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IN RE FLYING MAILMEN SERV.

November 7, 1975

In the Matter of FLYING MAILMEN SERVICE, INC., Bankrupt. Charles GOLD, Plaintiff-Appellant,
v.
Herbert K. LIPPMAN, Trustee in Bankruptcy of Flying Mailmen Service, Inc., Defendant-Appellee



The opinion of the court was delivered by: LASKER

MEMORANDUM

 LASKER, District Judge.

 Charles Gold appeals from a decision and order of the Bankruptcy Court, Honorable Asa A. Herzog, which denied his application for payment of a secured claim and which ordered him to refund monies to the trustee in bankruptcy.

 In settlement of an action pending in New York Supreme Court, Flying Mailmen Service, Inc. (debtor) agreed to pay Gold the sum of $150,000. The agreement, dated December 16, 1970, specifically allocated 17% of the amount payable as settlement of certain claims Gold might assert against the debtor and 83% as consideration for the repurchase of the debtor's common capital stock held by Gold. *fn1" To guarantee payment, the debtor granted Gold a secured lien against all of its present and future assets. Gold filed a financing statement as required by New York law, U.C.C. § 9-402.

 Gold had received approximately $83,000. when on February 17, 1972 the debtor filed a petition under Chapter XI of the Bankruptcy Act. The debtor was subsequently adjudicated a bankrupt and a trustee in bankruptcy was appointed and qualified. The debtor is in default on the remainder of the debt.

 By memoranda dated December 16, 1974 and July 2, 1974, and order dated October 2, 1974, the Bankruptcy Judge declined to enforce the original settlement agreement between Gold and the debtor or the security interest on the grounds that the executory portions of the agreement and the security interest were unenforceable as a result of the insolvency of the corporation. The judge held that the balance of the monies owed Gold constituted an unsecured claim subordinated to the claims of all general creditors. In addition, Gold was ordered to refund money paid him after the date that the debtor filed his petition in bankruptcy.

 I.

 The first issue raised by Gold's petition is the validity of the December 16, 1970 settlement agreement and the security interest given to guarantee its performance. The Bankruptcy Judge was correct in finding that the provision of the settlement agreement relating to the repurchase of the debtor's stock (and the security interest guaranteeing that obligation) was unenforceable against the debtor corporation because it was insolvent.

 Section 513(a) of the New York Business Corporation Law provides:

 
"(a) A corporation, subject to any restrictions contained in its certificate of incorporation, may purchase its own shares, or redeem its redeemable shares, out of surplus except when currently the corporation is insolvent or would thereby be made insolvent." (Emphasis added)

 Section 514(b) of the Business Corporation Law states:

 
"(b) The possibility that a corporation may not be able to purchase its shares under section 513 shall not be a ground for denying to either party specific performance of an agreement for the purchase by a corporation of its own shares, if at the time for performance the corporation can purchase all or part of such shares under section 513." (Emphasis added)

 Applying these sections to the present case, the debtor's agreement to repurchase its own stock may have been valid at the time of execution (§ 513(a)) but the debtor's obligation to pay for the stock became unenforceable upon the debtor's insolvency (§ 514(b)). Baxter v. Lancer Industries, 213 F. Supp. 92, 96 (E.D.N.Y.1963); Cross v. Beguelin, 252 N.Y. 262, 265, 169 N.E. 378, 379 (1929); and the security ...


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