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GE v. HOL-GAR MFG. CORP.

May 19, 1977

GENERAL ELECTRIC COMPANY
v.
HOL-GAR MANUFACTURING CORP. and YARDNEY ELECTRIC CORPORATION, Garnishee



The opinion of the court was delivered by: LUONGO

 This is a diversity action *fn1" to determine who has superior rights to certain property. The matter is before me on a motion for summary judgment by garnishee, Yardney Electric Corporation (Yardney), under Federal Rule 56.

 Background and Procedural History

 Hol-Gar Manufacturing Corporation was an independent corporation until 1969, when it was purchased by Whitaker Corporation and was made a division of Whitaker's subsidiary, Yardney. In late 1971, Yardney made it known that it wished to sell its Hol-Gar division. Henry Mancuso, Robert Gasparro, Herman Kessler, and Fred Gartner, former officers of the Hol-Gar Manufacturing Corporation, who had been retained after the corporation's purchase by Whitaker, negotiated to purchase the division. Mancuso, Gasparro, Kessler, and Gartner formed a new Hol-Gar Manufacturing Corporation (Hol-Gar), the defendant herein, in March 1972, each contributing $75,000 capital. On March 28, 1972, Hol-Gar purchased from Yardney all of the assets of Yardney's Hol-Gar division for $250,000 or $300,000 cash, *fn2" a $750,000 promissory note, 20% of outstanding Hol-Gar stock, and the assumption of certain liabilities pertaining to the Hol-Gar division. On that same date, Hol-Gar and Yardney entered into a security agreement whereby Yardney was given a security interest in all of Hol-Gar's assets as collateral for the note. The agreement provided that if Hol-Gar defaulted on the note, Yardney could, inter alia, foreclose and take possession of all or part of the collateral and sell it. Yardney perfected the security interest by filing financing statements with the Delaware County Prothonotary and the Secretary of the Commonwealth in Harrisburg on April 3, 1972. As additional security the principals of the new Hol-Gar corporation pledged to Yardney their 80% of the Hol-Gar stock.

 The new Hol-Gar corporation suffered financial losses. On June 24, 1974, plaintiff herein, General Electric Company (GE), which had been selling goods to Hol-Gar, suspended further deliveries because of nonpayment of invoices and Hol-Gar's failure to provide adequate assurance of due performance. On July 9, 1974, Yardney notified Hol-Gar that it was in default on its March 28, 1972 promissory note.

 On September 23, 1974, GE instituted suit in this court (Civil Action No. 74-2469) to replevy the goods for which Hol-Gar had not paid. On the following day the United States Marshal seized on Hol-Gar's premises, and tagged, certain goods with a claimed value of $450,913.85. On January 2, 1975, GE and Hol-Gar entered into a settlement agreement as to the replevin action under the terms of which Hol-Gar promised to pay GE $445,356.19 plus an additional amount left open to negotiation. The agreement provided that Hol-Gar would make an initial payment of $140,000 by March 15, 1975, *fn3" with the balance payable in $50,000 monthly installments, with authorization to GE to enter judgment by confession in the event of Hol-Gar's default.

 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." *fn4" 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. *fn5" 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. *fn6"

 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. *fn7" 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.

 Discussion

 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. *fn9" 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 ...


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