Kiskadden v. Steinle

• Decision Date: 04 February 1913
• Docket Number: 2,252.
• Citation: 203 F. 375
• Parties: KISKADDEN v. STEINLE.
• Court: U.S. Court of Appeals — Sixth Circuit

203 F. 375

KISKADDEN v. STEINLE.

No. 2,252.

United States Court of Appeals, Sixth Circuit.

February 4, 1913

The trustee sought to have a claim of Steinle re-examined and diminished, which had been allowed December 4, 1909. The claim was for $16,549, with interest from October 23, 1909. The claim was based upon five promissory notes, two for $6,500 each and three for $1,000 each, bearing date March 26 1909, and falling due on different dates between that time and October 26th following, with 6 per cent. interest. The notes were executed by the C. C. Anderson Manufacturing Company (whose name was changed to the Fostoria Undermuslin Company) to the order of A. V. Bauman, and were indorsed by Bauman, Henry Hughes, and C. O. Frick. Bauman discounted the paper and turned the money over to the Fostoria Company. When the notes matured, the company was unable to pay them, and they were taken up by Bauman and held by him until November 2, 1909, when they were assigned to Steinle. The facts alleged in support of the right to have the claim diminished were, in substance, that Bauman subscribed for 300 shares, of the par value of $100 each, of the capital stock of the company, but did not fully pay for the shares, and so is indebted to the company for the balance remaining due upon his subscription; that Bauman was the real owner of the notes and the claim, but that, if it should be found that they were in fact owned by Steinle, since he obtained the notes after maturity, the claim in his hands was subject to a set-off to the extent of such balance.

In June, 1904, C. C. Anderson and Bauman formed a copartnership for the purpose of manufacturing muslin underwear, acquiring a factory, with goods and stock, and conducting the business at Fostoria, Ohio. They also purchased and removed to this factory certain equipment and goods of a company in Saginaw Mich. In October, 1904, they incorporated a company under the laws of Ohio, with an authorized capital stock of $100,000 Anderson and Bauman each subscribing for 44 shares, J. J Anderson for 10 shares, and Anna Rose G. Bauman and Helen May Anderson for 1 share each, these five persons being also the incorporators and directors. The company, through these directors, thereupon purchased the partnership property, business, and good will of Anderson and Bauman, and assumed the firm's obligations for the consideration of 602 shares ($60,200 par value) of what was characterized as 'the fully paid and nonassessable stock' of the newly incorporated company. This was to include the shares subscribed, 'and the issue of which was in full satisfaction of the obligations assumed by them and each of them by said subscription. ' In the summary of the evidence it appears that the real estate turned over to the corporation was purchased by Anderson and Bauman for $5,000; that the purchase of the articles at Saginaw was from a company that had gone into liquidation, which, after disposing of part of its property to others, sold the remainder to Anderson and Bauman for $7,500. The referee found that the property and articles of every kind turned over by the copartnership to the company in payment of the 602 shares of stock cost the firm from $27,500 to $32,500. The company sold 200 shares of its so-called treasury stock to Henry Hughes, one of the indorsers of the notes in dispute, at $67.50 per share. This price was made and accepted on the representation of Anderson and Bauman that they had invested $40,000 in the property turned over to the company, and the declared purpose was to sell the stock to Hughes at a price 'that would let him in on the same basis as Anderson and Bauman,' because 'Hughes had originally intended to join the partnership. ' The referee found that the fair and reasonable value of all of the property, which Anderson and Bauman sold to the company, 'did not exceed the sum of forty thousand ($40,000) dollars,' and that the overvaluation of the property 'was not due to error of judgment on the part of C. C. Anderson and A. V. Bauman and other directors of the corporation at the time of the transaction. * * * '

Of the 602 shares of stock received for the sale of the property, Bauman received 300 shares ($30,000 par value), and is still the owner of the stock.

The finding of the referee respecting these shares is as follows: 'That at the time of the issue to him of the said three hundred shares of stock' of the company 'Bauman was aware of the overvaluation of the property of Anderson and Bauman, and that his half interest in the partnership, for which he received the three hundred shares of stock of the par value of one hundred ($100) dollars each, was worth not to exceed twenty thousand ($20,000) dollars.'

The referee ordered Steinle's claim of $16,549 to be reduced in the sum of $10,000, letting it stand as 'allowed against the bankrupt' for $6,549, with interest. The court below reversed the referee's order, denied the petition of the trustee to disallow the claim, and dismissed the petition with costs. The case was brought to this court upon appeal prayed and allowed within 10 days of the date of the order made by the court below.

