In re Trimble Company, 72-1055.

Citation479 F.2d 103
Decision Date30 March 1973
Docket NumberNo. 72-1055.,72-1055.
PartiesIn the Matter of The TRIMBLE COMPANY, a corporation. Appeal of William J. McMINN et al.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

R. J. Cleary, Pittsburgh, Pa., for appellants.

Thomas J. Donnelly, Houston, Houston & Donnelly, Pittsburgh, Pa., for William J. McMinn, appellant.

K. Sidney Neuman, Calvin R. Harvey, Buchanan, Ingersoll, Rodewald, Kyle & Buerger, Pittsburgh, Pa., for appellee.

Edmund K. Trent, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., for Federal Ins. Co., amicus curiae.

Before FORMAN, ADAMS and ROSENN, Circuit Judges.

OPINION OF THE COURT

FORMAN, Circuit Judge.

This is the second time this case has been here. It originated in an involuntary petition filed by four petitioners in the United States District Court for the Western District of Pennsylvania against the Trimble Company (hereinafter called the Company), incorporated in Pennsylvania in 1942, having its principal office and place of business in Pittsburgh and engaged as a general contractor constructing buildings. The Company answered, pretrial proceedings followed, and after the filing of a stipulation of facts, the matter came to trial on June 3, 1963 before the District Court, a requested jury having been waived. An understanding of the case requires the recital, as sparingly as possible, of its extensive background.1

The following circumstances emerge: pursuant to an agreement dated March 12, 1958 and executed April 2, 1958, the Company purchased 8100 shares of its stock from four of its officers: William J. McMinn,2 Samuel A. Robinson, Joseph J. Warren, Jr., and R. J. Marshall, the petitioners, in consideration of a payment in cash and the issuance of promissory notes to the order of each petitioner.3 The stock was surrendered at the closing date, April 7, 1958, as of March 31, 1958. At the time of the transaction, the Company possessed assets of $1,674,971.78 and owed liabilities of $955,094.70. The income of the Company fell progressively from the time of the petitioners' sale of their stock. By March 31, 1961, the date of default on the notes of petitioners, its assets had dwindled to $880,801.91 and its liabilities were $891,845.56.

In July of 1960 Anthony H. Trimble and William F. Trimble advanced to the Company $40,000 and $45,000 respectively, and received therefor the Company's demand judgment promissory notes.

On or about August 1961 the Company ceased all operations except the conservation of its assets. In the pretrial proceedings the Company stated that the Trimbles, the petitioners and the Federal Insurance Company agreed that there should be no distribution to them until the dispute between the Trimbles and the petitioners was settled.4

After the first default, petitioners demanded payment of all notes, alleging that the default accelerated payment on the remaining notes. Failure of the Company to satisfy any of the petitioners' indebtedness prompted them to file the involuntary petition, charging a violation of the second act of bankruptcy.5

Following the trial, an order was filed in which the District Court recited that the petitioners based their status, as such, on notes in default at a time when payment thereof would have rendered the corporation insolvent. The District Court went on to hold that it is against public policy under Pennsylvania law for a corporation to pay debts arising out of purchase of its own stock, impairing its capital which should be available for its bona fide creditors. It determined that the petitioners' debts were unenforceable at the expense of such creditors, and contingent; whereby petitioners were left without standing to support their petition. The order dismissed the petition without prejudice to the rights of the petitioners to bring, in a court of competent jurisdiction, appropriate proceedings for the liquidation of the Company and a determination of their respective rights against it.

A notice of appeal by the petitioners was filed timely. It was heard before this court and determined in a filed opinion.6 In it the court first gave consideration to the appellant-petitioners' contention that the District Court erred in dismissing their petition because they are creditors within the meaning of section 59 of the Bankruptcy Act as amended October 7, 1952, 66 Stat. 425. It held that as of April 7, 1958, the Company had the right to purchase its stock, pay cash and issue its notes for the balance of the purchase price. It found that while neither the Pennsylvania statutes7 nor any authoritative Pennsylvania cases expressly prohibited a corporation from paying for shares of its own stock under circumstances as in the instant case, extended research of cases of other states is persuasive of the conclusion that a Pennsylvania court of statewide jurisdiction would hold that the payment of the notes in issue was unenforceable until such time as the assets of the Company were such that "payment would not violate the law."

