Consolidated Music Co. v. Brinkerhoff Piano Co.

• Decision Date: 11 April 1933
• Docket Number: No. 693.,693.
• Citation: 64 F.2d 884
• Parties: CONSOLIDATED MUSIC CO. et al. v. BRINKERHOFF PIANO CO.
• Court: U.S. Court of Appeals — Tenth Circuit

64 F.2d 884 (1933)

CONSOLIDATED MUSIC CO. et al. v. BRINKERHOFF PIANO CO.

No. 693.

Circuit Court of Appeals, Tenth Circuit.

April 11, 1933.

D. A. Skeen, of Salt Lake City, Utah (Jesse R. S. Budge, A. B. Irvine, and Sam D. Thurman, all of Salt Lake City, Utah, on the brief), for appellants.

Grant H. Bagley, of Salt Lake City, Utah (Waldemar Van Cott, P. T. Farnsworth, Jr., W. Q. Van Cott and B. R. Howell, all of Salt Lake City, Utah, on the brief), for appellee.

Before LEWIS, PHILLIPS, and McDERMOTT, Circuit Judges.

McDERMOTT, Circuit Judge.

All parties having moved for a directed verdict at the close of the evidence, the trial court held that the Consolidated Music Company and R. W. Daynes were liable to the appellee for breach of their agreement to repurchase preferred stock of the Music Company, which the appellee had acquired for cash in order to help the Music Company over a financial sand bar. The receiver of the Music Company, appointed by a state court after this action was filed, was permitted to intervene, and thereupon asserted that the appellee should not share ratably with certain creditors in the distribution of assets in its hands as receiver. The trial court, having no dominion over the receiver or the assets, declined to meddle with the distribution of the assets in the possession of the state court, and dismissed the receiver from the cause "without prejudice to its rights to assert the said rights and claims in any other proceeding or action." The receiver, the Music Company, and Daynes, appeal.

The articles of incorporation of the Music Company authorize the issuance of preferred stock, and make provision for its retirement. Creditors were therefore advised by the charter that stock so issued did not constitute a permanent fund to which they might look. In January, 1924, the company endeavored to relieve its financial embarrassment by issuing preferred stock, and offered to sell some of such stock to appellee. After much correspondence, appellee bought 200 shares, for which it paid $20,000 in cash, upon the company's written agreement to repurchase it at $110 per share within five years, or when the Music Company disposed of certain real estate. Daynes, the secretary and manager of the Music Company, in a separate writing, agreed that "either he or the Consolidated Music Company" would repurchase such stock on those terms. Within the time specified, appellee exercised its right to resell the stock to the Music Company. The company was not able to comply with its obligation, and after a long and acrimonious correspondence, carried on by Daynes for the Music Company, appellee agreed to a substituted performance in that it would accept $400 a month until the $20,000 with interest was paid, in which event the original agreement would be canceled, but otherwise to remain in full force and effect. Daynes did not sign any substituted agreement for himself, but asked for and received these ameliorated terms for his corporation. The company paid for a few months and then quit. This action is at law upon the original contract, credit being given for the trifling amount actually paid under the substituted agreement. The company's defense is that it could not legally buy its own stock; Daynes' defense is that his obligation was that of a guarantor and was discharged by the extension of time accorded the company at his request.

A few days after this action was filed, the state court appointed a receiver for the properties of the Music Company. The receiver intervened in this action, of its own volition, and set up that the company was insolvent when the original contract was made, and therefore the contract was voidable as to existing creditors, at least. Much of the trial dealt with the question of the rights of creditors. At the conclusion of the trial, Judge Johnson dismissed the receiver from the cause, without prejudice to its rights to assert any claims of creditors as to the distribution of the corporate assets in the court of administration. That issue being eliminated, nothing remained but the bald assertion of the Music Company that the contract was void, and the assertion of Daynes that the subsequent contract discharged him of liability.

One of the most stubbornly fought conflicts in corporation law is over the power of a corporation to purchase its own stock. The English courts have quite uniformly adhered to the trust fund doctrine that, in the absence of statutory or charter authority, a corporation is without power to acquire its own shares; that the capital of a corporation is held in trust for its creditors; that since it is the only fund to which they may look for the payment of their claims, it may not be distributed to the shareholders by the purchase of their stock, for to do so would be to enable the shareholders to secure a priority over corporate creditors. Many of the courts of this country have followed the English doctrine. On the other hand, undoubtedly the majority of the jurisdictions in the United States have held to the so-called "modern rule" that in the absence of statutory or charter prohibition, and without express authority, a corporation may purchase its own shares, if done in good faith and without injury to creditors. Other decisions take various middle grounds, that corporate surplus only may be used for such purpose, or condition the power on the solvency of the corporation, or hold the transaction voidable as to existing creditors, or subsequent creditors without actual notice. Cases from all jurisdictions that had passed on the point by 1927 are gathered in Thompson on Corporations (3d Ed.) §§ 4081 to 4099. The point is becoming of less practical importance because statutes are being enacted, from time to time, marking expressly the limits of the power. The Supreme Court of the United States has not passed directly on the point, as far as we can discover. The two cases generally cited are not persuasive; in Johnston v. Laflin, 103 U. S. 800, 26 L. Ed. 532, a statute prohibited national banking associations from such purchase except within narrow limits; the statement in Commissioners of Johnson County v. Thayer, 94 U. S. 631, 24 L. Ed. 133, is the merest kind of an aside. The Eighth Circuit has adhered to the modern rule, Burnes v. Burnes, 137 F. 781, First Trust Co. v. Illinois Cent. R. Co., 256...