McCauley & Weller, of Tiffin, Ohio, for appellant.

King & Ramsey, of Sandusky, Ohio, and H. C. De Ran, of Fremont, Ohio, for appellee.

Before WARRINGTON and KNAPPEN, Circuit Judges, and McCALL, District, judge.

WARRINGTON Circuit Judge (after stating the facts as above).

We shall consider the case under the objections urged on behalf of appellee: (a) The case is not appealable; (b) no stock liability exists against Bauman; (c) such liability cannot be set off against the claim of Steinle.

The Appeal. The object of the proceeding before the referee was to have the claim of Steinle, as previously allowed, reconsidered and in substantial portion disallowed. This involved a controversy of fact concerning the value of the copartnership property and the nature of the sale to the company, which resulted in the issue of 602 shares of the corporate stock in payment for the property; and it also embraced Bauman's part in the transaction, his half interest in the partnership property, and the 300 shares received by him of such 602 shares of the stock. The reversal in the court below of the order of the referee operated to restore and allow the claim as originally proved. It follows, we think, that the trustee instituted a proceeding in bankruptcy, which was appealable to this court under section 25a(3) (Act July 1, 1898, c. 541, 30 Stat. 553 (U.S. Comp. St. 1901, p. 3432)). Matter of Loving, 224 U.S. 183, 187, 32 Sup.Ct. 446, 56 L.Ed. 725; Cooper, Trustee, v. Miller, 203 F. 383 (C.C.A. 6th Cir.)

Alleged Stock Liability. No opinion was handed down in the court below, and we have no means of ascertaining the views of the learned trial judge, except as they were stated in the arguments of counsel, and as they appear in their briefs. The claims that no liability of Bauman exists in respect of the 300 shares of stock received by him, and that, if there be any such liability, it cannot be set off against the claim of Steinle, present questions of some difficulty. However, since the promissory notes were past due when obtained by Steinle, it is not disputed that they were received by him subject to any defense of the company to which they would have been open in the hands of Bauman. If the facts are accepted, as in substance found by the referee, that the overvaluation of the partnership property was not due to error in judgment of Anderson and Bauman and the other directors of the corporation at the time of the transaction, and that Bauman then knew that the portion of the property he was transferring to the company was $10,000 less in value than the par value of the stock he was receiving, we are met with the question whether proof of the claim must be allowed and payments made upon it out of the bankrupt's assets ratably with the claims of the general creditors, who confessedly are not indebted to the estate, without regard to the unpaid portion of the Bauman stock. position? As pointed out in the statement, the corporation was organized under the laws of Ohio. Whether Bauman is liable for the unpaid portion of the stock he received is a local question, and is governed by the pertinent rule of decision of the Supreme Court of Ohio. Black v. Zacharie & Co., 3 How. 482, 511, 11 L.Ed. 690; Thompson v. Fairbanks, 196 U.S. 516, 523, 25 Sup.Ct. 306, 49 L.Ed. 577; Detroit Trust Co. v. Pontiac Savings Bank, 196 F. 29, 33, 115 C.C.A. 663 (C.C.A. 6th Cir.); In re Jassoy Co., 178 F. 515, 516, 101 C.C.A. 641 (C.C.A. 2d Cir.); Shaw v. Goebel Brewing Co., 202 F. 408 (C.C.A. 6th Cir.); Mishawaka Woolen Mfg. Co. v. Westveer, 191 F. 465, 466, 112 C.C.A. 109 (C.C.A. 6th Cir.).

It has been laid down by the Supreme Court of Ohio (Gates, Adm'r, v. Tippecanoe Stone Co., 57 Ohio St. 60, 48 N.E. 285, 63 Am.St.Rep. 705), upon facts in effect kindred to those found by the referee here, that each partner will be regarded as an original subscriber for so much of the stock as is issued to him, and credited on his subscription for only the actual value of his interest in the partnership property transferred to the corporation in payment of the subscription, holding in the second paragraph of the syllabus, in which all the judges concurred:

'The balance left, after applying this credit, will be deemed a debt due from him to the corporation, and, therefore, corporate assets.'

The way in which this conclusion of the court was reached may in part be indicated by a portion of the opinion (57 Ohio St. 78, 48 N.E. 287, 63 Am.St.Rep. 705):

'This attempt by McLain and his associates to dispose of their property at a fictitious or inflated value, to a corporation of their own

...