as required by statute. Gibbon v. Hill, 3 Cir., 79 F.2d 288.
It necessarily follows that the repurchase by the bankrupt of its own stock was void as against creditors, no certificate having been either filed or published as required by statute. It also follows that all payments on account of the purchase price made to the stockholder, Shirley Droutman, in 1947 and 1948, when the bankrupt was operating at a substantial loss, impaired the capital and were therefore unlawful. However, the ultimate decision of the Court does not rest entirely on these conclusions.
The claim of Shirley Droutman for the purchase price of the stock may not be accorded the usual priority notwithstanding the validity of the mortgages given to secure the payment. The recognition and payment of this claim as one entitled to priority would deplete, if not exhaust, the bankrupt estate to the injury of other creditors. This claim must, therefore, be subordinated to the claims of other creditors notwithstanding the mortgages.
The rule adopted by the Court of Appeals, Fifth Circuit, in the case of Robinson v. Wangemann, 75 F.2d 756, is applicable here. It is therein stated, 75 F.2d at page 757: 'A transaction by which a corporation acquires its own stock from a stockholder for a sum of money is not really a sale. The corporation does not acquire anything of value equivalent to the depletion of its assets, if the stock is held in the treasury, as in this case. It is simply a method of distributing a proportion of the assets to the stockholder. * * * When such a transaction is had, regardless of the good faith of the parties, it is essential to its validity that there be sufficient surplus to retire the stock, without prejudice to creditors, at the time payment is made out of assets. In principle, the contract between (the stockholder) and the corporation (is) executory until the stock (shall) be paid for in cash. It is immaterial that the corporation was solvent and had sufficient surplus to make payment when the agreement was entered into. It is necessary to a recovery that the corporation (shall) be solvent and have sufficient surplus to prevent injury to creditors when the payment is actually made.' (Emphasis by the Court.) See also In re Fechheimer Fishel Co., 2 Cir., 212 F. 357; M. V. Moore & Co. v. Gilmore, 4 Cir., 216 F. 99; Coleman v. Tepel, 3 Cir., 230 F. 63; First Trust Co. v. Illinois Cent. R. Co., 8 Cir., 256 F. 830; Keith v. Kilmer, 1 Cir., 261 F. 733, 9 A.L.R. 1287; Matthews Bros. v. Pullen, 1 Cir., 268 F. 827; Boggs v. Fleming, 4 Cir., 66 F.2d 859. Payment cannot be made where, as here, insolvency and the rights of other creditors intervene before the obligation to pay matures. Ibid.
It appears from the evidence (Exhibit M-2) that the bankrupt made monthly payments to Shirley Droutman pursuant to the terms of their agreement. The last payment was made on October 29, 1948. These payments may not be credited to the claim for the purchase price of the stock but must be credited to the claim for the monies advanced on behalf of and to the bankrupt. The allocation of these payments would permit Shirley Droutman to recover a part of the purchase price of the stock and avoid the personal liability created by the statute hereinabove quoted. The allocation of the payments to the purchase price of the stock, or any part thereof, would violate not only the statute but also the equitable principles by which the court of bankruptcy must be guided in the administration of assets.
Claim for Monies Advanced on Behalf of and to the Bankrupt
This claim is a valid claim and must be accorded the priority to which the mortgages entitle it. The claimant may not be denied her rights as a creditor even though she was a stockholder at the time the debt was incurred. The payments heretofore made, both principal and interest, must be credited to this claim alone.
It appears from the memorandum filed by the Referee that he has allowed interest from October 28, 1948, the approximate date of the last payment, on the full amount of $ 8350. It is our opinion that the claimant is entitled to interest only on the unpaid balance as of that date.
The claim should be re-examined in the light of the conclusions herein expressed.
Claim of Nicholas Popovich
An examination of the schedules discloses a debt due Nicholas Popovich, an officer of the bankrupt. It appears from the evidence that this creditor was a party to the transactions here in question and executed the mortgages. It would seem that under these circumstances his claim should be subordinated to both claims of Shirley Droutman.
It is further recommended that this claim be re-examined in the light of the agreement (T-13) between Nicholas Popovich and others and the Bell Tone Records, Inc. We direct the attention of the Referee to paragraph 11 of this agreement.
I. The order of the Referee directing the sale of assets free and clear of all liens, the liens, if any, to attach to the proceeds, was not error. The sale should, therefore, be confirmed.
II. The claims of creditors should be classified and allowed in the following order of priority:
(a) The claim of Shirley Droutman for monies advanced on behalf of and to the bankrupt. The payments heretofore made to Shirley Droutman must be credited to this claim alone and the balance due thereon allowed as a superior claim.
(b) The valid claims of general creditors, except the claim of Nicholas Popovich.
(c) The claim of Shirley Droutman for the purchase price of the stock.
(d) The claim of Nicholas Popovich, unless it is determined that the agreement (T-13) was an effective release of this claim. We make no decision concerning the effect of this agreement because there is no question before us concerning it.
III. This matter is referred to the Referee for further proceedings consistent with this opinion.
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