New York Trust Co. v. Island Oil & Transport Corp.
34 F.2d 655 (2nd Cir. 1929)
Island Oil had several Mexican
subsidiaries, and owned all their stock. They were in financial trouble
and mortgaged their stock in the subsidiaries.
At the same time, in order
to fix their books, Island had one of their subsidiaries sell a large
quantity of nonexistent oil to Island Oil, and then had Island Oil owe
the subsidiary a lot of money.
Island Oil went bankrupt and
their subsidiaries were sold off to pay their debts. A new owner, New York
Trust, took over one of the subsidiaries.
New York Trust demanded that
Island Oil pay the money they owed to the subsidiary.
Island Oil argued that the
contract between themselves and the subsidiary was a scam and not
The Trial Court found for
Island Oil. New York Trust appealed.
The Trial Court found that
the "contract" to sell the oil to Island was a sham, and no actual oil was sold. Therefore the
contract is void.
The US Supreme Court affirmed.
The US Supreme Court found
that the contract was simply part of a plan to deceive third persons.
The general rule illustrated
in this case is that contracts are only enforceable if they are
legitimate. If a contract is made as part of a scam, then it is
non-enforceable, even if it meets all of the requirements to be a