9-401 et seq. See also id. § 9-303(2), 12A P.S. § 9-303(2). GE did not acquire an interest in the property until April 11, 1975, when it executed on its judgment in this action and became a lien creditor under UCC § 9-301(3), 12A P.S. § 9-301(3). Yardney therefore correctly argues that, since it had a prior perfected security interest in the collateral, it had superior rights to the Hol-Gar assets. See UCC §§ 9-301(1), 9-312, 12A P.S. §§ 9-301(1), 9-312; Massachusetts Mutual Life Ins. Co. v. Central Penn National Bank, 372 F. Supp. 1027, 1042 (E.D. Pa. 1974), aff'd mem., 510 F.2d 970 (3d Cir. 1975). Under UCC § 9-504(1), 12A P.S. § 9-504(1), Yardney was entitled to sell the collateral to Fastener, and, since the sale proceeds from Fastener did not fully satisfy the debt owed to Yardney by Hol-Gar, Yardney was entitled to keep all of the sale proceeds for itself.
In opposing summary judgment, GE contends that, even if Yardney held a prior perfected security interest, GE should be accorded superior rights under the doctrine of equitable subordination.
The doctrine of equitable subordination is a rule of bankruptcy law and derives from Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 83 L. Ed. 669, 59 S. Ct. 543 (1939), and Pepper v. Litton, 308 U.S. 295, 84 L. Ed. 281, 60 S. Ct. 238 (1939). Taylor was a case in which a parent corporation had retained complete control of its subsidiary; had grossly mismanaged the subsidiary's affairs while accumulating huge debts to itself; and, to prevent the subsidiary's preferred shareholders from gaining voting rights, had forced payment of dividends to those shareholders while the subsidiary was in a precarious financial condition. The Supreme Court held that, under those facts, the debts owed to the parent corporation were required to be subordinated to the interests of the preferred shareholders in a reorganization of the subsidiary under the Bankruptcy Act. In Pepper, the Court held that under the facts of that case the bankruptcy court had a "duty" (308 U.S. at 312) to subordinate the claims asserted by a "dominant and controlling stockholder" ( id. at 296) against the corporation which he controlled. The stockholder had accumulated unpaid salary claims against the corporation in amounts fixed by himself and entered judgments by confession on those claims at a time when the corporation was in financial trouble. The stockholder caused the corporation to obtain suspension of execution on another creditor's judgment against the corporation to give himself time to levy on corporate property and make the property unavailable to the other creditor. He then caused the corporation to go into bankruptcy to avoid the other creditor's claims. The Taylor and Pepper decisions were based on the equitable powers of bankruptcy courts.
The facts in the instant case differ materially from those of Taylor and Pepper. First, this is not a bankruptcy case, and I am aware of no case applying the equitable subordination doctrine in a non-bankruptcy situation. Second, Yardney was neither Hol-Gar's parent corporation, as was the creditor in Taylor, nor Hol-Gar's dominant or controlling shareholder, as was the case in Pepper. Yardney owned only 20% of Hol-Gar's stock. The evidence is uncontroverted that Hol-Gar never voted those shares, had no representative on Hol-Gar's Board of Directors, and did not participate in the daily management of Hol-Gar's affairs in any way. GE has cited no authority, and independent research has disclosed none, to support application of the doctrine of equitable subordination in the absence of the close relationship between creditor and debtor exemplified in Taylor and Pepper.10 See also, e.g., Comstock v. Group of Institutional Investors, 335 U.S. 211, 92 L. Ed. 1911, 68 S. Ct. 1454 (1948); In re Calpa Products Co., 249 F. Supp. 71 (E.D. Pa.), aff'd per curiam, 354 F.2d 1002 (3d Cir. 1965), cert. denied sub nom., Grasberger v. Calissi, 383 U.S. 947, 16 L. Ed. 2d 209, 86 S. Ct. 1204 (1966). Since the record discloses no genuine issue of fact as to the existence of such a close relationship, as a matter of law the doctrine cannot be applied.
Furthermore, even if equitable subordination were applicable to this type of case, there is no evidence of inequitable conduct by Yardney which justifies subordination of Yardney's claim. GE contends that there is a genuine issue of fact relating to its claim of equitable subordination in that Yardney participated in the formation of Hol-Gar as a drastically undercapitalized corporation in a scheme to defraud Hol-Gar's creditors. A party must plead the circumstances underlying an averment of fraud with particularity, however. Fed. R. Civ. P. 9(b). This requirement takes on special significance in light of the rule, discussed above, that once a motion for summary judgment is made the opposing party must counter with specific facts showing a genuine issue for trial (Fed. R. Civ. P. 56(e)). There are no facts to support GE's fraudulent undercapitalization theory.
GE relies primarily on the affidavit of a certified public accountant who reviewed Hol-Gar's financial statements and records. For purposes of this motion, Yardney has admitted the facts set forth in the accountant's affidavit. The affiant states that:
"a. Generally accepted accounting principles require that inventories be stated at the lower of cost or market and that adequate allowances be made for obsolete, slow-moving, or unsaleable inventories. It does not appear that adequate valuation reserves were recorded on the financial statements of Yardney's Hol-Gar Manufacturing Division (hereinafter 'Hol-Gar Division') and Hol-Gar.
b. Certain inventory reserves were reflected on the pro forma Balance Sheet dated January 2, 1972, for Yardney's Hol-Gar Division, but such reserves do not appear on the balance sheet of Hol-Gar after the transfer of assets. Such reserves exceeded Hol-Gar's Shareholders' equity on March 28, 1972, by an amount in excess of $200,000.00.