New York Trust Co. v. Island Oil & Transport Corp.

34 F.2d 655 (2d Cir. 1929).

Dawson, pp. 333-334

Facts: Island was trying to get around some laws and they made up some Enron-type shell companies so they could make it look like it wasn’t really them doing the oil stuff where they weren’t allowed to do it. They made up these Mexican subsidiaries and basically owned almost all of the stock in them. They kept accounts showing payments between the Mexican subsidiaries and Island, and these accounts had balances due that Island theoretically had to pay the shell companies. Island mortgaged stock in the shell companies, and the stock was sold at foreclosure. In a bankruptcy organization type thing, the bank that bought shares of the shell companies sued the receiver of Island for balance due from Island to the shell companies. The bank’s claim was dismissed and the bank appealed.

Issue: Should legal duties be created by “utterances” designed to scam a third party?

Rule: The fact that a writing was a sham trumps the fact that it would otherwise on its face appear legally binding.

Analysis: It wasn’t really anticipated that the shell companies and the real company would ever be at odds since the latter created the former to basically scam the government. Naturally, you wouldn’t break a contract with yourself. But when the shell company and the real company get separated and have conflicting interests, it turns out that the fictional dealings between them have no legal force. They don’t become real.

Conclusion: The dismissal of the bank’s claim was upheld.

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