Alcott Company v. Raphael

• Decision Date: 08 March 1960
• Docket Number: No. 17938.,17938.
• Citation: 275 F.2d 551
• Parties: ALCOTT COMPANY, Inc., Appellant, v. E. J. RAPHAEL, Trustee in Bankruptcy of J. P. Shepherd Lumber Company, Inc., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

275 F.2d 551 (1960)

ALCOTT COMPANY, Inc., Appellant, v. E. J. RAPHAEL, Trustee in Bankruptcy of J. P. Shepherd Lumber Company, Inc., Appellee.

No. 17938.

United States Court of Appeals Fifth Circuit.

March 8, 1960.

Philip Mansour, Greenville, Miss., for appellant.

W. C. Keady, R. T. Love, Greenville, Miss., for appellee.

Before RIVES, Chief Judge, and HUTCHESON and TUTTLE, Circuit Judges.

TUTTLE, Circuit Judge.

This is an appeal from a judgment in favor of a trustee in bankruptcy setting aside a conveyance of real estate by the bankrupt corporation to appellant, its stockholder, under the provisions of Section 70, sub. e of the Bankruptcy Act.¹

In determining whether there was a voidable conveyance which the trustee may set aside, we must look to the state law, Gonterman v. Nicholas, 5 Cir., 270 F.2d 509. See 4 Collier, Bankruptcy, 14th ed., p. 1352.

The Mississippi Statutes, which the trustee relies on as the basis for his attack on the transfer are:

Section 5328, Mississippi Code of 1942:

"No part of the capital stock in any corporation shall be withdrawn or diverted from its purpose, nor a dividend declared, when the company is insolvent, or would be rendered insolvent by such withdrawal on the payment of such dividend; and the directors who assented to such withdrawal, or declared and paid such dividend, as well as the stockholders who received it, shall be jointly and severally liable to creditors whose debts then existed, to the extent of such withdrawal or dividend and interest."

Section 5311, Mississippi Code of 1942:

"No outstanding stock of any corporation shall be retired if the corporation would be thereby rendered insolvent or its paid in capital be thereby reduced to less than the minimum amount required by its charter or amendments thereto, except upon dissolution."

The basis of the trustee's attack is thus set out before reciting the facts of the case because it at once becomes apparent that there must be proof of insolvency of the corporation following, and as a result of, the transfer in order for the trustee to prevail.

The appellant here attacks the conclusion of the trial court on the dual ground that the test of insolvency used by the court was erroneous and that, even under the correct test, the finding of insolvency is without any evidence to support it.

Stating the facts most strongly in favor of the appellee, as we must on an appeal from a finding of facts, the record discloses that the trial court would be warranted in finding, as it did:

(1) J. P. Shepherd Lumber Company was incorporated in January, 1955, with authorized capital stock of $20,000 consisting of 200 shares of common stock of a par value of $100 per share. The charter required 10 shares to be subscribed and paid for before the corporation was authorized to commence business. This corporation succeeded to the business previously operated under the same name by J. P. Shepherd and Harry W. Alcott as partners. The charter was amended in September, 1955, to increase the authorized capital stock to $70,000 consisting of 700 shares of common stock of a par value of $100 per share. That year J. P. Shepherd and his wife subscribed and paid for 280 shares and Harry W. Alcott and the members of his family subscribed and paid for 200 shares. Shepherd was President of the corporation and directed its business operations. Alcott was Secretary from the organization of the corporation until at least August 15, 1956, and at all times was spokesman and agent for the other stockholders in his family.

(2) The principal business of this corporation was contracting for the construction of residences and other buildings, but it also sold building materials at retail.

(3) In September, 1955, the corporation acquired for $28,000 cash a 55 acre tract of land intended for residential development, which was called "Cherokee Gardens." This purchase gave rise to the increase in authorized stock and the increase of paid in capital to $48,000. After this purchase, the corporation sold buildings located on this land for a net of $1,278.95, thus leaving the cost of this property at $26,721.05, which was the figure carried on the corporate records as the cost of this property and entered on its tax return for the fiscal year ending January 31, 1956.

