In re Scranton & Short, Inc. , 7 F.2d 473 ( 1925 )

WOLVERTON, District Judge.

Prior to

1918, C. H. Scranton and Harris French were partners, engaged in mercantile business, consisting of men’s furnishing goods, at La Grande, Or. In that year Scranton bought French’s interest; the purchase price being $10,000. Scranton borrowed the money from the La Grande National Bank with which to make the purchase. The note given for the loan was never paid in full, but was reduced to $8,000. Scranton continued to carry on the business in his own name until about October 1, 1923, when a corporation was formed, under the name of Scranton & Short, Inc., which took over the business. The capital stock of the corporation was fixed, so far as the record shows, at $25,000, consisting of 250 shares at $100 per share; 200 shares of stock were subscribed — 99 shares each by Scranton and Short, and one share each by their wives. Scranton was to hold the entire stock, although none was ever issued. Under the agreement, Short was to pay $12,000, and, when paid, he was to get (he and his wife) 100 shares. The stock of merchandise was inventoried at approximately $22,500. The incorporation was irregular and never became a wholly completed organization, although a certificate of incorporation was issued. The business was carried on in the corporate name until bankruptcy proceedings were instituted about August 16, 1924. Short never paid the $12,-000, nor any part of it except $800. His delinquency was the cause of the failure in the business of Scranton & 'Short, Inc. The business was carried on much as it had been before the incorporation. The bills payable of the Scranton business were met as though there had been no reorganization, and some money was applied on the bank note in the way of meeting the interest as it became due.

In due time the bank presented its claim to the trustee for allowance. The claim was later amended, but, upon objections filed by divers of the creditors, it was disallowed by the referee.

The special reasons assigned why the claim should be allowed are: First, that the bank was never notified, as required by the Bulk Sales Act, of the sale by Scranton to Scranton & Short, Inc.; and second, that under the transfer arrangements between Scranton and Short the corporation agreed to pay the debts of the business, and especially the bank obligation of $8,000.

As to the first specification, but little need be said. The bank had ample notice and knowledge that the sale was to be made. Its cashier was in touch with both Scranton and ShoH at the time, and was well advised of the conditions of the project, and approved it, being of the view that it was a good business venture, and would enable Scranton to meet his obligations. Such being the ease, the bank cannot now insist that the Bulk Sales Law (Or. L. § 8161 et seq.) was not complied with, to its disadvantage.

The second specification is more difficult of solution. I am of- the opinion, however, that it should be resolved in favor of the bank.

It must be premised that the business and good will were wholly Scranton’s, prior to the transfer to Scranton & Short, Inc. He had been carrying it on for years. The business and stock in trade, with the bills receivable arising therefrom, were practically all he had. They were all his creditors had to look to for their reimbursement. The bank was one of his creditors from the time he bought Harris French’s interest. When the corporation was organized, it was well understood that, when Short paid in his $12,000, the bank note was to be paid. Indeed, while the business was being carried on by the new concern, interest on the note was paid from it. Aside from this, the new concern met-many, if not all, of the prior obligations of Scranton arising from his prior business, and perhaps some of his individual debts, hut not the bank note, except some of the interest accruing thereon. True, the stock of goods and the business of Scranton were transferred to the corporation. Short was to pay $12,000 for his stock. Thenceforth, ho and Scranton would share equally in the business. The $12,000, when paid, would become available for the payment by Scranton of his obligation to the hank. In short, Short was purchasing an interest in the business, with the tacit understanding between the parties that Scranton’s obligations should all be paid, and naturally the payment was to come from the business.

The capital stock subscribed by each of the parties represented their respective interests in the business and the creditors have relief over against the unpaid stock for the liquidation and payment of their demands after the property of the corporation is exhausted. That Short himself is insolvent, if such be the case, does not alter the liability. This corporation was so far completed in its organization that Short could not deny his liability on the stock, and I am strongly of the impression that there was, in effect, an assumption of this hank obligation along with the rest by Scranton & Short, Inc., which fixes its liability therefor.

The finding and order of the referee will he set aside, and the bank’s claim will be allowed.