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Obre v. Alban Tractor Co.

Decided: April 11, 1962.

OBRE
v.
ALBAN TRACTOR COMPANY ET AL.



Appeal from the Circuit Court for Baltimore County; Raine, Jr., J.

Henderson, Prescott, Horney, Marbury and Sybert, JJ. Sybert, J., delivered the opinion of the Court.

Sybert

The single question raised by this appeal is whether the Chancellor erred in his finding that a note of a corporation to its principal stockholder represented a risk capital investment in the corporation and not a bona fide debt entitling the stockholder to share as a general creditor in distribution of the corporation's assets due to insolvency.

The Annel Corporation began its existence in January, 1959, when the appellant, Henry Obre, and F. Stevens Nelson pooled certain equipment and cash for the purpose of forming the

corporation to engage in the dirt moving and road building business. As his share, Obre transferred to the corporation equipment independently appraised at $63,874.86, plus $1,673.24 cash, for a total of $65,548.10. Nelson's contribution was equipment valued at $8,495.00 and $1,505.00 in cash, totaling $10,000.00.

In return, Obre received $20,000.00 par value non-voting preferred stock and $10,000.00 par value voting common stock. In addition, he received the corporation's unsecured note for $35,548.10, dated January 2, 1959, which was the date of the incorporation. The note, which is the subject of this appeal, was made payable five years after date and carried interest at the rate of five per cent per annum, though no interest was ever actually paid. Nelson received for his contribution voting common stock of $10,000.00 par value.

The corporation, with Obre as president and Nelson as vice-president, experienced financial difficulty very soon after beginning its operations, requiring Obre to pay certain creditors and meet a payroll in March, 1959, by use of his own funds. For the same reason he discontinued taking his salary of $75.00 a week in May, 1959. In April, 1959, the corporation borrowed $27,079.20 from a bank, securing the loan with a chattel mortgage. During its period of operation the corporation prepared monthly financial reports in which Obre's note was listed as a debt of the corporation. In 1959 the corporation showed an operating loss of $14,324.67. Its continued lack of success led to the execution of a deed of trust for the benefit of creditors on October 19, 1960, and the Circuit Court for Baltimore County, sitting in equity, assumed jurisdiction of the trust.

Obre filed four separate claims in the case which were excepted to by Alban Tractor Co. and certain other trade creditors (appellees here). The Chancellor, after hearing, issued a decree sustaining the exceptions to Obre's claim on the note in question, on the ground that the note represented a contribution to the capital of the corporation and not a bona fide debt owed to Obre upon which he could share as a general creditor. The Chancellor based his decision on his finding that the corporation could not have carried on its operations

without the equipment contributed by Obre. He felt that the fact that the note was given on the same day the corporation was formed, and that it was a five year note, indicated that the transaction was not a loan but was really a risk capital contribution. He held that, in view of these factors, equity required that the claim be subordinated to the claims of the general creditors. Under the circumstances of this case we are unable to agree with the conclusion of the Chancellor.

A loan to a corporate entity by a substantial or even the sole owner of stock is not per se invalid, although such a transaction is always open to inquiry. Coffman v. Publishing Co., 167 Md. 275, 173 Atl. 248 (1934); Dollar Cleansers v. McGregor, 163 Md. 105, 161 Atl. 159 (1932). In Hock & Co. v. Strohm, 166 Md. 253, 255, 170 Atl. 738 (1934), where this Court refused to subordinate loans made at intervals by a stockholder to a corporation in which she owned the dominant interest, it was said:

"* * * In the absence of any element of fraud or imposition or of a subordinating equity, such a loan is recoverable to the same extent as if made ...


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