In re Romadka Bros. Co.

| E.D. Wis. | Jul 5, 1913

G.EIGRR, District Judge

(after stating the facts as above). It is clear that for some time prior to March 17, 1909, the financial affairs of the bankrupt corporation were in a condition requiring urgent attention ; in fact, it was deemed imperative that some measure be adopted to avert impending disaster. Disregarding, for the moment, their relation to each other, there were certainly taken, to accomplish in some degree the desired object of rehabilitation, these two steps: (1) The increase of the capital slock of the corporation from $359,000 to $500,000, classified and to be issued, as stated; (2) the transfer by the A. V. Romadka heirs to the corporation of the real estate owned by them individually.

These two steps should be considered in connection with the fact that Charles P. Romadka had in his possession as pledgee, to the knowledge of the corporation and of all its shareholders, the entire capital stock, to secure payment of a debt of approximately $30,000, owing by the shareholders to him; that at the meeting of jMarch 17, 1909, although the shares of stock had not been transferred 1o him on the books of the corporation, his rights as pledgee were fully recognized by the shareholders and by the corporation as such, and it was conclusively assumed that the contemplated step to increase the capital stock could not be taken without his assent; that while the transfer of the real estate is not expressly shown to be the primary consideration for the guaranty of the note in question, both steps were in fact taken to accomplish a general plan of refinancing, or rehabilitating the corporation.

It is urged on behalf of the trustee that the corporation’s act in guaranteeing the note was beyond its legitimate corporate power; that the obligation rested upon the individual A. V. Romadka heirs, and that the corporation could not, under the guise of furthering the corporate act of increasing its capital stock, in law bind itself to a pecuniary obligation in consideration of enabling it to increase its stock; that, upon the testimony, tlie transfer of the A. V. Romadka real estate by the heirs was in no way connected with the execution of the guaranty by the corporation, but, on the contrary, that had been agreed upon and consummated before the meeting of March 17, 1909, upon consideration of extinguishing the personal liability of the heirs to the corporation upon their respective overdrawn accounts.

Respecting the first of these contentious, it may be true that steps to be taken by a corporation in accordance with the statute, for the increase of its stock, for effectuating matters pertaining to corporate organization, are not the transactions of corporate business. In other words, a corporation having a right, in obedience to certain statutes, to enlarge or change its organization, cannot he presumed to have the power to do anything but to comply with the statute, as its terms prescribe, and that any bargaining to accomplish such results may justly be said not to be the transaction of corporate business or the legitimate exercise of corporate powers. But the situation here is to be judged in the' light of everything that transpired, and every fact present and acted upon by the corporation, not alone to enable it to increase its capital stock, but to enable it to better its financial condition, must be considered. Now, what was the situation as recognized by the corporation? It was this: The shareholders were possessed of real estate, which we must presume to be of some considerable value. They were indebted to the corporation on their personal accounts. They were also indebted to claimant’s testate in the sum of $30,000, as security for which he held the entire capital stock. They desired to strengthen the company financially, first, by transferring their real estate — by which act they would necessarily disable claimant’s testate from looking to them for satisfaction of his debt out of such resources — secondly, they desired-to increase the capital stock from $359,000 to $500,000, taking in exchange for their then holdings common stock to the amount of $400,000, and to issue preferred stock for-$100,000, the latter involving necessarily the reduction of the stock held by claimant’s testate to a position of juniority in its rank as a capital liability; and they assumed this could not be done without his assent, and they necessarily assumed that if the plan were adopted, the stock would then be of' greater value because of the increase in the corporate assets.

With respect to the precise consideration prompting the transfer of the real estate to the corporation, there is controversy in the testimony, but it is fairly inferable from the evidence given by the bankrupt’s then attorney, as well as by its former treasurer, that it was contemplated that, among other things, the difference between the $359,000 of stock theretofore outstanding and the $400,000 of common stock to be issued, namely, $41,000, should go to the old shareholders as a consideration for such transfer, and as a part of the general plan of reorganization. The records of the coloration are singularly deficient in pointing out the details of the plan and the means of its execution; but this conclusion finds strong support in the testimony referred to, particularly such as is based upon recommendations made by an expert accountant, who pointed out that in this manner the apparent financial strength of the company would be increased, and a better showing could be made through the elimination of the personal accounts, which otherwise appeared to be a doubtful asset.

It may, be noted that, unless it be conceded that the old shareholders were to receive the balance of the $41,000 — the excess of common stock to be issued beyond the $359,000 then qutstanding — no suggestion is made in the record respecting the disposition otherwise expected to be made of such $41,000. The corporation’s attorney, in giving his testimony, supported it by a memorandum showing the allotment to the five shareholders of their respective proportions of this $41,000.

Now, whether, as matter qf law, a pledgee could obstruct a plan such as was here proposed need not be determined. It would seem, however, that, the corporation and all its shareholders, having assumed and recognized the existence, of such right on his part, and ha haviug dealt with them in justifiable reliance upon the existence of such right, the corporation at least should not now be heard to say that the result could have been accomplished without consulting him at all. But whatever be right upon this phase of the case, the evidence is susceptible of no other fair inference, except that all of the steps were taken for the consumnaiion of a plan of refinancing, or rehabilitating the business of the corporation; and, after its accomplishment, no one ought to be heard to say that the act of one party participating therein was not taken into consideration by the others in ordering his or their conduct respecting individual rights at that time; and I therefore conclude that the heirs of A. V. Romadka made the transfer pursuant to negotiations which had been under way for a iong time, that the resolution increasing the capital stock was likewise passed, and such increase was accomplished as a consummation oí what was under discussion for a long time, and that each of siren steps was taken, not only upon the supposition, but in consideration that the other would also be accomplished. Therefore the heirs made such transfer in contemplation of the issue of stock of a different character than that which they then held, also in contemplation of the surrender by Charles P. Romadka of the larger portion of his collateral, and the reduction of that which he retained, to a lower rank as a capital liability. The act of the corporation in accepting the transfer of the Romadka heirs; of Charles P. Romadka in giving his assent thereto, making the surrender of his collateral; the agreement through a corporate meeting to assume a liability on the claim then held by him against the shareholders — not only concurred in point of time, but were considerations each for the other to enable the result indicated. Such corporate agreement, no matter in what form it was ultimately executed, was a, valid and binding corporate act, based upon sufficient consideration. Although in form a guaranty, in effect the corporation really assumed the personal debt. Viewed in this light, the transaction does not differ from the transfer of property by one to another, in consideration of the payment, by the transferee, of the transferror’s debt to a third person.

The order of the referee is reversed, with instructions to allow the claim.