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Home > Journals > Michigan Law Review > MLR > Volume 34 > Issue 4 (1936)

 

Abstract

Defendant corporation had an excess of assets over liabilities, but its ratio of current assets to current liabilities had declined below the then normal banking credit requirement of two to one. In order to avoid acknowledgment of commercial insolvency due to inability to meet obligations maturing in the near future, defendant organized a subsidiary corporation to take over the sales end of the enterprise, transferring to the subsidiary sufficient current assets to give it the required banking ratio with regard to the liabilities assumed by the subsidiary consisting of bank obligations and some of the current bills payable of the defendant. The acknowledged purpose of forming the subsidiary was to improve defendant's credit situation. Defendant owned all of the capital stock of the subsidiary, and the officers and directors of both were the same. Their businesses were, however, kept distinct in so far as corporate formalities were concerned, except for the fact that parent and subsidiary occupied the same office. Defendant's financial condition failed to improve and a receiver was appointed to take over its affairs. This action was brought to extend the receivership to the subsidiary. Held, extension of the receivership granted so as to include the subsidiary, it being but an instrumentality of the defendant because it could only improve the credit situation of defendant, the purpose for which it was formed, if that were its status. Further, that as to creditors other than the banks, this was a blind which prevented them from taking action to get security for they had not been given notice of a preference required by the law of the state and were not in possession of facts giving them any knowledge as to the purpose or manner of forming the subsidiary. Woodbury v. Pickering Lumber Co., (D. C. Mo. 1933) 10 F. Supp. 761.

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