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AMERICAN KITCHEN FOODS, INC. v. HERSCH COLD STORAG

August 10, 1977

AMERICAN KITCHEN FOODS, INC., Plaintiff,
v.
HERSCH COLD STORAGE COMPANY, Paul J. Seligson, Erie Farms, Incorporated, Security Peoples Trust Company and Sky Brothers Company, Defendants



The opinion of the court was delivered by: WEBER

 The present action arose after defendant Security Peoples Trust Company (SPT), possessing a security interest in the inventory of Erie Farms, Inc. (EFI), a food wholesale distributor, sold frozen food products allegedly belonging to the plaintiff, American Kitchen Foods, Inc. (AKF), to Sky Brothers Company at a distress sale. AKF bases its ownership rights on a warehousing arrangement between AKF and Hersch Cold Storage Company (HCS), a cold storage warehousing operation, and sister entity of EFI. AKF alleges that due to the public nature of HCS, certain goods found in the HCS facility were owned by AKF and not covered by the SPT security interest in the EFI inventory.

 In its complaint, AKF alleges that the defendants "willfully and maliciously converted" certain potato products belonging to AKF, and valued at $91,480.38. Presently, AKF moves for summary judgment alleging the absence of a genuine dispute as to any material fact. Defendants SPT and Sky Brothers oppose entry of summary judgment. *fn1"

 EFI was a wholesale distributor of primarily wholesale foods. EFI's principal and sole shareholder was Paul J. Seligson, a defendant in this case. Seligson also controlled HCS by reason of his personal holding of a minority of the voting stock of HCS, the majority stock held by Seligson's EFI. Seligson had acquired the interests of EFI and HCS in 1971 or 1972 from Louis Hersch. Louis Hersch continued to occupy an office in the complex.

 HCS owned all the realty occupied by EFI and HCS, subject to a mortgage held by SPT and consisting of a large complex of buildings, situated in close proximity to one another. One of the buildings was an eight story refrigerated warehouse occupied by EFI for its wholesale food distribution business. HCS leased the entire facility to EFI, excepting the top two floors which were used for HCS cold storage.

 In 1972, Seligson decided to phase HCS out of the public warehousing business. However, a small amount of warehousing continued up to the time of the bankruptcy of EFI. Late in 1974, AKF began storing its products at the HCS warehouse; AKF products constituted the greatest share of the several firms "warehousing" with HCS in February of 1975. Prior to this time, AKF sales were made directly to its area distributor, EFI. This pattern changed following the visit of AKF executive vicepresident, T. B. Angelos, to EFI. Angelos' visit was prompted by rumors circulated in the food products trade and industry that EFI was experiencing financial difficulties. At the time, EFI owed AKF between $30,000 and $40,000. Angelos met with Seligson and Hersch at the EFI and HCS facility and worked out a warehousing arrangement with HCS for future AKF deliveries. Subsequent to this meeting, direct deliveries to EFI ceased and deliveries to HCS commenced. In order for EFI to purchase and receive AKF products stored with HCS, EFI was required to telephone its order to AKF, then, send AKF a written confirmation of the transaction in the form of a purchase order. If the requested goods were available, only Linda Schwab, office and credit manager of Potato Service, Inc., a subsidiary of AKF, could authorize the release of the goods by calling HCS. The taking of possession and subsequent sale by SPT of these frozen potato products constitute the subject matter of this lawsuit. *fn2"

 Prior to January 1975, SPT had viewed EFI and HCS as excellent credit risks and had extended large amounts of credit to EFI. However, in late January, large checking account overdrafts required SPT to investigate EFI's financial situation. In order to assure SPT that EFI remained an "excellent credit risk", Seligson submitted an inventory computer print-out. SPT subsequently learned that the print-out was inaccurate in that it was inflated to three times the actual inventory. Subsequent to February 13, 1975, SPT as a secured creditor with a perfected security interest in EPI's inventory, took possession of the goods contained in the entire refrigerated building, assuming it all to be EFI inventory, at the time unaware of any outstanding warehouse receipts. During the week of February 17, 1975, for various reasons, SPT, as creditor in possession, felt it imperative to liquidate the collateral as quickly as possible. On March 6, 1975, the entire warehouse inventory was sold to defendant Sky Brothers at a distress sale. *fn3"

 Critical to the resolution of his case is whether AKF entered into and maintained a bona fide warehousing arrangement with HCS, thereby effectively preventing SPT from enforcing its security interest in the frozen potatoes. After considering the pleadings and evidentiary material in form of affidavits, depositions and admissions on file, and resolving all inferences and doubts and issues of credibility in favor of the nonmoving parties, it appears that summary judgment is appropriate since there exists no dispute as to a material fact. Suchomajcz v. Hummel Chemical Company, 524 F.2d 19 [3d Cir. 1975].

