Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


August 3, 1972

In the Matter of EASTERN ERECTORS, INC., Alleged Bankrupt

Masterson, District Judge.

The opinion of the court was delivered by: MASTERSON

MASTERSON, District Judge.

 This matter is before us upon a Petition for Review of the Referee's Order dismissing the Creditors' Involuntary Petition in Bankruptcy.

 On November 10, 1971, Falls Equipment Corporation, American Equipment Corporation, and Francis Pinciotti, Jr., filed a Petition alleging an involuntary bankruptcy against Eastern Erectors, Inc., setting forth, as an act of bankruptcy a preferential transfer on October 16, 1971, while the alleged bankrupt was insolvent. The act of bankruptcy was admitted, but respondent denied its insolvency. Several lengthy hearings were conducted and Referee Goldhaber found that the alleged bankrupt was solvent on October 16, 1971. After careful consideration of the creditors' objections, we affirm the referee's Opinion and Order.

 At the outset, it is important to note that the referee ruled properly as to the burden of proving insolvency. (N.T. 21). The preferential transfer of property would constitute the Second Act of Bankruptcy, *fn1" and since insolvency is an element of this allegation, the primary burden of proving this financial condition is on the petitioning creditors. Stitzer Hotel Co. v. Beyer, 55 F.2d 620 (3rd Cir. 1932); 1 Collier on Bankruptcy, P 3.208, p. 456. *fn2"

 The thrust of the creditors' position is that items which the referee found to be properly classified as capital investments were actually liabilities of the corporation. Two items totalling $16,500. would, if classified as liabilities, bring the total liabilities to a figure above that of total assets. *fn3"

 First, the creditors challenge Finding of Fact No. 9: "The loans made to the corporation by shareholders were really capital investments." We are asked initially to reverse the referee's factual determination that the $6,500. in question was invested by the shareholders and not some other creditor of the corporation. It is clear that we must accept the referee's findings of fact unless clearly erroneous. General Order of Bankruptcy 47, 28 U.S.C.A. The creditors rely heavily upon the absence or insufficiency of respondent's proof that these funds were derived from the shareholders. *fn4" However, since the burden of proving otherwise was on the creditors who presented no evidence as to this point, we are satisfied that the referee's finding of fact was correct.

 The significance of the creditors' concern with the factual determination is found in the referee's Conclusion of Law No. 3: "As a matter of law, where a corporation is under-capitalized, loans made to the corporation by its shareholders, are treated as capital contributions." The creditors maintain that this item, which was recorded on the balance sheet of the alleged bankrupt as a liability, "loans from stockholders," should also have been considered as a liability by the referee when the determination of insolvency was made. While the referee's legal conclusion was stated overbroadly, we are satisfied, after examining the record, that this $6,500. was properly considered as a capital investment by the referee.

 While apparently being a novel issue in a bankruptcy context, this debt-equity issue has been extensively litigated under the Internal Revenue Act. The determination of whether an advance made by a stockholder to a closed corporation creates a true debtor-creditor relationship or actually represents a contribution to capital is often critical in assessing the tax consequences of a distribution to the shareholder. While this tax question is obviously not raised here, we find the analysis made in these various debt-equity cases helpful in deciding the issue presented.

 The referee was correct that thin or inadequate capitalization is indicative of a capital contribution rather than a loan by a shareholder. *fn5" However, this is only one of several factors to be considered in making the debt-equity determination, and the broad generalization recited by the referee is not dispositive. The issue can only be decided by analyzing the particular facts of each case. John Kelley Co. v. Commissioner, 326 U.S. 521, 66 S. Ct. 299, 90 L. Ed. 278 (1946).

 While many combinations of factors are found in the analysis of the debt or equity status of shareholders' interests, *fn6" the following is a typical list of the guiding considerations:

"(1) the names given to the certificates evidencing the indebtedness; (2) the presence or absence of a maturity date; (3) the source of the payments; (4) the right to enforce the payment of principal and interest; (5) participation in management; (6) a status equal to or inferior to that of regular corporate creditors; (7) the intent of the parties; (8) 'thin' or adequate capitalization; (9) identity of interest between creditor and stockholder; (10) payment of interest only out of 'dividend' money; (11) the ability of the corporation to obtain loans from outside lending institutions."
Dillin v. United States, 433 F.2d 1097, 1100 (5th Cir. 1970).

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.