In RE v. Loewer's Gambrinus Brewery Co.

167 F.2d 318, 1948 U.S. App. LEXIS 3070

• Court: Court of Appeals for the Second Circuit
• Decided: March 31, 1948
• Docket: 188, Docket 20891
• Status: Published

Opinions

FRANK, Circuit Judge.

The opinion of the district court, reported in 74 F.Supp. 909, sets forth the Referee’s findings and conclusions. Neither the Referee nor the Judge found fraud; nor did either of them find that the debt was a sham (although their opinions perhaps so imply). The Referee, however, explicitly found as a fact that, at all pertinent times to the date of bankruptcy, appellant, the Realty Company, and the bankrupt, the Brewery Company, had the same stockholders, officers and directors. We accept that finding as true, since, as the district judge stated (74 F.Supp. at 913), appellant, in its petition to review, did not except to, or question, any of the Referee’s findings. There is some evidence, not printed in appellant’s Appendix to its brief, that the stock in the two companies was not held in precisely the same proportions by the common stockholders. As, however, appellant made nothing of that fact below or in its brief in this court, the case must be treated as if the proportions were identical, and there is no need to consider whether and to what extent differences in such proportions would compel a different conclusion from that reached here.

With identical stockholders, we may regard the situation as if there had been no Realty Company and as if the Brewery Company were indebted directly to its stockholders. The question here thus boils down to this: If stockholders, acting in concert, make loans to their corporation in amounts directly proportionate to their stockholdings, may they assert unsubordinated claims, for such loans, against their corporation when it becomes bankrupt? In the light of recent Supreme Court decisions,¹ the answer would seem to .be No. The test does “not turn on the existence or non-existence of the debt” nor on the existence of an “instrumentality” or the like; the test is whether the failure to subordinate will “work injustice,” will not “be fair and equitable to other creditors,” will result “in the violation of rules of fair play and good conscience.”² If that test be applied to a case where stockholders deal with their corporation in the manner above described, it would seem that the potential injustice to other creditors is so great as to require subordination. For, in such circumstances, unfairness can easily occur and yet be so easily concealed that no scrutiny by the bankruptcy court, however rigid, will uncover it; accordingly, merely to put on the stockholders a heavy burden of proof as to fairness would be insufficient; therefore, as a matter of public policy the stockholders will not be heard to deny unfairness.

Up to this point the case has been approached as if there were no debtor corporation. But application of the unfairness test calls for a further step; In marshalling in bankruptcy, both corporations should be ignored, the common stockholders being deemed members of a partnership indebted to them and which went into bankruptcy.³ It is unnecessary here to consider whether the ruling would be different if creditors of the Realty Company had intervened and had shown that they would be adversely affected by the subordination.⁴

Affirmed.

1 See Pepper v. Litton, 308 U.S. 295, 306-311, 60 S.Ct. 238, 84. L.Ed. 281; Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 322, 59 S.Ct. 543, 83 L. Ed. 669; cf. Sampsell v. Imperial Paper Corp., 313 U.S. 215, 218, 219, 61 S.Ct. 904, 85 L.Ed. 1293.

2 In re Watertown Paper Co., 2 Cir., 169 F. 252, 256, should be regarded as overruled by the Supreme Court cases cited in the preceding footnote.

3 In Pepper v. Litton, 308 U.S. 295, 309, 60 S.Ct. 238, 84 L.Ed. 281, the Court cited and quoted with approval from In re Burnside Lodge, D.C., 7 F. Supp. 785, 787, where claims for services rendered by two stockholders to their w'liolly owned corporation were subordinated; the services were regarded as if they had been rendered to an unincorporated business owned by the claimants. Paraphrasing the language quoted by the Supreme Court from the Burnside Lodge case, we may say here: If the debtor had not been incorporated and if appellant had conducted debtor’s business as part of appellant’s, appellant would not be allowed to assert its claim on a parity with other creditors, and there is no cogent reason why the mere incorporation of debtor should lead to a different result.

4 Cf. Consolidated Rock Products Co. v. DuBois, 312 U.S. 510, 524, 61 S.Ct. 675, 85 L.Ed. 982; Henry v. Dolley, 10 Cir., 99 F.2d 94, 97.