 In support of its motion for summary judgment, plaintiff has produced documents of title (bills of lading and warehouse receipts) and supporting evidence sufficient to establish a prima facie case of a bailment through the use of a warehousing arrangement. The authenticity of the documents evidencing this is not disputed nor do SPT and Sky Brothers allege any fraudulent participation by AKF in a fictitious warehousing operation. However, defendants SPT and Sky Brothers claim that HCS and EFI were actually a single corporate enterprise and as such AKF cannot protect its dealings with HCS on the basis of establishing that HCS was a public warehousing operation and a corporate entity separate and distinct from EFI. These defendants also claim an estoppel of the plaintiff to assert the benefits of its apparent property interest by reason of the warehousing arrangement due to AKF's failure to investigate properly the relationship between EFI and HCS prior to entering the arrangement with HCS. Defendants contend that AKF, in these circumstances, was under a duty to inquire about the financial structure of HCS, there being certain indicia of lack of a bona fide warehousing operation into which a reasonable business enterprise would inquire, i.e., customer and warehouse located in the same building, rumors in the trade that EFI was faltering, a substantial debt owed by EFI to AKF, and, the absence of bonded warehousing. Defendants contend that had AKF simply availed itself of the standard credit reporting systems, it would have been apprised of the fact that Seligson controlled EFI and EFI was the reported owner of HCS, and, by failing to so inquire, AKF is now estopped from asserting any ownership claim to the subject potatoes. *fn4" Therefore, SPT and Sky Brothers allege that a dispute as to a material fact exists because, under the circumstances, AKF, operating as a reasonable business enterprise, was put on inquiry notice of the absence of a true warehousing operation prior to entering the arrangement with HCS.

 The rule that a corporation for most purposes is an entity distinct from its individual members or shareholders has been said to be a legal theory introduced for purposes of convenience and designed to serve the needs of justice. However, the fiction of a corporation as an entity distinct from the individuals comprising it will be disregarded whenever justice and public policy demand and when the rights of innocent parties are not prejudiced thereby. Gagnon v. Speback, 389 Pa. 17, 131 A.2d 619 [1957]; Pasos v. Ferber, 263 F. Supp. 877 [M.D.Pa.1967], aff'd, 386 F.2d 452 [3d Cir. 1967]. Those wishing to have the court disregard the corporate entity have the burden of establishing by a preponderance of the evidence that the corporation was an artifice and a sham designed to execute an illegitimate purpose in abuse of the corporate entity and the immunity that it creates. However, when piercing the corporate veil the court must start from the general proposition that the corporate entity should be recognized and upheld unless specific, unusual circumstances call for an exception. Zubik v. Zubik, 384 F.2d 267 [3d Cir. 1967], cert. denied, 390 U.S. 988, 88 S. Ct. 1183, 19 L. Ed. 2d 1291 [1968].

 In the present case, defendants SPT and Sky Brothers allege that the control of HCS and EFI by Seligson justifies the disregarding of the corporate form in this instance. Possibly, such a conclusion would follow if Seligson was using the corporate entity to shield his dealings with some injured third party. However, this is not the case. Here, a defendant corporation is not raising the corporate defense to prevent the imposition of personal liability upon those controlling the corporation. Rather, SPT and Sky Brothers seek to have the corporate entity of HCS disregarded as to its dealings with AKF to prevent AKF from claiming the existence of a true bailment or warehousing arrangement.

 Since HCS is not using its corporate structure to protect an improperly obtained corporate advantage, we disagree with the contention of the defendants of the propriety of disregarding HCS's corporate existence in this instance. Piercing HCS's corporate veil in order to preclude AKF from asserting that it transacted business with a distinct and viable entity would be an unwarranted use of this equitable remedy. No allegations are made that HCS was formed with an intent to perpetrate a fraud nor is the corporate fiction being employed as a means to shield HCS from its ultimate responsibilities and liabilities; therefore, HCS stands immune from the piercing operation. Sams v. Redevelopment Authority, supra; Chengelis v. Cenco Instruments Corp., 386 F. Supp. 862 [W.D.Pa.1975], aff'd, 523 F.2d 1050 [3d Cir. 1975].

 The defendants also assert that despite AKF's and HCS's compliance with the formalities of a true warehousing arrangement and HCS's de jure corporate existence, AKF should be estopped from claiming any property interest in the warehoused goods due to its failure to investigate properly its potential warehouseman. It is contended that such an inquiry would have notified AKF of the HCS/EFI relationship and that ...


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