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Kleinberg v. Schwartz

Decided: April 5, 1965.

PAUL R. KLEINBERG, ETC., PLAINTIFF-RESPONDENT,
v.
ARTHUR SCHWARTZ, ET AL., DEFENDANTS-APPELLANTS



Conford, Kilkenny and Lewis. The opinion of the court was delivered by Kilkenny, J.A.D.

Kilkenny

After a plenary trial in the Chancery Division, a final judgment was entered against defendant Charles Schwartz (hereinafter "Charles") alone for the sum of $46,127.21 and in favor of plaintiff, as assignee for the benefit of creditors of Roger's Outfitters, a New Jersey corporation (hereinafter "Outfitters"). The other defendants were not served in the action. Charles appeals from the judgment.

The trial court found that Outfitters had purchased its own shares of stock from Charles, one of its stockholders and a former director, and in paying therefor had invaded the capital of the corporation to the extent of $46,127.21, without having complied with the requirements of R.S. 14:11-5.

R.S. 14:11-5 provides that if a corporation buys its own shares of stock and uses the capital of the corporation, as distinguished from its surplus, to pay for those shares, it must retire the purchased shares and publicize the fact that its capital has been thus reduced by filing a written certificate of reduction of capital in the office of the Secretary of State and

publishing the same for three weeks successively, at least once in each week, in a newspaper published in the county in which the principal office of the corporation is located. "In default of such publication when so required the directors of the corporation shall be jointly and severally liable for all debts of the corporation contracted before the filing of the certificate, and the stockholders shall also be liable for such sums as they may respectively receive of the amount so reduced."

A corporation may purchase its own shares of stock and pay therefor out of surplus. The purchased shares then become treasury stock and may be reissued. When payment is made out of surplus, it is not necessary to file and publish a certificate of reduction of capital as in the case where capital is used by a corporation to purchase its own shares.

It is conceded that a certificate, such as that required by R.S. 14:11-5, was not filed or published by Outfitters. If, therefore, Outfitters purchased its own shares of stock from Charles by the use of capital, then Charles would be subject to the legal consequences, as defined in this statute.

In seeking a reversal Charles contends: (1) Outfitters was not the purchaser of his shares in that corporation, but his brother Arthur was; and (2) payments for his shares were not made out of the capital of Outfitters but out of surplus, or out of loans made by Outfitters to Arthur's corporate nominee and offset by loans made by Arthur to Outfitters.

I.

The evidence supports the finding by the trial court that Outfitters was the actual purchaser of Charles' shares, regardless of the form used to screen the real transaction.

Arthur, Charles and their father, Nathan, each owned a one-third stock interest in Outfitters, a family corporation operated by them and organized in 1953. A lack of family harmony resulted in a decision that Charles and Nathan would leave the firm and Arthur alone would remain. Charles and Nathan were each to be paid $152,532 for their respective

stock interests in the corporation. The payments were to be made at the rate of $500 weekly (without interest). This was the same amount as had previously been drawn weekly as salary by both Charles and Nathan from this family corporation. There was ample evidence to justify the trial court's finding that the parties anticipated that the payments for the shares would come from the funds of Outfitters.

The parties consulted their respective attorneys and accountants. Arthur's attorney drew an agreement for the purchase of the shares of Charles and Nathan. Outfitters was named therein as the purchaser. Counsel for Charles and Nathan disapproved the form of the agreement because no audit had been made of the financial affairs of Outfitters and fear was expressed as to the possible consequences of a corporation's buying its own shares. Arthur's financial advisers did not want Arthur named as the purchaser because ...


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