Before BIGGS, Chief Judge, and HASTIE and GANEY, Circuit Judges.
On June 4, 1962, four individuals filed a creditors' petition in bankruptcy against The Trimble Company ("Company"), a corporation organized and existing under the laws of Pennsylvania, and having its principal place of business in Pittsburgh, Pa.
The petition alleges that the four individuals were creditors of the Company at the time of the filing of the petition, having provable claims against it, fixed as to liability and liquidated in amount, totaling more than $500. The amount claimed to be owing them is $145,062.33, plus interest at 5% a year*fn1, evidenced by eight promissory notes. The asserted ground for the petition is the second act of bankruptcy, to wit: the Company, while insolvent, did, within four months preceding the filing of the petition, make preferential transfers to persons and companies named in the petition.
The Company's answer to the petition admits having executed the promissory notes and receiving notices of default and that such notes have not been paid. In defense the Company claims that payment by it on or after March 31, 1961, would be illegal under the provisions of the Pennsylvania Business Corporation Law of May 5, 1933, P.L. 364, as amended in 1957, particularly §§ 701-709 thereof, 15 P.S. §§ 2852-1 et seq., 2852-701 to 2852-709, because its capital would be impaired by payment of any part of the notes since it had "no unrestricted or unreserved earned or capital surplus legally available" for such payment. As an additional defense, it denies having committed the second act of bankruptcy*fn2
The petitioners and the Company entered into a stipulation of fact; they also presented testimony before the court sitting without a jury. From the stipulation we obtain the following pertinent information:
On March 12, 1958, in settlement of a dispute between the Company and the petitioners who were then shareholders of the Company, they entered into an agreement effective March 31, 1958. The Company agreed to purchase from the petitioners a total of 8,100 shares of its own stock for $433,500 or about $53.52 per share*fn3 The Company was to pay 30 percent of the purchase price in cash and the balance of $303,345 in annual installments to the four petitioners as follows: To each of two of the petitioners owning 2,200 shares each, five payments of $16,478; to the third, possessing 2,200 shares, three payments of $27,463.33; and to the fourth, holding 1,500 shares, three payments of $18,725.
On April 7, 1958, the petitioners surrendered their 8,100 shares to the Company and received in exchange $130,005 in cash and sixteen promissory notes as evidence of the amounts to become due in the years to follow. These notes bore interest at 5 percent per year, and contained a notation that in the event of default in the payment of interest or principal on any one of such notes continuing for 30 days or more after written notice thereof, all such notes shall become due and payable. At the time of the transfer, the Company's unrestricted and unreserved earned surplus was over $900,000 or more than enough to pay the full purchase price of $433,500 for the 8,100 shares. Immediately upon the acquisition of such shares, the Company made entries in its books of account restricting the amount of its earned, capital surplus and capital stock by the amount of the entire consideration being paid for the shares, and noted that amount as a liability of the Company. The transferred shares were not retired or resold by the Company, but were retained as treasury stock, bringing the total of such stock to 10,300 shares and left outstanding 9,700 shares all owned by members of the Trimble family. Thereafter, the Company carried the amount of the notes upon its books as a debt owed to the petitioners.
The first two installments totaling $158,288 were paid on schedule, but the Company did not pay on the third installment allegedly due March 31, 1961. On that date its books reflected a deficit of $11,043.65. The required demand for payment was refused by the Company, and the petition followed. The Company has paid nothing on the remaining eight notes, and its net worth, as of the filing of the petition, showed a deficit of $114,406.67 on the books.
In the order, from which petitioners have appealed, the district court notes, in dismissing the creditors' petition without prejudice, the following:
"[It] appearing that at the time when certain subsequent installments of said notes became payable payment thereof would have rendered said corporation insolvent; and the Court being of the opinion that it is against public policy under Pennsylvania law for debts arising out of purchase of its own stock by a corporation to impair the capital which should be available for bona fide creditors of the corporation, and that petitioners' debts arising out of stock purchase were unenforceable at the expense of bona fide creditors of the corporation, and contingent, and hence do not give petitioners standing as petitioning creditors to institute these proceedings. * *"
The petitioners contend that the district court erred in dismissing their petition because they are creditors having claims within the meaning of § 59, sub. b of the Bankruptcy Act, as amended effective October 7, 1952, 66 Stat. 425. This section, prior to the September 25, 1962, amendment (76 Stat. 570, 11 U.S.C.A. § 95 sub. b), read as follows:
"b. Three or more creditors who have provable claims liquidated as to amount and not contingent as to liability against any person which amount in the aggregate in excess of * * * $500 or over * * * ...