(4) In computing its operating loss for the fiscal year 1955, ending January 31, 1956, the corporation accounted for real estate owned costing $37,613.98. Its operating statement for the fiscal year showed a deficit of $316.26 charged against paid in capital which was shown at $48,000.00

(5) On September 27, 1955, Harry W. Alcott paid $4,000 to J. P. Shepherd Lumber Company, showing thereon that it was in payment for 3 acres of the Cherokee Gardens tract on which the Pehl house was located. Both Alcott and Shepherd testified that Alcott was to have this tract as his individual property. However, this claim cannot be reconciled with the aforementioned corporate records with respect to the net cost of the Cherokee Gardens property nor with the various financial statements issued by the corporation. On most, if not all, of these records and statements, the cost of the Cherokee Gardens property was shown as aforementioned. Record title to all of the Cherokee Gardens property remained in the corporation until August 15, 1956, and no deed was executed to Harry W. Alcott, individually, for any part of this property. The weight of the evidence indicates that, after the purchase of this property, it was decided that Alcott would apply this payment toward the purchase of stock.

(6) The corporation's basic books consisted of a cash journal and a general ledger. No accounts payable ledger was kept, but trade and other invoices were loosely kept in a file folder. There was an accounts receivable ledger in which charges to customers were posted irregularly. From time to time, the accounts receivable would be adjusted by the corporation's bookkeeper to reflect estimates of work completed on the various construction jobs. A physical inventory was taken only at the end of the fiscal year which closed with January 31.

(7) During the life of the now bankrupt corporation, Alcott was President and a stockholder of Mill Supplies, Incorporated, another corporation, which sold industrial supplies to customers. He is an intelligent businessman, conversant with inventories, accounts receivable and trade accounts payable. He knows how to read a balance sheet and determine the net worth of a company. Shepherd was a builder, and, apparently, had small business experience other than his efforts to direct the bankrupt's business, which were characterized by poor estimates, poor bidding on contracts, excessive cost in construction and consistent loss of money in the bankrupt's operations.

(8) It is apparent that there was a very substantial operating loss to the corporation from February 1, 1956, to June 30, 1956. The size of that loss would depend, in large measure, upon the value of the merchandise inventory at the latter date. This actual merchandise inventory is not known. The only records available in that regard consist of two slips of paper, located in the working papers of an accountant, upon which figures purporting to be merchandise inventory at June 30, 1956, were written. It is not shown who prepared these two slips of paper, and, hence, it cannot be known whether either of them have any validity or not. Considering the lower figure of slightly more than $8,000 (the figure more in line with the financial history of the bankrupt corporation's operations) the operating loss for the five month period would have been $20,132.95, averaging more than $4,000 per month for that period.

(9) Alcott and Shepherd had an informal understanding in about May of 1956, which contemplated that, for certain considerations, the investment real estate of the corporation, carried at a cost of $37,613.98 would be conveyed to The Alcott Company, Incorporated, a corporation organized by Alcott for himself and family for the express purpose of receiving title to this real estate. Alcott was the President and dominant figure in that new enterprise. In their informal discussions, it was assumed that Alcott would surrender to the corporation 200 shares of stock owned by him and the members of his family.

Although not so found by the court, the evidence showed without dispute that the agreement also called for the payment of $10,848.26 cash, the assumption of certain debts and the giving of a $5,000 note. Considering the stock to be worth par, which is the amount Alcott paid for it less than a year previously, the total thus paid for the land would equal its value.

Neither Alcott nor Shepherd requested the corporation bookkeeper to prepare a financial statement showing the then current financial condition of the corporation. No physical inventory was taken by Shepherd or the corporate officers. No effort was made to determine the amount of accounts payable then owing by the corporation. Alcott testified that he knew the capital was unimpaired (except for $316.26) at February 1st and he assumed the company was in about the same condition in May. No resolution was adopted by the stockholders and officers of the corporation ratifying or recognizing the informal understanding between Alcott and Shepherd until June 1, 1957. Instead, Alcott paid to the corporation certain sums which were credited on the corporate records to the cost of the Cherokee Gardens property. These sums and the dates upon which payments were made are as follows: $5,000 on May 16, 1956; $3,000 on June 12, 1956; $2,000 on June 29, 1956; $848.26 on August 16, 1956 for a total of $10,848.26. On August 15, 1956 the bankrupt deeded to The Alcott Company, Incorporated, the Cherokee Gardens property reciting that the consideration was the transfer of 200 shares of stock by the Alcotts to the wife of J. P. Shepherd. A companion deed was executed by Alcott and Shepherd...