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In re Piccadilly Realty Co.


June 21, 1935


Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.

Author: Alschuler

Before EVANS, FITZHENRY, and ALSCHULER, Circuit Judges.

ALSCHULER, Circuit Judge.

The appeal is from an order of the District Court granting appellee's petition seeking reorganization (under section 77B of the Bankruptcy Act, U.S.C. tit. 11, § 207 [11 USCA § 207]) of the Piccadilly Realty Company.

As will appear from the stipulated facts and the court's findings of fact based thereon, the relevant substance whereof is set out in the margin*fn1, the main question is whether, under the facts, matured installments of preferred stock and past-due dividends on the preferred stock, contracted to be paid, may be the basis of a petition under section 77B.

The company's financial condition, at the time the order herein was made, apart from its preferred stock obligations, would not, in our judgment, have justified the invocation of section 77B. There was its valuable unencumbered real estate, having average gross monthly income of about $2,300, with cash in the receiver's hands of about $6,500, as against its unpaid corporate debts of about $1,756. True, there was on file in the state court Smith's claim for $6,600 for his services performed for the receiver; but it is at best extremely questionable whether, for the purpose of invoking section 77B, expenses incurred in maintaining the receivership should have been considered as debts. But even if includable as debts, it is evident that with anything like a proper administration of the receivership it could not be long before the net income from the property would overtop all the outstanding obligations, other than such as are founded on alleged preferred stock maturities.

In comparison with the large unencumbered corporate assets, the debts, apart from preferred stock liabilities, were so negligible, and their payment within reasonable time so absolutely secured and assured, that we wholly disregard them as an influential factor, and we consider only whether the matured dividends and the past-due preferred stock under the stipulation of the preferred stock certificates are a lawful basis for the invocation of section 77B.

The accumulated unpaid dividends of six per cent. per annum contracted to be paid in the preferred stock certificates, and at the time the petition was filed amounting to $55,575, cannot be regarded as a debt of the corporation within the purview of the bankruptcy law and particularly section 77B thereof. The Corporation Act of Indiana (1921, § 23, Burns' Ann. Stat. 1926, § 4846), in force at the time of the incorporation of appellee and the issuance of the preferred stock, provided:

"No corporation shall declare or distribute any dividend to preferred stockholders or to common stockholders except from the profits earned by the business of the corporation, and if any such distribution shall be made, the directors shall be personally liable to creditors to the extent of all such distribution, and the stockholders shall be liable to refund such dividends received by them. * * *"

In the 1929 revision of the Indiana corporation laws there is, as applicable to the facts here, substantially the same limitation upon paying dividends. Acts 1929, c. 215, § 12, Burns' Ann. St. 1933, § 25-211. In Allied Magnet Wire Corp. v. Tuttle, 199 Ind. 166, 154 N.E. 480, 481, 156 N.E. 558, 50 A.L.R. 252, it was held that an agreement to pay dividends on preferred stock was not enforceable where there were no "profits earned by the business of the corporation."

We may assume, without deciding, that where there are surplus profits out of which dividends might be paid such an agreement may be enforced; and it might then be said that out of such an undertaking to pay dividends a corporate debt would arise in favor of the preferred stockholders. But where, as here, there was neither surplus nor profits out of which dividends might be paid, the promise to pay dividends, however absolute on its face, was unenforceable, and the relation of debtor and creditor did not arise therefrom. This eliminates the dividends as a corporate debt.

Respecting the default in the undertaking to make annual payments and retirement of preferred stock, we are met with the question whether upon the maturity of such a promise there arises the status of debtor and creditor on account of which resort may be had to section 77B as in cases of corporate indebtedness generally. Section 77B (b), 11 USCA § 207(b), contains this sentence:

"The term "claims' includes debts, securities, other than stock, liens, or other interests of whatever character."

If this does not mean that corporate stock shall not be the basis of any "claim" whereon to commence proceedings under that section, we are at loss to understand what it does mean. Our best judgment of its meaning is that stock in a corporation, regardless of its statutory or stipulated rank, privileges of any claim, or limitation, cannot be the basis for the invocation of section 77B, and therefore matured corporate promises to retire or pay corporate stock cannot be considered corporate debts in a proceeding under 77B.

Appellee argues that here the articles of association and the underwriting agreement and the preferred stock certificates approximate "as nearly as possible to a mortgage security"; but these parties have undertaken with the corporation the relation of stockholders, and that relation cannot be shifted to that of mortgagee for the purpose of enabling preferred stockholders to qualify as creditors under section 77B. It has been held in Indiana that a preferred stockholder, whatever the stipulated preferences may be, is nevertheless a "party to the business venture, along with the common stockholder." Star Publishing Co. v. Ball, 192 Ind. 158, 134 N.E. 285, 289.

The claim out of which it is contended this corporate debt arises is predicated directly and wholly upon "stock" of the corporation, which section 77B excludes as a basis for application of the section.

It seems to us that this controversy is one wholly between the preferred and the common stockholders for control of the corporation, and we are satisfied that section 77B was not enacted for the purpose of adjusting such disputes where substantial claims of other and actual creditors are not involved.

We believe the court erred in granting the petition, and the order appealed from is reversed with direction to the District Court to dismiss the petition.

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