In re German-American Improvement Co., 40.

• Decision Date: 03 November 1924
• Docket Number: No. 40.,40.
• Citation: 3 F.2d 572
• Parties: In re GERMAN-AMERICAN IMPROVEMENT CO. DOSCHER v. GARVIN et al.
• Court: U.S. Court of Appeals — Second Circuit

3 F.2d 572 (1924)

In re GERMAN-AMERICAN IMPROVEMENT CO.

DOSCHER v. GARVIN et al.

No. 40.

Circuit Court of Appeals, Second Circuit.

November 3, 1924.

Henry F. Cochrane, of Brooklyn, N. Y., for appellant.

Samuel C. Duberstein, of New York City, for respondent-trustee.

Engelhard, Pollak, Pitcher & Stern, of New York City (Samuel C. Duberstein and George H. Engelhard, both of New York City, of counsel), for Alfred Hoffman, as trustee under the will of Magdalena Brommer.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

ROGERS, Circuit Judge (after stating the facts as above).

The claim which has been disallowed consists of a promissory note which may be found in the margin.¹ The note, it appears, was given as a renewal of a note executed by the company under date of May 1, 1901, to Claus Doscher, trustee, for $86,744.28. The proof of claim does not set forth the consideration for the note.

The German-American Improvement Company, the bankrupt herein, was organized in 1891 as a land company with a paid in capital of $300,000. It acquired a large tract of land with a view to its development into residential sites. It laid out streets which it paved, flagged, and curbed. It installed a complete sewer system and a water plant for the purpose of supplying water to those who would subsequently buy and build on the land which was designated to be developed. The first intention was to improve the property and to sell off the houses after the improvements were completed. This proved to be a disappointing proposition with the result that, after building about 300 houses, the company stopped building and confined itself to the selling of lots to those who would improve them.

All of the stockholders, except two, were men of large means who advanced the company money from time to time in the work of development until upwards of $2,000,000 had been so expended. It thus came about that in the year 1901 the company owed its officers and stockholders a large amount of money. Matters had not progressed as favorably as had been anticipated and sales had been infrequent. The company in 1901 considered it for the best interests of all concerned to divide up all of the unsold property of the company among its stockholders in proportion to the amount of stock which each held.

In that year all the stockholders filed with the board of trustees a consent and request, under their hands and seals and duly acknowledged, that the corporation grant and convey unto the said shareholders all of its property in the ratio of their respective holdings, and requested the board to adopt a suitable resolution to carry into effect the said grant and conveyance.

The board thereupon, on June 4, 1901, adopted resolutions, which, after reciting the action, consent, and desires of the stockholders, read as follows:

"Resolved, that this corporation do grant and convey unto its shareholders respectively in the ratio of their respective holdings of stock all of its real property, except the water plant of this company, and the land constituting the streets in the property of said company, together with all sewerage, water, and other pipes contained beneath the surface of said streets, according to the plan and scheme of distribution of said stock heretofore submitted to and approved by the said stockholders; and

"Resolved, that the president and treasurer of this company be and they hereby are authorized and directed to make, execute, acknowledge and deliver in the name of this corporation any and all necessary and proper instruments, deeds and conveyances, to carry into effect the terms and provisions of this resolution, and to do any and all other acts which may be necessary and proper for that purpose."

The record discloses a conflict in the evidence as to the circumstances under which the original note of May 1, 1901, was given.

It is the contention of the appellant that the stockholders, who had previously loaned to the company large sums of money, declined to advance any further sum except upon the company's agreement to pay them the amount so advanced as a loan. This it is said the company agreed to do, and that in pursuance of this agreement Claus Doscher, as trustee, loaned the company $86,744.28, which was contributed by the stockholders according to their respective holdings — being paid by them to Doscher, as trustee, who turned the same over to the company and took the note of May 1, 1901, as evidence of the transaction. And there is some testimony to support the contention that it was expected that the money thus contributed and paid over was to be repaid out of the money that was to be realized from the sale of the water plants and the streets if the city ultimately took them over; the said water plants and streets being reserved when the remainder of the real property was distributed among the stockholders.

It is, on the other hand, contended by the appellees that the stockholders had come to the conclusion before the note was given that the company could not successfully continue its business. It was not succeeding in making sales of its real estate, and was without funds to pay its debts, mortgage liens, and taxes. It was being threatened with foreclosure suits, and the stockholders were unwilling longer to continue advancing moneys to the company. In this situation the suggestion was made, in order to protect the properties of the company against foreclosure and sale and to clear off tax arrearages, that the stockholders should be assessed according to their respective holdings and previous advancements, and that the money thus raised should be used to clear off indebtedness. That being done, the understanding was that the real property should be distributed among the stockholders in proportion to their stock holdings and the amount that they had advanced to the company; and that the company's indebtedness to the stockholders should then be wiped out by the conveyance of the land to them after the same had been freed from the incumbrance of arrearages in taxes and interest; that the note of May 1, 1901, was taken merely as temporary evidence of the assessment payments until the real property could be actually distributed, when it was to be considered as discharged and wiped out like all the other claims of the stockholders.

If the contention of the appellants be correct, the note of May 1, 1901, was unpaid when the note of April 6, 1911, was given in its stead. If the contention of the appellee be correct, the note of May 1, 1901, was extinguished by the distribution of the property, among the stockholders pursuant to the action of the board heretofore recited. And, if that be the case, the renewal note of August 6, 1911, which is put forward as a claim against the bankrupt, was without consideration and void.

The referee disallowed the claim, and found:

"(1) That the claim was barred by the statute of limitations; that the bar of the statute was not raised by two interest payments made during the six years preceding the filing of the bankruptcy petition, because those payments were made while the company was insolvent, and constituted preferences unlawful under the New York Corporation Law, the second one also under the Bankruptcy Act.

"(2) That the claim on the note had been extinguished in 1901 when the corporation distributed practically all its assets among the same persons, its then stockholders, who are now the beneficiaries of the note."

The district judge on petition to review concurred in the referee's view as to the statute of limitations, and denied the petition to review.

If the note is barred by the statute of limitations, it really becomes unnecessary to consider the conflicting evidence presented and which goes to the validity or invalidity of the note at the time it was given, and whether or not it was supported by any consideration.

The referee, speaking of the original note in his report, said:

"I am forced to conclude that under the plan of distribution of the bankrupt's realty amongst the stockholders this $86,744.28 was paid in for the purpose of paying off the interest on mortgages and taxes and other charges, and thereby to prevent foreclosure of the mortgage covering the same, and that all advances, including the $86,744.28 made by the stockholders were all extinguished upon the carrying out of the plan of the distribution of the realty to the stockholders. The only explanation that I can find for the issuance of the note is that it was intended to serve as evidence of an indebtedness during the time between the payment of the advances which made up the amount of the face of the note and the subsequent actual distribution of the properties amongst the stockholders. It is inconceivable that, upon distribution of the assets, the plan or scope of such adjustment and distribution should not include the discharge of the various personal...