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 enforceable.
  • 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 contract.