Appellants argued alternatively that section 303 of the Pennsylvania Business Corporation Law, 15 P.S. section 2852-303, dealing with the defense of ultra vires would bar the Company from asserting the defense of unenforceability in a suit on the notes and that it should also be barred here. As to this the court found that the Pennsylvania courts would conclude that such payment would be against public policy and would hold that section 303 of the Pennsylvania Business Corporation Law, supra, would not bar the Company from raising the statutory prohibition in a suit on the notes. Nevertheless it was held that the appellants are creditors who have provable claims against the Company "liquidated as to amount and not contingent as to liability."

The court, however, found that the matter was not yet ended. The Company by way of defense in its answer denied that it had committed the second act of bankruptcy concerning preferences as charged in the petition. It contended that petitioners are in a class subordinate to the creditors who were named in the petition, and that at the time of filing of the petition the Company had sufficient assets to satisfy the claims of creditors of the same class as the allegedly preferred creditors. As to this contention of the Company, this court took the position:

"To constitute a preference under § 60 of the Bankruptcy Act, 11 U.S.C.A. § 96, there must be (1) a transfer by a debtor of his property, (2) to or for the benefit of creditors, (3) for or on account of an antecedent debt, (4) made or suffered by such debtor while insolvent, (5) within four months of the filing of the petition, and (6) the effect of which will be to enable such creditor to obtain a greater percentage of his debt than he would be entitled to under the distributive provisions of the Act. 3 Colliers on Bankruptcy (14th ed.) § 60.34. The existence of elements 1, 2, 3 and 5 have been admitted. The trial court, although it gave no figures, found that payment of the notes would have rendered the Company insolvent if it were not already such. We agree that petitioners are in a class subordinate to the general creditors of the Company. Cases cited. Yet it does not follow from the existence of these facts alone that a preference has not been committed by the Company. If one or more of the creditors have obtained a greater percentage of their debts than they would have been entitled to under the Bankruptcy Act, and the other elements are present, then a preference has been made and the trial court was in error in dismissing the petition. Cases cited. The district court made no findings regarding this element because under its view of the law there was no necessity for it to do so. On the record before us, we are unable to determine whether or not the second act of bankruptcy had been committed by the Company. Consequently the matter must be sent back to give the district court an opportunity to make that determination. Footnote omitted.
"Accordingly, the judgment of the District Court will be vacated for further proceedings not inconsistent with this opinion." In re Trimble Company, supra at pp. 844-845.

On remand it appears that the Court and counsel conferred informally on August 11, 19658 and the parties agreed to file briefs and suggested findings of fact and conclusions of law embodying the directive of this court in its opinion to make findings regarding the element whether "one or more of the creditors have obtained a greater percentage of their debts than they would have been entitled to under the Bankruptcy Act."

The District Court adopted and filed on October 28, 1971 the findings of fact and conclusions of law9 proffered by the amicus curiae, Federal Insurance Company, a creditor of the Company. Briefly stated, they incorporated in detail fact findings concerning the relationship of the Company and its stockholders; the sale of its stock to appellants; the loans of the Trimble brothers; the indebtedness due to Federal Insurance Company for sums it paid as surety on account of the Company's unperformed obligations; the amount of the assets and the liabilities of the Company as of February 4, 1962 and the filing of the involuntary petition four months thereafter on June 4, 1962.

Specifically, concerning the notes petitioners received for the sale of the stock, the District Court found, among other things:

"8. On March 31, 1961, when the notes securing the third installment of said purchase price were due, the Company had no unrestricted and unreserved earned surplus.
"9. On March 31, 1962, when the notes securing the fourth installment of said purchase price were due, the Company had no unrestricted and unreserved earned surplus.
"10. The Company did not pay the notes securing the third or any subsequent installment of said purchase price."

As to the Trimble notes, the Court found:

"11. On July 28, 1960, Anthony H. Trimble and William F. Trimble III paid the
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