## Facts

- Mexican law barred Island Oil & Transportation Corporation (Island) from owning or operating certain oil-bearing lands off Mexico’s coast.
- To conduct the business, Island organized multiple Mexican subsidiary corporations to hold and operate the properties.
- The subsidiaries had Mexican officers and kept separate books, but the officers had no real authority; Island owned the stock and Island’s directors managed the subsidiaries.
- Mexican law required the subsidiaries to keep books of account, and those books recorded “supposed transactions” between Island and the subsidiaries.
- For one subsidiary, the books showed a substantial unpaid balance supposedly owed by Island to the subsidiary for oil.
- Island pledged its stock in the Mexican subsidiaries as collateral under a mortgage.
- The mortgage went into default, and the pledged subsidiary stock was sold at foreclosure.
- New York Trust Co. (New York Trust) acquired, through the foreclosure sale, the stock of the subsidiary whose books reflected the unpaid intercompany balance.
- New York Trust then sued Island to recover the book balance as an enforceable debt owed by Island to the subsidiary.
- A master recommended dismissal of the claim as not legally viable; the district court confirmed the report and dismissed the action, and New York Trust appealed.

## Issues

1. Whether an intercompany “account receivable” shown on the books of a wholly controlled subsidiary—kept largely to satisfy Mexican corporate requirements—constituted an enforceable debt against the parent company.
2. Whether a purchaser of the subsidiary’s stock at foreclosure could treat that book balance as a stand-alone asset and sue the former parent to collect it.

## Decision

- The Second Circuit affirmed the dismissal.
- The court concluded that the book entries did not establish a genuine, arm’s-length obligation by Island to the subsidiary.
- Because the subsidiaries functioned as instrumentalities of Island and the entries were maintained for form and regulatory compliance rather than as evidence of a real creditor-debtor relationship, New York Trust could not convert those internal accounts into a collectible claim against Island merely by buying the subsidiary’s shares.

## Legal Principles

- Courts may disregard accounting and corporate form when the record shows that asserted obligations are internal entries within a dominated corporate group rather than transactions between independent actors.
- Bookkeeping entries between a parent and a controlled subsidiary, made to satisfy legal formalities, do not by themselves prove a binding debt absent evidence of an actual, intended obligation.
- A foreclosure purchaser of a subsidiary’s stock generally acquires the equity interest as it exists in substance and cannot transform internal intercompany balances into an external creditor claim against the former parent solely because the subsidiary’s books reflect a balance due.

## Conclusion

The Second Circuit treated the Mexican subsidiaries as shells controlled by Island and held that the intercompany balance shown on the subsidiary’s books was not a real debt enforceable against Island; therefore, New York Trust’s purchase of the subsidiary’s stock at foreclosure did not give it the right to sue Island to collect that internal account, and dismissal was affirmed.


New York Trust Co. v. Island Oil & Transport Co., 34 F.2d 655 (1929)