In re Stern-Slegman-Prins Co.
| Decision Date | 19 May 1988 |
| Docket Number | Bankruptcy No. 84-00812-1-11 to 84-00816-1-11. |
| Parties | In re STERN-SLEGMAN-PRINS COMPANY, S.S.P. Realty Corporation, Braemoor Garment Co., Inc., Suburban Casuals, Inc., Westport Casuals, Inc., Debtors. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri |
John Donner, Stinson, Mag & Fizzell, Overland Park, Kan., for debtors.
Paul Hoffman, Lathrop, Koontz, Righter, Clagitt & Norquist, Kansas City, Mo., for trustees, Slegman Trust, Boatmen's Bank.
Morris J. Levin, Levin & Weinhaus, St. Louis, Mo., and Marc Richards, Booth, Marcus & Pierce, New York City, for ILGWU Nat. Retirement Fund.
Pending is debtors' Second Amended Plan of Reorganization.1 Debtors are substantively consolidated. At issue is a provision to subordinate claims arising under two stock repurchase agreements entered into August 3, 1965 between debtor Stern-Slegman-Prins Company ("Stern-Slegman") and shareholders Arthur Mag and Ferdinand Stern. The trustees of the Stern estate, Boatmen's First National Bank and Donald Chisholm ("Trustees"), object to subordination and voted against the plan. The subordination proposal resulted from last minute negotiations between debtors and the ILGWU National Retirement Fund ("Fund"). The Trustees' Class 4 claim of $720,000 and the Fund's Class 3 claim of $1.8 million are both unsecured. The Fund agreed to reduce its claim by half in exchange for subordination of the Trustees' claim.
If the plan is confirmed the Trustees will receive no payment on their claim and the Fund would receive about 82% (estimated at $187,780) of funds distributed to unsecured creditors. If the Fund's claim is not voluntarily reduced by half and the Trustees' claim is not subordinated, so that both are treated as general unsecured creditors, after payment of all priority and administrative expense claims, the Fund would receive about 66% of distributed funds, the Trustees would receive about 26% and other unsecured creditors would receive an estimated 8%. If the Trustees were treated as general unsecured claimants they would receive approximately $59,540 and the Fund, on its unreduced claim of $1.8 million, would receive about $151,140.2 After the hearing the parties were directed to brief the issue of equitable subordination. Briefs were filed by the Trustees and the Fund. No objections to or briefs in support of the plan were filed by debtor or other creditors.
The Trustees alleged the following facts, which were not contested by the Fund. On August 3, 1965, Mr. Stern entered a stock repurchase agreement with Stern-Slegman which provided that upon Mr. Stern's death his estate would sell and Stern-Slegman would buy all common stock of the company then held by Mr. Stern.3 The parties had nine months after death to consummate the transaction. Mr. Stern died in August 1970. On April 19, 1971, pursuant to the agreement, Stern-Slegman purchased 30,000 shares of its common stock from Mr. Stern's estate for $735,132. The terms of the purchase were $100,000 from life insurance proceeds, the balance of $635,132.95 to be paid in annual installments over 20 years, and quarterly interest payments at five percent. On April 19, 1971 Stern-Slegman had surplus capital of $1,628,530. For the next 10 years, Stern-Slegman's surplus capital was between $1.3 and $2.1 million. Between September 30, 1980 and March 31, 1981, surplus capital decreased from $1.3 million to $933,017. On March 31, 1982 surplus capital decreased again to $196,508, then to a negative balance of $413,169 on March 31, 1983. When Stern-Slegman filed bankruptcy on March 14, 1984 its surplus capital was a negative $997,786.
The Fund raises the threshold question whether Stern-Slegman's repurchase of its shares is valid under Missouri law. Section 351.390 RSMo. (1986) (enacted in 1943) provides:
A corporation shall have power to purchase, take, receive, or otherwise acquire, hold, own, pledge, transfer or otherwise dispose of its own shares; provided, that it shall not purchase, either directly or indirectly, its own shares when its net assets are less than its stated capital or when by so doing its net assets would be reduced below its stated capital.
The Fund contends § 351.390 requires a surplus both when the agreement was made and when any distribution under the agreement is made.4 It does not contest the fact that a surplus existed at the time the agreement was entered into and thereafter until March 31, 1985, almost eleven years after the repurchase option was exercised. The Trustees, on the other hand, contend the statute requires a surplus only at the time the agreement was entered into.
