Appeal from the District Court of the United States for the Eastern District of New York.
Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
Bay Ridge Inn, Inc., filed a voluntary petition in bankruptcy on January 16, 1937, and was adjudicated a bankrupt thereon. On September 30, 1936, it made a mortgage to its three stockholders, namely, Camille Vallomy, Frank Turino and Bruno Mandraccia, the petitioners herein, who owned its entire capital stock in equal proportions consisting of 45 shares of the aggregate par value of $4,500.
The above stockholders, each owning fifteen shares of the corporate stock, entered into a contract with one Valerio on August 31, 1936, to sell their stock to the latter. The corporation was not a party to the contract, nor was it to receive any part of the consideration. The price for the stock was $5,025, the valuation of the business. The price, to the extent of $3,000, was to be paid in cash, but to the extent of $2,025 by notes of the corporation payable to the sellers and secured by a chattel mortgage on the corporate lease and fixtures. In respect to the $2,025 of the purchase price the contract provided as follows:
"d. The balance of the Two thousand and twenty-five ($2,025.00) dollars to be paid by the delivery and execution to the sellers of the promissory notes of the purchaser totalling Two thousand and twentyfive ($2,025.00) dollars payable at the rate of One hundred and seventy ($170.00) dollars per month for eleven (11) months and One hundred and fifty-five ($155.00) dollars the twelfth month, which notes are to be secured by a chattel mortgage on the lease and fixtures now held by the Bay Ridge Inn, Inc."
The sale was closed on October 2, 1936. The chattel mortgage was executed by Turino as president of the corporation and was to secure the promissory notes of the corporation above mentioned which were also signed by Turino as president. A resolution of the Board of Directors composed of Turino, Vallomy and Mandraccia, who were also the sole stockholders, was adopted September 30, 1936, authorizing the execution of the mortgage and the delivery of the notes and mortgage to Turino, Vallomy and Mandraccia. Although the resolution stated that the notes and mortgage were to be in consideration of loans by these stockholders to the corporation, it is conceded that there were no such loans and that the notes and mortgage were merely given on behalf of those who were selling their stock and sought thereby to obtain payment of $2,025 of the purchase price owed to them by the purchaser under the contract. Certain cash payments were made in accordance with the contract, but for the purpose of closing the parties caused another mortgage upon the corporate assets to be made by Bay Ridge Inn, Inc., in order to raise $1,200 of the necessary cash payments. The purchaser Valerio accomplished this by obtaining a loan of $1,200 from one Adelson who gave his check drawn to the order of the corporation. Though the corporation was bound to repay the loan to Adelson and had mortgaged its property for that purpose, Adelson's check was upon delivery immediately endorsed by Vallomy, Turino and Mandraccia in the name of the corporation to the order of their attorney who deposited it in his account and divided the proceeds among the stockholders after deducting his fees. Thus the corporation obtained no benefit from the $1,200 and as between it and the stockholders who received the proceeds the loan was without consideration. At the time of closing the transaction there was added to the original contract price of $5,025 for the stock, the sum of $172.72 to purchase the merchandise of the corporation then on hand, and $150 to purchase the cabaret license which it owned, making the total purchase price and the gross valuation of the assets $5,347.72.
The liabilities and assets of Bay Ridge Inn, Inc., at the time of closing were as follows:
Merchandise creditors 536.08
Adelson mortgage 1,200.00
Total liabilities $6,236.08
Valuation of assets 5,347.72