In re Mifflinburg Body Co., 7876.

• Decision Date: 02 April 1942
• Docket Number: No. 7876.,7876.
• Citation: 127 F.2d 59
• Parties: In re MIFFLINBURG BODY CO. Appeal of MIFFLINBURG BANK & TRUST CO.
• Court: U.S. Court of Appeals — Third Circuit

127 F.2d 59 (1942)

In re MIFFLINBURG BODY CO. Appeal of MIFFLINBURG BANK & TRUST CO.

No. 7876.

Circuit Court of Appeals, Third Circuit.

Argued February 4, 1942.

Decided April 2, 1942.

Samuel Handler, of Harrisburg, Pa. (Gilbert Nurick and Earl Handler, both of Harrisburg, Pa., on the brief), for appellant.

Harry S. Knight, of Sunbury, Pa. (Walter H. Compton, of Harrisburg, Pa., and Knight & Kivko, of Sunbury, Pa., on the brief), for Clarence P. Wynne, trustee in reorganization proceedings of Mifflinburg Body Company, appellee.

Before MARIS, JONES, and GOODRICH, Circuit Judges.

MARIS, Circuit Judge.

Mifflinburg Body Company and Mifflinburg Bank and Trust Company are Pennsylvania corporations. At various times prior to 1935 the company borrowed moneys from the bank by discounting trade acceptances with it. Occasionally the company substituted its own notes for some of the trade acceptances. No new loans were made after 1935. On April 1, 1938, the company executed a mortgage for $150,000 upon its plant and equipment to secure a bond issue of the same amount. From the sale of some of these bonds it realized $36,800 in cash. It applied the major portion of the cash towards the indebtedness, which was thereby reduced to $93,328.60. The bank, acting in compliance with instructions by the Banking Department of the Commonwealth of Pennsylvania, demanded additional collateral as security for the indebtedness. On October 23, 1938, the company delivered bonds having a face value of $95,000 to the bank as collateral security. On June 11, 1940, creditors petitioned for the reorganization of the company under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. In the reorganization proceedings the bank filed a proof of claim as a secured creditor and petitioned that the court determine the value of the pledged bonds. The district court found that the bonds had been issued in contravention of Article 16, Section 7, of the Constitution of Pennsylvania, P.S., and were therefore void and ordered that the bank be treated as an unsecured creditor.

The sole question argued upon the appeal from the district court's order is whether a pledge of bonds to secure a preexisting indebtedness owing from a Pennsylvania corporation to a Pennsylvania bank and incurred in the regular course of the corporation's business is invalid as in contravention of Article 16, Section 7, of the Pennsylvania Constitution of 1874. That section reads: "No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void. * * *"

The question whether the pledge of its bonds by a corporation to secure a preexisting debt is in contravention of a state constitution or statute is by no means novel. Under constitutional and statutory provisions similar to that of Pennsylvania, courts in California, Missouri, Montana, New York, South Dakota and Texas have ruled that bonds so pledged are invalid,¹ whereas the courts of Alabama and Wisconsin have ruled that such bonds are valid.² These decisions may serve as aids in our construction of the provision in the Pennsylvania constitution if they are based upon persuasive reasoning but primarily our task is to determine what the courts of Pennsylvania have ruled in construing this section of its constitution. For if the state court has construed its own state constitution it is of no consequence that decisions from other states involving similar provisions are to the contrary. Cooper v. Taylor, 5 Cir., 1932, 54 F.2d 1055, certiorari denied 286 U.S. 554, 52 S.Ct. 579, 76 L.Ed. 1289.

The fact situation involved in the question before us contains two elements, first that the debt was already in existence when the bonds were issued, and second that the bonds were issued not outright but in pledge. Although we have been referred to no decision in Pennsylvania which answers the question, each of its elements has been passed upon by the appellate courts of Pennsylvania. In Wrightsville Hardware Co. v. McElroy, 1916, 254 Pa. 422, 98 A. 1052, the Supreme Court of Pennsylvania held that bonds issued to take up outstanding corporate notes were not issued in contravention of the constitutional provision since the refunding transaction resulted simply in a change of the form of the corporate obligation and not in a fictitious increase of indebtedness. No significance was attached by the court to the fact that the debt for which the bonds were issued was a preexisting debt. In Miller v. Hellam Distilling Co. (No. 1), 1914, 57 Pa. Super. 183, 191, the Superior Court of Pennsylvania held that bonds pledged for a loan less than their face value were not issued in violation of the constitutional provision since there was no fictitious increase of indebtedness involved. The court held further that where a corporation had the power to issue bonds by sale, absolute or conditional, it also had the power to pledge the bonds. While, as we have said, the Pennsylvania courts have not had occasion to pass upon the validity of corporate bonds pledged for a preexisting debt — the exact question now before us — we are convinced by the rulings and reasoning of the two cases to which we have referred that the Pennsylvania constitutional provision does not invalidate bonds so issued.

We are fortified in this conclusion when we consider the Pennsylvania...