IN RE v. Loewer's Gambrinus Brewery Co., 188

• Decision Date: 31 March 1948
• Docket Number: No. 188,Docket 20891.,188
• Citation: 167 F.2d 318
• Parties: In re V. LOEWER'S GAMBRINUS BREWERY CO. FLYNN v. LOEWER REALTY CO.
• Court: U.S. Court of Appeals — Second Circuit

167 F.2d 318 (1948)

In re V. LOEWER'S GAMBRINUS BREWERY CO.

FLYNN v. LOEWER REALTY CO.

No. 188, Docket 20891.

Circuit Court of Appeals, Second Circuit.

March 31, 1948.

Finke & Jacobs, of New York City (Marcy Finke, of New York City, of counsel), for claimant-appellant.

Glass & Lynch, of New York City (Leslie Kirsch, Bernard Alpert and Sidney Freiberg, all of New York City, of counsel), for trustee-appellee.

Before L. HAND, SWAN and FRANK, Circuit Judges.

FRANK, Circuit Judge.

The opinion of the district court, reported in 74 F.Supp. 909, sets forth the Referee's findings and conclusions. Neither the Referee nor the Judge found fraud; nor did either of them find that the debt was a sham (although their opinions perhaps so imply). The Referee, however, explicitly found as a fact that, at all pertinent times to the date of bankruptcy, appellant, the Realty Company, and the bankrupt, the Brewery Company, had the same stockholders, officers and directors. We accept that finding as true, since, as the district judge stated (74 F.Supp. at 913), appellant, in its petition to review, did not except to, or question, any of the Referee's findings. There is some evidence, not printed in appellant's Appendix to its brief, that the stock in the two companies was not held in precisely the same proportions by the common stockholders. As, however, appellant made nothing of that fact below or in its brief in this court, the case must be treated as if the proportions were identical, and there is no need to consider whether and to what extent differences in such proportions would compel a different conclusion from that reached here.

With identical stockholders, we may regard the situation as if there had been no Realty Company and as if the Brewery Company were indebted directly to its stockholders. The question here thus boils down to this: If stockholders, acting in concert, make loans to their corporation in amounts directly proportionate to their stockholdings, may they assert unsubordinated claims, for such loans, against their corporation when it becomes bankrupt? In the light of recent Supreme Court decisions,¹ the answer would seem to be No. The test does "not turn on the existence or non-existence of the debt" nor on the existence of an "instrumentality" or the like; the test is whether the failure to subordinate will "work injustice," will not "be fair and equitable to other creditors," will result "in the violation of rules of fair play and good conscience."² If that test be applied to a case where stockholders deal with their corporation in the manner above described, it would seem that the potential injustice to other creditors is so great as to require subordination. For, in such circumstances, unfairness can easily occur and yet be so easily concealed that no scrutiny by the bankruptcy court, however rigid, will uncover it; accordingly, merely to put on the stockholders a heavy burden of proof as to fairness would be insufficient; therefore, as a matter of public policy the stockholders will not be heard to deny unfairness.

Up to this point the case has been approached as if there were no debtor corporation. But application of the unfairness test calls for a further step: In marshalling in bankruptcy, both corporations should be ignored, the common stockholders being deemed members of a partnership indebted to them and which went into bankruptcy.³ It is unnecessary here to consider whether the ruling would be different if creditors of the Realty Company had intervened and had shown that they would be adversely affected by the subordination.⁴

Affirmed.

L. HAND, Circuit Judge (concurring).

Courts have very generally held it unjust to allow a corporation to claim in insolvency upon a parity with other creditors against another corporation, when the shareholders of both are the same. In In Re Watertown Paper Co.¹ we held that this depended upon whether the creditor corporation was an "adjunct" or "agency or instrumentality" of the debtor; but Taylor v. Standard Gas Co.² repudiated this as a test, and said that the question was one of "fraud or injustice," which left the matter wholly at large. Pepper v. Litton³ perhaps re-established the earlier statement by confining the doctrine to cases where the creditor corporation was "a part of the stockholder's own enterprise." I should not of course venture to challenge the last statement; but, taking it as it reads, it seems to me that it may be possible a little to sharpen it in application, if we can learn what reasons make it the right test, and I shall try to state what these seem to me to be.

Both the shareholders and the creditors in any enterprise assume some risk of its failure, but their risks are different. The shareholders stand to lose first, but in return th...