Since enactment, § 351.390 has been the subject of only one reported Missouri decision, Hawkins v. Mall, Inc., 444 S.W.2d 369 (Mo.1969). In Hawkins a corporate note was given as part of the consideration for a buy out by a third party of one shareholder's interest. The corporation defaulted on the note and the former shareholder sued. The corporation asserted that the transaction violated § 351.390 and apparently argued that the note should be declared void as a result of the violation of state law. The court assumed the corporation's net assets were inadequate to purchase its own stock at the time the transaction was closed and the shares were issued to the third party. The court then held:
Section 351.390 . . . does not declare transactions contrary to its requirements void. If the court is to declare such a result, the case presented should be one in which that result would subserve the public policy embodied in the statute. The essential policy consideration involved in the statutory regulation of corporate dealing in its own stock is protection of the interests of creditors or other stockholders. Here, the other stockholders . . . assented to and approved the transaction. No rights of creditors existing at the time are claimed to be involved. The subsequent creditors . . . assert no defense on the basis of violation of § 351.390. . . . As subsequent creditors, they would have no standing to do so. . . . Those corporations would, however, be the principal beneficiaries of a declaration that the $100,000 note and deed of trust securing it are void.
Under Hawkins, even if a transaction did not comply with § 351.390, it would still be valid and enforceable unless a court found that the interests of existing creditors and shareholders were unprotected. Here, neither the bylaws nor minutes of any shareholder meetings, from which the Court might discern shareholder consent, have been admitted into evidence. However, neither the debtor nor any other shareholder has contested the validity of the repurchase agreement. The only party contesting its validity under state law is the Fund and it does not contest the Trustees' assertion that the Fund is a subsequent creditor. Thus, none of the parties that the statute protects have contested the validity of the repurchase agreement.
Moreover, there is no evidence or contention that the rights of any creditor in existence at the time the repurchase option was exercised and the indebtedness incurred have been prejudiced. Nor is there any contention that the Trustees have placed themselves in a better position in relation to creditors existing at that time as a result of the repurchase agreement. Because shareholder and existing creditors' rights are protected if the agreement is enforced, the Court finds that under the Hawkins decision the repurchase agreement should not be declared void.
The Court acknowledges the parties' arguments concerning whether the Missouri statute should be construed as applying the surplus test on the date the indebtedness is incurred — referred to as an "outset" test, or each time an installment on the payment of the debt is made — referred to as an "installment test." For the following reasons this Court alternatively finds that, if faced with this issue and under the facts of this case, Missouri courts would require solvency only on the date the repurchase option was exercised and the debt incurred. First, in determining whether a repurchase agreement is effective, Hawkins implies the date the repurchase transaction is consummated is the appropriate date to measure capital surplus. Hawkins, 444 S.W.2d at 386.
Second, when Hawkins was decided a majority of courts applied the installment test requiring solvency on the date of repayment. See, e.g., McConnell v. Estate of Butler, 402 F.2d 362, 366 (9th Cir.1968); Matter of Trimble Co., 339 F.2d 838, 842-43 (3d Cir.1964); Mountain State Steel Foundries, Inc. v. Commissioner, 284 F.2d 737 (4th Cir.1960); Robinson v. Wangemann, 75 F.2d 756, 757 (5th Cir.1935); Boggs v. Fleming, 66 F.2d 859 (4th Cir. 1933); In re Fechheimer Fishel Co., 212 F. 357 (2nd Cir.1914). Thus, the Missouri Supreme Court could have followed the majority view, but instead chose to interpret § 351.390 to require solvency only at the outset of the transaction. See Case Comment, Corporation Stock Repurchase — Surplus Test Application Date, 35 Mo.L. Rev. 423 (1970).
Third, when faced with judicial interpretations of stock repurchase statutes, other state legislatures have altered their statutes to reflect the legislature's intent when it conflicts with the judicial interpretation. For example, in Kleinberg v. Schwartz, 87 N.J.Super. 216, 208 A.2d 803 (App.Div.), aff'd on opinion below, 46 N.J. 2, 214 A.2d 313 (1965), the court overruled an earlier decision rejecting the installment test and applying the outset test. See, Wolff v. Heidritter Lumber Co., 112 N.J.Eq. 34, 163 A. 140 (Ch.1932). The Kleinberg decision was legislatively overruled and the Heidritter decision reinstated with the enactment of New Jersey Statute § 14A:7-16(6) (West 1969).5 The Missouri legislature never altered § 351.390 to legislatively overrule Hawkins, indicating that it is the legislature's intent that...
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